Martin Boileau

Trade in capital goods and the volatility of net exports and the terms of trade

Abstract Standard two-country dynamic general equilibrium models grossly underpredict the volatility of net exports and the terms of trade. We analyze whether trade in capital goods (equipment) can explain this failure. Trade in equipment accounts for about half of the trade balance of G7 countries and most of its fluctuations over the 1971–1990 period. Simulation results show that a standard model with trade in final goods generates a volatility of 0.10 for net exports and 0.52 for the terms of trade, while the annual G7 median relative volatility are 0.60 and 2.18! Models with trade in equipment, however, generate a volatility between 0.55 and 0.98 for net exports and between 1.23 and 3.24 for the terms of trade.

Trade in capital goods and investment-specific technical change ☆

This paper studies the role of trade in capital goods and investment-specific technical change in the determination of the cross-country correlation of output and the volatility of the terms of trade. The cross-country correlation of output for G7 countries ranges from 0.42 to 0.85 and the relative volatility of the terms of trade ranges from 1.24 to 6.06. The standard model with total factor productivity change and trade in final goods only generates a cross-country correlation of 0.05 and a volatility of 0.68. Models that allow trade in capital goods and investment-specific technical change produce a cross-country correlation of at least 0.47 and a volatility of at least 3.86.

Growth and the International Transmission of Business Cycles

Two-country single-good real business cycle models predict that the cross-country correlation of output is smaller than the cross-country correlations of consumption and productivity, in contrast to the evidence in historical samples. The objective of this paper is to reproduce the observed empirical evidence in a two-country real business cycle model with endogenous growth. Central features of the model include a nonmarket sector and international externalities in production. The model generates realistic cross-country correlations for output, consumption, and productivity with standard parameter values. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Corporate Cash Holdings and Credit Line Usage

We investigate the factors driving the unprecedented rise in corporate liquidities since the 1970s. We find that an economy‐wide reduction in the cost of holding liquidities and an increase in risk best explain the rise in cash holdings and the widespread use of credit lines. The structural estimation results shed light on two widely acknowledged motives for holding cash. The precautionary motive and the liquidity motive translate risk exposure into cash holdings. Our results, however, do not suggest that firms have become more prudent over time. It is higher liquidity needs that has forced firms to hold more cash and use more credit lines.

THE SPIRIT OF CAPITALISM, ASSET RETURNS, AND THE BUSINESS CYCLE

We evaluate whether the spirit of capitalism improves the ability of the real business cycle model to explain the main features of both asset return and the business cycle. In our model, the spirit of capitalism is embodied in the assumption that individuals have preferences for financial wealth. Our simulation results suggest that this assumption may improve the models ability to explain the risk-free rate puzzle but not the equity premium puzzle. This assumption also markedly deteriorates the models ability to account for the main features of the business cycle.

How much persistence should sticky-price models generate to match US data?

Abstract A number of recent papers find that sticky-price models fail to explain the persistence of output and inflation. We argue that this failure is partially attributable to low frequency fluctuations present in US data, but absent from sticky-price models.

Do Tax Cuts Generate Twin Deficits? A Multi‐Country Analysis (Est‐Ce Que Des Réductions D’Impôt Engendrent Des Déficits Jumeaux? Une Analyse De Plusieurs Pays)

English Abstract: We study the effects of tax shocks on the budget and external deficits for 16 industrialized countries over the post‐1970 period. Our structural approach is based on a small open economy model where a tax cut affects the external deficit by two distinct channels. The demographic channel works through the overlapping‐generation structure of the model. The forecasting channel works through the dynamic structure of the model. Our empirical analysis documents that tax shocks generate twin deficits, and that both channels play important roles in explaining the positive comovement between the budget and external deficits. French Abstract: On etudie des effets de chocs fiscaux sur les deficits budgetaire et exterieur de 16 pays industrialises au cours de la periode de l’apres 1970. L’approche structurelle adoptee est basee sur un modele de petite economie ouverte ou les effets d’une reduction d’impot affectent le deficit exterieur par deux canaux distinct : le canal demographique joue a travers la structure de chevauchement des generations, et le canal previsionnel joue a travers la structure dynamique du modele. On montre empiriquement que les chocs fiscaux engendrent les deficits jumeaux, et que les deux canaux jouent un role important dans l’explication du co‐mouvement positif entre les deficits budgetaire et exterieur.

Inventories, sticky prices, and the persistence of output and inflation

Post-war business cycle fluctuations of output and inflation are remarkably persistent. Many recent sticky-price models, however, grossly underpredict this persistence. We assess whether adding inventories to a standard sticky-price model raises the persistence of output and inflation. For this addition, we consider a shopping-cost model. In the model, consumers find shopping activities costly, and the cost of shopping depends on the stock of goods available. In this context, producers manage inventories to smooth production and to affect the cost of shopping. We find that the shopping-cost model generates a persistence for output and inflation that matches the persistence observed in the post-1985 US data.

Labor Hoarding, Superior Information and Business Cycle Dynamics

In this paper, we test whether labor-hoarding environments with basic and augmented laws of motion provide an adequate explanation for observed business cycle dynamics. The basic law of motion assumes that the information set used by economic agents to forecast future forcing variables includes only the history of forcing variables. Augmented laws of motion assume that the information set is superior and include both forcing and hidden exogenous variables. We show that the labor-hoarding environment with the basic law of motion fails to replicate observed business cycle facts, while the environment with augmented laws of motion successfully matches these facts.

The Current Account and the Interest Differential in Canada

For post-1975 Canadian data, we document the joint behavior of output, the current account, and the interest differential at the business cycle frequency. We also interpret the joint behavior using a simple small open economy model. Our simple model assumes that agents have access to world international financial markets, but face country-specific interest rate on their holdings of world assets. The interest differential depends negatively on the countrys net foreign asset position. We find that our simple model matches the Canadian data remarkably well.