Economics 820 (Fall 2008)


Two Page Resume. Download

Research: Five Recent Working, Forthcoming & Published Papers

A Search for Timing Effects of Macroeconomic Shocks in the U.S.
With Jing Han.

This paper addresses whether the response of output to various shocks has timing or season-contingent effects; that is, does a particular shock have a different effect on output if it originates in a particular calendar quarter? We study, in turn, shocks to: government spending, government revenue and monetary policy. For spending shocks, there is very little evidence of a timing effect. For revenue shocks, there is no evidence of a timing effect. For the final shock, we find a timing effect, which is consistent with existing research. However, omitting the early part of the Volcker disinflation, 1980-1983, eliminates this effect. Download.

Executing Long Run Restrictions.  
With Leonard Kiefer.  

The structural vector-autoregression (SVAR) method uses restrictions from economic theory to identify shocks that have economic, and not simply statistical, meaning. Recent research criticizes this method by applying it to data generated from a stochastic macroeconomic model. The SVAR approach has been evaluated according to its accuracy in estimating the response of hours to a technology shock. This recent research finds that the estimated response of hours has: (i) large bias, (ii) high root mean squared error. This paper develops a new method that avoids using vector autoregressions and instead estimates a moving average representation directly. Our method is based on multi-step ahead forecasts. The method reduces, relative to the standard approach, the bias by 74% and the root mean square error by 7%. Finally, we compare how our method performs to alternative, recently developed approaches. Download

What Do Technology Shocks Tell Us about the New Keynesian Paradigm? 
With Jing Han and Yi-Chan Tsai.
(Published in the Journal of Monetary Economics, May 2009)

Researchers have used unanticipated changes to monetary policy to identify preference and technology parameters of macroeconomic models. This paper uses changes in technology to identify the same set of parameters. Estimates based on technology shocks differ substantially from those based on monetary policy shocks. In the post World War II United States, a positive technology shock reduces inflation and increases hours worked, significantly and rapidly in both cases. Relative to policy shock identification, technology shock identification implies: (1) long duration durability in preferences instead of short duration habit, (2) built-in inflation inertia disappears and price flexibility increases. In response to technological improvement, consumption durability increases hours worked because households temporarily increase labor supply to accumulate durables towards new, higher steady state levels. Limited nominal rigidities allow inflation to fall because firms are able to immediately cut prices when households' labor supply increases.

Integrating Sticky Information and Sticky Prices.  
With Tomiyuki Kitamura and Takayuki Tsuruga. 
(Forthcoming in the Review of Economics and Statistics)

Understanding the relationship between nominal and real variables, most notably inflation and cyclical output, is one of economics' fundamental questions. Towards this understanding, we develop a model that integrates sticky prices and sticky information, i.e. a dual stickiness model. We nd that both rigidities are present in U.S. data. We also show that the dual stickiness model's closest competitor is the hybrid New Keynesian model. For both models, current inflation depends in part on last period's inflation. The former model achieves this dependence endogenously through the interaction of the two rigidities, rather than through backward-looking behavior. U.S. data supports the dual stickiness over the hybrid model because lagged expectations terms appear in the former's inflation Euler equation. Finally, we show that it is quantitatively important to distinguish between the two by simulating a dynamic equilibrium model under each of the two inflation equations. (Formerly circulated as 'Do Sticky Prices Need to Be Replaced by Sticky Information?') Download

Stabilizing Non-Fundamental Asset Price Movements under Discretion and Limited Information.  
(Published in the Journal of Monetary Economics, Dec. 2005) 

Inflation, output and interest rate stabilization are all potential central bank objectives. We explore whether monetary policy should respond to asset price fluctuations, when they are driven by irrational expectational shocks to the future returns to capital. In our model, an optimistic shock to future returns generates both an increase in equity prices and physical investment. The increased investment is inefficient and, thus, a central bank optimally responds to this expectations shocks. This induces a trade-off between stabilizing nominal prices and non-fundamental asset price movements. We compare the optimal policy under different assumptions: full versus limited information and commitment versus discretion. If the central bank has limited information about whether an asset price movement has a fundamental or non-fundamental origin, then the central bank responds less aggressively to the non-fundamental exuberance shocks than under full information. Without commitment, a central bank responds more aggressively to non-fundamental exuberance shocks.


Hobbies

Life coaching.