Marianne Baxter

Business cycles and the exchange-rate regime : Some international evidence

This paper investigates empirically the differences in time?series behavior of key economic aggregates under alternative exchange rate systems. We use a postwar sample of 49 countries to compare the behavior of output. consumption, trade flows, government consumption spending, and real exchange rates under alternative exchange rate systems (pegged, floating, and systems such as the EMS). We then examine evidence from two particular episodes, involving Canada and Ireland, of changes in the exchange rate system. Aside from greater variability of real exchange rates under flexible than under pegged nominal exchange rate systems, we find little evidence of systematic differences in the behavior of other macroeconomic aggregates or international trade flows under alternative exchange rate systems. These results are of interest because a large class of theoretical models implies that the nominal exchange rate system has important effects on a number of macroeconomic quantities.

Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?

Abstract This paper investigates the link between real exchange rates and real interest differentials over the recent floating-rate period. In contrast to earlier econometric studies, we find evidence of a relationship, with the strongest link at trend and business-cycle frequencies. Because these prior studies focused on high-frequency components of the data, they found no statistical link between real exchange rates and real interest differentials.

Are Consumer Durables Important for Business Cycles

This paper investigates whether consumer durables are important for the generation and propagation of business cycles. The author constructs a two-sector model that succeeds in generating business cycles that mimic empirical patterns of cross-sector volatility and comovement. She finds that half the relatively higher volatility associated with the durable-goods sector is due to higher volatility of shocks hitting this sector, with the other half due to endogenous responses, notably the investment accelerator. Nevertheless, this model does not have stronger internal propagation than the one-sector model. Further, incorporating durable consumer goods has little effect on the behavior of other macroeconomic variables. Copyright 1996 by MIT Press.

Business cycles, stylized facts, and the exchange rate regime: evidence from the United States

Abstract This paper investigates the robustness of central maroeconomic ‘stylized facts’ to (i) commonly-employed detrending methods, and (ii) the exchange rate regime. We find that the stylized facts are not at all robust to the choice of detrnding method, with the most important variations occurring in the cyclic behavior of hours and productivity. With respect to the exchange rate regime, the most surprising find is that the correlation between GNP, on the one hand, and consumption, investment, hours, exports, and imports on the other all, all rose in the post-1973 period. This reinforces Baxter and Stockmans (1989) finding that business cycles in the post-1973 period have been more nation-specific than in the prior Bretton-Woods era.

APPROXIMATING SUBOPTIMAL DYNAMIC EQUILIBRIA: AN EULER EQUATION APPROACH

Abstract This paper develops a method for numerical approximation of dynamic competitive equilibria which can be applied quite generally. This method produces approximations to the equilibrium decision rules via a direct attack on the stochastic Euler equations which define competitive equilibrium. This approach does not require the Pareto optimality of competitive equilibrium. We provide a detailed discussion of the implementation of this computational method, and discuss considerations important for the choice of one computational technique versus another. For illustrative purposes, the paper presents several examples based on the analysis of taxation in the one-sector neoclassical model.

Trade structure, industrial structure, and international business cycles

This paper examines the extent to which the composition of a countrys production and trade differs among its trade partners. For example, does the US export the same bundle of goods to the UK as it does to Japan? If we find high dispersion in a countrys export and import bundles with its various trading partners, can this be linked to identifiable country characteristics? These findings are important for two reasons. First, they enrich our empirical understanding of the nature of trade. Second, they will stand as a guide for further development of economic theories of the international transmission of business cycles.

Toward an empirical assessment of game-theoretic models of policymaking: A comment

In recent years, there has been an explosion of research involving game-theoretic interactions of one or more policymakers with private agents. This line of research extends the rational expectations paradigm to an important area of macroeconomics: the decision problem of the pol icymaker. The “maximizing government” approach represents an intellectual advance over earlier approaches that simply specified government decision rules as functions of other economic variables, since it can potentially give correct answers to questions about proposed changes in the economic environment in a way that an exogenously specified reducedform equation never can. By focusing on the problem faced by a maximizing policymaker operating strategically, this literature has been able to address in a theoretically appealing way some aspects of policymaking and policymakers that seem, to the casual observer, to be important. Some problems include the policymaker’s concern about reputation, his temptation to cheat on announced plans, the possibility of punishment in the form of lost reputation, and the persistent short-term focus of policymakers. The Canzoneri/Henderson paper is the second Carnegie-Rochester Conference paper to deal with this area of research--the first was Rogoff’s (1986) paper on reputational constraints on monetary policy. In my collrnents. I will first discuss specific aspects of the Canzoneri/Henderson paper. Second, I will raise the question of how we can determine whether various aspects of these models are, in fact, part of the policy process that we observe.

Money and market incompleteness in overlapping generations models

Abstract This paper investigates the extent to which the character of equilibria in stochastic overlapping generations models stems from the models generic market incompleteness. In addition, it addreses the question of whether money serves to complete markets in these models. We show that money does not complete markets in the sense of expanding the set of state-contingent commodities that an individual may trade. The introduction of money effects state-contingent transfers of wealth between individuals; this is a generalization of a result obtained by Marshall, Sonstelie, and Gilles (1987). Numerical simulation of the model suggests that the risk-sharing induced in the monetary economy leads to substantial increases in welfare levels relative to the nonmonetary economy.