Working
Papers
The Statistical Behavior of GDP after Financial Crises and Severe Recessions
(with Ruxandra Prodan)
Do severe recessions associated with financial crises cause permanent reductions in potential GDP, or does the economy return to its trend? If the economy eventually returns to its trend, does the return take longer than the return following recessions not associated with financial crises? We develop a statistical methodology that is appropriate for identifying and analyzing slumps, episodes that combine a contraction and an expansion, and end when the economy returns to its trend growth rate. We analyze the Great Depression of the 1930s for the U.S., severe and milder financial crises for advanced economics, severe financial crises for emerging markets, and postwar recessions for the U.S. and other advanced economies. The preponderance of evidence for episodes comparable with the current U.S. slump is that, while potential GDP is eventually restored, the slumps last an average of nine years. If this historical pattern holds, the Great Recession that started in 2007:4 will not ultimately affect potential GDP, but the Great Slump is not yet half over. (October 2011)
Taylor’s Rule versus Taylor Rules
(with Alex Nikolsko-Rzhevskyy)
Does
the
The (Un)Reliability of Real-Time Output Gap Estimates with Revised Data
(with Onur Ince)
This paper investigates the differences between real-time
and ex-post output gap estimates using a newly-constructed international
real-time data set over the period from 1973:Q1 to 2007:Q2. We extend the
findings in Orphanides and van Norden
(2002) for the
Time Series Tests of Constant Steady-State
Growth
(with Ruxandra Prodan)
We propose a new methodology to study the stability of
steady-state growth. Long-run GDP per capita can be characterized by: (1) the linear trend hypothesis, where there are
no long-run changes in GDP levels or growth rates, (2) the level shift hypothesis, where there are long-run level shifts, but
not changes in growth rates, and (3) the growth
shift hypothesis, where there are long-run changes in both GDP levels and
growth rates. We formally test these hypotheses using time series techniques
with over 135 years of data. The results are not favorable to the hypothesis of
constant steady-state growth. While we find evidence supporting the linear trend hypothesis for the
Taylor Rules and the Great Inflation:
Lessons from the 1970s for the Road Ahead for the Fed
(with Alex Nikolsko-Rzhevskyy)
Can U.S. monetary policy
in the 1970s be described by a stabilizing Taylor rule with a two percent
inflation target when policy is evaluated with real-time inflation and output
gap data? If so, it is problematic to use the Taylor rule as a guide to good
policy today since the same policy produced the Great Inflation. Using economic
research on the full employment level of unemployment and the natural rate of
unemployment published between 1970 and 1977 to construct real-time output gap
measures for the periods of peak unemployment, we find that the Federal Reserve
did not follow a Taylor rule if appropriate measures are used. We estimate
Taylor rules and find no evidence that monetary policy stabilized inflation,
even allowing for changes in the inflation target. While monetary policy was
stabilizing with respect to inflation forecasts, the forecasts systematically
under-predicted inflation following the 1970s recessions and this does not
constitute evidence of stabilizing policy. We also find that the Federal Reserve
responded too strongly to negative output gaps. The results suggest that the
Federal Reserve should stabilize inflation rather than inflation forecasts and
not respond too strongly to the output gap. (January 2011)
Are Euro Area Inflation Rates Misaligned?
(with Claude Lopez)
We
study the behavior of inflation rates among Euro countries. More specifically,
we are interested in testing whether and when group convergence dictated by the
Inflation
Persistence and the Taylor Principle
(with Chris Murray and Alex
Nikolsko-Rzhevskyy)
Although
the persistence of inflation is a central concern of macroeconomics, there is
no consensus regarding whether or not inflation is stationary or has a unit
root. In the context of a “textbook” macroeconomic model, inflation is
stationary if and only if the
Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle
(with Claude Lopez and Chris Murray)
Using median-unbiased estimation based on Augmented-Dickey-Fuller (ADF) regressions, recent research has questioned the validity of Rogoff’s “remarkable consensus” of 3-5 year half-lives of deviations from PPP. The confidence intervals of these half-life estimates, however, are extremely wide, with lower bounds of about one year and upper bounds of infinity. We extend median-unbiased estimation to the DF-GLS regression of Elliott, Rothenberg, and Stock (1996). We find that combining median-unbiased estimation with this regression has the potential to tighten confidence intervals for the half-lives. Using long horizon real exchange rate data, we find that the typical lower bound of the confidence intervals for median-unbiased half-lives is just under 3 years. Thus, while previous confidence intervals for median-unbiased half-lives are consistent with virtually anything, our tighter confidence intervals are inconsistent with economic models with nominal rigidities as candidates for explaining the observed behavior of real exchange rates and move us away from solving the PPP puzzle. (February 2009)
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