Don E. Schlagenhauf

Liquidity and real activity in a simple open economy model

We examine nominal and real exchange rates, interest rates, prices, and evolutions of real variables in a two-country, monetary general-equilibrium model that includes a financial sector and shocks to technologies and money growth rates. Qualitative properties of the model are provided and moment predictions from a calibrated version of the model are compared to moments of time series drawn from actual economies. We focus on international monetary shock transmissions, and effects of monetary innovations on nominal and real exchange rates and nominal interest rates.

The role of international factors in the business cycle: A multi-country study

Abstract Empirical research has been conducted on the various theories of the business cycle over many countries. However, very little research has attempted to undertake a multi-country disaggregate investigation into the sources of output change. This paper decomposes fluctuations in industry output in a particular country into: (1) a nation-specific shock; (2) an industry-specific shock; (3) a common shock; and (4) an idiosyncratic factor. Using a dynamic factor analysis state-space approach, the paper finds that the industry-specific impulse explains a significant but small part of the variance of the forecast error. This provides limited support for the disaggregated real business cycle paradigm.

An inquiry into the sources of macroeconomic fluctuations

Abstract This paper attempts to decompose the sources of fluctuations in quarterly employment by industry and region into: (1) an aggregate (national) shock, (2) region-specific shocks, (3) industry-specific shocks, and (4) idiosyncratic factors. The empirical analysis is motivated by a dynamic theory of the business cycle. The empirical methodology is the Engle-Watson dynamic MIMIC model, implemented via the EM algorithm. The work is motivated as an attempt to compare empirically aggregate, ‘single-factor’ theories of the cycle with real business cycle theories emphasizing industrial or regional shocks.

Tests of rationality, neutrality and market efficiency. A Monte Carlo analysis of alternative test statistics

Abstract This paper examines the small sample properties of three testing strategies used to analyze the rationality, monetary neutrality and market efficiency hypotheses. We focus on the original ‘two-step’ Barro test of the MRE hypothesis formed entirely from OLS results, a test that employs the correct variance-covariance formulae for these ‘two-step’ estimates, and Mishkins FIMLE testing framework. Each test is examined under likely model respecifications. The findings highlight the extensive bias incurred by drawing inferences from simple unadjusted ‘two-step’ estimates and reveal the relative power of all tests in identifying alternatives to the null hypotheses.

INTERTEMPORAL ASSET-PRICING RELATIONSHIPS IN BARTER AND MONETARY ECONOMIES: AN EMPIRICAL ANALYSIS

This paper explores whether liquidity services and nonsuperneutral effects of money are important for and permit improved explanation of asset returns. Euler equations governing asset choices, implied by dynamic barter, cash-in-advance (CIA), and money-in-the-utility function models, are estimated and testing using generalized-method-of-moments techniques and monthly data for the U.S. Observational equivalence between CIA and barter models is shown under specific assumptions about the timing of information and decisions. The findings suggest that only for one CIA model are monetary effects both important for and permit improved explanation of asset returns. Success in this regard is (not) for stock (treasury-bill) returns.

Rational expectations and monetary models of exchange rate determination: An empirical examination

Abstract One asset model of exchange rate determination that has received substantial attention in the literature is the monetary model. As with other asset models, expectations of future exchange rates play a key role. Usually these expectations are assumed to be formed rationally. However, to date there has been no attempt to empirically estimate a complete monetary model with rational expectations. In this paper, such a model is estimated and the restrictions implicity imposed by the rational expectation hypothesis tested. The results suggest that both the parameter constraints associated with the monetary model and those implied by the REH are consistent with recent exchange rate behavior.

An Econometric Investigation of the Monetary Neutrality and Rationality Propositions from an International Perspective

T HE combination of the natural rate of unemployment and the rational expectations hypotheses in macroeconomic models results in the now well-known conclusion that anticipated short-run monetary stabilization policies do not influence real economic variables. This policy ineffectiveness proposition has been named the Macro Rational Expectations (MRE) hypothesis by Modigliani (1977). As a result, the implicit policy prescription is that a price level stabilization policy should be pursued. The empirical validity of this conclusion is perhaps the central issue in modern stabilization theory. Barro (1977, 1978, 1981), Barro and Rush (1980), and Leiderman (1980) have presented empirical evidence for the United States supporting this proposition. However, a number of recent studies have claimed that previous empirical results which support the finding that anticipated policy is neutral are flawed. Corrections of these problems often result in conflicting conclusions (see Small (1979), Gordon (1979), and Mishkin (1982)). Given the important implications of the MRE hypothesis, it is curious that almost all formal testing has been focused upon the United States. While Barro has suggested that a cross-country study would be useful, as far as we know, only Darby (1980) attempts to test whether anticipated changes in monetary policy are neutral across countries. Unfortunately, his results suffer from problems caused by using generated regressors. In addition, he makes no attempt to test the individual implications of the MRE hypothesis which encompasses the propositions that expectations are rational (lad anticipated monetary policy does not matter. In this paper, we employ the methodology developed by Mishkin to test the MRE hypothesis in six countries-Canada, Germany, Italy, Japan, the United Kingdom, and the United States. The paper is divided into three major sections and a conclusion. Section II briefly reviews Mishkins testing method. In section III the procedure employed to specify the money growth equation is discussed and these equations specified. Section IV presents and discusses the results of applying the method introduced in section II. In the conclusion, the major findings are restated, possible limitations discussed, and extensions suggested.

Sources of output fluctuations in the United States during the inter-war and post-war years☆

Abstract This paper attempts to decompose the sources of fluctuations in industry output into: (1) an aggregate (national) shock, (2) industry group specific shocks, and (3) idiosyncratic factors. The empirical methodology is the Engle-Watson dynamic MIMIC model. The work is motivated as an attempt to compare empirically aggregate, ‘single factor’ theories of the cycle with real business cycle theories emphasizing technology shocks. Disaggregate data from the inter-war and post-war periods are examined. Conclusions on the relative importance of the various shocks seem to be dependent on the period being considered. The ‘single index’ theory of the cycle seems more appropriate for the inter-war period.

THE ROLE OF INTERNATIONAL FACTORS IN THE BUSINESS CYCLE: A MULTICOUNTRY STUDY

Abstract This paper attempts to identify the sources or impulses that result in business cycles in an open economy. A dynamic macroeconomic model is developed that allows business cycle impulses to be decomposed into a world-wide component, a nation-specific component, an industry-specific component and an idiosyncratic component. The model is estimated using the dynamic multiple indicator-multiple cause model of Engle and Watson. This methodology allows the impulses to be measured as well as identify possible causes of the impulses. Our results suggest the nation-specific and world-wide components are the most important sources of business cycles in a country.

Exchange rate dynamics and international effects of monetary shocks in monetary, equilibrium models

Abstract This paper analyzes the ability of open-economy extensions of Lucass (1990) liquidity model to explain features of observed nominal and real exchange rate dynamics and responses of key variables to monetary shocks. The two-country models that we consider are inhabited by multi-member households who face cash-in-advance constraints on goods purchases and shocks to each countrys technology and money growth rate. Countries are linked by trades in goods and currencies. Qualitative and quantitative implications of the model economies for exchange rate dynamics and behaviors of other key variables are examined.