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During the 2007-2011 economic downturn, the duration that one could collect unemployment insurance (UI) in the United States increased to an unprecedented 99 weeks, and the UI benefit amount increased by $25. This article explores the policy of increasing the generosity of UI during recessions using a model that accounts for the insurance and moral hazard implications of UI as well as the program's impact on job creation. When limited to adjusting the duration of benefits, a more generous UI system is optimal. However, due to UI's negative impact on job creation and the increased cost of providing benefits when unemployment is high, the optimal extension is just 1.3 months. When the government adjusts both the benefit amount and its duration, the optimal policy during downturns is a reduction in the replacement rate. This mitigates the decline in job creation and funds a UI extension of 4.3 months. JEL Classification: J65, J64, E32, 1. Introduction In most developed countries, unemployment insurance (UI) is a static program that remains constant regardless of labor market conditions. The United States, along with Canada, are the only [...]

This paper describes the overall dynamic behavior of an economic system by viewing it as analogous to a living system with productive aims involving goods and services. The focus is on the ubiquitous macro-behavior common to all production systems like a company, a state or a country. The mathematical structure utilized is the well-known Lotka-Volterra set of nonlinear differential equations connecting the physical production capacity and the corresponding production, both expressed in the same monetary basis. The novelty production factor is represented by the parameter variation utilized in the study of living systems. The example presented in this paper is the case of Brazil and the basic variables are the Capital Stock and the Gross Domestic Product. Aspects such as dissipative structures, economic non-equilibrium, multi-periodicity and irregularities in business cycles can be viewed within this simple approach. The model can be useful for analyzing investment policies and scenarios from an aggregated perspective and thereby strategic assessment of entrepreneurial ventures including social entrepreneurship., Introduction In previous papers Kamimura et al. (2001, 2004) investigate the nonlinear relations between two macroeconomic variables--the utilized capital stock K and the resultant output production or Gross Domestic Product [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2010.06.018 Byline: Giovanni Dosi (a)(b), Giorgio Fagiolo (a), Andrea Roventini (c)(a) Abstract: This paper studies an agent-based model that bridges Keynesian theories of demand-generation and Schumpeterian theories of technology-fueled economic growth. We employ the model to investigate the properties of macroeconomic dynamics and the impact of public polices on supply, demand and the 'fundamentals' of the economy. We find profound complementarities between factors influencing aggregate demand and drivers of technological change that affect both 'short-run' fluctuations and long-term growth patterns. From a normative point of view, simulations show a corresponding complementarity between 'Keynesian' and 'Schumpeterian' policies in sustaining long-run growth paths characterized by milder fluctuations and relatively lower unemployment levels. The matching or mismatching between innovative exploration of new technologies and the conditions of demand generation appear to suggest the presence of two distinct 'regimes' of growth (or absence thereof) characterized by different short-run fluctuations and unemployment levels. Author Affiliation: (a) Laboratory of Economics and Management, Sant'Anna School of Advanced Studies, Pisa, Italy (b) MIoIR, University of Manchester, UK (c) Department of Economics, University of Verona, Italy

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2010.02.001 Byline: Ana Babus (a), Casper G. de Vries (b) Abstract: The dynamic properties of micro based stochastic macro models are often analyzed through a linearization around the associated deterministic steady state. Recent literature has investigated the errors made by such a deterministic approximation. Complementary to this literature we investigate how the linearization affects the stochastic properties of the original model. We consider a simple real business cycle model with noisy learning by doing. The solution has a stationary distribution that exhibits moment failure and has an unbounded support. The linear approximation, however, yields a stationary distribution with possibly a bounded support and all moments finite. Author Affiliation: (a) University of Cambridge, UK (b) Department of Economics H8-33, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands Article History: Received 11 October 2007; Revised 19 April 2009; Accepted 29 September 2009

It is demonstrated how the cyclical performance of large and small businesses in job creation is also mirrored in stock returns. The correlation between the returns of small cap stocks and large cap stocks with the unemployment rate is also shown.

The empirical success of Real Business Cycle (RBC) models is often judged by their ability to explain the behavior of a multitude of real macroeconomic variables using a single exogenous shock process. This paper shows that in a model with the same basic structure as the bare bones RBC model, monetary, cost-push or preference shocks are equally successful at explaining the behavior of macroeconomic variables. Thus, the empirical success of the RBC model with respect to standard RBC evaluation techniques arises from the basic form of the dynamic stochastic general equilibrium model, not from the specific role of the productivity shock. (JEL E32, E37), I. INTRODUCTION A major achievement of Real Business Cycle (RBC) models has been their success at elegantly explaining a remarkably large fraction of business cycle fluctuations in aggregate variables based [...]

A unified model of business cycles that generates aggregate and sectoral comovement in response to aggregate and sectoral shocks is proposed. Short-run wealth effects on the labor market should be weak if comovement is to be robust to the timing and nature of shocks affecting the economy.

Consumption habits have become an integral component in new Keynesian models. However, consumption habits can be modeled in a host of different ways and this diversity is reflected in the literature. I examine whether different approaches to modeling consumption habits have important implications for business cycle behavior. Using a standard New Keynesian business cycle model, I show that, to a first-order log-approximation, the consumption Euler equation associated with the additive functional form for habit formation encompasses the multiplicative function form. Empirically, I show that whether consumption habits are internal or external has little effect on the model's business cycle characteristics. JEL codes: E52, E58 Keywords: habit formation, business cycles., CONSUMPTION HABITS ARE a key component in modern New Keynesian business cycle models. (1) They are relied on to explain movements in aggregate consumption data and to generate the 'hump-shaped' [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.eeh.2009.04.002 Byline: Samad Sarferaz (a), Martin Uebele (b) Keywords: Business cycle chronology; Imperial Germany; Dynamic factor models; Industrialization Abstract: We use a Bayesian dynamic factor model in order to calculate an economic activity index for Germany prior to World War I. The procedure allows us to incorporate information from a vast number of time series, which are underutilized by historical national accounts. Therefore, our indicator provides an alternative measure for economic activity, based on a broader database. To investigate industrialization, we compare our aggregate measure of economic activity with sectoral activity indices. We find that the industrial transition was completed earlier than agricultural output and employment shares suggest, since the indicator for agriculture had already decoupled from the aggregate business cycle measure during the 1860s. Moreover, we find that stock prices are strongly correlated with our indicator, and lead it by 1-2 years. Author Affiliation: (a) Institute for Empirical Research in Economics, Winterthurerstrasse 30, CH-8006 Zurich, Switzerland (b) Institute for Economic and Social History, Domplatz 20-22, D-48143 Munster, Germany Article History: Received 1 August 2007 Article Note: (footnote) [star] We are indebted to Albrecht Ritschl for many discussions and careful readings, and grateful for helpful advice to Pooyan Amir Ahmadi, Stephen Broadberry, Michael C. Burda, Carsten Burhop, Nicholas Crafts, Martin Ellison, Bartosz MaAkowiak, Emanuel Monch, Alexander Rathke, Wolfgang Reichmuth, Oliver Volckart, Mirko Wiederholt, Ulrich Woitek, Nikolaus Wolf, and conference and seminar participants. Generous support is acknowledged from the Deutsche Forschungsgemeinschaft through SFB 649 'Economic Risk,' Humboldt University of Berlin, and from the Marie Curie Research Training Network 'Unifying the European Experience.' An earlier version of this paper was awarded the 2006 New Researcher Prize of the Economic History Society.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.02.003 Byline: Takashi Kano Keywords: Current account; Habit formation; World real interest rate; Present-value model; Small open economy model; Bayesian analysis Abstract: In a recent paper, Gruber (Gruber, J.W., 2004. A present value test of habits and the current account. Journal of Monetary Economics 51, 1495-1507) claims that habit formation in consumption plays an important role in current account fluctuations in selected developed countries, extending the present-value model of the current account (PVM) with consumption habits. In this paper, however, I show that the habit-forming PVM is observationally equivalent to the PVM augmented with persistent transitory consumption, which is induced by world real interest rate shocks. Based on a small open-economy real business cycle (SOE-RBC) model endowed with consumption habits as well as persistent world real interest rate shocks, this paper resolves the inherent identification problem of the habit-forming PVM by Bayesian methods to seek effects of habit formation on current account fluctuations in typical small open economies, Canada and the United Kingdom. Results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations. Author Affiliation: Graduate School of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan Article History: Received 1 August 2007; Revised 29 January 2009; Accepted 10 February 2009

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jebo.2008.12.004 Byline: V.I. Yukalov (a)(b), D. Sornette (a), E.P. Yukalova (c) Keywords: Prices; Business fluctuations and cycles; Simultaneous equation models; General aggregative models Abstract: We introduce and study a non-equilibrium continuous-time dynamical model of the price of a single asset traded by a population of heterogeneous interacting agents in the presence of uncertainty and regulatory constraints. The model takes into account (i) the price formation delay between decision and investment by the second-order nature of the dynamical equations, (ii) the linear and nonlinear mean-reversal or their contrarian in the form of speculative price trading, (iii) market friction, (iv) uncertainty in the fundamental value that controls the amplitude of mispricing, (v) nonlinear speculative momentum effects and (vi) market regulations that may limit large mispricing drifts. We find markets with coexisting equilibrium, conventions and business cycles that depend on (a) the relative strength of value-investing versus momentum-investing, (b) the level of uncertainty on the fundamental value, and (c) the degree of market regulation. The stochastic dynamics is characterized by nonlinear geometric random walk-like processes with spontaneous regime shifts between different conventions or business cycles. This model provides a natural dynamical framework to model regime shifts between different market phases that may result from the interplay between the effects (i-vi). Author Affiliation: (a) Department of Management, Technology and Economics, ETH Zurich, Zurich CH-8032, Switzerland (b) Bogolubov Laboratory of Theoretical Physics, Joint Institute for Nuclear Research, Dubna 141980, Russia (c) Laboratory of Information Technologies, Joint Institute for Nuclear Research, Dubna 141980, Russia Article History: Received 25 December 2006; Revised 11 December 2008; Accepted 11 December 2008

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2008.05.006 Byline: Christian Kascha (a), Karel Mertens (b) Abstract: Can long-run identified structural vector autoregressions (SVARs) discriminate between competing models in practice? Several authors have suggested SVARs fail partly because they are finite-order approximations to infinite-order processes. We estimate vector autoregressive moving average (VARMA) and state space models, which are not misspecified, using simulated data and compare true with estimated impulse responses of hours worked to a technology shock. We find few gains from using VARMA models. However, state space algorithms can outperform SVARs. In particular, the CCA subspace method consistently yields lower mean squared errors, although even these estimates remain too imprecise for reliable inference. The qualitative differences for algorithms based on different representations are small. The comparison with estimation methods without specification error suggests that the main problem is not one of working with a VAR approximation. The properties of the processes used in the literature make identification via long-run restrictions difficult for any method. Author Affiliation: (a) Research Department, Norges Bank, Bankplassen 2, P.O. Box 1179 Sentrum, 0107 Oslo, Norway (b) Economics Department, Cornell University, USA Article History: Received 9 March 2007; Accepted 31 May 2008

It is well-known that the current speeding-up of globalization has been, on one hand, spreading macro economic effects around the world, while, on the other, fueling firms' activities of crossing national borders. Then, are there any links between these two influences? As we have concluded in previous research that inward FDI and business cycle development do pro-cyclically relate on Granger base, this paper will further discuss 'how do they react to each other?' Again, we chose China as subject and employed the 1983~2004 authorized annual statistic data. By constructing an Endogenous Growth model, we, after processing Correlation Analysis and testing the coefficient significance of each variable, found out the original momentum of Chinese economic growth and explored whether there exist some long-term relationship through Johansen Co-integration Test Key words: Business cycles; Inward FDI; Endogenous Growth; Johansen Co-integration Test., INTRODUCTION The issue of the relationship between inward FDI and business cycle development keeps hot since it was born. Why? One point is the significance of the topic, as for [...]

An investment model with informational frictions and uncertainty is developed to capture the asymmetric dynamics of business cycles. When hit by a negative shock, the economy responds differently, in both size and recovery length, than when bit by a positive shock. In the model, the role for fiscal policy in smoothing the effects of business cycles fluctuations depends on initial conditions at the time of the shock. Based on the degree of fiscal fragility of the government, expansionary fiscal policy may be expansionary of contractionary in terms of output. JEL classification: H32; E00; E22 Keywords: Asymmetric information; Business cycles; Fiscal fragility; Fiscal policy

This paper examines the consequences of introducing firm-specific capital into a selection of commonly used sticky price business cycle models. We find that modelling firm-specific capital markets greatly reduces the response of inflation to changes in average real marginal cost. Calibrated to US data, we find that models with firm-specific capital generate a less volatile, as well as more persistent series for inflation than those which assume an economy wide market for capital. Overall, it is not clear if assuming firm-specific capital helps our models match the US business cycle data. JEL classification: E31; E32; E37; E58 Keywords: Intertemporal macro; Monetary policy; Real and nominal labour market distortions; Firm-specific capital

The use of finite-mixture models to pool multiple time series into groups is proposed. Bayesian Markov chain Monte Carlo simulation methods are used to estimate time series groups. Efficiency gains in estimation and forecasting are noted.

The abilities of a nonparametric algorithm and a parametric Markov-switching dynamic factor model to establish US business cycle turning point dates in real time are investigated. Both approaches yield significant improvement over the National Bureau of Economic Research in predicting business cycle troughs.

Duration dependence in stock market cycles is studied using a generalized Weibull model. Evidence of duration dependence for all prewar and postwar cycles is found. The generalized Weibull model is statistically superior to the conventional Weibull model.

An equilibrium model of business cycle where firms follow inventory policies due to nonconvex delivery costs is presented. The model challenges the popular belief that inventories strengthens aggregate fluctuations. Impacts of inventories on production volatility are also evaluated.

Technology improvement initially appears to have adverse effects owing to price rigidity even though it greatly decreases nonresidential investment and input utilization. Estimating sectoral production functions can help generate an aggregate technology index.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jeconom.2005.07.005 Byline: Aaron Smith (a), Prasad A. Naik (b), Chih-Ling Tsai (b)(c) Keywords: Advertising effectiveness; Business cycles; EM algorithm; Hidden Markov models; Information criterion; Markov-switching regression. Abstract: In Markov-switching regression models, we use Kullback-Leibler (KL) divergence between the true and candidate models to select the number of states and variables simultaneously. Specifically, we derive a new information criterion, Markov switching criterion (MSC), which is an estimate of KL divergence. MSC imposes an appropriate penalty to mitigate the over-retention of states in the Markov chain, and it performs well in Monte Carlo studies with single and multiple states, small and large samples, and low and high noise. We illustrate the usefulness of MSC via applications to the U.S. business cycle and to media advertising. Author Affiliation: (a) Department of Agricultural and Resource Economics, University of California, One Shields Avenue, Davis, CA 95616, USA (b) Graduate School of Management, University of California, Davis, USA (c) Guanghua School of Management, Peking University, PR China

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jedc.2005.08.009 Byline: Pierpaolo Benigno (a), Michael Woodford (b) Abstract: We reconsider the optimal taxation of income from labor and capital in the stochastic growth model analyzed by Chari et al. [1994. Optimal fiscal policy in a business cycle model. Journal of Political Economy 102, 617-652; 1995. Policy analysis in business cycle models. In: Cooley, T.F. (Ed.), Frontiers of Business Cycle Research. Princeton University Press, Princeton], but using a linear-quadratic (LQ) approximation to derive a log-linear approximation to the optimal policy rules. The example illustrates how inaccurate 'naive' LQ approximation - in which the quadratic objective is obtained from a simple Taylor expansion of the utility function of the representative household - can be, but also shows how a correct LQ approximation can be obtained, which will provide a correct local approximation to the optimal policy rules in the case of small enough shocks. We also consider the numerical accuracy of the LQ approximation in the case of shocks of the size assumed in the calibration of Chari et al. We find that the correct LQ approximation yields results that are quite accurate, and similar in most respects to the results obtained by Chari et al. using a more computationally intensive numerical method. Author Affiliation: (a) New York University, USA (b) Department of Economics, Columbia University, 10098 International Affairs Building, 420 W. 118th Street, New York, NY 10027, USA Article History: Received 3 October 2004; Accepted 9 August 2005

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jeconom.2005.01.030 Byline: Domenico Giannone (a), Lucrezia Reichlin (a)(b), Luca Sala (a)(c) Abstract: Equilibrium business cycle models have typically less shocks than variables. As pointed out by Altug (1989) International Economic Review 30 (4) 889-920 and Sargent (1989) The Journal of Political Economy 97 (2) 251-287, if variables are measured with error, this characteristic implies that the model solution for measured variables has a factor structure. This paper compares estimation performance for the impulse response coefficients based on a VAR approximation to this class of models and an estimation method that explicitly takes into account the restrictions implied by the factor structure. Bias and mean-squared error for both factor- and VAR-based estimates of impulse response functions are quantified using, as data-generating process, a calibrated standard equilibrium business cycle model. We show that, at short horizons, VAR estimates of impulse response functions are less accurate than factor estimates while the two methods perform similarly at medium and long run horizons. Author Affiliation: (a) ECARES, Universite Libre de Bruxelles, av. F.D. Roosevelt 50, Bruxelles 1050, Belgium (b) CEPR (c) IGIER and IEP, Universita Bocconi

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2005.07.002 Byline: M. Ayhan Kose (a), Kei-Mu Yi (b) Keywords: International trade; International business cycle comovement Abstract: Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures, complete markets and international financial autarky. Our main finding is that under both asset market structures the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. Even when we control for the fact that most country-pairs are small with respect to the rest-of-the-world, the model continues to fall short. We also conduct additional simulations that allow for increased trade with the third country or increased TFP shock comovement to affect the country-pair's business cycle comovement. These simulations are helpful in highlighting channels that could narrow the gap between the empirical findings and the predictions of the model. Author Affiliation: (a) International Monetary Fund, 700 19th St., N.W., Washington, DC 20431, United States (b) Research Department, Federal Reserve Bank of Philadelphia, 10 Independence Mall, Philadelphia, PA 19106, United States Article History: Received 11 December 2002; Revised 25 April 2005; Accepted 5 July 2005

Implications of exit-entry decision of firms motivated by animal spirits on business cycles are studied using a model.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2005.01.004 Byline: James M. Nason (a), John H. Rogers (b) Keywords: Current account; Present value model; World real interest rate; International capital mobility; Bayesian Monte Carlo Abstract: Tests of the present-value model (PVM) of the current account are frequently rejected by data. Standard explanations rely on the 'usual suspects' of non-separable preferences, fiscal policy and world real interest rate shocks, external imperfect international capital mobility, and an internalized risk premium. We confirm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model (RBC). Bayesian Monte Carlo experiments reveal that a 'canonical' RBC model is close to the data, but far from the PVM predictions. Although each suspect matters in some way, none improve the fit to the data. However, the PVM restrictions are reproduced when the internalized risk premium is introduced into the canonical model. By adding the exogenous world real interest rate shock to this version of the model, it matches the data better and is moved closer to the PVM predictions. This suggests that there is an important common world component to current account fluctuations, which points to additional underlying macroeconomic factors that drive the current account. Author Affiliation: (a) Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree St., N.E. Atlanta, GA 30033, United States (b) Mail Stop 20, International Finance Division, Board of Governors of the Federal Reserve System, Washington, DC 20551, United States Article History: Received 20 May 2002; Revised 4 October 2004; Accepted 18 January 2005

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2005.08.008 Byline: Pau Rabanal (a), Juan F. Rubio-Ramirez (b) Abstract: The baseline New Keynesian model cannot replicate the observed persistence in inflation, output, and real wages for sensible parameter values. As a result, several extensions have been suggested to improve its fit to the data. We use a Bayesian approach to estimate and compare the baseline sticky price model of Calvo's [1983. Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383-398.] and three extensions. Our empirical results are as follows. First, we find that adding price indexation improves the fit of Calvo's [1983. Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383-398.] model. Second, models with both staggered price and wage setting dominate models with only price rigidities. Third, introducing wage indexation does not significantly improve the fit. Fourth, all model estimates suggest a high degree of price stickiness. Fifth, the estimates of labor supply elasticity are higher in models with both staggered price and wage contracts. Finally, the estimated inflation parameters of the Taylor ruleare stable across models. Author Affiliation: (a) International Monetary Fund, 700 19th Street NW, Washington, DC 20431, USA (b) Research Department,Federal Reserve Bank of Atlanta, 1000 Peachtree Street, NE, Atlanta, GA 30309, USA Article Note: (footnote) [star] This paper circulated previously under the name 'Nominal versus Real Wage Rigidities: A Bayesian Approach.' We are thankful to Pierpaolo Benigno, Jesus Fernandez-Villaverde, Jordi Gali, Mark Gertler, Andrew Levin, Sydney Ludvigson, Jim Nason, Simon Potter, Ellis Talman, Tao Zha, and seminar participants at various institutions for their useful comments. We are also grateful to an anonymous referee and to the editor, Bob King, for detailed comments. We also thank the financial support from Banco de EspaA[+ or -]a, the Minnesota Supercomputing Institute, and Fundacion BBVA(1/BBVA 00044.321-15466/2002) for financial support. All remaining errors and omissions are our own. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or the International Monetary Fund.

We develop a dynamic general-equilibrium model with demand (preference) shocks, estimated using Hall's (J. Labour Economics 15 (1997) 223) residual, that replicates U.S. business cycles well, at least compared to the real business cycle models. The key factor is cyclical capital utilization, which is based on imperfect competition, slow adjustments in capital stock, and fixed requirement of labor input. We also demonstrate theoretically that a representative-agent economy with preference shocks could be viewed as the reduced form of a heterogeneous-agents economy with incomplete markets. Specifically, a heterogeneous-agents economy with incomplete markets is aggregated into a representative-agent economy with preference shocks. This result would provide a microeconomic foundation for preference shock models. It is also shown that a shock to marginal utility of consumption and a shock to marginal disutility of labor have different effects. JEL classification: E22; E32 Keywords: Aggregation; Preference shocks; Capacity utilization; Business cycles

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2005.07.006 Byline: Javier Andres (a)(b), J. David Lopez-Salido (b)(c), Edward Nelson (c)(d) Abstract: A major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state. In this paper we estimate a dynamic optimizing business cycle model whose price-setting behavior satisfies the natural rate hypothesis. The price-adjustment specifications we consider are the sticky-information specification of Mankiw and Reis (Sticky information versus sticky prices: a proposal to replace the new Keynesian Phillips curve. Quarterly Journal of Economics 117, 1295-1328) and the indexed contracts of Christiano et al. (Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1-45). Our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen. Consequently, the alternative model specifications deliver similar estimates of the U.S. output gap series, but the empirical behavior of the gap series differs substantially from standard gap estimates. Author Affiliation: (a) Universidad de Valencia, Valencia, Spain (b) Bank of Spain, Spain (c) CEPR, London, UK (d) Federal Reserve Bank of St. Louis, USA Article Note: (footnote) [star] We thank Charles Evans, Marvin Goodfriend, Dale Henderson, Michael Woodford, and participants at the November 2004 Carnegie-Rochester Conference for comments on an earlier draft, and Jason Buol for providing money base data. The views expressed in this paper are those of the authors and should not be interpreted as those of the Bank of Spain, the Federal Reserve Bank of St. Louis, or the Federal Reserve System. Javier Andres acknowledges financial support from CICYT Grant SEC2002-0026.

We consider a multi-sector overlapping generations model with oligopolistic firms in the output markets and wage-setting trade unions in the labour markets. A coordination problem between firms creates multiple temporary equilibria which are either Walrasian or of the Keynesian unemployment type. There exist many deterministic and stochastic equilibrium cycles fluctuating between Keynesian recession and Walrasian boom periods with arbitrarily long phases in each regime. The cycles are in accordance with certain empirical regularities. Money is neutral and superneutral, but appropriate countercyclical fiscal policies stabilize the cycles in a textbook Keynesian way. JEL classification: D43; E32; E62 Keywords: Endogenous business cycles; Imperfect competition; Stabilization policy

We use a new approach to study questions in political economy that relies on data on the subjective well-being of a large sample of people living in the OECD over the period 1975-1992. Controlling for the personal characteristics of the respondents, year and country fixed effects and country-specific time trends, we find that the data describe social happiness functions for left-wing and right-wing individuals where inflation and unemployment enter negatively. We use these functions to test the root assumption of partisan business cycle models. The evidence is consistent with the hypothesis that left-wing individuals care more about unemployment relative to inflation than right-wingers. Interestingly, we find that individuals declare themselves to be happier when the party they support is in power, even after controlling for macroeconomic variables. The effect of politics is large. Finally, we find that these partisan differences cannot be traced back to income differences. That is, it is misleading to assume--as it is done in the previous literature--that the poor (rich) behave similarly to the left (right). For example, inflation and unemployment do not have differential effects across rich and poor and the happiness levels of these two groups are unaffected by the identity of the party in power. Our findings are hard to explain using median voter models but are to be expected in a partisan world.

In this paper, we examine empirically the predictions of a range of theoretical models which give a prominent role to technology shocks in explaining business cycles. To this end, we estimate (4-digit SIC) industry-level VAR models for US manufacturing using real output, the real wage and utilization corrected measures of technology and labor input. Our results support both sticky-wage DGE and RBC models over sticky-price DGE models. Moreover, they cast some doubt on the importance of technology shocks as propulsive mechanism for business cycles at the industry level. JEL classification: E32; O47 Keywords: Real business cycles; Sticky-price DGE models; Technology shocks; Total factor productivity

An alternative business cycle model to Hicksian multiplier-accelerator model to examine varied growth rates of actual capital stock is presented.

Under perfect competition and constant returns-to-scale, a one-sector real business cycle model may exhibit indeterminacy and sunspots when income tax rates are determined by a balanced-budget rule with a pre-set level of government expenditures. It is shown that the indeterminacy disappears if the government finances endogenous public spending and transfer with fixed income tax rates.

A model of endogenous business cycle in the presence of knowledge spillovers and a time-to-build restriction is presented. It is shown that the resulting dynamics generated by a dynamical system leads to an asymmetric periodic cycle of arbitrary period that appears to switch repeatedly between different regimes.

Byline: Martin Brunner (1), Holger Strulik (1) Keywords: saddlepoint problems; nonlinear dynamics; stochastic economic growth Abstract: We present a nonlinear solution method of saddlepoint dynamics in discrete time optimization problems. It is based on the backward attractivity of the stable manifold and is very easy to implement. After an introduction to the general method we present two applications. First, we consider the deterministic neoclassical growth model and demonstrate accuracy and stability of the method. Second, we solve a basic real business cycle model. Author Affiliation: (1) Department of Economics, University of Hamburg, Von Melle Park 5, D-20146, Hamburg, Germany Article History: Registration Date: 01/01/2003 Received Date: 27/09/2002 Online Date: 23/12/2003 Article note: revised version received July 2, 2003

Vector smooth transition regression (VSTR) model can be used to forecast output growth and business-cycle phases. The nonlinear forecasting power of the Conference Board composite index of leading indicators is used to predict the output growth and the business-cycle phases of the U.S economy.

A study shows that in an under indeterminate real business cycle (RBC) model with capacity utilization and mild increasing returns to scale, aggregate demand shocks can play a pivotal role in explaining actual economic fluctuations. The analysis brings the RBC theory into closer conformity with the actual data.

We derive closed-form solutions for asset prices in an RBC economy. The equations are based on a log-linear solution of the RBC model and allow a clearer understanding of the determination of risk premia in models with production. We demonstrate not only why the premium of equity over the risk-free rate is small but also why the premium of equity over a real long-term bond is small and often negative. In particular, risk premia for equity and long real bonds are negative when technology shocks are permanent.

In single sector models of business cycle with lower increasing returns, the route of indeterminacy does not work by exploiting preferences that are non-separable in consumption and leisure.

In simple pure exchange overlapping generations economies in which the households live for three periods, the properties of two-period monetary cycles is studied. It is shown that economies which fail the Grandmont condition, or which do not have conventional monetary steady states or where aggregate demand for assets is not decreasing in the real return rate at a gross real rate of unity can have monetary cycles.

Search-theoretical models by Cass and Shell are pursued . Search models generate interesting dynamic equilibria, including cycles, chaos and sunspot equilibria just as in overlapping generations models which help us to understand how alternative models are related.