Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the "Great Moderation"?

/pdf/shocks-and-frictions-in-us-business-cycles-a-bayesian-dsge-d1f6ynd58q.pdf

Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach

/pdf/the-theory-of-industrial-organization-19bejph0ej.pdf

The Theory of Industrial Organization

are price decreases. (3) The frequency of price increases covaries strongly with inflation, whereas the frequency of price decreases and the size of price increases and price decreases do not. (4) The frequency of price change is highly seasonal: it is highest in the first quarter and then declines. (5) We find no evidence of upwardsloping hazard functions of price changes for individual products. We show that the first, second, and third facts are consistent with a benchmark menu-cost model, whereas the fourth and fifth facts are not.

/pdf/five-facts-about-prices-a-reevaluation-of-menu-cost-models-35l383bzoq.pdf

Five Facts about Prices: A Reevaluation of Menu Cost Models

This paper studies a macroeconomic model in which financial experts borrow from less productive agents. We pursue four sets of results: (i) The economy is prone to instability and occasionally enters volatile episodes. As volatility spikes agents precautionary motive increases depressing prices even further. Log-linear approximations fail to capture these non-linear effects that can cause economies to be significantly depressed for long periods of time. (ii) Endogenous risk during volatile episodes increases asset price correlations. (iii) Financial experts impose a negative externality on each other and on the labor sector by not maintaining adequate capital cushion, and funding structure. (iv) While risk sharing within the financial sector (through securitization and derivatives contracts) reduces many inefficiencies, it can also amlify systemic risks.

/pdf/a-macroeconomic-model-with-a-financial-sector-1s2akgr5uv.pdf

A macroeconomic model with a financial sector

The ability of a two-sector model to quantify the contribution of the housing market to business fluctuations is investigated using U.S. data and Bayesian methods. The estimated model, which contains nominal and real rigidities and collateral constraints, displays the following features: first, a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector; second, residential investment and housing prices are very sensitive to monetary policy and housing demand shocks; third, the wealth effects from housing on consumption are positive and significant, and have become more important over time. The structural nature of the model allows identifying and quantifying the sources of fluctuations in house prices and residential investment and measuring the contribution of housing booms and busts to business cycles.

/pdf/housing-market-spillovers-evidence-from-an-estimated-dsge-cw32z51gvs.pdf

Housing Market Spillovers: Evidence from an Estimated DSGE Model

This study investigates the pricing behaviour of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks, covering more than 11,000 firms. The results, robust across countries, show that firms operate in monopolistically competitive markets, where prices are mostly set following markup rules and where price discrimination is common. Around one-third of firms follow mainly time-dependent pricing rules while two-thirds allow for elements of state-dependence. The majority of firms take into account past and expected economic developments in their pricing decisions. Price stickiness is mainly driven by customer relationships - explicit and implicit contracts - and coordination failure. Firms adjust prices asymmetrically in response to shocks: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, reductions in demand are more likely to induce a price change than increases in demand.

/pdf/the-pricing-behaviour-of-firms-in-the-euro-area-new-survey-2m9vea5u4p.pdf

The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence

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The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence