Michael T. Kiley

Natural Rate Measures in an Estimated DSGE Model of the U.S. Economy

This paper presents a monetary DSGE model of the U.S. economy. The model captures the most important production, expenditure, and nominal-contracting decisions underlying economic data while remaining sufficiently small to allow it to provide a clear interpretation of the data. We emphasize the role of model-based analyses as vehicles for storytelling by providing several examples - based around the evolution of natural rates of production and interest - of how our model can provide narratives to explain recent macroeconomic fluctuations. The stories obtained from our model are both similar to and quite different from conventional accounts.

Partial Adjustment and Staggered Price Setting

This paper compares Taylor-style staggered price setting to partial adjustment of prices (or Calvo staggering) in a small optimizing IS/LM model. In contrast to the overwhelming perception in the literature, the models are not similar for most parameterizations. In particular, the dynamic response of the economy to shocks is quite different in the two models, and the welfare cost of price rigidity is eight or more times larger in the Calvo model than in the Taylor model (for typical calibrations). Suggestions for calibrations under which the models are more similar are also presented.

A Quantitative Comparison of Sticky-Price and Sticky-Information Models of Price Setting

I estimate sticky-price and sticky-information models of price setting for the United States via maximum-likelihood techniques, reaching several conclusions. First, the sticky-price model fits best, and captures inflation dynamics as well as reduced-form equations once hybrid-behavior is allowed. Second, the importance of hybrid behavior in sticky-price models is potentially consistent with a role for some information imperfections, such as sticky information, as a complement to nominal price rigidities. Finally, the favorable results herein for the hybrid sticky-price model when evaluated by statistics that summarize the relative fit of different models is consistent with the existing literature that is both supportive and dismissive of such models, as this literature has largely ignored fit in evaluating such models. Many previous studies have focused on ancillary issues, such as the standard errors associated with certain parameters or Granger-causality tests that may not provide much information about sticky-price models.

Endogenous Price Stickiness and Business Cycle Persistence

Sticky prices help generate persistent output fluctuations in response to aggregate demand shocks. This paper develops a model in which price stickiness is endogenous and generates persistent output fluctuations. Since the degree of price stickiness should be lower in high-inflation economies, output persistence should also be lower in high-inflation economies. Estimation of the model, as well as simple autocorrelations of detrended real output, suggest that, indeed, output fluctuations about trend are less persistent in high-inflation economies.

Computers and growth with costs of adjustment: will the future look like the past?

This paper augments the traditional growth accounting framework by including a common specification of investment adjustment costs and uses the new framework to examine the past and likely future growth in nonfarm business output in the United States. The inclusion of adjustment costs can have large effects on the growth-accounting exercise when a new investment good is introduced--such as computers in the last thirty years. The new framework indicates that the contribution of computers to economic growth has been held down by the large adjustment costs required to incorporate a new investment good into the economys capital stock. Alternative calibrations of the model suggest that these adjustment costs have lowered measured growth in multifactor productivity since 1974 by about 1/2 percentage point--a nontrivial percentage of the productivity slowdown. Combining the adjustments to multifactor productivity and the impact of computers implied by the model with adjustment costs boosts long-run growth in output per hour 3/4 percentage point above the 1974-1991 average.

Monetary policy and the global housing bubble

What caused the housing boom of the 2000s? A number of researchers have suggested that loose monetary policy during the first half of the 2000s was a primary cause of the substantial run-up in house prices in many countries. However, using a common statistical approach, we find that monetary policy was not the main factor. That should not be surprising: Although low interest rates raise house prices, the increase in prices during the mid-2000s was much larger than the historical relationship between the two variables would suggest. Instead, we investigate further the link between the marked loosening in terms and standards for mortgage credit and the most rapid increases in house prices. This link provides some evidence for a story where credit provision and the demand for housing fed on each other and helped spur the housing boom. Our work suggests a greater role for macroprudential regulation rather than monetary policy in managing asset price booms.

Computers and growth with frictions: aggregate and disaggregate evidence

Abstract Not long ago, discussions of the computer revolution by economists centered on the disappointing payoff computers seemed to be having on aggregate, industry, or firm-level movements in productivity, but this disappointed has passed and the business pages are filled with stories heralding the arrival of the “new economy”. This paper investigates the role of computers, software, and communications equipment in the recent surge in U.S. productivity growth in a neoclassical model of investment and production in an attempt to clarify the potential importance of frictions in the transition to a more computer-intensive mode of production on the productivity effects of high-tech equipment. The estimated response of investment in high-tech equipment to its relative price is substantial and sluggish. The high-price elasticity of high-tech capital implies, in conjunction with reasonable assumptions about future declines in high-tech equipment prices and multifactor productivity throughout the economy, that trend GDP growth over 2001–2005 is likely to range between 3 percent and 3- 3 4 percent. The estimated investment frictions are suggestive of complicated dynamics in the short-run impact of high-tech investment on productivity; firm-level evidence suggests such short-run effects may be important, as do the large costs of training workers and installing high-tech capital.

Policy paradoxes in the New Keynesian model

The common sticky-prices New-Keynesian model behaves differently in a zero-lower bound environment. Fiscal and forward guidance multipliers can be very large. Positive supply shocks, such as an increase in productivity, will lower production, and increased price flexibility can exacerbate such a decline in output (as well as amplifying the effects of other shocks). These results are fragile and disappear under a plausible alternative to sticky prices (sticky information): Fiscal and monetary multipliers are smaller, positive supply shocks raise output, and greater price flexibility, in the sense of more frequent updating of information, moves the economys response toward the neoclassical benchmark. (Copyright: Elsevier)

Habit Persistence, Non-Separability between Consumption and Leisure, or Rule-of-Thumb Consumers: Which Accounts for the Predictability of Consumption Growth?

Consumption growth is predictable, a basic violation of the permanent-income hypothesis. This paper examines three possible explanations: rule-of-thumb behavior, in which households allow consumption to track per-period income flows rather than permanent income; habit persistence; and non-separability in preferences over consumption and leisure. The data appear most consistent with non-separable preferences over consumption and leisure.

Documentation of the Research and Statistics Divisions Estimated DSGE Model of the U.S. Economy: 2006 Version

This paper provides documentation for the large-scale estimated DSGE model of the U.S. economy used in Edge, Kiley, and Laforte (2007). The model represents part of an ongoing research project (the Federal Reserve Boards Estimated, Dynamic, Optimization-based--FRB/EDO--model project) in the Macroeconomic and Quantitative Studies section of the Federal Reserve Board aimed at developing a DSGE model that can be used to address practical policy questions and the model documented here is the version that was current at the end of 2006. The paper discusses the models specification, estimated parameters, and key properties.