Transcript Document

Introducing BC
Lecture 1
1
Schedule of the lecture

Situating Modern BC Theory within the context of
Macroeconomic theory
(Mankiw, JEL 90)

RBC methodology

Fluctuations and facts
2
1. Situating Modern BC Theory within
the context of Macroeconomic Theory
Consensus in the 70’s:

At the textbook level:
 IS-LM (with fixed prices)
 + a phillips curve to explain price adjustment
 For some theorists, the Phillips curves exhibits the
natural rate property  the economy is selfcorrecting in the long run

At the applied level: this theory was used to construct
large econometric models.
3
2 reasons for the breakdown of the
consensus

An empirical reason: how to explain increasing inflation
rates with high unemployment levels at the same time as
was observed in the 70’s?

A theoretical reason: the intellectual problem of the gap
between micro and macro

These 2 reasons appear in the famous prediction of
Friedman et Phelps at the end of the 60’s
+ Lucas’critique
4
Consequences

A huge research effort and most of this research has
been focused on what generated the breakdown of the
consensus: the construction of macro on
microfoundations

A gap between theoretical and applied macro: even if
macroeconometric models were no longer considered
as serious by academic macroeconomists, they have
still been used for a while (why?)
5
Taxonomy of the research effort
a.
b.
c.
Modelling of expectations
New-classical modelling
New-keynesian modelling
6
Modelling of expectations
Large acceptance of rational expectations
1/ In monetary policy
Sargent et Wallace (1975)
2/ Rule versus discretion : important question re-examined
through rational expectations
3/
Expectations and empirical
consumption, Hall (1978)
work,
in
particular
7
New-classical modelling

Optimizing agents

Markets at the equilibrium
8
Imperfect information
Lack of information 


Produceurs think that the increase in the price only applies to
their products: they believe it is a relative price change and not a
general level of price change.

Workers wish to provide more work since they believe that the
increase in nominal wage is an increase in real wage
Cycles at equilibrium
(Lucas JET 1972, AER 1973 Barro JPE 1978)
BUT : how realistic the assumption of a lack of information
about prices?
9
RBC
(Long Plosser, JPE 1983 ; Barro king, QJE 1984).
This theory has 3 strenghts:
(i) Models are simple
(ii) They are rigorously microfounded
(iii) They do a good job at reproducing the behavior of
macro variables.
10
New-Keynesian models

Economic fluctuations do not reflect the Paretoefficient response of the economy to technological
shocks but rather market failures on a large scale.
1) Fixed wages
Long-term contracts Fisher JPE (1977) et Taylor AER 1979,
2) Monopolistic competition and fixed prices
Menu costs (Mankiw 85 ; Ball Mankiw, Romer, 89).
3) Real rigidities
Efficiency wages (Katz, NBER 86 ; Shapiro et Stiglitz, AER 84)
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Conclusion 1
1/ what is largely accepted
2/ no consensus in particular for what concerns the theory
of cycles
- New-classical theory
- New-Keynesian theory
12
Conclusion 2: another view on recent
macroeconomics (Danthine, 97)






What is macroeconomics for?
How to reach our objective?
Requirements for the artificial economy
2 strategies can be considered: which one
should we choose?
How to proceed practically?
How to define success?
13
2. RBC methodology
King and Rebelo (1999) “Resuscitating RBC”
"Business cycles research studies the causes and
consequences of the recurrent expansions and
contractions in aggregate economic activity"
-
Which sources ?
Why cycles ?
→ are BC alike across time and countries ?
14
R. Lucas (1977)
«Understanding Business Cycles»
“…[understanding] business cycles means constructing a
model in the most literal sense: a fully articulated
artificial economy which behaves through time as to
imitate closely the time series behavior of actual
economies.”
→ the model will be
- in general equilibrium
- microfounded
- dynamic
- stochastic
15
A new methodology

Observe stylized facts

Construct the model
A top-down strategy

Generate artificial data

Obtain « artificial stylized facts»

Improve the model
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3. Fluctuations and facts
Burns and Mitchell [1946]
“Measuring business cycles”, NBER
“Business cycles are a type of fluctuation found in the aggregate
economic activity of nations that organize their work mainly in
business enterprises: a cycle consists of expansions occurring
at the same time in many economic activities, followed by
similarly general recessions, contractions and revivals which
merge into the expansion phase of the next cycle; this sequence
of changes is recurrent but not periodic; in duration, business
cycles vary from more than one year to ten or twelve years;
they are not divisible into shorter cycles of similar character
with amplitudes approximating their own.”
17
Business Cycles expansions
and contractions
BUSINESS CYCLE
REFERENCE DATES
Peak
Quarterly dates
are in parentheses
DURATION IN MONTHS
Trough
Contraction
Peak
to
Trough
Expansion
Previous trough
to
this peak
Cycle
Trough from Peak from
Previous
Previous
Trough
Peak
--
--
June 1857(II)
October 1860(III)
April 1865(I)
June 1869(II)
October 1873(III)
December 1854 (IV) -December 1858 (IV)
June 1861 (III)
December 1867 (I)
December 1870 (IV)
March 1879 (I)
18
8
32
18
65
30
22
46
18
34
-48 -30
78
36
99
March 1882(I)
March 1887(II)
July 1890(III)
January 1893(I)
December 1895(IV)
May 1885 (II)
April 1888 (I)
May 1891 (II)
June 1894 (II)
June 1897 (II)
38
13
10
17
18
36
22
27
20
18
74
35
37
37
36
101
60
40
30
35
June 1899(III)
September 1902(IV)
May 1907(II)
January 1910(I)
January 1913(I)
December 1900 (IV)
August 1904 (III)
June 1908 (II)
January 1912 (IV)
December 1914 (IV)
18
23
13
24
23
24
21
33
19
12
42
44
46
43
35
42
39
56
32
36
August 1918(III)
January 1920(I)
May 1923(II)
October 1926(III)
August 1929(III)
March 1919 (I)
July 1921 (III)
July 1924 (III)
November 1927 (IV)
March 1933 (I)
7
18
14
13
43
44
10
22
27
21
51
28
36
40
64
67
17
40
41
34
Source: Public Information Office National Bureau of Economic Research, Inc.
40
54
50
52
18
Business Cycles expansions
and contractions (f’d)
May 1937(II)
February 1945(I)
November 1948(IV)
July 1953(II)
August 1957(III)
June 1938 (II)
October 1945 (IV)
October 1949 (IV)
May 1954 (II)
April 1958 (II)
13
8
11
10
8
50
80
37
45
39
63
88
48
55
47
93
93
45
56
49
April 1960(II)
December 1969(IV)
November 1973(IV)
January 1980(I)
July 1981(III)
February 1961 (I)
November 1970 (IV)
March 1975 (I)
July 1980 (III)
November 1982 (IV)
10
11
16
6
16
24
106
36
58
12
34
117
52
64
28
32
116
47
74
18
July 1990(III)
March 2001(I)
March 1991(I)
November 2001 (IV)
8
8
92
120
100
128
108
128
17
22
18
10
38
27
35
57
55 56*
48 49**
53
67
18
22
20
10
33
24
26
52
51
46
46
63
Average, all cycles:
1854-2001 (32 cycles)
1854-1919 (16 cycles)
1919-1945 (6 cycles)
1945-2001 (10 cycles)
Average, peacetime cycles:
1854-2001 (27 cycles)
1854-1919 (14 cycles)
1919-1945 (5 cycles)
1945-2001 (8 cycles)
* 31 cycles
** 15 cycles
*** 26 cycles
**** 13 cycles
Source: Public Information Office National Bureau of Economic Research, Inc.
53
67
52***
47****
45
63
19
Estimated instantaneous standard deviation
of 4-quarter growth of GDP per capita
Source : Stock and Watson 2003
20
Estimated instantaneous standard deviation of
4-quarter growth of GDP per capita (f’ed)
21
22
Stock and Watson (1988)
« Variable trends in Economic Time Series »
23
O. Blanchard and S. Fischer [1989]
Lectures on macroeconomics
“the picture that emerge is […] that of an economy
on which both types of shocks play an important
role. Transitory shocks matter and have a humpshaped effect on output before their effects die
out.
But the path of output would be far from smooth
even in the absence of those transitory shocks.
What emerges is a more complex image of
fluctuations, with temporary shocks moving
output around a stochastic trend that itself
contributes significantly to the movements in the
real GNP”
24
Linear filter 1: HP filter
xˆ  x  xT  x 
J
a
j  J
x
j j
xˆ : cycle component
x T : trend component
min  x
x 
T t
t
1
t 1
 1


 xT

2
 
s.t. xT1  xT  xT  xT1
 2

2


: controls the properties of the trend component generated
by the filter
25
King and Rebelo (1999)
26
King and Rebelo (1993)
linear
27
King and Rebelo (1993)
28
Stock and Watson (1998)
29
Linear filter 2: BP-filter
(Baxter and King, 1999)
The ideal band-pass filter has the following 2-sided infinite moving
average representation: :
x
BP
t


a
h  
h
xt  h  a ( L) xt
L : lag operator.
Symmetry ( ak  ak ) is imposed.
For stationary time-series:

xt    ( ) d

 ( ) : random periodic components
30
BP filter (f’d)
Then :

x
BP
t
   ( ) ( )d


1 if 1     2
Frequency-response function :  ( )  

0 otherwise
with 1   / 16,  2   / 3,   2 / P and 6  P  32
One can then show that :
a0  2  1  /  and ah  sin(h2 ) / h  sin(h1 ) / h for h  1,2,...
x
BK
t

K
a
h K
h
x t  h  a K ( L) x t
31
M. Baxter and R. King (1999), « Measuring BC: Approximate
Band-Pass Filters for Economic Time Series »
32
33
34
Goods’market
35
Inputs
36
Labor market
37
All variables (except r) are in logarithms and have been detrended using HP filter
Source: Stock and Watson (1998)
38
Stylized facts for Europe
Germany 1967:1-1984:2
Switzerland 1967:1-1984:2
 xˆ
 xˆ /  yˆ
Corr ( xˆ, yˆ )
yˆ
cˆ
iˆ
hˆ
pˆ
2.38
1
1
1.68
0.71
0.67
9.41
3.93
0.89
1.37
0.58
0.78
1.57
0.66
0.84
UK 1967:1-1984:2
 xˆ
 xˆ /  yˆ
Corr ( xˆ, yˆ )
 xˆ
 xˆ /  yˆ
Corr ( xˆ, yˆ )
yˆ
cˆ
iˆ
hˆ
pˆ
1.56
1
1
1.42
0.91
0.66
4.59
2.94
0.79
1.10
0.71
0.65
1.19
0.76
0.71
France 1970:1-1990:2
yˆ
cˆ
iˆ
hˆ
pˆ
1.73
1
1
1.99
1.15
0.66
3.42
1.98
0.71
1.11
0.64
0.48
1.55
0.89
0.77
 xˆ
 xˆ /  yˆ
Corr ( xˆ, yˆ )
yˆ
cˆ
iˆ
hˆ
pˆ
0.91
1
1
0.81
0.9
0.63
3.64
4.01
0.80
0.83
0.92
0.71
0.65
0.72
0.45
39