Search

This paper derives a new set of results that provide corrective measures of overall technical inefficiency that either have been ignored or wrongly assumed in the literature. Using directional distance functions, we argue that overall technical inefficiency is not only a function of input and output technical inefficiencies as previous studies claim but also of the interaction between them. The derivation of the interactive effects between input and output technical inefficiencies (IEIOs) solves the arbitrary decomposition of overall technical inefficiency into input and output components. We also show that the IEIO depends on the choice of the directional vector and whether quantities and prices are taken into consideration. Using exogenous and endogenous directional vectors, we prove these results theoretically and empirically using the US commercial banking data set. Using Bayesian estimation with the monotonicity conditions imposed at each observation, we estimate input and output technical inefficiencies separately using directional input and output distance functions with the three commonly used directional vectors; the unit value, the observed input−output, and the optimal directional vectors. The overall technical inefficiency is estimated using systems of equations to incorporate the interactive effect equation and to address the endogeneity of inputs and outputs. Consistent with the theoretical results, we find significant evidence of the IEIO which has a negative effect on the overall technical inefficiency. This result is robust to alternative directional vectors and model specifications, suggesting that the adjustability of both inputs and outputs is required for the improvement of the efficiency of the US commercial banks. [ABSTRACT FROM AUTHOR]

We use nonparametric and parametric demand analysis to empirically estimate a credit card-augmented monetary asset demand system, based on the Minflex Laurent flexible functional form, and a sample period that includes the 2007–2009 global financial crisis and the COVID-19 pandemic. We also use multivariate copulae in an attempt to capture various patterns of dependence structures. In doing so, we relax the joint normality assumption of the errors of the demand system and estimate the model without having to delete one equation as is usually the practice. We show that the Minflex Laurent copula-based demand system produces a higher income elasticity for credit card transaction services and higher Morishima elasticities between credit card transaction services and monetary assets compared to the traditional estimation of the Minflex Laurent demand system. We also show that credit cards are substitutes for monetary assets and that there is lower tail dependence between the demand for credit card transaction services and transaction balances. [ABSTRACT FROM AUTHOR]

This paper examines correlation and dependence structures between money and the level of economic activity in the USA in the context of a Markov-switching copula vector error correction model. We use the error correction model to focus on the short-run dynamics between money and output while accounting for their long-run equilibrium relationship. We use the Markov regime-switching model to account for instabilities in the relationship between money and output, and also consider different copula models with different dependence structures to investigate (upper and lower) tail dependence. [ABSTRACT FROM AUTHOR]

In this paper, we are motivated by the fact that little is known about the relative performance of broad and narrow Divisia monetary aggregates, and by recent work that tests and rejects the appropriateness of the aggregation assumptions that underlie the various monetary aggregates published by the Federal Reserve as well as a large number of monetary asset groupings suggested by earlier studies. We present a comprehensive comparison of narrow versus broad Divisia monetary aggregates within three classes of empirical models. We compute correlations between the cyclical components of Divisia monetary aggregates at different levels of aggregation and the cyclical component of industrial production. We test for Granger causality running from the Divisia aggregates to industrial production and various other measures of real economic activity. We also reestimate a structural vector autoregression based on earlier work by Leeper and Roush [(2003) Journal of Money, Credit, and Banking 35, 1217–1256] and Belongia and Ireland [(2015) Journal of Business and Economic Statistics 33, 255–269; (2016) Journal of Money, Credit and Banking 48, 1223–1266], modifying that earlier work using monthly rather than quarterly data and extending it, both using broad as well as narrower Divisia monetary aggregates and by allowing for Generalized autoregressive conditional heteroskedasticity (GARCH) behavior in the structural shocks. [ABSTRACT FROM AUTHOR]

This paper takes a parametric approach to demand analysis and tests the weak separability assumptions that are often implicitly made in representative agent models of modern macroeconomics. The approach allows estimation and testing in a systems-of-equations context, using the minflex Laurent flexible functional form for the underlying utility function and relaxing the assumption of fixed consumer preferences by assuming Markov regime switching. We generate inference consistent with both theoretical and econometric regularity. We strongly reject weak separability of consumption and leisure from real money balances as well as weak separability of consumption from leisure and real money balances, meaning that the inclusion of a money in economic models would be of quantitative importance. We also investigate the substitutability/complementarity relationship among different categories of personal consumption expenditure (nondurables, durables, and services), leisure, and money. We find that the goods are net Morishima substitutes, but because of positive income effects they are gross complements. The implications for monetary policy are also briefly discussed. [ABSTRACT FROM AUTHOR]

This paper extends the ongoing literature on the macroeconomic effects of money supply volatility. We use monthly data for the USA and a bivariate, Markov switching, structural vector error correction model that is modified to accommodate generalized autoregressive conditional heteroscedasticity-in-mean errors to isolate the effects of money growth volatility on output growth. The model allows us to study how monetary uncertainty affects economic growth across different macroeconomic regimes. [ABSTRACT FROM AUTHOR]

We investigate how key monetary policy instruments and financial regulation affect the banking firm. We take the user-cost approach to the construction of prices for financial services and use quarterly data on the U.S. commercial banking sector, over the period from 1992 to 2016, obtained from the Federal Deposit Insurance Corporation. We use the symmetric generalized Barnett variable profit function to derive demands for and supplies of monetary and nonmonetary goods and provide evidence consistent with neoclassical microeconomic theory. We find that the compensated price elasticities of banking technology are small in magnitude. Yet a hypothetical policy experiment shows that even small changes in the holding costs of financial goods can result in significant changes in user costs and the quantities demanded and supplied. [ABSTRACT FROM AUTHOR]

We investigate the demand for money and the degree of substitutability among monetary assets in the United States using the generalized Leontief and the Minflex Laurent (ML) models as suggested by Serletis and Shahmoradi (2007). In doing so, we merge the demand systems literature with the recent financial econometrics literature, relaxing the homoskedasticity assumption and instead assuming that the covariance matrix of the errors of flexible demand systems is time-varying. We also pay explicit attention to theoretical regularity, treating the curvature property as a maintained hypothesis. Our findings indicate that only the curvature constrained ML model with a Baba, Engle, Kraft, and Kroner (BEKK) specification for the conditional covariance matrix is able to generate inference consistent with theoretical regularity. [ABSTRACT FROM AUTHOR]

We test the long-run neutrality of money proposition for the United States paying attention to the integration and cointegration properties of the variables. We use quarterly data (over the period from 1967:1 to 2014:1) and the new Center for Financial Stability Divisia monetary aggregates. We make a comparison among the narrower monetary aggregates, M1, M2M, MZM, M2, and ALL, and the broad monetary aggregates, M4+, M4-, and M3, and show that there is no statistically significant evidence against long-run monetary neutrality, consistent with both monetarist and Keynesian macroeconomic theory. [ABSTRACT FROM AUTHOR]

We use the longest span data that have ever been studied before (from 1870 to 2014) to investigate the relationship between the price of oil and the level of economic activity in the United States. In the context of a bivariate (identified) structural generalized autoregressive conditional heteroscedasticity (GARCH)-in-Mean VAR in real output growth and the change in the real price of oil, we find that uncertainty about oil prices has had a negative and significant effect on real output. We also find that the responses of real output growth to positive and negative shocks are not very informative of whether they are symmetric or asymmetric, and that accounting for oil price uncertainty tends to amplify the negative dynamic response of real output growth to unfavorable (positive) oil price shocks. [ABSTRACT FROM AUTHOR]

We investigate mean and volatility spillovers between the crude oil market and the debt, stock, and foreign exchange markets. In doing so, we estimate a four-variable VARMA–GARCH model with a BEKK representation and also examine the possible effects of monetary policy at the zero lower bound by including a dummy variable in both the conditional mean and variance equations. We find that the crude oil market and the financial markets are tightly interconnected and that monetary policy at the zero lower bound has strengthened their linkages. [ABSTRACT FROM AUTHOR]

This paper provides long-run evidence on the dynamic effects of supply and demand shocks on commodity prices. I assemble and analyze a new data set of price and production levels of copper, lead, tin, and zinc from 1840 to 2014. Using a novel approach to identification, I show that price fluctuations are primarily driven by demand, rather than supply shocks. Demand shocks affect the price for up to 15 years, whereas the effect of mineral supply shocks persists for up to 5 years. Price surges caused by rapid industrialization are a recurrent phenomenon throughout history. Mineral commodity prices return to their declining or stable trends in the long run. [ABSTRACT FROM AUTHOR]

Little is known about the accuracy of expert outlooks, so heavily relied upon by industry participants and policy makers, regarding the future path of oil prices. Using the regular publications by the Energy Information Administration (EIA), we examine the accuracy of annual recursive oil price forecasts generated by the National Energy Modeling System model of the Agency for forecast horizons of up to 15 years. Our results reveal that the EIA model outperforms the benchmark random walk model around the two ends of the forecast horizon spectrum. Additionally, at the longer horizons, simple econometric forecasting models often produce similar, if not better accuracy than the EIA model. Time varying such specifications generally also exhibit stability in their forecast performance. Finally, although combining forecasts does not change the overall patterns, some additional accuracy gains are obtained at intermediate horizons, and in some cases, forecast performance stability is also achieved. [ABSTRACT FROM AUTHOR]

This paper emphasizes the use of data-driven techniques to discern trends in commodity prices. Whereas many previous papers rely on parametric assumptions, we take as our departure point the view that such trends are inherently nonparametric, driven by complex forces of innovation and obsolescence, competition and strategic behavior, resource depletion and discovery, and supply and demand. Our reference specification is the partial linear model yt = f(t) + ztβ + ϵt where macroeconomic variables z enter parametrically, and f is nonparametric, to be discovered using cross-validation.We analyze data on 11 commodities—3 hydrocarbons and 8 metals. For the majority of these commodities, our data-driven estimates of f bear close similarity to band pass estimates which include long term trends and super cycles. The OPEC effect is estimated to have increased oil prices by over 50% on average and coal prices by about 25%. U.S. coal mining legislation is estimated to have increased coal prices by 9% to 15%. [ABSTRACT FROM AUTHOR]

Previous research shows that volatility in oil prices has tended to depress output, as measured by nonresidential investment, gross domestic product, and aggregated measures of industrial production in several countries. This paper investigates the effect of oil price volatility on disaggregated measures of industrial production. The disaggregated measures that we examine are the special aggregates by market groups as calculated by the Federal Reserve Board. Our results are reported for three categories of special aggregates: indexes for industrial production excluding two major industries (technology and motor vehicles), energy-related special aggregates, and non-energy-related special aggregates. Our results indicate that among energy-related market groups, the effects of oil price volatility are concentrated in activities related to primary energy generation and oil and gas drilling. Among non-energy-related market groups, oil price volatility affects a broad range of special aggregates, including aggregates sorted by consumer goods and business equipment. [ABSTRACT FROM AUTHOR]

We propose a novel explanation for the observed increase in the correlation of commodity prices over the past decade. In contrast to theories that rely on the increased influence of financial speculators, we examine the effect of interest rates on the volatility and correlation of commodity prices via a panel GARCH model. In theory, lower interest rates decrease the volatility of prices, as lower inventory costs promote the smoothing of transient shocks, and increase price correlation if common shocks are more persistent than idiosyncratic shocks. Empirically, we find that price volatility attributable to transitory shocks declines with interest rates, whereas particularly for metals prices, price correlation increases as interest rates decline. [ABSTRACT FROM AUTHOR]

We study the impact of oil price shocks on the U.S. stock market volatility. We jointly analyze three different structural oil market shocks (i.e., aggregate demand, oil supply, and oil-specific demand shocks) and stock market volatility using a structural vector autoregressive model. Identification is achieved by assuming that the price of crude oil reacts to stock market volatility only with delay. This implies that innovations to the price of crude oil are not strictly exogenous, but predetermined with respect to the stock market. We show that volatility responds significantly to oil price shocks caused by unexpected changes in aggregate and oil-specific demand, whereas the impact of supply-side shocks is negligible. [ABSTRACT FROM AUTHOR]

This special issue of Macroeconomic Dynamics presents a timely and fresh body of high-quality research on the complexity and evolution of the international oil markets, the dynamics of the price of oil, and the financialization and the interconnections of oil, energy, and nonenergy commodity markets. [ABSTRACT FROM AUTHOR]

In this paper we investigate the relationship between crude oil and gasoline prices and also examine the effect of oil price uncertainty on gasoline prices. The empirical model is based on a structural vector autoregression that is modified to accommodate multivariate GARCH-in-Mean errors. We use monthly data for the United States over the period from January 1976 to September 2014. We find that there is an asymmetric relationship between crude oil and gasoline prices, and that oil price uncertainty has a positive effect on gasoline price changes. Our results are robust to alternative model specifications and alternative measures of the price of oil. [ABSTRACT FROM AUTHOR]

Many oil industry analysts believe that there is predictive power in the product spread, defined as the difference between suitably weighted refined product market prices and the price of crude oil. We derive a number of alternative forecasting model specifications based on product spreads and compare the implied forecasts to the no-change forecast of the real price of oil. We show that not all product spread models are useful for out-of-sample forecasting, but some models are, even at horizons between one and two years. The most accurate model is a time-varying parameter model of gasoline and heating oil spot price spreads that allows for structural change in product markets. We document mean-squared prediction error reductions as high as 20% and directional accuracy as high as 63% at the two-year horizon, making product spread models a good complement to forecasting models based on economic fundamentals, which work best at short horizons. [ABSTRACT FROM AUTHOR]

This paper investigates the time delay in the transmission of oil price shocks using disaggregated manufacturing data on inventories and sales. VAR estimates indicate that industry-level inventories and sales respond faster to an oil price shock than aggregate gross domestic product, especially in industries that are energy-intensive. In response to an unexpected oil price increase, sales drop and inventories are accumulated. This leads to future reductions in production. We estimate a modified linear–quadratic inventory model to inquire whether the patterns observed in the VAR impulse responses are consistent with rational behavior by the firms. Estimation results suggest that three mechanisms play a role in the industry-level dynamics. First, oil prices act as a negative demand shock. Second, the shock catches manufacturers by surprise, resulting in higher-than-anticipated inventories. Third, because of their desire to smooth production, manufacturers deviate from the target level of inventories and spread the decline in production over various quarters; hence the delay in the response of aggregate output. [ABSTRACT FROM AUTHOR]

This paper suggests that we need an alternative approach to economic modeling in general, and macroeconomic modeling in particular, if we are to capture salient characteristics of recent economic developments. Rather than focusing on models built on the basis of isolated, rational, optimizing agents, we should recognize that much simpler individuals following basic rules can collectively generate complex behavior. We have lessons to learn from studying the behavior of social insects for example. Noisy systems of interactive agents can generate aggregate phenomena such as sudden changes in the state of an economy or market, with no external shock. I give two examples of simple models of financial markets to illustrate this but would argue more generally that such models are indispensible if we are to understand aggregate economic phenomena. [ABSTRACT FROM AUTHOR]

We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that, in our model economy, increasing the trend rate of inflation above 3% has a substantial deleterious effect, but lowering it below 3% has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality. [ABSTRACT FROM AUTHOR]

In the aftermath of the global financial crisis, questions have been raised regarding the value and applicability of modern macroeconomics. Motivated by these developments and recent advances in dynamical systems theory, the papers in this special issue of Macroeconomic Dynamics deal with specific aspects of the economy as a complex evolving dynamic system. [ABSTRACT FROM AUTHOR]

We formulate a central bank's problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted stationary utility for a heterogeneous population of infinitely lived households in an economy with constant aggregate income and public information. Households are segmented into agents who store value in currency alone and agents who have access to both currency and loans. We show that the optimum inflation rate is positive, because inflation reduces the value of the outside option for credit agents and raises their debt limits. [ABSTRACT FROM AUTHOR]

This paper distinguishes two kinds of endogenous business cycle models: EBC1 models, which display dynamic indeterminacy, and EBC2 models, which display steady-state indeterminacy. Both strands of the literature have their origins in the sunspot literature that developed at the University of Pennsylvania in the 1980s. I argue that EBC1 models are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models provide a microfoundation for one of the most important ideas to emerge from Keynes's (1936) General Theory of Employment, Interest and Money: that high involuntary unemployment can persist as part of the steady-state equilibrium of a market economy. [ABSTRACT FROM AUTHOR]

We propose a sectoral–shift theory of aggregate factor productivity for a class of multisector economies with AK technologies and a constant production possibilities frontier. Loans are partly secured by collateral and partly based on reputation. We find that both the growth rate and total factor productivity (TFP) respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital, which, in turn, responds to reversible exogenous shifts in relative sector productivities. Endogenous debt limits on secured and unsecured loans slow down capital reallocation, preventing the equalization of risk-adjusted equity yields across sectors. Economywide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP, and sectoral growth rates. We also find highly volatile limit cycles in economies with small amounts of collateral. [ABSTRACT FROM AUTHOR]

We explore bifurcation phenomena in the open-economy New Keynesian model developed by Galí and Monacelli in 2005. We find that the open economy framework brings about more complex dynamics, along with a wider variety of qualitative behaviors and policy responses. Introducing parameters related to the open economy structure affects the values of bifurcation parameters and changes the location of bifurcation boundaries. As a result, the stratification of the confidence region, as previously seen in closed-economy New Keynesian models, remains an important research and policy risk to be considered in the context of the open-economy New Keynesian functional structures. In fact, econometrics and optimal policy design become more complex within an open economy. Dynamical inferences need to be qualified by the risk of bifurcation boundaries crossing the confidence regions. Policy design needs to take into consideration that a change in monetary policy can produce an unanticipated bifurcation, without adequate prior econometrics research. [ABSTRACT FROM AUTHOR]

We introduce public spending, financed through income taxation, into the Ramsey model with heterogeneous agents. Public spending as a source of welfare generates more complex dynamics. In contrast to previous contributions focusing on similar models but with wasteful public spending, limit cycles through Hopf bifurcation and expectation-driven fluctuations appear if the degree of capital–labor substitution is high enough to be compatible with capital income monotonicity. Moreover, unlike frameworks with a representative agent, our results do not require externalities in production and are compatible with a weakly elastic labor supply with respect to wage. [ABSTRACT FROM AUTHOR]

We study the dynamics of the distribution of wealth in an economy with infinitely lived agents, intergenerational transmission of wealth, and redistributive fiscal policy. We show that wealth accumulation with idiosyncratic investment risk and uncertain lifetimes can generate a double Pareto wealth distribution. [ABSTRACT FROM AUTHOR]

In this paper we investigate the relationship between leverage and the level of economic activity in the United States, using quarterly data over the period 1951–2012. We address the question for five different measures of leverage—household leverage, nonfinancial firm leverage, commercial bank leverage, broker–dealer leverage, and shadow bank leverage—making a distinction between traditional banks and shadow banks, the latter being a consequence of financial innovation and deregulation in the financial services industry over the past 30 years. We investigate whether the relationship between leverage and the level of economic activity is nonlinear and asymmetric using slope-based tests as well as tests of the null hypothesis of symmetric impulse responses. Our results inform policymakers about the important distinction between traditional banks and the market-based financial intermediaries that have been at the center of the global financial crisis of 2007–2009. They also inform about the macroeconomic effects of the deleveraging process that began in 2008, as well as about the need for countercyclical macroprudential policies to reduce the procyclicality of the financial system. [ABSTRACT FROM AUTHOR]