Reexamination of Real Business Cycles in a Small Open Economy (original) (raw)

Reexamination of real business

2007

Standard dynamic small open economy models have predicted a counterfactual perfectly positive correlation between output and hours worked over the business cycle. In addition, this class of models exhibits a weak internal propagation mechanism. To address these anomalies, this paper incorporates intertemporally non-separable labor supply and variable capital utilization into the canonical Mendoza model with adjustment costs of net investment. Our analysis shows that a dynamic, technology-shock driven small open economy model with internal habit formation in labor hours and endogenous capital utilization is able to account for the main real business-cycle regularities of Canada after 1981.

Investment-specific shocks and external balances in a small open economy model

Canadian Journal of Economics/Revue canadienne d'économique, 2007

We set up a standard small-open economy business cycle model driven by government spending shocks and two types of productivity shocks. The model is calibrated to quarterly Canadian data and its predicted moments are compared to those in these data. We find that models including either neutral productivity shocks (i.e. shocks to total factor productivity) or investment-specific productivity shocks (in addition to government spending shocks that are included in all models) do not match the data very well. However, the model including both types of productivity shocks matches very well the moments of output, investment and the trade balance.

Overtime, effort, and the propagation of business cycle shocks

Journal of Monetary Economics, 1996

This paper presents and estimates a variant of Hansen and Sargent's (1988) real business cycle model with straight time and overtime. The model presented has only one latent variable, the state of technology, yet it does as good a job propagating and magnifying shocks as labor hoarding models which incorporate unobserved effort. This paper also finds that the implied effort series of labor hoarding models displays a high coherence with U.S. overtime data at business cycle frequencies. This supports the view that effort is procyclical. 1 I n t r o d u c t i o n This paper estimates a dynamic general equilibrium real business cycle model of the U.S. economy incorporating straight time and overtime. This model is a hybrid of Hansen and Sargent's (1988) model with straight time and overtime and Burnside, Eichenbaum and Rebelo's (1993) labor hoarding model. This model is studied along with an estimated version of Burnside, Eichenbaum and Rebelo's model. The two models are analyzed to answer two questions. First, how do different assumptions about laoor market rigidities effect the real business cycle model's ability to propagate and magnify shocks? Second, does the unobservable time series effort implied by the labor hoarding models make sense?

Accounting for Business Cycles in Canada: I. The Role of Supply-Side Factors

2016

After documenting business cycle facts in Canada, I have used a bunch of popular models to explain them. The common features of these models are: the use of the neoclassical growth framework, the assumption that prices are flexible enough to ensure a general equilibrium, and the reliance on supply-side factors, mainly technological change, to explain business cycles. I have also assessed the ability of these models to replicate these business cycle facts.

Business cycles in a small open economy with a banking sector

2001

This paper studies the interest-rate-driven business cycles of a small open economy (SOE). For than end a costly operated banking system is added to the standard real-business-cycles model. Banks are the only domestic agents considered worthy of credit in international capital markets. They borrow from the rest of the world and lend domestically in a competitive credit market. Existent quantitative models of business cycles in SOE's indicate that interest-rate shocks are unable to cast the kind of output variability produced by productivity or terms-of-trade shocks. Contrary to this finding, it seems that the macroeconomic performances of several SOE's are tightly related to international interest rates and capital flows. Neumeyer and Perri (1999) points out that the introduction of working capital needs may close the gap between the standard model's predictions and the observed consequences of interest-rate shocks. This paper shows that a more careful analysis of the microfoundations of working capital may give rise to an intermediate position where working capital matters in explaining output fluctuations, but not as much as Neumayer and Perri suggest. For that end, the model is calibrated to the Argentinean economy.

The Labor Market in Real Business Cycle Theory

A Reader, 1998

The basic objective of the real business cycle research program is to use the neoclassical growth model to interpret observed patterns of fluctuations in overall economic activity. If we take a simple version of the model, calibrate it to be consistent with long-run growth facts, and subject it to random technology shocks calibrated to observed Solow residuals, the model displays short-run cyclical behavior that is qualitatively and quantitatively similar to that displayed by actual economies along many important dimensions. For example, the model predicts that consumption will be less than half as volatile as output, that investment will be about three times as volatile as output, and that consumption, investment, and employment will be strongly positively correlated with output, just as in the postwar U.S. time series. 1 In this sense, the real business cycle approach can be thought of as providing a benchmark for the study of aggregate fluctuations.

A Structural Small Open-Economy Model for Canada

2004

The authors develop a small open-economy dynamic stochastic general-equilibrium (DSGE) model in an attempt to understand the dynamic relationships in Canadian macroeconomic data. The model differs from most recent DSGE models in two key ways. First, for prices and wages, the authors use the time-dependent staggered contracting model of Dotsey, King, and Wolman (1999) and Wolman (1999), rather than the Calvo (1983) specification. Second, to model investment, the authors adopt Edge's (2000a, b) framework of time-to-build with ex-post inflexibilities. The model's parameters are chosen to minimize the distance between the structural model's impulse responses to interest rate, demand (consumption), and exchange rate shocks and those from an estimated vector autoregression (VAR). The majority of the model's theoretical impulse responses fall within the 5 and 95 per cent confidence intervals generated by the VAR.

Investment, capacity utilization, and the real business cycle

The American Economic Review, 1988

This paper adopts Keynes' view that shocks to the marginal efficiency of investment are important for business fluctuations, but incorporates it in a neoclassical framework with endogenous capacity utilization. Increases in the efficiency of newly produced investment goods stimulate the formation of "new" capital and more intensive utilization and accelerated depreciation of "old" capital. Theoretical and quantitative analysis suggests that the shocks and transmission mechanism studied here may be important elements of business cycles. In the real-business cycle models of the type developed by Finn Kydland and Edward Prescott (1982), and John Long and Charles Plosser (1983), the cycles are generated by exogenous shocks to the production function. A stylized version of the main mechanism working in these models can be described as follows. Dynamic optimizing behavior on the part of agents in the economy implies that both consumption and investment react positively to these direct shocks to output. Since the marginal productivity of labor is directly affected, employment is also procyclical. The resulting capital accumulation provides a channel of persistence, even if the technology shocks are serially uncorrelated. Hence, these productivity shocks are able to generate, from a neoclassical framework, co-movements of macroeconomic variables and persistence of fluctuations that conform to those typically observed during business cycles. In contrast with the mechanism described above, where investment reacts to changes in output, the present paper adopts John Maynard Keynes' (1936) view that it is shocks to the marginal efficiency of investment that are important for generating output fluctuations. However, these shocks are incorporated here in a neoclassical framework where the rate of capital utilization is endogenous. In the present model, a positive shock to the marginal efficiency of investment stimulates the formation of "new" capital and the more intensive utilization and accelerated depreciation of "old" capital. The main operating characteristics of the proposed model are analyzed in order to gain an understanding of the transmission mechanism of the shocks. Of particular theoretical interest are the qualitative characteristics of the pattern of co-movements and persistence effects permissible in this framework Then, a quantitative analysis of the model is performed to assess its ability to mimic the observed pattern of postwar-U.S. business cycle fluctuations. This is carried out by constructing a parametrized version of the model for which the exact joint probability distribution of the endogenous and exogenous variables is numerically computed. Using this distribution, a set of second moments for the artificial economy's variables-reflecting their co-movements and persistence-is computed and compared with that characterizing U.S. data. Fluctuations in investment played a key role in Keynes' view of the trade cycle. There, shifts in the marginal efficiency of investment impact on investment, aggregate demand and therefore, given the disequilibrium in the labor market, employment and output. The quintessential case of this type is when there is an increase in the