"A Rational Expectations Approach to Macroeconometrics" pursues a rational expectations approach to the estimation of a class of models widely discussed in the macroeconomics and finance literature: those which emphasize the effects from unanticipated, rather than anticipated, movements in variables. In this volume, Fredrick S. Mishkin first theoretically develops and discusses a unified econometric treatment of these models and then shows how to estimate them with an annotated computer program.

Introduction to "A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models"

Supply-side asymmetry and the non-neutrality of demand fluctuations

The evidence of business cycles across a sample of industrial countries indicates asymmetry in the output and price adjustments to aggregate demand shocks in the pre- and post-war periods. Upward price flexibility is significant in moderating output fluctuations across countries in the pre- and post-war periods. Nonetheless, the effect of upward price flexibility in accelerating trend price inflation is more evident across countries in the post-war period compared to the pre-war period. The combined evidence is consistent with a steeper supply curve in the face of expansionary demand shocks that increases the stabilizing effect of upward price flexibility. In contrast, a flatter supply curve in the face of negative demand shocks has countered the stabilizing function of downward price flexibility, which appears insignificant across countries in the pre- and post-war periods. In addition, a slower demand response to price change during recessions has further reinforced the contractionary effect on output d...

The asymmetric stabilizing effects of price flexibility: historical evidence and implications

The focus of this investigation is one the asymmetric effects of monetary growth Shocks in the pre-and periods of United States history. The downward Rigidity of nominal wages in the post -war period appears to be an important factor in Differentiating the slope of the aggregate supply curve over time. Accordingly, the Response of real output and price to expansionary monetary growth shocks is similar in The pre-and post-war periods. In contrast, the aggregate supply curve is flatter in the Face of negative monetary growth shocks in the post-war period, exacerbating output Contraction and moderating price deflaction. The apparent change in the asymmetric Effects of m onetary growth shocks deflation. The apparent change in the asymmetric States over time. [E30,E33,E34,E35]

Asymmetry In Economic Fluctuations In The Us Economy: The Pre-War And The 1946–1991 Periods Compared

I. INTRODUCTION Is increased price flexibility stabilizing? The importance of this question can be easily established by observing the number of recently published papers in which this question, or a slight modification of it, has appeared in their titles.(1) While most economists would answer this question affirmatively, a strand of macroeconomic thought that questions the wisdom of too much price flexibility has recently regained some attention.(2) In the most widely discussed of this recent literature, DeLong and Summers [1986b] question the wisdom of too much price flexibility. Their work was motivated by some of the ideas expressed by Keynes [1936] and formally articulated by James Tobin [1975]. Low prices work to move the economy to full employment but falling prices, to the extent that they lead to expectations of deflation, raise the real interest rate (through the Mundell effect) and move the economy away from full employment. In a version of Taylor's [1979] wage-setting model, DeLong and Summers show that instability is likely to occur if expectations of inflation adjust rapidly to actual inflation and the real interest rate effect is large. This view presents a direct challenge to mainstream Keynesian models of business cycles.(3) According to these models, sluggish wages and prices are generally the culprits of unemployment and business fluctuations. An exogenous (institutional) increase in the degree of price inflexibility increases the size of quantities adjustment in response to aggregate demand shocks in the current period and over time. The assumption of exogeneity is consistent with the view that wage and price rigidity are the result of an institutional structure that is relatively unresponsive to changes in the underlying economic conditions. In Gray and Kandil [1991], we find this view unappealing considering recent efforts to rationalize nominal rigidities as the outcome of explicit optimization exercises.(4) It is for this reason that we examine the relationship between price flexibility and output variability in a framework in which both are endogenously determined. In the model we develop, price rigidity is attributed to the length of contractual wage agreements. An increase in contract length will occur if the costs of negotiating contracts rise or the amount of uncertainty impinging on the economy declines. In the first case, declines in wage and price flexibility will be accompanied by decreased stability of output. In the latter case, the opposite will occur: the reduction in the size of stochastic disturbances impinging on the economic system has a direct stabilizing impact on real output. Concurrently, the reduction in the degree of uncertainty increases agents' incentives to write longer contracts. The increased rigidity is destabilizing. This destabilizing impact is dominated, however, by the direct stabilizing impact. The implications of the alternative views can be contrasted in many respects. In Kandil [1991b], I test the relation between measures of wage and price flexibility and the size of macroeconomic fluctuations across a group of ten major industrial countries. The analysis of this paper extends this research in several directions. First, the analysis provides a formal illustration of the channels through which price flexibility may differentiate the real effects of specific shocks underlying aggregate demand and, in turn, aggregate variability. The framework approximates the key relationships for the theoretical debate under consideration. These relationships are replicated empirically to establish the validity of the hypotheses that differentiate the alternative views. Second, the analysis provides a more formal attempt towards quantifying the structural shocks underlying aggregate demand. These shocks are the driving forces of economic instability and, in turn, they are crucial to the debate on the stabilizing effects of price flexibility. …

Price flexibility and aggregate stability: new evidence and implications

This paper explores the empirical validity of theoretical channels through which price flexibility may have caused differences in the stability of output in developing and developed countries. The relation between these two variables suggests several principles. Where the size of stochastic disturbances that impinge on the economic system does not play an important role in determining the degree of price flexibility, the increased flexibility is clearly stabilizing. Developing countries generally are characterized by larger stochastic disturbances and a higher flexibility of the price level than developed countries. The larger variability of disturbances is indeed destabilizing. Further, this destabilizing effect has domi- nated the stabilizing effect that is associated with the increased flexibility of the price level in developing countries, and this results in a clear positive correlation between price flexibility and output variability.

Price flexibility and aggregate stability: some evidence contrasting developing and developed countries

This paper investigates the implications of a sticky-wage contracting model that can explain both the decline in wage and price flexibility and the increased stability of the post-war American economy. The reduction in the size of demand shocks in the post-war period has increased agents' incentives to write longer contracts. Though longer contracts have rendered real activity more responsive to demand shocks in the post-war period, the reduction in the size of these shocks has dominated the increase in the size of response to a particular shock. Overall, real activity has become more stable in the post-war period, as predicted by theory.

Some Evidence on Demand Fluctuations and the Increased Stability of the Post-War American Economy

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Price flexibility and aggregate stability: some evidence contrasting developing and developed countries

Some Evidence on Demand Fluctuations and the Increased Stability of the Post-War American Economy