Peter McAdam

Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach

Using a normalized CES function with factor-augmenting technical progress, we estimate a supply-side system of the U.S. economy from 1953 to 1998. Avoiding potential estimation biases that may have occurred in earlier studies and putting a high emphasis on data consistency, we obtain robust results not only for the aggregate elasticity of substitution but also for the parameters of labor and capital augmenting technical change. We find that the elasticity of substitution is significantly below unity and that technical progress shows an asymmetrical pattern where the growth of labor-augmenting technical progress is exponential, while that of capital is hyperbolic or logarithmic.

Medium Run Redux

We develop a framework for measuring and analyzing medium-run departures from balanced growth, and apply it to developments in the euro area. A time-varying factor-augmenting production function (mimicking directed technical change) with below-unitary substitution elasticity is shown to account for the observed dynamics of factor incomes shares, TFP growth, and its components. Based on careful data accounting, we also identify a rising markup and the importance of financial-market regulations in the 1970s. The balanced growth path emerges as a special (and testable) case of our framework, as do existing strands of medium-run debates.

US, Japan and the Euro Area: Comparing Business-Cycle Features

Abstract There has been much discussion of the differences in macroeconomic performance and prospects between the USA, Japan and the Euro area. Using Markov‐switching techniques, we identify and compare specifically their major business‐cycle features and examine the case for a common business cycle, asymmetries in the national cycles and, using a number of algorithms, date business‐cycle turning points. Despite a high degree of trade and financial linkages, the cyclical features of USA, Japan and the Euro area appear quite distinct. Documenting and comparing such international business‐cycle features can, for example, aid the development of business‐cycle models and inform policy making.

Nonlinearity, ComputationaL Complexity and Macroeconomic Modelling

In this paper we survey and appraise the main contributions to solving and stabilising non-linear equation systems typically found in Economics. We are keen wherever possible to draw distinctions and limiting cases between different solution methods, define acceleration strategies and encourage the use of hybrid or switching algorithms. Both large-scale traditional macroeconomic models as well as smaller non-linear analytical models are considered. Copyright 1999 by Blackwell Publishers Ltd

Production, supply and factor shares: an application to estimating German long-run supply

Abstract This paper proposes a new framework for long-run supply estimation. We present a multi-sector model of imperfect competition with an otherwise common technology but sector-specific mark-ups, technical level and technical progress. The model accommodates many important (but often neglected) issues related to supply estimation—such as possible non-stationarity in the profit margin and factor-income share. It has been applied to Germany from the 1980s, accounting for the following notable characteristics: break and catch up process of unification, the relatively large decline in factor shares and a noticeable change in profit margins and sectoral output shares. Our approach provides a flexible way to estimate aggregate supply in the presence of changing factor and sectoral shares.

Openness, Efficiency and Technology: An Industry Assessment

Most trade and macroeconomic models imply positive impacts on the economy from greater openness. And a key factor linking openness and progress is the efficiency with which resources are used. Empirically, however, the efficiency impacts of trade have been ambiguous. Using a stochastic frontier analysis, we examine the impact of openness on technical (in)efficiency for a sample of OECD economies. Unlike the bulk of related studies, we work at the industry level. Given recent debates, we additionally examine whether Information and Communication Technologies (ICT) expenditures impact openness and efficiency. We establish the elasticity of openness with respect to (in)efficiency; TFP and Scale Economies; and Technical Inefficiency across countries and sectors. Both openness and ICT usage have robustly positive impacts on efficiency. Our results shed light on the impact of, spillovers between, and heterogeneity across countries and industries from, increasing openness interacted with the use of advanced technologies.

A Retrospective Structural Break Analysis of the French German Interest Rate Differential in the run up to EMU

Mean breaks in the Franco-German interest rate differential prior to European Monetary Union can have an economic interpretation, namely gains or losses in credibility of the corresponding ERM central exchange rate. A variety of tests are used to detect such breaks, on daily data covering the 1990s. The analysis paints a broadly consistent picture of these breaks and how expectations evolved before EMU. Results suggest that credibility was characterised by gains as well as setbacks; however an effective convergence is found from 1996 onwards, suggesting a major increase of the credibility of the French participation to EMU around that date.

The Effects of Euro Area Interest Rate Changes: Evidence from Macroeconomic Models

This paper examines the effects of changes in Euro Area interest rates using macroeconomic models. It examines the results of a harmonised monetary policy simulation at the Euro Area level using the National Institute of Economic and Social Research’s Global Economic Model (NiGEM) and the European Central Bank’s Area Wide Model (AWM). Comparison is also drawn with the aggregate results from Euro Area National Central Bank models as reported in van Els et al. (2001). Overall, the results across the different models are broadly consistent with what might be regarded as the stylised facts of the monetary transmission mechanism. That is to say that, following a policy tightening, there is an initial fall in output consisting of a more pronounced investment response and a less pronounced consumption response. This output fall is accompanied by protracted price dynamics.

Arrow–Calvo Price Staggering

We merge Arrow and Calvo pricing themes leading to a price-resetting signal dependent on inflation and competitiveness. This allows us to tractably analyse state-dependent issues and to develop a New Keynesian Phillips curve (NKPC) expressed for the levels of variables and a specification which is not regime dependent. The standard NKPC arises as a special case. Using non-linear simulation and estimation techniques, we then demonstrate the importance of regime dependence in inflation dynamics and show that standard NKPCs are mis-specified even in low-inflation regimes. We further detect strong intrinsic persistence in historical US inflation.

Evaluating Macro-Modelling Systems: An Application to the Area Wide Model

This paper considers approaches to considering the validity of the overall structure of macro-econometric models - specifically, the Area Wide Model of the European Central Bank. By structure, we refer to the dynamic (business-cycle) and steady-state features that the model purports to capture. This leads to two types of tests. The first, drawing on the DSGE literature, is concerned with whether the model matches business-cycle (high-frequency) data characteristics. This is implemented by a Cholesky bootstrap whereby the steady state of the model is stochastically simulated using historically consistent covariances. The generated data is analysed for stylised-facts fitting and, similarly, using the models implied spectral characteristics, for congruence with the data in terms of persistence, periodicity and spectral fit. Moments matching, however, is only one aspect of overall model evaluation. Consequently, we move to tests that combine high-frequency aspects (short-horizon forecasts) with long-run features (such as the existence and identification of steady states and trends). Recursive forecasting tests form the second part. The forecasts attempt to measure the accuracy of model-based forecasts both simulated out-of-sample and in an in-sample exercise. The out-of-sample exercise analyses the 1- to 8-step-ahead forecasting ability of the model. For this, the model is re-estimated each time on a subset of the original sample, and the re-estimated model is used to generate a forecast over the remaining sample. The in-sample exercise omits the re-estimation step but performs a more thorough exercise, covering 1- to 12-steps-ahead forecasts over a larger part of the original sample. For this latter exercise, a thorough analysis of sources of forecast error is made. Both exercises incorporate alternative residual-projection methods, in order to assess the importance of unaccounted-for breaks in forecast accuracy. Conclusions reached are that, on the one hand, in-sample exercises should be preferred with systems of this size and typical samples; and, on the other, that mechanical residual adjustment or model re-estimation should be avoided except under strong evidence of mis-specification. The paper considers the testing procedure to be one applicable to the class of large, macro models and therefore of general interest.