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Economic Fluctuations and Growth. (Bureau News).

The NBER's Program on Economic Fluctuations and Growth met in San Francisco on February 7. Fernando Alvarez, NBER and University of Chicago, and Robert King, NBER and Boston University, organized this program:

Andrew Ang, NBER and Columbia University; Monika Piazzesi, NBER and University of California, Los Angeles; and Min Wei, Columbia University, "What does the Yield Curve Tell us about GDP Growth?"

Discussant: Urban Jermann, NBER and University of Pennsylvania

Susan Athey, NBER and Stanford University; Andrew Atkeson, NBER and University of California, Los Angeles; and Patrick J. Kehoe, Federal Reserve Bank of Minneapolis, "The Optimal Degree of Discretion in Monetary Policy" Discussant: Lawrence Christiano, NBER and Northwestern University

Boyan Jovanovic, NBER and New York University, and Peter L. Rousseau, NBER and Vanderbilt University, "Mergers as Reallocation" (NBER Working Paper No. 9279) Discussant: Andrew Atkeson

Marcelo Veracierto, Federal Reserve Bank of Chicago, "On the Cyclical Behavior of Employment, Unemployment and Labor Force Participation"

Discussant: Robert E. Hall, NBER and Stanford University

Yongsung Chang, University of Pennsylvania, and Sun-Bin Kim, Concordia University, "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy"

Discussant: Thomas E. MaCurdy, NBER and Stanford University

Aubhik Khan, Federal Reserve Bank of Philadelphia, and Julia K. Thomas, University of Minnesota, "Inventories and the Business Cycle: An Equilibrium Analysis of (S,s) Policies"

Discussant: Valerie A. Ramey, NBER and University of California, San Diego.

Ang, Piazzesi, and Wei build a dynamic model for GDP growth and yields that completely characterizes expectations of GDP. The model does not permit arbitrage. Contrary to previous studies, this paper concludes that the short rate has more predictive power than any term spread. The authors confirm this finding by forecasting GDP out-of-sample. The model also recommends the use of lagged GDP and the longest maturity yield to measure slope. Greater efficiency enables the yield-curve model to produce superior out-of-sample GDP forecasts than unconstrained ordinary least squares at all horizons.

Athey, Atkeson, and Kehoe analyze monetary policy design in an economy with an agreed-upon social welfare function that depends on the randomly fluctuating state of the economy. The monetary authority has private information about that state. In the model, well-designed rules trade off society's desire to give the monetary authority flexibility to react to its private information against society's need to guard against the standard time-inconsistency problem arising from the temptation to stimulate the economy with unexpected inflation. The authors find that the optimal degree of monetary policy discretion is decreasing in the severity of the time-inconsistency problem. As this problem becomes sufficiently severe, the optimal degree of discretion is zero. They also find that, despite the apparent complexity of this dynamic mechanism design problem, society can implement the optimal policy simply by legislating an inflation cap that specifies the highest allowable inflation rate.

Jovanovic and Rousseau argue that takeovers have played a major role in speeding up the diffusion of new technology. The role of takeovers is similar to that of entry and exit of firms. The authors focus on and compare two periods: 1890-1930, during which electricity and the internal combustion engine spread through the U.S. economy, and 1971-2001, the Information Age.

Veracierto evaluates how well a real business cycle (RBC) model that incorporates search and leisure decisions simultaneously can account for the observed behavior of employment, unemployment, and being out of the labor force. This work contrasts with the previous RBC literature, which analyzed employment or hours fluctuations either by lumping together unemployment and out-of-the-labor-force into a single non-employment state or by assuming fixed labor force participation. Once the three employment states are introduced explicitly, Veracierto finds that the RBC model generates highly counterfactual labor market dynamics.

Chang and Kim investigate the mapping from individual to aggregate labor supply using a general equilibrium heterogeneous-agent model with an incomplete market. They calibrate the nature of heterogeneity among workers using wage data from the Panel Survey of Income Dynamics. The gross worker flow between employment and nonemployment, and the cross-sectional earnings and wealth distributions in the model, are comparable to those in the micro data. The authors find that the aggregate labor supply elasticity of such an economy is around one, bigger than micro estimates but smaller than those often assumed in aggregate models.

Khan and Thomas develop an equilibrium business cycle model in which final goods' producers pursue generalized inventory policies with respect to intermediate goods, a consequence of nonconvex factor adjustment costs. Calibrating the model to reproduce the average inventory-to-sales ratio in postwar U.S. data, the authors find that it explains half of the cyclical variability of inventory investment. Moreover, inventory accumulation is strongly procyclical, and production is more volatile than sales, as in the data. The model economy exhibits a business cycle similar to that of a comparable benchmark without inventories, although the authors do observe somewhat higher variability in employment and lower variability in consumption and investment. Thus, equilibrium analysis, which necessarily endogenizes final sales, alters our understanding of the role of inventory accumulation for cyclical movements in GDP. The presence of inventories does not substantially raise the variability of production, because it damp ens movements in final sales.
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Title Annotation:list of papers discussed at the February 7, 2003 National Bureau of Economic Research meeting
Publication:NBER Reporter
Geographic Code:1USA
Date:Mar 22, 2003
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