Oil Shocks and Aggregate Macroeconomic Behavior:
The Role of Monetary Policy
A recent paper by Bernanke, Gertler and Watson (1997) suggests that monetary policy could be used to eliminate any recessionary consequences of an oil price shock. This paper challenges that conclusion on two grounds. First, we question whether the Federal Reserve actually has the power to implement such a policy; for example, we consider it unlikely that additional money creation would have succeeded in reducing the Fed funds rate by 900 basis points relative to the values seen in 1974. Second, we point out that the size of the eect that Bernanke, Gertler and Watson attribute to oil shocks is substantially smaller than that reported by other researchers, primarily due to their choice of a shorter lag length than used by other researchers. We oer evidence in favor of the longer lag length employed by previous research, and show that, under this speciÞcation, even the aggressive Federal Reserve policies proposed would not have succeeded in averting a downturn.
Oil Price Shocks, Inventories and Macroeconomic Behavior
The purpose of this research is to generate new methods for studying the behavior of inventories and new insights into the causes and propagations of business cycles. The particular goals are: (1) Develop an appropriate framework to apply the linear-quadratic inventory model to data that exhibit long-run stochastic trends. (2) Use this method to study different two-digit manufacturing sectors to characterize the response of inventories, production, and final sales to an oil price shock, and trace out the intersectoral and intertemporal linkages that may be involved in propagating the shock into an economic recession.
Predicting U.S. Recessions Using an Autoregressive Conditional Binomial Model
This paper uses a modified version of the Autoregressive Conditional Multinomial model of Engle and Russell (2002) to forecast the probability of U.S. recessions. The estimated Autoregressive Conditional Binomial model allows this probability to depend not only on the lagged slope of the yield curve, but on the previous state of the business cycle and the historic distribution of recessions. I find that the predictive content of the yield spread declines, as autoregressive terms are included. Nevertheless, in-sample and out-of-sample measures of goodness of fit, and the log probability score provide strong evidence in favor of the ACB model.
The Decline in US Inventories Volatility: Inventory Investment and Systematic Monetary Policy (This paper was previously circulated under the tilte: The Decline in US Inventories Volatility: Structural Changes in Inventories or Sales?)
Explanations for the decline in US output volatility since the mid-1980s comprise: "better policy", "good luck", and technological change. Our multiple break estimates suggest that reductions in volatility since the mid-1980s extend not only to manufacturing inventories but also to sales. This finding, along with a concentration of the reduction in the volatility of inventories in material and supplies, and the lack a significant break in the inventory-sales covariance, imply that new inventory technology cannot account for the majority of the decline in output volatility. Our GARCH and VAR estimates suggest that monetary policy, particularly its systematic component, contributed to the rise in output volatility in the 1970s and it’s subsequent decline since the mid-1980s.
Informed Finance and Technological Change: Evidence from Credit Relationships
In this paper we investigate the impact of informed Þnance on technological change. Using data from a sample of Italian manufacturing firms, we test whether the information of the firms' main banks supports or hinders innovation. We find that banks' information fosters product innovation but is neutral for process innovation. We argue that these results are consistent with the positive effects of informed finance explored by the theoretical literature. However, the findings also suggest that, when innovations have a high degree of opaqueness, the risk of being held-up by informed banks may discourage firms from undertaking them.
Obstacles to Business Devlopment and the Size of Firms in Latin America
According to results of world business environment surveys, Latin American businesses face major obstacles such as financing, excesive taxes and regulation, policy instability and, to a lesser extent, inflation and exchange rate volatility. This paper shows that the severity of these obstacles is consistent with the fact that large firms in Latin America are too small in relation to world patterns, in terms of both the quantity of assests they control and the amount of employment they generate. Our econometric analysis supports the managers' claim that financing is a major obstacle, but it does not support their concern regarding other factors. Instead, we find that deficiencies in infrastructure do appear to severely affect business development, at least for the region's largest Þrms.
Bribery and the Nature of Corruption
This study provides empirical evidence supporting the claim that the cost of corruption faced by the firm varies with the network through which corruption is organized. We show that the probability that a firm will pay irregular additional payments is higher in environments with lower uncertainty regarding corruption, and lower where monitoring is more effective. More specifically, the frequency of bribes increases where firms know in advance the size of bribes and believe that the service for which the bribe is offered will be delivered once the payment is made. Additionally, the frequency of bribes decreases if firms have effective recourse through government channels or a managerial superior to obtain proper treatment without agreeing to make unofficial payments. Furthermore, the cost of the bribes is larger in environments where firms doubt the delivery of the service that is the object of a bribe and where other government officials frequently require subsequent unofficial payments. This paper offers novel results suggesting that the incidence and total cost of bribes is lower for firms operating in countries where the quality of the infrastructure, security and/or the courts and regulatory system is rated highly. Thus, our results suggest that government policies directed towards improving public infrastructure and the legal system could meaningfully reduce corruption and thereby foster economic growth.
Dynamic censored regression and the Open Market Desk reaction function
The censored regression model and the Tobit model are standard tools in econometrics. This paper provides a formal asymptotic theory for dynamic time series censored regression when lags of the dependent variable have been included among the regressors. We derive fading memory properties of the model under the assumption that the regression error is strong mixing. We show the formal asymptotic correctness of conditional maximum likelihood estimation of the dynamic Tobit model, and the correctness of Powell's least absolute deviations procedure for the estimation of the dynamic censored regression model. The paper is concluded with an application of the dynamic censored regression methodology to temporary purchases of the Open Market Desk.
A Dynamic Model of Central Bank Intervention
We examine central bank intervention in foreign exchange markets using a dynamic censored regression model. We allow the amount of purchase and sale interventions to depend nonlinearly upon lagged values of intervention and on measures of disorderly foreign exchange markets. Using data for the CBRT, we find persistence in interventions, which may suggest the presence of political costs and/or a signal of future monetary policy. We find strong evidence of nonnormality and heteroskedasticity in the Tobit model of the reaction function. Estimation results using Powell’s LAD, a robust estimator, reveal the importance of considering these specification issues when modeling central bank intervention.
Oil Price Shocks, Systematic Monetary Policy and the "Great Moderation
The U.S. economy has experienced a reduction in volatility since the mid 1980's. In this paper we investigate the role of systematic monetary policy in accounting for changes in the response of output, inflation, inventories and sales to an exogenous oil price shock. We find that, during the Volcker-Greenspan, the magnitude and the duration of the response of output, and especially inflation, to an oil price shock have diminished while the contribution of systematic monetary policy to the dynamic response of most macro variables has been smaller. Our results suggest that, even if the size of the oil price shock had been constant across sub-samples, changes in the monetary policy rule may be only partly responsible for the difference in responses of macro variables across sub-samples. The evidence is stronger for inflation, durables inventories and sales, and in particular for input inventories.
We inquire into the existence of a process of inter-firm credit reallocation. Employing the methodology developed by Davis and Haltiwanger (1992) for the measurement of job reallocation, we find that at any phase of the business cycle a significant amount of credit flows across U.S. firms. Credit reallocation well exceeds net credit changes and is highly volatile. We also find that, as a result of a procyclical credit creation and a more mildly countercyclical credit destruction, credit reallocation is moderately procyclical. Finally, most of the magnitude and dynamics of credit reallocation reflect credit flows across firms relatively homogeneous for size, industry or location. The results suggest that recent models of macroeconomic restructuring which allow for lock-in effects in credit relationships can usefully complement established models of the flight to quality and the financial accelerator.