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This paper examines the role of uncertainty on elasticities of trade flows with respect to variable trade costs in a canonical model of trade with monopolistic competition and heterogeneous firms. We identify two channels through which uncertainty impacts trade: through export participation thresholds (the selection effect) and the distribution of shocks governing export selection (the dispersion effect). While the selection effect dampens trade elasticities under uncertainty, the dispersion effect is ambiguous. We develop a methodology for using customs firm-level data to quantify trade elasticities under uncertainty, and the magnitude of each of the two channels through which uncertainty impacts trade. We find that uncertainty amplifies trade elasticities, on average, indicating that the dispersion effect of idiosyncratic firm-level shocks dominates - though the effect is heterogeneous across industries. The overall magnitude of the endogenous selection mechanism on trade elasticities is small, indicating that the main drivers of trade in this class of trade models are overwhelmingly incumbent firms. [ABSTRACT FROM AUTHOR]

This paper reviews literature on the empirical relationship between vulnerabilities in the financial system and the macroeconomy, and how monetary policy affects that connection. Financial vulnerabilities build up over time, with both risk appetite and risk taking rising during economic expansions. To some extent, financial crises are predictable and have severe real economic consequences when they occur. Empirically it is difficult to link monetary policy to financial vulnerabilities, in part because financial cycles have long durations, making it difficult to separate effects of changes in monetary policy from other business cycle effects. [ABSTRACT FROM AUTHOR]

This paper offers a solution to the international co-movement puzzle found in open-economy macroeconomic models. We develop a small open-economy (SOE) dynamic stochastic general equilibrium (DSGE) model describing three endogenous channels that capture spillovers from the world to a commodity exporter: a world commodity price channel, a domestic commodity supply channel, and a financial channel. We estimate our model with Bayesian methods on two commodity-exporting SOEs, namely Canada and South Africa. In addition to explaining international business cycle synchronization, the new model attributes an important fraction of business cycle fluctuations to foreign shocks in the SOEs. [ABSTRACT FROM AUTHOR]

The Cobb-Douglas matching function is ubiquitous in search and matching models, even though it imposes a constant matching elasticity that is unlikely to hold empirically. Using a general constant returns to scale matching function, this paper first derives analytical conditions that determine how the cyclicality of the matching elasticity amplifies or dampens the nonlinear dynamics of the job finding and unemployment rates. It then demonstrates that these effects are quantitatively significant and driven by plausible variation in the matching elasticity. [ABSTRACT FROM AUTHOR]

In the US, income and expenditure-side estimates of GDP (GDPI and GDPE) measure "true" GDP with error and are available at a quarterly frequency. Methods exist for using these proxies to produce reconciled quarterly estimates of true GDP. In this paper, we extend these methods to provide reconciled historical true GDP estimates at a monthly frequency. We do this using a Bayesian mixed frequency vector autoregression (MF-VAR) involving GDPE, GDPI, unobserved true GDP, and monthly indicators of short-term economic activity. Our MF-VAR imposes restrictions that reect a measurement-error perspective (that is, the two GDP proxies are assumed to equal true GDP plus measurement error). Without further restrictions, our model is unidentified. We consider a range of restrictions that allow for point and set identification of true GDP and show that they lead to informative monthly GDP estimates. We illustrate how these new monthly data contribute to our historical understanding of business cycles and we provide a real-time application nowcasting monthly GDP over the pandemic recession. [ABSTRACT FROM AUTHOR]

Several Phillips curves based on sticky information and sticky prices are estimated and compared using Bayesian VAR-GMM. This method derives expectations in each Phillips curve from a VAR and estimates the Phillips curve parameters and the VAR coefficients simultaneously. Quasi-marginal likelihood-based model comparison selects a dual stickiness Phillips curve in which, each period, some prices remain unchanged, consistent with micro evidence. Moreover, sticky information is a more plausible source of inflation inertia in the Phillips curve than other sources proposed in previous studies. Sticky information, sticky prices, and unchanged prices in each period are all needed to better describe inflation dynamics. [ABSTRACT FROM AUTHOR]

We propose a model with costly international financial intermediation that links exchange rate movements to shifts in the demand for domestically produced goods relative to the demand for imported goods (trade rebalancing). Our model is consistent with stylized facts of exchange rate dynamics, including those related to the trade balance, which is typically overlooked in the literature on exchange rate determination. In a quantitative assessment, trade rebalancing explains nearly 50 percent of exchange rate fluctuations over the business cycle, whereas exogenous deviations from the uncovered interest rate parity— the primary source of exchange rate fluctuations in the literature—account for just above 20 percent. Using data on trade flows or the trade balance is key to properly identifying the determinants of the exchange rate. Thus, our model overcomes the sharp dichotomy between the real exchange rate and the macroeconomy embedded in other models of exchange rate determination. [ABSTRACT FROM AUTHOR]

I show that business cycles can generate most of the low-frequency movements in the unemployment rate. First, I provide evidence that the unemployment rate is stationary, while its flows have unit roots. Then, I model the log unemployment rate as the error correction term of log labor flows in a vector error correction model (VECM) with intercepts that change over the business cycle. Feeding historical expansions and recessions into the VECM generates large low-frequency movements in the unemployment rate. Frequent recessions from the late 1960s to the early 1980s interrupt labor market recoveries and ratchet the unemployment rate upward. Long expansions in the 1980s and 1990s undo this upward ratcheting. Finally, the VECM predicts that the unemployment rate will be near 3.6 percent after a 10-year expansion and that lower unemployment rates are possible with longer expansions. [ABSTRACT FROM AUTHOR]

I study the business cycle properties of wage posting models with random search, for which the distributions of employment and wages play a nontrivial role for the equilibrium path. In fact, the main result of this paper is that the distribution of firms is one of the most important elements to understand business cycle fluctuations in the labor market. The distribution of firms (1) determines which shocks are relevant for the labor market, (2) implies that wage rigidity does not significantly amplify shocks, and (3) puts discipline on the relative value of the flow opportunity cost of employment. To assess these type of models quantitatively, I propose a new algorithm that finds the steady state and computes transitional dynamics rapidly. Hence, integrating wage posting models with random search to larger models becomes possible (and easy) with this new algorithm. [ABSTRACT FROM AUTHOR]

Empirical evidence suggests that recessions have long-run effects on the economy's productive capacity. Recent literature embeds endogenous growth mechanisms within business cycle models to account for these/scarring" effects. The optimal conduct of monetary policy in these settings, however, remains largely unexplored. This paper augments the standard sticky-price New Keynesian (NK) to allow for endogenous dynamics in aggregate productivity. The model has a representation similar to the two-equation NK model, with an additional condition linking productivity growth to current and expected future output gaps. Absent state contingency in the subsidies that correct the externalities associated with productivity growth, optimal monetary policy sets inflation above target whenever the subsidies fall short of the externalities. In the recovery from a spell at the ZLB, the optimal discretionary policy sets inflation temporarily above target, helping mitigate the long-run damage. Following a cost-push shock that creates inflationary pressure, the central bank tolerates a larger rise in inflation than in a model with exogenous productivity. The gains from commitment include the central bank's ability to make credible promises about future output gaps in a way that allows it to manipulate current productivity growth. [ABSTRACT FROM AUTHOR]

By examining statements made by the Federal Reserve leadership since the early 1950s, we establish that there has been considerable continuity in policymakers' perceptions of the benefits of price stability. Policymakers have consistently contended that deviations from price stability give rise to greater cyclical instability, and they have also frequently suggested that potential output is significantly lowered by inflation. The recurrent support for price stability that comes through in these statements implies that it is invalid to take periods in the U.S. record of deviations from price stability as indicating a policymaker belief in the desirability of inflation. [ABSTRACT FROM AUTHOR]

Using synthetic differences-in-differences models, we study whether U.S. counties containing state flagship universities experienced resiliency via lower unemployment rates during the past three U.S. recessions. We find an insignificant effect for the 2001 recession and a large resiliency effect for the 2008-2009 recession. However, counties with flagship universities faced higher unemployment rates during the 2020 recession, and were therefore less resilient to the Covid-19 recession than other counties. These results support the hypothesis that stable consumption demand for non-tradables drives resiliency, which was absent during the 2020 recession when most university campuses were closed to students due to Covid-19 restrictions. [ABSTRACT FROM AUTHOR]

We explore a new source of data on layoffs: timely 8-K filings with the Securities and and Exchange Commission. We develop measures of both the number of reported layoff events and the number of affected workers. These series are highly correlated with the business cycle and other layoff indicators. Linking firm-level reported layoff events with WARN notices suggests that 8-K filings are sometimes available before WARN notices, and preliminary regression results suggest our layoff series are useful for forecasting. We also document the industry composition of the data and specific areas where the industry shares diverge. [ABSTRACT FROM AUTHOR]

Using a panel of tax data, we follow the earnings of individuals over business cycles. Compared to prior recessions, the Covid policy response and recovery were far more progressive. Among workers starting in the bottom quintile, median real earnings including fiscal relief increased 66 percent in 2020 and earnings increases offset relief decreases in the 2021 recovery. After the prior two recessions, this measure had decreased by 24 percent. Among those starting in the top quintile, median and average real earnings were approximately unchanged. This difference from prior recessions is largely attributable to larger Covid-era stimulus payments and unemployment insurance. [ABSTRACT FROM AUTHOR]

The creation of new businesses declines in recessions. In this paper, I study the effects of pro-cyclical business formation on aggregate employment in a general equilibrium model of firm dynamics. The key features of the model are that the elasticity of demand faced by firms falls with their market share and that adjustment costs slow the reallocation of employment between firms. In response to a decline in entry, incumbent firms' market shares increase, their elasticity of demand falls, and they increase their markups and reduce employment. To quantify the model, I study the relationship between variable input use and revenue in panel data on large firms. Viewed through the lens of my model, my estimates imply that for large firms, the within-firm elasticity of the markup to relative sales is 25 percent. I use the calibrated model to study shocks to entry, finding that a fall in entry can lead to a significant contraction in employment. A shock to entry that replicates the decline in the number of businesses during the Great Recession generates a prolonged 2.5 percent fall in employment in the model. Finally, I show that the declining correlation between revenue and variable input use over the past 30 years implies that the effect of entry on the business cycle has become stronger over time. [ABSTRACT FROM AUTHOR]

We uncover the major drivers of macro aggregates and the real exchange rate at business cycle frequencies in Group of Seven countries. The estimated main drivers of key macro variables resemble each other and account for a modest fraction of the real exchange rate variances. Dominant drivers of the real exchange rate are orthogonal to main drivers of business cycles, generate a significant deviation of the uncovered interest parity condition, and lead to small movements in net exports. We use these facts to evaluate international business cycle models accounting for the dynamics of both macro aggregates and the real exchange rate. [ABSTRACT FROM AUTHOR]

We establish that the Phillips curve is persistence-dependent: inflation responds differently to persistent versus moderately persistent (or versus transient) fluctuations in the unemployment rate gap. This persistence-dependent relationship appears to align with business-cycle stages and is thus consistent with existing theory. Previous work fails to model this dependence, thereby finding numerous "inflation puzzles" - e.g., missing inflation/disinflation - noted in the literature. Our specification eliminates these puzzles; for example, the Phillips curve has not weakened, nor was inflation "stubbornly low" in 2019. The model's coefficients are stable, and it provides accurate conditional recursive forecasts through the Great Recession. There are important monetary policy implications. [ABSTRACT FROM AUTHOR]

Using a novel data set of U.S. residential land developments, we document that the average time to develop residential properties--which includes both the time spent preparing land infrastructures and construction--is about three years, consistent with sizable lags in housing investment projects. We show that the time to develop is highly dispersed across locations, a finding that helps quantify the housing supply elasticity that is relevant for assessing local housing variations over the business cycle. We also show that incorporating long and dispersed time to develop into an otherwise standard housing investment model helps rationalize some empirical facts on the housing market. Our model implies that policies to boost housing supply are less effective in immediately stabilizing house prices for regions where land development takes a long time. [ABSTRACT FROM AUTHOR]

Canonical menu cost models, when parameterized to match the micro-price data, cannot reproduce the extent to which the fraction of price changes increases with inflation. They also predict implausibly large menu costs and misallocation in the presence of strategic complementarities. We resolve these shortcomings by extending the multiproduct menu cost model along two dimensions. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to standard models, the fraction of price changes increases rapidly with the size of monetary shocks, so our model implies a non-linear Phillips curve. [ABSTRACT FROM AUTHOR]

We develop a two-country macroeconomic model that we fit to a set of aggregate prices and quantities for the U.S. and the rest of the world. In addition to a standard array of shocks, the model includes time variation in agents' preference for safe bonds. We allow for a component of this time variation to be common across countries and biased toward dollar-denominated safe assets, and refer to this component as global flight to safety (GFS). We find that GFS shocks are the most important shocks driving world business cycles, and are also important drivers of activity in the U.S. and especially abroad. An adverse GFS shock lowers global GDP and inflation, widens global corporate credit spreads, and appreciates the dollar. These effects are very close to those obtained from a structural VAR which uses the excess bond premium (Gilchrist and Zakrajšek, 2012) as proxy for global flight to safety. [ABSTRACT FROM AUTHOR]

We study the relation between inflation and real activity over the business cycle. We employ a Trend-Cycle VAR model to control for low-frequency movements in inflation, unemployment, and growth that are pervasive in the post-WWII period. We show that cyclical fluctuations of inflation are related to cyclical movements in real activity and unemployment, in line with what is implied by the New Keynesian framework. We then discuss the reasons for which our results relying on a Trend-Cycle VAR differ from the findings of previous studies based on VAR analysis. We explain empirically and theoretically how to reconcile these differences. [ABSTRACT FROM AUTHOR]

We study the dynamic link between economic news coverage and the macroeconomy. We construct two measures of media coverage of bad and good unemployment figures based on three major US newspapers. Using nonlinear time series techniques, we document three facts: (i) there is no significant negativity bias in economic news coverage. The asymmetric responsiveness of newspapers' coverage to positive and negative unemployment shocks is entirely explained by the effects of these shocks on unemployment itself; (ii) consumption reacts to bad news, but not to good news; (iii) bad news is more informative to the agents and affects their expectations more than good news. [ABSTRACT FROM AUTHOR]

How can we measure the welfare benefit of ongoing stabilization policies? We develop a methodology to calculate the welfare cost of business cycles taking into account that observed consumption is partially smoothed. We propose a decomposition that disentangles consumption in a mix of laissez-faire (absent policies) and riskless components. With a novel identification strategy, we estimate the span of stabilization power. In our preferred specification, we find that the welfare cost of total fluctuations is 11 percent of lifetime consumption, of which 82 percent is smoothed by the status quo policies, yielding a residual 1.8 percent of consumption to be tackled by policymakers. [ABSTRACT FROM AUTHOR]

We study the dynamic link between economic news coverage and the macroeconomy. We construct two measures of media coverage of bad and good unemployment figures based on three major US newspapers. Using nonlinear time series techniques, we document three facts: (i) there is no significant negativity bias in economic news coverage. The asymmetric responsiveness of newspapers' coverage to positive and negative unemployment shocks is entirely explained by the effects of these shocks on unemployment itself; (ii) consumption reacts to bad news, but not to good news; (iii) bad news is more informative to the agents and affects their expectations more than good news. [ABSTRACT FROM AUTHOR]

A common practice in empirical macroeconomics is to examine alternative recursive orderings of the variables in structural vector autoregressive (VAR) models. When the implied impulse responses look similar, the estimates are considered trustworthy. When they do not, the estimates are used to bound the true response without directly addressing the identification challenge. A leading example of this practice is the literature on the effects of uncertainty shocks on economic activity. We prove by counterexample that this practice is invalid in general, whether the data generating process is a structural VAR model or a dynamic stochastic general equilibrium model. [ABSTRACT FROM AUTHOR]

We investigate the effects of financial risk cycles on business cycles, using a panel spanning 73 countries since 1900. Agents use a Bayesian learning model to form their beliefs on risk. We construct a proxy of these beliefs and show that perceived low risk encourages risk-taking, augmenting growth at the cost of accumulating financial vulnerabilities, and therefore, a reversal in growth follows. The reversal is particularly pronounced when the low-risk environment persists and credit growth is excessive. Global-risk cycles have a stronger effect on growth than local-risk cycles via their impact on capital flows, investment, and debt-issuer quality. [ABSTRACT FROM AUTHOR]

We develop a business cycle model with search frictions in the labor market and a labor supply decision along the extensive margin that yields cyclical asymmetry between peaks and troughs of the unemployment rate and symmetric fluctuations of the labor force participation rate as in the U.S. data. We calibrate the model and find that cyclical changes in the extent of search frictions are solely responsible for the peaktrough asymmetry. Participation decisions do not generate asymmetry but contribute to the fluctuations in search frictions by changing the size and composition of the pool of job seekers, which in turn affects the tightness ratio and thereby slack in the labor market. The participation rate would be counterfactually asymmetric absent labor supply responses to shocks. [ABSTRACT FROM AUTHOR]

How can we measure the welfare benefit of ongoing stabilization policies? We develop a methodology to calculate the welfare cost of business cycles taking into account that observed consumption is partially smoothed. We propose a decomposition that disentangles consumption in a mix of laissez-faire (absent policies) and riskless components. With a novel identification strategy, we estimate the span of stabilization power. Our results show that the welfare cost of total fluctuations is 11 percent of lifetime consumption, of which 82 percent is smoothed by the status quo policies, yielding a residual 1.8 percent of consumption to be tackled by policymakers. [ABSTRACT FROM AUTHOR]

Upon arrival of macroeconomic news, economic agents update their beliefs about the long-run fundamentals of the economy. I show that signals about the agents' long-run expectations, proxied by the economic outlook revisions of professional forecasters, convey suffcient information to identify the effects of expected future technological changes, or news shocks. A major advantage of this approach from the existing news shock literature is that it does not depend on an empirical measure for technology, or on assumptions about common trends and timing of the technological change. I show that technological news shocks cause a strong anticipation effect in investment and an increase in hours, while there is less evidence of consumption smoothing over time|in line with news-driven business cycle models featuring a key role of financial frictions. [ABSTRACT FROM AUTHOR]

We study the non-linear propagation mechanism of tax policy in a heterogeneousagent equilibrium business cycle model with search frictions in the labor market and an extensive margin of employment adjustment. The model exhibits endogenous job destruction and endogenous hiring standards in the form of occasionally-binding zero-surplus constraints. After parameterizing the model using U.S. data, we find that the dynamic response of employment to a temporary change in the labor income tax is highly non-linear, displaying sizable asymmetries and state-dependence. Notably, the response to a tax rate cut is at least twice as large in a recession as in an expansion. [ABSTRACT FROM AUTHOR]

We present a model in which efficient long-term employment relationships are sustained by wage adjustments prompted by shocks to idiosyncratic productivity and the arrival of outside job offers. In accordance with casual and formal evidence, these wage adjustments occur only sporadically, due to the presence of renegotiation costs. The model is amenable to analytical solution and yields new insights into a number of labor market phenomena, including: (1) key features of the empirical distributions of changes in pay among job stayers; (2) a property of near-"memorylessness" in wage dynamics that implies that initial hiring wages have only limited influence on later wages and allocation decisions; and (3) a crucial role for nonbase pay--specifically, recruitment and retention bonuses--in sustaining efficient employment relationships. [ABSTRACT FROM AUTHOR]

Examining a parsimonious, yet comprehensive, set of recession signals yields three lessons. First, signals from financial markets, leading indicators of activity, and gauges of the macroeconomic environment are each useful at different horizons, with leading indicators and financial signals informative at short horizons and the state of the business cycle at medium horizons. Second, approaches emphasizing the yield curve overstate the recession signal from the term spread if other factors are not considered; given correlations among indicators, these differences are often small, but were large in 2022. Finally, simulations of a reduced-form vector autoregression of unemployment and financial conditions, which captures the time-series properties of the series well, suggest the patterns are consistent with a typical hump-shape characterization of business cycle dynamics; this synthesis tightens the connections of the recession prediction literature with the business-cycle literature. [ABSTRACT FROM AUTHOR]

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The article focuses on common causes of economic recession which is characterized by decreases in output and employment. It mentions volatility of the business cycle, can help to ease the short-term output and employment losses caused by economic downturns. It also mentions variety of factors in determining recessions, including income, employment, consumption, sales, and industrial production.

We evaluate the aggregate effects of changes in trade barriers when these changes can be implemented slowly over time and trade responds gradually to changes in trade barriers because firm-level trade costs make exporting a dynamic decision. Our model shows how expectations of changes in trade barriers affect the economy. We find that while decreases in trade barriers increase economic activity, expectations of lower future trade barriers temporarily decrease investment, hours worked, and output. Further-more, canceling an expected decline in future trade barriers raises investment and output in the short run but substantially lowers medium-run growth. These effects are larger when the expected reform is bigger. In the data, we find that countries with more trade growth after the General Agreement on Tariffs and Trade (GATT) rounds decreased investment and hours worked in the years leading to the tariff cuts, as predicted by our model. [ABSTRACT FROM AUTHOR]

The article focuses on introduction to the U.S. economy and discusses the business cycle, how recessions are determined, and potential causes and effects of these fluctuations in the economy. It mentions real gross domestic product (GDP) total economic output adjusted for inflation is the broadest measure of economic activity. It also mentions economy's movement through these alternating periods of growth and contraction is known as the business cycle.