Steven Ambler

Stochastic Depreciation and the Business Cycle

The authors study a version of the neoclassical growth model in which shocks to both aggregate productivity and the depreciation of capital generate fluctuations around the steady-state growth path. Depreciation shocks induce an inverse comovement between average labor productivity and hours worked. When the model is calibrated to U.S. data, it generates a correlation between productivity and hours which is significantly closer to the observed value than that of standard real business cycle models. Furthermore, the addition of depreciation shocks does not cause a deterioration of the predictions of the model concerning other comovements. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Price-Level Targeting and Stabilisation Policy: A Survey

This paper surveys recent articles on the costs and benefits of price-level targeting, focusing its use as a tool for stabilisation policy. It discusses how price-level targeting can affect the short-run trade-off between output and inflation variability by influencing inflation expectations. It reviews how assigning an explicit price-level target to a central bank that is unable to commit to its future policies can improve economic performance. It surveys other potential benefits and costs. Among the costs, it underlines the importance of perfectly rational expectations for the optimality of price-level targeting, and an exacerbation of the time inconsistency problem. Copyright

Wage contracts and business cycle models

Abstract The paper introduces an explicit production technology into a business cycle model with nominal rigidities and evaluates the modified model using criteria similar to those commonly used to assess real business cycle (RBC) models. In general, the model compares favorably to standard RBC models, and is superior in several important respects. It reproduces the observed correlation of average labor productivity and hours as well as the relative volatilities of hours and output, and requires technological shocks of a lower magnitude to generate the observed volatility of output. Finally, the modified model is capable of reproducing some of the stylized response patterns from the recent empirical literature.

Price-Level Targeting: A Post-Mortem?

Recent research has shown that monetary policy based on price-level targeting has several advantages over the traditional inflation targeting method, particularly in times of economic distress. Although several central banks have been coping with the aftershocks of the 2008 financial crisis for prolonged periods, none has adopted price-level targeting. This Commentary reviews some of the reasons for this in the Canadian and American contexts. The relative mildness of Canada’s 2008-2009 recession convinced the Bank of Canada that inflation-targeting can work in troubled as well as tranquil times. Meanwhile, the severity of the US recession led the Federal Reserve to explore several types of unconventional monetary policies, but not price-level targeting. The latter requires a commitment to offset the effects of unexpected inflation on the price level and makes monetary policy history-dependent. The Fed prefers to exercise discretion, and inflation targeting allows central banks to ignore past inflation shocks and engage in fine-tuning of the business cycle. The Bank of Canada shares the Fed’s predilection for discretion in this regard.

The stabilizing effects of price flexibility in contract-based models☆

We Show That the Destabilizing Effects of Price Flexibility Due to the Increased Sensitivity of Contract Wages to Labor Market Tightness Depends Critically on an Arbitrary Restriction on the Information Available to Wage Settes Who Ae Negotiating Contact Renewals. If These Agents Are Put on the Same Footing As Investors and the Monetary Authorities by Being Given Access to Current Information Then Increased Price Flexibility Can Reduce the Magnitude of Economic Fluctuations in the Face of Demand Shocks. Contrary to Other Recent Papers, This Result Is Derived Completely Within a Staggered Contracts Framework.

Optimal price-level drift under commitment in the canonical New Keynesian model

In both the canonical and many extended versions of the New Keynesian model, optimal monetary policy under commitment implies price-level stationarity as long as expectations are rational. We show that this is no longer the case if the central bank and private agents make decisions before observing current shocks. The optimal amount of price-level drift in response to unexpected innovations to inflation is quantitatively important. This result has important implications for monetary policy, including the design of the optimal loss function for the central bank if it cannot commit to its future policies.

On Export Promotion and Growth

Over the last thirty years, countries such as South Korea, Hong Kong, Taiwan and Singapore have had sustained high growth rates and have undergone substantial economic transformations. Lucas (1993), for instance, speaks of a miracle in the case of South Korea, where between 1960 and 1988 yearly real per capita growth averaged 6.2%. This contrasts with a world average of 1.8% over the same period. All four countries are also characterized by their openness. In its 1987 classification of developing countries according to trade orientation, the World Bank lists only South Korea, Hong Kong and Singapore as strongly outward oriented economies over the 1963-1985 period. Lucas (1993) argues that neither policies to promote investment in physical capital nor policies to promote direct investment in human capital can explain these growth rates. Instead, he stresses the importance of human capital accumulation externalities in which learning is the by-product of applying labour and capital to new production processes. In this paper, we use a model of a small, open, developing economy with a human capital accumulation externality to assess the quantitative impact of optimal second-best commercial policy on growth. In order to do this, we calibrate the model and calculate the economys growth rate numerically. We find that commercial policy can lead to increases in steady-state growth rates on the order of five percent per year for plausible parameter values. Other authors, such as Lucas (1988) and Young (1991) have analyzed the effects of learning by doing and trade on growth. Grossman and Helpman (1991) consider the link between growth and trade in a model of learning by research and development. Other authors, such as Rivera-Batiz and Romer (1991), have also compared growth under free trade and protection. To our knowledge, our paper is the first to consider optimal second-best commercial

Interest rate innovations and the business cycle

Abstract Recent evidence from vector autoregressions points towards the importance of interest rate innovations in explaining output variations. We show that this evidence supports an interpretation of business cycles based on nominal contractual rigidities rather than cotinuous market clearing.

Optimal anti-inflation programs in semi-industrialized economies: Orthodox versus heterodox policies☆

Abstract The paper characterizes the optimal time-consistent anti-inflation program in a small, open, semi-industrialized economy when policy makers choose the rate of exchange rate crawl, the rate of change of fiscal spending and a wage and price control parameter to minimize deviations of output and inflation. The optimal program involves a rapidly decelerating rate of crawl, a sharp reduction in spending, and a short initial period of wage and price controls. The paper also assesses the importance of controls in helping to reduce the output loss associated with fighting inflation.

Impulse functions in dynamic perfect foresight models

Abstract The paper illustrates how Laplace transforms can be used to solve dynamic perfect foresight models in which some of the forcing variables can be characterized by impulse (Dirac delta) functions. The technique is applied to a variant of the Dornbusch (1976) exchange rate overshooting model.