Gregor W. Smith

Consumption and Real Exchange Rates in Dynamic Economies with Non-Traded Goods

We examine the possibility that nontraded goods may account for several striking features of international macroeconomic data: large, persistent deviations from purchasing power parity, small correlations of aggregate consumption fluctuations across countries, and substantial international real interest rate differentials. A dynamic, exchange economy is used to show that nontraded goods in principle can account for each of these phenomena. In the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates, but we find little evidence for this relation in time series data for eight OECD countries.

INTERNATIONAL RISK SHARING AND ECONOMIC GROWTH

International risk-sharing which diversifies away income risk will reduced saving, with constant relative risk aversion. It growth arises from the external effects of human capital accumulation then reducing saving will reduced growth. Welfare also may fall with risk-sharing, because endogenous growth with external effects of capital accumulation typically implies a competitive equilibrium growth rate already less than the optimal growth rate. We demonstrate these results in standard, representative-agent and overlapping-generations economies. In the same economies diversifying away rate-of-return risk also will reduce saving and growth rates if relative risk aversion exceeds one.

Realistic cross-country consumption correlations in a two-country, equilibrium, business cycle model

A well-known feature of one-good, multi-agent, Arrow-Debreu economies with identical additively-separable, homothetic preferences is that the consumptions of all agents are perfectly correlated. Such economies are widely used in interpreting business cycles but seem to be inconsistent with observed cross-country correlations of aggregate consumption. This paper provides an example of a two-country real business cycle model in which preferences are not separable between consumptions and labor supply. The model has a simple closed-form solution, and allows for fluctuations in labor supply in equilibrium. Moreover, it generates correlations between national consumption rates which are close to some of those observed in historical data.

Calibration as Testing: Inference in Simulated Macroeconomic Models

A stochastic macroeconomic model with no free parameters can be tested by comparing its features, such as moments, with those of data. Repeated simulation allows exact tests and gives the distribution of the sample moment under the null hypothesis that the model is true. The authors calculate the size of tests of the model studied by R. Mehra and E. C. Prescott. The approximate size of their test (which seeks to match model-generated, mean, risk-free interest rates and equity premia with historical values) is zero, although alternate empirical representations of this model economy or alternate moment-matching tests yield large probabilities of the type I error.

Calibration as estimation

One aspect of calibration in macroeconomics is the notion that free parameters of models should be chosen by matching certain moments of the simulated models with those of actual data. We formally examine this notion by treating the process of calibration as an econometric estimator. A numerical version of the Mehra-Prescott (1985) economy is the setting for an evaluation of calibration estimators via Monte Carlo methods. While these estimators sometimes have reasonable finite-sample properties they are not robust to mistakes in setting non-free parameters. In contrast, generalized method of moments (GMM) estimators have satisfactory finite-sample properties, quick convergence, and informational requirements less stringent than those of consistent calibration estimators. In dynamic equilibrium models in which GMM is infeasible we offer some suggestion for improving estimates based on calibration methodology.

A Dynamic Baumol-Tobin Model of Money Demand

This note considers a stochastic version of the Baumol-Tobin model of the demand for money. A dynamic demand function is derived for the case in which independent variables change to new, steady-state values. The (S, s) inventory policy is shown to give rise to an aggregate, partial-adjustment equation with a variable adjustment speed. The methodology is that introduced to target-threshold models by Milbourne, Buckholtz, and Wasan (1983) in their study of the Miller-Orr model.

Testing for Forecast Consensus

A panel of forecasts may be defined to be in consensus when individual forecasters place identical weights on a common latent variable. We suggest this definition and formulate a dynamic latent-variable model to test for consensus. This method also tests whether it is valid to use the mean forecast as the consensus forecast. In applications to surveys of U.S. macroeconomic forecasters, there is greater consensus in forecasts for output growth than for inflation or unemployment, but idiosyncratic forecast autocorrelation from year to year is present for most forecasters.

Transfer Problem Dynamics: Macroeconomics of the Franco-Prussian War Indemnity

We study the classic transfer problem of predicting the effects of an international transfer on the terms of trade and the current account. A two-country model with debt and capital allows for realistic features of historical transfers: they follow wartime increases in government spending and are financed partly by borrowing. The model is applied to the largest historical transfer, the Franco-Prussian War indemnity of 1871-1873. In these three years, France transferred to Germany an amount equal to 22 percent of a years GDP. When the transfer is combined with measured shocks to fiscal policy and a proxy for productivity shocks over the period, the model provides a very close fit to the historical sample paths of French GDP, terms of trade, net exports, and aggregate consumption. This makes a strong case for the dynamic general equilibrium approach to studying the transfer problem.

25 Statistical aspects of calibration in macroeconomics

Publisher Summary This chapter provides a formal statistical interpretation to some aspects of calibration in macroeconomics. Empirical questions in macroeconomics are addressed with dynamic, equilibrium models. Studying such questions involves formulating a model, solving it, assigning parameter values (that is, calibration), and then conducting experiments with the model and evaluating the results. The chapter reviews some methods for parameterization and evaluation. A formal statistical interpretation is best viewed as an informal guide to reformulating a theoretical model. This method has led to numerous modifications of the simple asset-pricing model used as an expository device in this chapter. Further statistical formalization and refinement of the methods used to evaluate calibrated models helps improve them. The chapter discusses a background to calibration methods in macroeconomics, a simple asset-pricing model, which serves as the setting for an outline of estimation and calibration, testing, and evaluating calibrated models, and several tests using the asset-pricing model.

Stochastic Process Switching and the Return to Gold, 1925

The authors analyze and estimate the effect on the dollar/sterling exchange rate in the early 1920s of anticipations of the return to the gold standard at prewar parity in the United Kingdom. These measures are consistent with a class of models of the exchange rate that includes a version of the monetary model and with any fundamentals that follow a random walk with drift. Contrary to some contemporary views, the appreciation of sterling prior to April 1925 appears to have been due to fundamentals (such as restrictive monetary policy) rather than to the expectation of a change in regime. Copyright 1990 by Royal Economic Society.