Download This PDF is a selection from a published volume from... Economic Research Volume Title: NBER Macroeconomics Annual 2007, Volume 22

This PDF is a selection from a published volume from the National Bureau of
Economic Research
Volume Title: NBER Macroeconomics Annual 2007, Volume 22
Volume Author/Editor: Daron Acemoglu, Kenneth Rogoff and Michael
Woodford, editors
Volume Publisher: University of Chicago Press
Volume ISBN: 978-0-226-00202-6
Volume URL: http://www.nber.org/books/acem07-1
Conference Date: March 30-31, 2007
Publication Date: June 2008
Chapter Title: Frontmatter, editorial and abstracts in "NBER Macroeconomics
Annual 2007, Volume 22"
Chapter Author: Daron Acemoglu, Kenneth Rogoff, Michael Woodford
Chapter URL: http://www.nber.org/chapters/c6398
NBER
Macroeconomics
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NBER Macroeconomics
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Kenneth Rogoff,
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NBER publication
described
Contents
xi
Editorial
Kenneth
Acemoglu,
xvii
Abstracts
Daron
1 Aggregate
Kiminori
Implications
Rogoff,
and Michael
of Credit Market
Woodford
Imperfections
Matsuyama
Comments
61
Mark Gertler
Nobuhiro
Kiyotaki
Discussion
2 How
79
Are
Structural
Structural
Jesus Fernandez-Villaverde
Comments
139
TimothyCogley
Frank Schorfheide
Discussion
165
Parameters?
83
and Juan F. Rubio-Ramirez
1
x Contents
3 In Search
Roberto
of the Transmission
Mechanism
of Fiscal Policy
169
Perotti
Comments
227
Ricardo Reis
Valerie Ramey
Discussion
247
4 Cyclical Budgetary
Learn from OECD
Philippe
Policy and Economic
251
Panel Data?
Growth:
What
Do We
and Ioana Marinescu
Aghion
279
Comments
Ricardo }. Caballero
Anil K Kashyap
Discussion
295
5 Monetary
Product
and Business
Policy
with
Endogenous
Entry
299
Variety
Florin O. Bilbiie,
Comments
Cycles
Fabio Ghironi,
and Marc
J.Melitz
355
VirgiliuMidrigan
Julio J. Rotemberg
377
Discussion
Rate Models
6 Exchange
Charles
Engel, Nelson
Comments
443
Kenneth Rogoff
Barbara Rossi
Discussion
471
Are Not As Bad As You Think
C. Mark,
and Kenneth
D. West
381
and
Editorial
Daron
Acemoglu,
Kenneth
Rogoff,
and Michael
Woodford
The twenty-second
volume of the NBER Macroeconomics
Annual contin
ues its tradition of featuring
macro
in
debates
important
present-day
economics
and presenting major developments
in the theory of macro
economic
The
market
economic
witnessed
shaping
business
and policy.
in this volume,
imperfections/'
by Kiminori
analysis
first paper
"Aggregate
of credit
implications
the macro
Matsuyama,
investigates
of credit market
frictions. Recent years have
implications
both a recognition
of the importance
in
of credit constraints
a number of
macroeconomic
from
major
phenomena,
ranging
and a flurry of
cycles to growth and economic
development,
on
of
models
credit
markets.
of these models
papers
imperfect
Many
make different assumptions
about how the economy works and they of
ten
reach
different,
a useful
per provides
of credit market
ferent models
framework
and
even
starting
conflicting,
conclusions.
Matsuyama's
point for understanding
and why
the predictions
imperfections
are sometimes
conflicting. Matsuyama
based on a simple and common model
pa
the implications
of various dif
a unified
presents
of individual
credit
market
feature the standard inability to borrow by in
constraints, which
unless
have
sufficient collateral. This constraint
creates
they
the well-known
net worth
balance
effect.
This
(or
sheet)
partial equilib
rium model
is familiar to most macroeconomists
and features inmany
dividuals
papers
in the literature. Where
the use of a unified
framework
becomes
is in showing
the importance
of general equilib
important
particularly
rium effects. The paper illustrates how general
and macro
equilibrium
features of models
influence the implications
of the standard net worth
effect for business
on how
cycles and growth. For example, depending
and
are
the
interaction
modeled,
endogenous
savings
among projects
can lead to greater
credit market
in macro
imperfections
persistence
xii Acemoglu,
Rogoff, and Woodford
fluctuations.
At the same time, they may
introduce greater
sometimes
also shows how
(and
self-sustaining)
volatility. Matsuyama
credit market
influence
the
direction
of
international
cap
imperfections
ital flows,
the distribution
of income in society, cross-country
income
economic
and international
trade. The framework
differences,
ful in its simplicity
and clarity. Itwill enable future
use
is particularly
to more
researchers
of credit market
clearly isolate the features of their models
that lead to specific predictions
and outcomes.
The
in the volume,
"How
by Jesus Fernandez-Villaverde
debate
light on an important
second
rameters?"
sheds
new
Robert
Lucas's
distinguishing
reduced-form
paper
structural
imperfections
are structural
pa
and
Juan Rubio-Ramirez,
in macroeconomics.
Since
have been careful in
critique, macroeconomists
structural parameters
from their
of dynamic models
An important reason for doing so is that
representations.
famous
the economy undergoes
important policy or technology
changes,
will
reduced-form
representations
change. Truly structural parameters
will
A major area in which
remain invariant, however.
the focus on
structural parameters
has been central is the development
and applica
when
tion of dynamic
which
stochastic general equilibrium
(DSGE) models,
are estimated
a
in order to provide
to
and calibrated
business
fit
good
cycles
in
fluctuations
the United
States
and
other
advanced
economies.
are also used to investigate
op
parameters
that many
timal monetary
and fiscal policy. This paper shows, however,
assume
constant parameters,
of the simpler models
of DSGE, which
and
less
for
the analysis of busi
be
thus
be
useful
may
may
misspecified
ness cycles and optimal policy than previously
thought. It calls for richer
These
estimates
theoretical
parameters
of structural
and empirical models
that allow for dynamically
to these
individual
reaction
and incorporate
changing
parameter
that prom
new empirical methods
changes. The paper also showcases
more
of this kind
ise to allow DSGE models with
complex specifications
a constructive
to be estimated.
toward a
This paper provides
approach
models
and is likely
of dynamic macroeconomic
in this exciting area.
Our next two papers deal with fiscal policy. The paper by Roberto Per
of fiscal policy," turns to
otti, "In search of the transmission mechanism
richer understanding
to spur new research
what are the impacts of shocks to
on
and employment?
real wages,
consumption,
government
spending
This question
is not only amajor one for macroeconomic
analysis, but it
in today's environment,
fiscal re
where major
relevant
is particularly
in the government's
of
forms and important changes
goods
purchases
a basic question
of macroeconomics:
xiii
Editorial
and services
demands
are
taking place because of reforms of Social Security and
services. The answer to this ques
for additional
government
between
also be important in distinguishing
of
leading models
tion may
short-run macroeconomic
fluctuations.
While
the standard
neoclassical
that an increase
in government
should lead to
predicts
spending
a decline
in private
real
(and
many Keynesian
consumption
wages),
Thus a careful identification
of the im
the opposite.
models
predict
on
of
the
economy may help us dis
government
plications
spending
of short-run fluctuations.
The paper
leading models
tinguish between
model
notes
used in the literature in the past have
methodologies
answers to these important questions.
Studies exploiting
to government
spending driven by the Korean War, the Vietnam
that different
led to different
shocks
War, and the first IraqWar have found evidence broadly
the neoclassical
while vector autoregression
predictions,
results more
often produced
rent paper tries to reconcile
in line with
these results
consistent
with
analyses have
view. The cur
the Keynesian
and argues that the vector au
are more
robust.
predictions
and the Keynesian
evidence
toregression
The discussion
the paper questions whether
these strong
surrounding
on
are
the role of fiscal policy
conclusions
warranted.
This paper and its
associated
discussion will certainly lead tomore detailed
investigations
and the channels
of fiscal policy on the economy
through
fiscal policy influences economic
activity.
The second paper on fiscal policy, by Philippe Aghion
and Ioana
and
economic
Marinescu,
"Cyclical budgetary
policy
growth: What do
we learn from OECD panel data?" investigates
the implications
of the
of
deficit.
models
government
sug
cyclicality
budget
Many Keynesian
should pursue a countercyclical
gest that the government
budget deficit
in order to smooth business
with the Euro
However,
cycle fluctuations.
of the effects
which
countries
have moved
pean Fiscal Stability Pact the European
away
from countercyclical
fiscal policy because
of the need to contain their
a more
whether
budget deficits. This paper investigates
cyclical fiscal
in
more
lead to
out
policy
Europe would
positive macroeconomic
more
economic
The
authors
comes,
including
rapid
growth.
suggest
that countercyclical
budget deficits may have an impact on growth by
on firms and thus
credit
constraints
them not to cut
relaxing
allowing
a range of
as
such
in re
investments
investments,
growth-enhancing
search and development,
downturns.
then
during
They
investigate how
important these effects might be using panel data from the OECD. They
first construct measures
of the countercyclicality
of the budget deficit for
each economy.
Using
these measures,
they then investigate
the effect of
xiv Acemoglu,
Rogoff, and Woodford
fiscal policy on economic
growth. The results suggest
countercyclical
an important positive
deficits
have
effect on
that countercyclical
budget
that this effect ismore
economic growth, and perhaps more importantly,
in societies with
less-developed
pronounced
is indirect evidence
that the cyclical behavior
On
credit market
behavior).
teracting with
deficits
note
that European
economies
fiscal
policy, both because
growth-promoting
the authors
more
financial markets
(which
of fiscal policy may be in
the basis of these results,
could have a significantly
are
quite
levels of financial
countercyclical
their current budget
low
they have relatively
to the United States (and thus
and because
compared
development
to gain from countercyclical
fiscal policy). This paper may
have more
and empirical work
future
theoretical
for
have important
implications
in macroeconomics
and for the conduct of macroeconomic
policy. The
focuses on
the paper
discussion
surrounding
lively and interesting
in the paper are quantitatively
whether
the effects emphasized
plausible
data.
from macroeconomic
and whether
such effects can be identified
The
with
fifth paper
in the volume,
"Monetary policy and business
entry and product
variety," by Florin Bilbiie,
endogenous
and Marc Melitz,
Ghironi,
develops
the
role of cyclical entry of new
study
a rich macroeconomic
cycles
Fabio
model
to
on the nature
firms and products
on
the effects of monetary
and
of business
policy.
cycle fluctuations
are also typically used for
which
of business
Standard models
cycles,
or monop
assume either perfect competition
monetary
policy analysis,
olistic competition with a given number of firms and products. The cur
in the economy with a
the number of products
rent paper endogenizes
are predicted
to
economic
of
Periods
condition.
expansion
free-entry
is consistent with the avail
lead to further entry by new products, which
affects not only the real side of the economy
able data. This entry margin
condition
the no-arbitrage
For example,
but also the inflation dynamics.
a new
creates
between
bonds and private equity
in the asset markets
the fact that the
channel for the impact of monetary
policy, incorporating
on future entry and future interest rates. The
price of equity will depend
of the model with endogenous
the
authors show that
entry
implications
traditional
of
those
in
from
differ
for business
ways
important
cycles
that the impact of and the
this new model
Moreover,
suggests
can
be quite different. They
for monetary
transmission
channels
policy
a
toward
first
also take
policy in this
step
optimal monetary
analyzing
and
innovation
context. The paper
is an important methodological
models.
poses new questions
conduct of monetary
relevant
policy.
for macroeconomic
theory
and
for the
xv
Editorial
final paper, by Charles Engel, Nelson Mark, and Kenneth West,
are not as bad as you think," turns to another
models
"Exchange-rate
Our
con
research and policy debate. Despite
major topic of macroeconomic
on
rates
and financial flows
international
siderable research
exchange
across
what
countries,
have
macroeconomists
not
reached
a
consensus
on
rate are most promising
for the
of the exchange
of international
financial equilibria. The standard neoclassical
class of models
analysis
models
a
rate are attractive
because
the exchange
they provide
rates to product prices, inter
for linking exchange
tractable framework
a
est rates, and output. However,
with
of papers, beginning
plethora
Meese
and Rogoff (1993a, b), point out that these models
do not perform
of
very well out of sample, either when measured
by forecasting
perfor
or out-of-sample
mance
fit. In fact, they almost universally
fail to im
(with no drift) except at very
prove on a simple random walk model
tests
This paper argues that these types of forecasting
rate models,
the failure of empirical exchange
and pres
ents a range of different
that the models
types of evidence
suggesting
more power
than is commonly
have at least modestly
For
appreciated.
long horizons.
may overstate
that, consistent with theory, ex
present evidence
news
indeed
about future prices, interest
incorporate
change
are flexible
and
and
that
the
standard
to
models
rates,
output,
enough
account for the observed
in
rates.
large volatility
exchange
They also
the authors
example,
rates do
can be
of these models
performance
improved
information
from
surveys, and by focus
expectations
by incorporating
and long-horizon
forecasts. The results in
ing on panel data estimation
the paper should lead to a reexamination
of some of the most negative
assessments
of the standard exchange-rate
and will certainly
models,
show how
the forecasting
stimulate new research in this important area. The insights of the
paper are also likely to be useful in the recent policy debate concerning
help
the
overvaluation
and
the National
for theMacroeconomics
particularly
for outstanding
conference
undervaluation
of
certain
rates.
exchange
to thank Martin Feldstein
like to take this opportunity
and
Bureau of Economic Research
for their continued
support
We would
Annual
like to thank
logistical
and the associated
conference.
We would
the conference
support
Luminita
to summarize
rapporteurs,
the discussions
knowledge
financial
support
staff, especially Rob Shannon,
and organization
and the
throughout,
Stevens
and Justin Svec, for helping
ac
We also gratefully
for this volume.
from the National
Science
Foundation.
Abstracts
1 Aggregate
Implications
Kiminori Matsuyama
of Credit Market
Credit market
important
ternational
in its wake
imperfections
issues in business
provide
cycles,
the key to understanding
growth and development,
many
and in
in these areas, however,
has left
progress
of
individual
models
with
array
bewildering
seemingly
results. This paper offers a road map. Using
the same single
economics.
Recent
a
conflicting
model
of credit market
imperfections
a unified
set of results within
diverse
Imperfections
a coherent
it brings together a
throughout,
In so doing, it aims to
framework.
is able to see close connections
be
picture, so that one
these results, thereby showing how a wide
range of aggregate
common
cause.
to
be
attributed
the
may
phenomena
They include,
other
technical
among
things, endogenous
investment-specific
changes,
recessions,
traps, leapfrogging,
development
persistent
recurring boom
and-bust
the rise and fall of
cycles, reverse international
capital flows,
across
and
the
of
international
trade. The
nations,
patterns
inequality
draw
tween
is also used
some equilibrium
to investigate
and distribu
of
the
of
credit
markets.
One recur
impacts
improving
efficiency
is
that
the
of
often
ring finding
properties
equilibrium
respond
to parameter
nonmonotonically
suggests some cautions
changes, which
for studying
of credit market
aggregate
implications
imperfections
a narrow class or a
within
particular
family of models.
framework
tional
2
How
Structural
Are
Jesus Ferndndez-Villaverde
This paper
"structural
studies
Structural
Parameters?
and Juan F. Rubio-Ramirez
the question of the stability over time of the so-called
of dynamic
stochastic
parameters"
general
equilibrium
xviii
Abstracts
To answer this question, we estimate a medium-scale
(DSGE) models.
our
DSGE model with real and nominal
rigidities, using U.S. data. In
and
rational
the
of
model, we allow for parameter
drifting
expectations
that there is strong evi
agents with respect to this drift. We document
our sample. We illustrate varia
dence that parameters
change within
the
tions in the parameters
monetary
describing
policy reaction function
the
of firms and
and in the parameters
characterizing
pricing behavior
we show how the movements
in the pricing pa
Moreover,
inflation. Thus, our results cast doubts on
rameters are correlated with
relevance of Calvo models.
the empirical
households.
3
In Search
of the Transmission
Mechanism
of Fiscal Policy
Roberto Perotti
Most
cause
economists
some
would
slowdown
agree that a hike in the federal funds rate will
in growth and inflation, and that the bulk of the
rea
this statement. But perfectly
with
even on the basic effects of a
can and do disagree
on goods
and services: neoclassical
shock to government
spending
and the real wage
models
predict that in general, private consumption
some neo-Keynesian
the opposite.
This
models
will fall, while
predict
evidence
empirical
sonable economists
is consistent
alternative
paper discusses
shocks
ernment
spending
to identify gov
effects. Applying
States and three other
time series methodologies
their
and to estimate
to data from the United
these methodologies
in favor of the neoclassical
little evidence
countries
provides
the paper then turns to
the
U.S.
tables,
input-output
Using
predictions.
to shed
two
around
evidence
buildups
major military
industry-level
OECD
light on the effects
of government
spending
shocks.
Policy and Economic Growth:
Cyclical Budgetary
OECD Panel Data?
Learn
from
Do
We
What
4
Philippe Aghion
and IoanaMarinescu
to analyze the re
uses yearly panel data on OECD countries
of
the budget deficit. We
lationship between
growth and the cyclicality
of the budget
new yearly estimates
of the countercyclicality
develop
coun
deficit and show that the budget deficit has become
increasingly
over the past twenty years. How
in
most
countries
OECD
tercyclical
Union
ever, European Monetary
(EMU) countries did not become more
with country- and year-fixed
Using panel specifications
countercyclical.
This paper
xix
Abstracts
a de
effects, we show that: (a) an increase in financial development,
crease in openness
to trade, and the adoption
of an inflation-targeting
regime move countries toward amore countercyclical
budget deficit; (b)
amore
countercyclical
on economic
growth,
ment
a positive and
budget deficit has
significant effect
and this effect is larger when
financial develop
is lower.
5 Monetary
and Business
Cycles with
Product
and
Endogenous
Entry
Variety
Florin O. Bilbiie, Fabio Ghironi, andMarc J.Melitz
Policy
This paper studies the role of endogenous
entry and product
producer
creation for monetary
and
in a
business
policy analysis
cycle dynamics
model
with
imperfect price adjustment.
general equilibrium
Optimal
monetary
policy stabilizes
index vary to accommodate
prices, but lets the consumer
in the number of available
changes
product
price
prod
ucts. The free-entry condition
links the price of equity (the value of prod
cost and markups
and hence with inflation dynam
ucts) with marginal
ics. No-arbitrage
return on
between bonds and equity links the expected
the return on
shares, and thus the financing of product
creation, with
bonds, affected by monetary
policy via interest rate setting. This new
channel of monetary
transmission
policy
through asset prices restores
in the presence of capital accumulation
the Taylor Principle
(in the form
of new production
interest rate setting, un
lines) and forward-looking
like in models with
traditional physical
capital. We also study the im
of
for
the
New
plications
endogenous
variety
Keynesian
Phillips curve
and business
fects of technology,
the second moment
more
and we document
the ef
generally,
as
as
and monetary
well
shocks,
deregulation,
policy
our
means
ex
of
of
numerical
model,
properties
by
cycle dynamics
amples.
6 Exchange Rate Models
Are Not As Bad As You Think
Charles Engel, Nelson C. Mark, and Kenneth D. West
models
of exchange
variables
rates, based on macroeconomic
as
such
prices, interest rates, output, and so forth, are thought by many
to have failed empirically. We present evidence
researchers
to the con
we
a
the
that
in
walk"
random
trary. First,
emphasize
point
"beating
a
too
is
an
criterion
for accepting
rate
forecasting
strong
exchange
model.
models
low
should
have
of
this
power
Typically
forecasting
Standard
xx Abstracts
a number
to evaluate models. We
of alternative ways
but
the
of the monetary
fit,
importance
in-sample
emphasize
on expectations
in determining
rates.
exchange
policy rule and its effects
rates incorporate news about
that exchange
Next we present evidence
as the models
future macroeconomic
fundamentals,
imply. We demon
ex
strate that the models
for observed
may well be able to account
type. We
examine
propose
rate volatility. We discuss
rates to announcements
exchange
rate models
estimates
of exchange
change
are calculated
studies
that examine
of economic
in which
data,
expected
forecasts.
the response of
then present
and
present
values
we
from survey
Finally,
can
of
models
be
increased
that out-of-sample
forecasting power
on
and
forecasts.
estimation
cusing
panel
long-horizon
fundamentals
of
show
by fo