Duration Dependence in US Expansions: A re-examination of the evidence
with Paul Beaudry, 2019
published in Economics Letters Volume 183, October 2019,
Pre-publication version (also CEPR working paper 13626)
It is commonly accepted that economic expansions do not exhibit duration dependence, that is, the probability of an expansion terminating in the near future is thought to be independent of the length of the expansion. Our main focus is on determining the probability of the US economy entering a recession in the following year (or following two years) conditional on the expansion having lasted q quarters. When looking at the probability of entering a recession within a year (or 2 years), we find considerable evidence of economically significant duration dependence, especially when adopting a non-parametric approach. For example, for an expansion that has lasted only 5 quarters, the probability of entering a recession in the next year is around 10%, while this increases to 30-40% if the expansion has lasted over 35 quarters. Similarly, if looking at a two years window, we find the probability of entering a recession in the next two years raises from 25-30% to around 50-80% as the expansion extends from 5 quarters to 32 quarters. This pattern suggests that certain types of macroeconomic vulnerabilities may be accumulating as the expansion ages causing the arrival of a recession to become more likely. Our non-parametric estimates suggest that this later pattern is especially important once a recession has lasted more than 6 years.
Real Keynesian Models and Sticky Prices
with Paul Beaudry, 2018
Current version (also CEPR and NBER working paper)
In this paper we present a generalized sticky price model which allows, depending on the parameterization, for demand shocks to maintain strong expansionary effects even in the presence of perfectly flexible prices. The model is constructed to incorporate the standard three-equation New Keynesian model as a special case. We refer to the parameterizations where demand shocks have expansionary effects regardless of the degree of price stickiness as Real Keynesian parameterizations. We use the model to show how the effects of monetary policy-- for the same degree of price stickiness-- differ depending whether the model parameters are within the Real Keynesian subset or not. In particular, we show that in the Real Keynesian subset, the effect of a monetary policy that tries to counter demand shocks creates the opposite tradeoff between inflation and output variability than under more traditional parameterizations. Moreover, we show that under the Real Keynesian parameterization neo-Fisherian effects emerge even though the equilibrium remains unique. We then estimate our extended sticky price model on U.S. data to see whether estimated parameters tend to fall within the Real Keynesian subset or whether they are more in line with the parameterization generally assumed in the New Keynesian literature. In passage, we use the model to justify a new SVAR procedure that offers a simple presentation of the data features which help identify the key parameters of the model. The main finding from our multiple estimations, and many robustness checks is that the data point to model parameters that fall within the Real Keynesian subset as opposed to a New Keynesian subset. We discuss both (i) how a Real Keynesian parametrization offers an explanation to puzzles associated with joint behavior of inflation and employment during the zero lower bound period and during the Great Moderation period, (ii) how it potentially changes the challenge faced by monetary policy if authorities want to achieve price stability and favor employment stability.
When is nonfundamentalness in SVARs a real problem?
with Paul Beaudry, Patrick Fève and Alain Guay, 2019
In SVARs, identification of structural shocks can be subject to nonfundamentalness, as the econometrician may have an information set smaller than the economic agents' one. How serious is that problem from a quantitative point of view? In this paper we propose a simple diagnostic for the quantitative importance of nonfundamentalness in structural VARs. The diagnostic is of interest as nonfundamentalness is not an either/or question, and its quantitative implications can be more or less severe. As an illustration, we apply our diagnostic to the identification of TFP news shocks and we find that nonfundamentalness is of little quantitatively importance in that context.
Putting the Cycle Back into Business Cycle Analysis
with Paul Beaudry and Dana Galizia, 2016
This paper begins by re-examining the spectral properties of several cyclically sensitive variables such as hours worked, unemployment and capacity utilization. For each of these series, we document the presence of an important peak in the spectral density at a periodicity of approximately 36-40 quarters. We take this pattern as suggestive of intriguing but little-studied cyclical phenomena at the long end of the business cycle, and we ask how best to explain it. In particular, we explore whether such patterns may reflect slow-moving limit cycle forces, wherein booms sow the seeds of the subsequent busts. To this end, we present a general class of models, featuring local complementarities, that can give rise to unique- equilibrium behavior characterized by stochastic limit cycles. We then use the framework to extend a New Keynesian-type model in a manner aimed at capturing the notion of an accumulation-liquidation cycle. We estimate the model by indirect inference and find that the cyclical properties identified in the data can be well explained by stochastic limit cycles forces, where the exogenous disturbances to the system are very short lived. This contrasts with results from most other macroeconomic models, which typically require very persistent shocks in order to explain macroeconomic fluctuations.
Is the Macroeconomy Locally Unstable and Why Should We Care?
with Paul Beaudry and Dana Galizia, 2016
Published in NBER Macroeconomics Annual, 2016
First preliminary version, prepared for the 2016 NBER Macroeconomic Annual
In most modern macroeconomic models, the steady state (or balanced growth path) of the system is a local attractor, in the sense that, in the absence of shocks, the economy would converge to the steady state. In this paper, we examine whether the time series behavior of macroeconomic aggregates (especially labor market aggregates) is in fact supportive of this local-stability view of macroeconomic dynamics, or if it instead favors an alternative interpretation in which the macroeconomy may be better characterized as being locally unstable, with nonlinear deterministic forces capable of producing endogenous cyclical behavior. To do this, we extend a standard AR representation of the data to allow for smooth nonlinearities. Our main finding is that, even using a procedure that may have low power to detect local instability, the data provide intriguing support for the view that the macroeconomy may be locally unstable and involve limit-cycle forces. An interesting finding is that the degree of nonlinearity we detect in the data is small, but nevertheless enough to alter the description of macroeconomic behavior. We complete the paper with a discussion of the extent to which these two different views about the inherent dynamics of the macroeconomy may matter for policy.
Reviving the Limit Cycle View of Macroeconomic Fluctuations
with Paul Beaudry and Dana Galizia, 2015
Revised as “Putting the Cycle Back into Business Cycle Analysis”
latest version (also CEPR DP 10645 and NBER WP 21241)
There is a long tradition in macroeconomics suggesting that market imperfections may explain why economies repeatedly go through periods of booms and busts, with booms sowing the seeds of the subsequent busts. This idea can be captured mathematically as a limit cycle. For several reasons, limit cycles play almost no role in current mainstream business cycle theory. In this paper we present both a general structure and a particular model with the aim of giving new life to this mostly dismissed view of fluctuations. We begin by showing why and when models with strategic complementarities---which are quite common in macroeconomics---give rise to unique equilibrium dynamics characterized by a limit cycle. We then develop and estimate a fully-specified dynamic general equilibrium model that embeds a demand complementarity to see whether the data favors a configuration supportive of a limit cycle. Booms and busts arise endogenously in our setting because agents want to concentrate their purchases of goods at times when purchases by others are high, since in such situations unemployment is low and therefore taking on debt is perceived as being less risky. A key feature of our approach is that we allow limit-cycle forces to compete with exogenous disturbances in explaining the data. Our estimation results indicate that US business cycle fluctuations in employment and output can be well explained by endogenous demand- driven cycles buffeted by technological disturbances that render those fluctuations irregular.
On The Quantitative Importance of Non-fundamentalness for News Shocks
with Paul Beaudry, 2014
revised as “When is nonfundamentalness in SVARs a real problem?”
It has been rightly suggested (see e.g. Forni and Gambetti  and Forni, Gambetti, and Sala ) that the identification of news shocks can be subject to non- fundamentalness. In this note we first illustrate why non-fundamentalness is not an either/or question, but is a quantitative issue which can be more or less severe. Second, we use the approach suggested by Forni, Gambetti, and Sala  to re-examine whether non-fundamentalness is likely an important problem for the identification of news shocks. Using our preferred strategy for identifying news shocks, we find that non-fundamentalness is quantitatively unimportant and that news shocks continue to generate significant business cycle type fluctuations when adjust the estimating procedure to take into account the potential non-fundamentalness issue.
Technological Diffusion News,
A comment on “Whither News Shocks?” by Barsky, Basu & Lee
Published in the NBER Macroeconomics Annual, 2015
Barsky, Basu, and Lee  are proposing to identify a technological news shock as the innovation in the expectation of TFP at a fixed horizon in the future that does not affect TFP on impact. In response to this shock, consumption typically rises following good news, but investment, consumer durables purchases and hours worked typically fall on impact. Noticing that this shock indeed moves TFP after one period, I propose ways to identify a technological diffusion news. By diffusion news, I mean that TFP is not affected in the short to medium run but permanently increases. In response to such a shock, the economy does display an aggregate boom with typical business cycles co-movements.
Reexamining the Cyclical Behavior of the Relative Price of Investment
with Paul Beaudry and Alban Moura, 2014
Published in Economics Letters, 2015
We document the cyclical behavior of several measures of the relative price of investment goods for the U.S. economy over the last fifty years. Our main result is that there is no robust evidence that this relative price is countercyclical in the data. Furthermore, for the recent (post-Volcker) period, the relative price of investment appears predominantly procyclical. When looking at more disaggregated series, most measures are procyclical, a few acyclical, and only the price of equipment is countercyclical for some periods and measures. The procyclical behavior of the relative price of aggregate investment is also found for the six other countries of the G7.
Reconciling Hayek’s and Keynes views of recessions
with Paul Beaudry and Dana Galizia, 2014
Published in The Review of Economic Studies, 2018
Recessions often happen after periods of rapid accumulation of houses, consumer durables and business capital. This observation has led some economists, most notably Friedrich Hayek, to conclude that recessions mainly reflect periods of needed liquidation resulting from past over-investment. According to the main proponents of this view, government spending should not be used to mitigate such a liquidation process, as doing so would simply result in a needed adjustment being postponed. In contrast, ever since the work of Keynes, many economists have viewed recessions as periods of deficient demand that should be countered by activist fiscal policy. In this paper we reexamine the liquidation perspective of recessions in a setup where prices are flexible but where not all trades are coordinated by centralized markets. We show why and how liquidations can produce periods where the economy functions particularly inefficiently, with many socially desirable trades between individuals remaining unexploited when the economy inherits too many capital goods. In this sense, our model illustrates how liquidations can cause recessions characterized by deficient aggregate demand and accordingly suggests that Keynes' and Hayek's views of recessions may be much more closely linked than previously recognized. In our framework, interventions aimed at stimulating aggregate demand face the trade-off emphasized by Hayek whereby current stimulus mainly postpones the adjustment process and therefore prolongs the recessions. However, when examining this trade-off, we find that some stimulative policies may nevertheless remain desirable even if they postpone a recovery.
News Driven Business Cycles: Insights and Challenges
with Paul Beaudry, 2013
Published in the Journal of Economic Literature, 2014
There is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations. The news view of business cycles offers a formalization of this perspective. In this paper we discuss mechanisms by which changes in agents' information, due to the arrival of news, can cause business cycle fluctuations driven by expectational change, and we review the empirical evidence aimed at evaluating its relevance. In particular, we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations, while at the same time we emphasize the many challenges that must be addressed before a proper assessment of its role in business cycles can be established.
Data and codes are available here.
Comparing Two Methods for the Identification of News Shocks
with Paul Beaudry and Atılım Seymen
Working paper version (ZEW Discussion Paper No. 13-110)
Recent empirical literature delivered, based on different structural VAR approaches, controversial results concerning the role of anticipated technology—news—shocks in business cycle fluctuations. We deal with this controversy and investigate (i) the extent to which two prominent structural VAR approaches can be useful in recuperating news shock dynamics from artificially generated data in general and (ii) why and to what extent these SVAR approaches differ in the results they deliver in particular. Thereby, we provide several insights for the users of both VAR techniques with small samples in practice.
Understanding Non-Inflationary Demand Driven Business Cycles
with Paul Beaudry, 2013
This is a revised version of “A Gains from Trade Perspective on Macroeconomic Fluctuations”, that is published in the Macroeconomics Annual 2013, Volume 28.
During the last thirty years, US business cycles have been characterized by countercyclical technology shocks and almost constant inflation. While the first fact runs counter to an RBC view of fluctuation and calls for demand shocks as a source of fluctuations, the second fact is difficult to reconcile with a New Keynesian model in which demand shocks, when accommodated, should be inflationary. In this paper we show that non-inflationary demand driven business cycles can be very easily explained if one moves away from the representative agent framework on which both the New Keynesian model and the RBC model are based. In particular, we first show how changes in demand induced by changes in perceptions about the future can cause business cycle type fluctuations in a Walrasian setting when agents' skills are specialized in different sectors. Such a model is able to generate demand driven positive co-movements of consumption, investment and hours together with pro-cyclical real wages and relative price of investment. To illustrate how the real mechanism we put forward works in the presence of sticky prices, we present a modified New Keynesian model with specialized agents where non inflationary demand driven fluctuations arise as the outcome. We also document the relevance of the assumptions underlying our framework using PSID data over the period 1968-2007.
A Gains from Trade Perspective on Macroeconomic Fluctuations
with Paul Beaudry, 2011
Revised as “Understanding Non-Inflationary Demand Driven Business Cycles”
Business cycles reflect changes over time in the amount of trade between individuals. In this paper we show that incorporating explicitly intra-temporal gains from trade between individuals into a macroeconomic model can provide new insight into the potential mechanisms driving economic fluctuations as well as modify key policy implications. We first show how a "gains from trade" approach can easily explain why changes in perceptions about the future (including "news" about the future) can cause booms and bust. We then turn to fiscal policy, and discuss under what conditions fiscal multipliers can be observed. While much of our analysis is conducted in a flexible price environment, we also present implications of our model for a sticky price environments, as it allows to understand stable-inflation boom-bust cycles. The source of the explicit gains from trade in our setup derives from simply assuming that in the short run workers are not perfect mobile across all sectors of the economy. We provide evidence from the PSID in support of this modeling assumption.
Monetary policy and herd behavior in new-tech investment
with Olivier Loisel and Aude Pommeret, 2010
newest version (April 1, 2012)
We study the role of monetary policy when asset-price bubbles may form due to herd behavior in investment in a new technology whose productivity is uncertain. To that aim, we build a simple general- equilibrium model whose agents are households, entrepreneurs, and a central bank. Entrepreneurs receive private signals about the productivity of the new technology and borrow from households to publicly invest in the old or the new technology. Monetary policy, by a ecting their cost of resources, can make them invest in the new technology if and only if they receive an encouraging private signal about its productivity. In doing so, it makes their investment decision reveal their private signal, and therefore prevents herd behavior and the asset-price bubble. We show that such a `leaning against the wind' monetary policy, contingent on the central bank's information set, may be preferable to laisser-faire, in terms of ex ante welfare, even though the central bank has less information than private agents on the productivity of the new technology.
La “grande récession” : une mise en perspective
avec Martial Dupaigne, 2011
Dernière version (21 juin 2012).
Publié dans la Revue d’Économie Politique, 2012.
Dans cet article, nous analysons la récession actuelle à l'aune de 50 années d'observation dans 34 pays de l'OCDE. Ces donnés historique nous permettent en effet d'établir les caractéristiques (longueur, profondeur, etc..) d'une récession médiane, mais aussi la distribution de ces caractéristiques sur toute les récessions observées. La récession actuelle apparaît comme celle qui touche le plus de pays. Elle apparaît également comme exceptionnelle en durée et en profondeur. Nous analysons également les caractéristiques médianes des récessions concernant les évolutions de la consommation, de l'investissement, des dépenses publiques, des exportations et des importations, mais aussi en décomposant le PIB en 7 branches d'activité. Il s'agit d'une récession essentiellement tirée par l'investissement; la consommation se maintient en France et dans une moindre mesure en Allemagne. Sectoriellement, le secteur manufacturier est fortement touché en France. Toujours en France, la gravité de la récession dans secteur de la construction n'est exceptionnelle que sur la dernière année.