Common cycles in macroeconomic aggregates (revised version)

Although there has been substantial research on long-run co-movement (common trends) in the empirical macroeconomics literature. little or no work has been done on short run co-movement (common cycles). Investigating common cycles is important on two grounds: first. their existence is an implication of most dynamic macroeconomic models. Second. they impose important restrictions on dynamic systems. Which can be used for efficient estimation and forecasting. In this paper. using a methodology that takes into account short- and long-run co-movement restrictions. we investigate their existence in a multivariate data set containing U.S. per-capita output. consumption. and investment. As predicted by theory. the data have common trends and common cycles. Based on the results of a post-sample forecasting comparison between restricted and unrestricted systems. we show that a non-trivial loss of efficiency results when common cycles are ignored. If permanent shocks are associated with changes in productivity. the latter fails to be an important source of variation for output and investment contradicting simple aggregate dynamic models. Nevertheless. these shocks play a very important role in explaining the variation of consumption. Showing evidence of smoothing. Furthermore. it seems that permanent shocks to output play a much more important role in explaining unemployment fluctuations than previously thought.

The private memory of aggregate shocks

Em economias caracterizadas por choques agregados e privados, mostramos que a alocação ótima restrita pode depender de forma não-trivial dos choques agregados. Usando versões dos modelos de Atkeson e Lucas (1992) e Mirrlees (1971) de dois períodos, é mostrado que a alocação ótima apresenta memória com relação aos choques agregados mesmo eles sendo i.i.d. e independentes dos choques individuais, quando esses últimos choques não são totalmente persistentes. O fato de os choques terem efeitos persistentes na alocação mesmo sendo informação pública, foi primeiramente apresentado em Phelan (1994). Nossas simulações numéricas indicam que esse não é um resultado pontual: existe uma relação contínua entre persistência de tipos privados e memória do choque agregado.

The private memory of aggregate shocks

We study constrained efficient aggregate risk sharing and its consequence for the behavior of macro-aggregates in a dynamic Mirrlees’s (1971) setting. Privately observed idiosyncratic productivity shocks are assumed to be independent of i.i.d. publicly observed aggregate shocks. Yet, private allocations display memory with respect to past aggregate shocks, when idosyncratic shocks are also i.i.d.. Under a mild restriction on the nature of optimal allocations the result extends to more persistent idiosyncratic shocks, for all but the limit at which idiosyncratic risk disappears, and the model collapses to a pure heterogeneity repeated Mirrlees economy identical to Werning [2007]. When preferences are iso-elastic we show that an allocation is memoryless only if it displays a strong form of separability with respect to aggregate shocks. Separability characterizes the pure heterogeneity limit as well as the general case with log preferences. With less than full persistence and risk aversion different from unity both memory and non-separability characterize optimal allocations. Exploiting the fact that non-separability is associated with state-varying labor wedges, we apply a business cycle accounting procedure (e.g. Chari et al. [2007]) to the aggregate data generated by the model. We show that, whenever risk aversion is great than one our model produces efficient counter-cyclical labor wedges.

Testing the optimality of aggregate consumption decisions: is there rule-of-thumb behavior?

Consumption is an important macroeconomic aggregate, being about 70% of GNP. Finding sub-optimal behavior in consumption decisions casts a serious doubt on whether optimizing behavior is applicable on an economy-wide scale, which, in turn, challenge whether it is applicable at all. This paper has several contributions to the literature on consumption optimality. First, we provide a new result on the basic rule-of-thumb regression, showing that it is observational equivalent to the one obtained in a well known optimizing real-business-cycle model. Second, for rule-of-thumb tests based on the Asset-Pricing Equation, we show that the omission of the higher-order term in the log-linear approximation yields inconsistent estimates when lagged observables are used as instruments. However, these are exactly the instruments that have been traditionally used in this literature. Third, we show that nonlinear estimation of a system of N Asset-Pricing Equations can be done efficiently even if the number of asset returns (N) is high vis-a-vis the number of time-series observations (T). We argue that efficiency can be restored by aggregating returns into a single measure that fully captures intertemporal substitution. Indeed, we show that there is no reason why return aggregation cannot be performed in the nonlinear setting of the Pricing Equation, since the latter is a linear function of individual returns. This forms the basis of a new test of rule-of-thumb behavior, which can be viewed as testing for the importance of rule-of-thumb consumers when the optimizing agent holds an equally-weighted portfolio or a weighted portfolio of traded assets. Using our setup, we find no signs of either rule-of-thumb behavior for U.S. consumers or of habit-formation in consumption decisions in econometric tests. Indeed, we show that the simple representative agent model with a CRRA utility is able to explain the time series data on consumption and aggregate returns. There, the intertemporal discount factor is significant and ranges from 0.956 to 0.969 while the relative risk-aversion coefficient is precisely estimated ranging from 0.829 to 1.126. There is no evidence of rejection in over-identifying-restriction tests.

Unemployment insurance an analysis of optimal mechanisms under aggregate shocks

The purpose of this work is to provide a brief overview of the literature on the optimal design of unemployment insurance systems by analyzing some of the most influential articles published over the last three decades on the subject and extend the main results to a multiple aggregate shocks environment. The properties of optimal contracts are discussed in light of the key assumptions commonly made in theoretical publications on the area. Moreover, the implications of relaxing each of these hypothesis is reckoned as well. The analysis of models of only one unemployment spell starts from the seminal work of Shavell and Weiss (1979). In a simple and common setting, unemployment benefits policies, wage taxes and search effort assignments are covered. Further, the idea that the UI distortion of the relative price of leisure and consumption is the only explanation for the marginal incentives to search for a job is discussed, putting into question the reduction in labor supply caused by social insurance, usually interpreted as solely an evidence of a dynamic moral hazard caused by a substitution effect. In addition, the paper presents one characterization of optimal unemployment insurance contracts in environments in which workers experience multiple unemployment spells. Finally, an extension to multiple aggregate shocks environment is considered. The paper ends with a numerical analysis of the implications of i.i.d. shocks to the optimal unemployment insurance mechanism.

Volatility Triggered Range Forward (VTRF): an instrument for protection against volatility fluctuations in the BRL/USD pair

Este trabalho propõe um instrumento capaz de absorver choques no par BRL/USD, garantindo ao seu detentor a possibilidade de realizar a conversão entre essas moedas a uma taxa observada recentemente. O Volatility Triggered Range Forward assemelha-se a um instrumento forward comum, cujo preço de entrega não é conhecido inicialmente, mas definido no momento em que um nível de volatilidade pré-determinado for atingido na cotação das moedas ao longo da vida do instrumento. Seu cronograma de ajustes pode ser definido para um número qualquer de períodos. Seu apreçamento e controle de riscos é baseado em uma árvore trinomial ponderada entre dois possíveis regimes de volatilidade. Esses regimes são determinados após um estudo na série BRL/USD no período entre 2003 e 2009, basedo em um modelo Switching Autoregressive Conditional Heteroskedasticity (SWARCH).

On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century

Lucas (1987) has shown a surprising result in business-cycle research: the welfare cost of business cycles are very small. Our paper has several original contributions. First, in computing welfare costs, we propose a novel setup that separates the effects of uncertainty stemming from business-cycle fluctuations and economic-growth variation. Second, we extend the sample from which to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence. So, we employ also pre-WWII data. Third, we take an econometric approach and compute explicitly the asymptotic standard deviation of welfare costs using the Delta Method. Estimates of welfare costs show major differences for the pre-WWII and the post-WWII era. They can reach up to 15 times for reasonable parameter values -β=0.985, and ∅=5. For example, in the pre-WWII period (1901-1941), welfare cost estimates are 0.31% of consumption if we consider only permanent shocks and 0.61% of consumption if we consider only transitory shocks. In comparison, the post-WWII era is much quieter: welfare costs of economic growth are 0.11% and welfare costs of business cycles are 0.037% - the latter being very close to the estimate in Lucas (0.040%). Estimates of marginal welfare costs are roughly twice the size of the total welfare costs. For the pre-WWII era, marginal welfare costs of economic-growth and business- cycle fluctuations are respectively 0.63% and 1.17% of per-capita consumption. The same figures for the post-WWII era are, respectively, 0.21% and 0.07% of per-capita consumption.

On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century

Lucas(1987) has shown a surprising result in business-cycle research: the welfare cost of business cycles are very small. Our paper has several original contributions. First, in computing welfare costs, we propose a novel setup that separates the effects of uncertainty stemming from business-cycle uctuations and economic-growth variation. Second, we extend the sample from which to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence. So, we employ also pre-WWII data. Third, we take an econometric approach and compute explicitly the asymptotic standard deviation of welfare costs using the Delta Method. Estimates of welfare costs show major diferences for the pre-WWII and the post-WWII era. They can reach up to 15 times for reasonable parameter values = 0:985, and = 5. For example, in the pre-WWII period (1901-1941), welfare cost estimates are 0.31% of consumption if we consider only permanent shocks and 0.61% of consumption if we consider only transitory shocks. In comparison, the post-WWII era is much quieter: welfare costs of economic growth are 0.11% and welfare costs of business cycles are 0.037% the latter being very close to the estimate in Lucas (0.040%). Estimates of marginal welfare costs are roughly twice the size of the total welfare costs. For the pre-WWII era, marginal welfare costs of economic-growth and business-cycle uctuations are respectively 0.63% and 1.17% of per-capita consumption. The same gures for the post-WWII era are, respectively, 0.21% and 0.07% of per-capita consumption.

Aggregate uncertainty, disappointment aversion and the business cycle

We investigate the eff ect of aggregate uncertainty shocks on real variables. More speci fically, we introduce a shock in the volatility of productivity in an RBC model with long-run volatility risk and preferences that exhibit generalised disappointment aversion. We find that, when combined with a negative productivity shock, a volatility shock leads to further decline in real variables, such as output, consumption, hours worked and investment. For instance, out of the 2% decrease in output as a result of both shocks, we attribute 0.25% to the e ffect of an increase in volatility. We also fi nd that this e ffect is the same as the one obtained in a model with Epstein-Zin- Weil preferences, but higher than that of a model with expected utility. Moreover, GDA preferences yield superior asset pricing results, when compared to both Epstein-Zin-Weil preferences and expected utility.

The long-run properties of a dynamic Mirrlees' model with aggregate shocks

Nós abordamos a existência de distribuições estacionárias de promessas de utilidade em um modelo Mirrlees dinâmico quando o governo tem record keeping imperfeito e a economia é sujeita a choques agregados. Quando esses choques são iid, provamos a existência de um estado estacionário não degenerado e caracterizamos parcialmente as alocações estacionárias. Mostramos que a proporção do consumo agregado é invariante ao estado agregado. Quando os choques agregados apresentam persistência, porém, alocações eficientes apresentam dependência da história de choques e, em geral, uma distribuição invariante não existe.

On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century and beyond

The main objective of this paper is to propose a novel setup that allows estimating separately the welfare costs of the uncertainty stemming from business-cycle uctuations and from economic-growth variation, when the two types of shocks associated with them (respectively,transitory and permanent shocks) hit consumption simultaneously. Separating these welfare costs requires dealing with degenerate bivariate distributions. Levis Continuity Theorem and the Disintegration Theorem allow us to adequately de ne the one-dimensional limiting marginal distributions. Under Normality, we show that the parameters of the original marginal distributions are not afected, providing the means for calculating separately the welfare costs of business-cycle uctuations and of economic-growth variation. Our empirical results show that, if we consider only transitory shocks, the welfare cost of business cycles is much smaller than previously thought. Indeed, we found it to be negative - -0:03% of per-capita consumption! On the other hand, we found that the welfare cost of economic-growth variation is relatively large. Our estimate for reasonable preference-parameter values shows that it is 0:71% of consumption US$ 208:98 per person, per year.

Forecasting Brazilian inflation by its aggregate and disaggregated data: a test of predictive power by forecast horizon

This work aims to compare the forecast efficiency of different types of methodologies applied to Brazilian Consumer inflation (IPCA). We will compare forecasting models using disaggregated and aggregated data over twelve months ahead. The disaggregated models were estimated by SARIMA and will have different levels of disaggregation. Aggregated models will be estimated by time series techniques such as SARIMA, state-space structural models and Markov-switching. The forecasting accuracy comparison will be made by the selection model procedure known as Model Confidence Set and by Diebold-Mariano procedure. We were able to find evidence of forecast accuracy gains in models using more disaggregated data

Essays on the credit channel of monetary policy: a case study for Brazil

The onset of the financial crisis in 2008 and the European sovereign crisis in 2010 renewed the interest of macroeconomists on the role played by credit in business cycle fluctuations. The purpose of the present work is to present empirical evidence on the monetary policy transmission mechanism in Brazil with a special eye on the role played by the credit channel, using different econometric techniques. It is comprised by three articles. The first one presents a review of the literature of financial frictions, with a focus on the overlaps between credit activity and the monetary policy. It highlights how the sharp disruptions in the financial markets spurred central banks in developed and emerging nations to deploy of a broad set of non conventional tools to overcome the damage on financial intermediation. A chapter is dedicated to the challenge face by the policymaking in emerging markets and Brazil in particular in the highly integrated global capital market. This second article investigates the implications of the credit channel of the monetary policy transmission mechanism in the case of Brazil, using a structural FAVAR (SFAVAR) approach. The term “structural” comes from the estimation strategy, which generates factors that have a clear economic interpretation. The results show that unexpected shocks in the proxies for the external finance premium and the credit volume produce large and persistent fluctuations in inflation and economic activity – accounting for more than 30% of the error forecast variance of the latter in a three-year horizon. Counterfactual simulations demonstrate that the credit channel amplified the economic contraction in Brazil during the acute phase of the global financial crisis in the last quarter of 2008, thus gave an important impulse to the recovery period that followed. In the third articles, I make use of Bayesian estimation of a classical neo-Keynesian DSGE model, incorporating the financial accelerator channel developed by Bernanke, Gertler and Gilchrist (1999). The results present evidences in line to those already seen in the previous article: disturbances on the external finance premium – represented here by credit spreads – trigger significant responses on the aggregate demand and inflation and monetary policy shocks are amplified by the financial accelerator mechanism. Keywords: Macroeconomics, Monetary Policy, Credit Channel, Financial Accelerator, FAVAR, DSGE, Bayesian Econometrics

Testing consumption optimality using aggregate data

The objective of this paper is to test for optimality of consumption decisions at the aggregate level (representative consumer) taking into account popular deviations from the canonical CRRA utility model rule of thumb and habit. First, we show that rule-of-thumb behavior in consumption is observational equivalent to behavior obtained by the optimizing model of King, Plosser and Rebelo (Journal of Monetary Economics, 1988), casting doubt on how reliable standard rule-of-thumb tests are. Second, although Carroll (2001) and Weber (2002) have criticized the linearization and testing of euler equations for consumption, we provide a deeper critique directly applicable to current rule-of-thumb tests. Third, we show that there is no reason why return aggregation cannot be performed in the nonlinear setting of the Asset-Pricing Equation, since the latter is a linear function of individual returns. Fourth, aggregation of the nonlinear euler equation forms the basis of a novel test of deviations from the canonical CRRA model of consumption in the presence of rule-of-thumb and habit behavior. We estimated 48 euler equations using GMM, with encouraging results vis-a-vis the optimality of consumption decisions. At the 5% level, we only rejected optimality twice out of 48 times. Empirical-test results show that we can still rely on the canonical CRRA model so prevalent in macroeconomics: out of 24 regressions, we found the rule-of-thumb parameter to be statistically signi cant at the 5% level only twice, and the habit ƴ parameter to be statistically signi cant on four occasions. The main message of this paper is that proper return aggregation is critical to study intertemporal substitution in a representative-agent framework. In this case, we fi nd little evidence of lack of optimality in consumption decisions, and deviations of the CRRA utility model along the lines of rule-of-thumb behavior and habit in preferences represent the exception, not the rule.

Collateral, Intermediated Lending, and Aggregate Productivity

Neste trabalho busca-se compreender como que restrições a diferentes tipos de crédito - doméstico e internacional - afetam a dinâmica de uma economia, especialmente com relação a sua Produtividade Total dos Fatores (PTF). Para ajudar no entendimento dessa questão e assuntos relacionados, propomos um simples modelo de economia aberta. Nesse contexto, empreendedores domésticos possuem produtividades heterogêneas, o que implica que a distribuição de riqueza entre indivíduos é essencial para a determinação da produtividade agregada da economia. Além disso, o ambiente de comprometimento limitado obriga os tomadores de empréstimo a dispor de colateral para contrair dívidas. Por hipótese, dívida doméstica e externa requerem diferentes quantidades de colateral. O modelo gera uma dinâmica macroeconômica rica após mudanças na taxa de juros internacional e restrições a crédito. Mais especificamente, um alívio na restrição doméstica causa um aumento da PTF, enquanto a mesma variação na restrição internacional tem o efeito contrário.