Jesús Vázquez

SWITCHING EQUILIBRIA. The Present Value Model for Stock Prices Revisited

This paper analyzes the different dynamic features displayed by alternative RE equilibria in the context of the present value for stock prices with feedback. In particular, it is shown that there exists a unique (bubble-free) RE equilibrium implying cointegration between stock prices and dividends and this unique equilibrium is characterized either by the fundamental or, alternatively, by the backward equilibrium solution depending on the size of the feedback parameter. Based on this result, it is illustrated a simple mechanism of switching equilibria caused by small changes in the dividend process parameters. Using historical US data and structural estimation, the hypothesis of feedback from stock prices to dividends is tested. In addition, we test for the presence of switching equilibria as suggested by Timmermann (1994). The empirical results provide evidence of a small but very significant presence of feedback from stock prices to dividends. Moreover, when analyzing different sub-samples we find evidence supporting the hypothesis of switching equilibria.

Term structure and the estimated monetary policy rule in the Eurozone

In this paper we estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure in order to analyze two issues. First, we analyze the effect of introducing an explicit term structure channel in the NKM model on the estimated parameter values of the model, with special emphasis on the interest rate smoothing parameter using data for the Eurozone. Second, we study the ability of the model to reproduce some stylized facts such as highly persistent dynamics, the weak comovement between economic activity and inflation, and the positive, strong comovement between interest rates observed in actual Eurozone data. The estimation procedure implemented is a classical structural method based on the indirect inference principle.

How high can inflation get during hyperinflation? A transaction cost demand for money approach

Abstract We develop an inflationary finance model where transaction costs of the type suggested by [Barro, R., 1976. Integral constraints and aggregation in an inventory model of money demand. Journal of Finance, Vol. 31, pp. 77–87] are assumed. The model implies that there is a single unstable steady state. This result is in sharp contrast to those of traditional inflationary finance literature in which there exists the possibility of dual steady states and a high-inflation trap. In our model, inflation increases at an increasing rate along the hyperinflationary path, as it does during hyperinflationary episodes, until it reaches an upper bound. Moreover, we show that the inflation rate reaches a higher upper bound when the country is more financially developed and private resources are larger.

Testing the Canonical Model of Exchange Rates with Unobservable Fundamentals

In this paper, the authors test the asset market approach or canonical model of exchange rates. They treat exchange rate fundamentals as unobservable. The empirical results do not reject the canonical model and, therefore, the embedded rational expectations assumption, in sharp contrast with previous empirical evidence. The authors also find evidence of feedback from the exchange rate to fundamentals, which is normally omitted in the theoretical literature. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

SWITCHING REGIMES IN THE TERM STRUCTURE OF INTEREST RATES DURING U.S. POST-WAR: A case for the Lucas proof equilibrium? ∗

Farmer (1991) suggests that in a model in which there are multiple rational expectations (RE) equilibria agents may find it useful to coordinate their expectations in a unique RE equilibrium which is immune to the Lucas Critique. In this paper, we evaluate Lucas proof (LP) equilibrium performance in the context of the term structure of interest rates model by using post-war US data. Estimation results show that LP equilibrium exhibits some important features of the data that are not reproduced by the fundamental equilibrium. For instance, the short rate behaves as a random walk in a regime characterized by low conditional volatility, whereas the term spread Granger-causes changes in the short-rate in periods characterized by high conditional volatility.

EXPLOSIVE HYPERINFLATION, INFLATION TAX LAFFER CURVE AND MODELING THE USE OF MONEY ∗

This paper analyzes the existence of an inflation-tax Laffer curve (ITLC) in the context of two optimizing monetary models. Explosive hyperinflation rules out the presence of an ITLC. In a cash-in-advance economy, this paper shows that explosive hyperinflation is possible and thus an ITLC is ruled out whenever the relative risk aversion parameter is greater than one. In a money-in-the-utility-function model, it is shown that (i) an ITLC is also ruled out and (ii) explosive hyperinflations are more likely when the transactions role of money is more important.

The co-movement between output and prices in the EU15 countries: an empirical investigation

The paper studies the co-movement between output and prices in the EU15 countries. Following Den Haan, the correlations of VAR forecast errors at different horizons are used to analyse the dynamics in the output-price relationship. The empirical results show that ten countries display a significant negative co-movement between output and prices in the ‘long run’ whereas this is positive in the ‘short run’ only for three countries. Finally, four countries do not exhibit any significant co-movement.

Cyclical features of the Uzawa-Lucas endogenous growth model

This paper analyzes the cyclical properties of a generalized version of Uzawa-Lucas endogenous growth model. We study the dynamic features of different cyclical components of this model characterized by a variety of decomposition methods. The decomposition methods considered can be classified in two groups. On the one hand, we consider three statistical filters: the Hodrick-Prescott filter, the Baxter-King filter and GonzaloGranger decomposition. On the other hand, we use four model-based decomposition methods. The latter decomposition procedures share the property that the cyclical components obtained by these methods preserve the log-linear approximation of the Euler-equation restrictions imposed by the agent’s intertemporal optimization problem. The paper shows that both model dynamics and model performance substantially vary across decomposition methods. A parallel exercise is carried out with a standard real business cycle model. The results should help researchers to better understand the performance of Uzawa-Lucas model in relation to standard business cycle models under alternative definitions of the business cycle.

On the Informational Role of Term Structure in the U.S. Monetary Policy Rule

This paper uses a structural approach based on the indirect inference principle to estimate a standard version of the new Keynesian monetary (NKM) model augmented with term structure using both revised and real-time data. The estimation results show that the term spread and policy inertia are both important determinants of the US estimated monetary policy rule whereas the persistence of shocks plays a small but significant role when revised and real-time data of output and inflation are both considered. More importantly, the relative importance of term spread and persistent shocks in the policy rule and the shock transmission mechanism drastically change when it is taken into account that real-time data are not well behaved.

How Does the New Keynesian Monetary Model Fit in the U.S. and the Eurozone? An Indirect Inference Approach

This paper estimates a standard version of the New Keynesian monetary (NKM) model under alternative specifications of the monetary policy rule using U.S. and Eurozone data. The estimation procedure implemented is a classical method based on the indirect inference principle. An unrestricted VAR is considered as the auxiliary model. On the one hand, the estimation method proposed overcomes some of the shortcomings of using a structural VAR as the auxiliary model in order to identify the impulse response that defines the minimum distance estimator implemented in the literature. On the other hand, by following a classical approach we can further assess the estimation results found in recent papers that follow a maximum-likelihood Bayesian approach. The estimation results show that some structural parameter estimates are quite sensitive to the specification of monetary policy. Moreover, the estimation results in the U.S. show that the fit of the NKM under an optimal monetary plan is much worse than the fit of the NKM model assuming a forward-looking Taylor rule. We also find, in contrast to the literature, evidence of indeterminacy under the best fitting monetary policy rule under the Greenspan era. In contrast to the U.S. case,in the Eurozone the best fit is obtained assuming a backward-looking Taylor rule and determinacy holds, but the improvement is rather small with respect to assuming either a forward-looking Taylor rule or an optimal plan.