Roberto Perli

Indeterminacy, home production, and the business cycle: A calibrated analysis

Abstract In this paper I present a business cycle model with one market sector that produces a standard good, and another that produces a non-market, or home, good. The model can have multiple equilibria, and therefore cycles driven only by self-fulfilling expectations, with low externalities to market production. In particular, an upward sloping aggregate labor demand, as e.g., in Farmer and Guo (J. Economic Theory 63 (1994) 42–72), is not required for indeterminacy. The effect of technology shocks is also studied. In all cases the time series that are generated have properties that are comparable to the real US postwar series.

Monopolistic competition, indeterminacy and growth

In this paper we analyse the dynamics of both Romers original model of endogenous growth and of a modified version where the level of labour and human capital are determined endogenously. We find that the original model can have an indeterminate Balanced Growth Path (BGP) if there is some degree of complementarity between the intermediate inputs, and if agents have a high intertemporal elasticity of substitution of consumption. Once we allow for the endogenous determination of labour and of total human capital, we find that equilibrium can be indeterminate with a much lower elasticity of intertemporal substitution of consumption. Moreover, if some modest increasing returns are introduced into the production function for human capital, the issue of global as opposed to local indeterminacy arises: this refers to situations when there exist multiple determinate BGPs, but where the global dynamics is still indeterminate from given initial conditions.

Human capital formation and business cycle persistence

Abstract In this paper we examine the role of the formation of human capital in propagating shocks over the business cycle. We show that a two-sector equilibrium business cycle model with human capital is able to generate persistence in the growth of output and other aggregate variables comparable to that observed in the post-war US data. A key feature is the relatively low elasticity of substitution between skilled and unskilled labor in the production of human capital.

Does Mortgage Hedging Amplify Movements in Long-term Interest Rates?

The growth of the mortgage market in recent years has raised the question of what effects, if any, the hedging of mortgage portfolios has on the behavior of long-term interest rates. This paper finds that the volatility of the ten-year swap rate implied by swaptions increases when the prepayment risk of outstanding mortgages increases - most likely because investors expect the hedging of prepayment risk to amplify future interest rate movements. These amplification effects can be considerable in magnitude, but they are generally expected to persist only for several months.

Financial Market Perceptions of Recession Risk

Over the Great Moderation period in the United States, we find that corporate credit spreads embed crucial information about the one-year-ahead probability of recession, as evidenced by both in- and out-of-sample fit. Furthermore, the incidence of “false positive” predictions of recession is dramatically reduced by utilizing a bivariate model that includes a measure of credit spreads along with the slope of the yield curve; indeed, these bivariate models provide much better forecasting performance than any combination of univariate models. We also find that optimal (Bayesian) model combination strongly dominates simple averaging of model forecasts in predicting recessions.

Increasing returns, home production and persistence of business cycles

Abstract This paper presents a business cycle model with a propagation mechanism capable of generating persistence of output growth comparable to that observed in the US data. The key is that in this model consumption and labor move together not only at the impact of a shock, but also for a few periods after that; this can happen if there are sufficient increasing returns to make the equilibrium indeterminate. The exact degree of increasing returns is estimated so that the distance between the spectra of the model and US output growth is minimized.