Markups, Gaps, and the Welfare Costs of Business Fluctuations

In this paper we present a simple theory-based measure of the variations in aggregate economic efficiency: the gap between the marginal product of labor and the household s consumption/leisure tradeoff. We show that this indicator corresponds to the inverse of the markup of price over social marginal cost, and give some evidence in support of this interpretation. We then show that, with some auxilliary assumptions our gap variable may be used to measure the efficiency costs of business fluctuations. We find that the latter costs are modest on average. However, to the extent the flexible price equilibrium is distorted, the gross efficiency losses from recessions and gains from booms may be large. Indeed, we find that the major recessions involved large efficiency losses. These results hold for reasonable parameterizations of the Frisch elasticity of labor supply, the coefficient of relative risk aversion, and steady state distortions.

Markups, gaps and the welfare costs of business fluctuations

In this paper we present a simple theory-based measure of the variations in aggregate economic efficiency: the gap between the marginal product of labor and the household s consumption/leisure tradeoff. We show that this indicator corresponds to the inverse of the markup of price over social marginal cost, and give some evidence in support of this interpretation. We then show that, with some auxilliary assumptions our gap variable may be used to measure the efficiency costs of business fluctuations. We find that the latter costs are modest on average. However, to the extent the flexible price equilibrium is distorted,the gross efficiency losses from recessions and gains from booms may be large. Indeed, we find that the major recessions involved large efficiency losses. These results hold for reasonable parameterizations of the Frisch elasticity of labor supply, the coefficient of relative risk aversion, and steady state distortions.

Three essays on short-term macroeconomics : business fluctuations, large devaluations and inflation dynamics

Résumé: At least since the Great Depression, explaining why there are business fluctuations has been one of the biggest challenges that the science of economics has had to face. The hope is that if we could better understand recessions, then we could also be more successful in overcoming them. This dissertation consists of three papers that are part of the general endeavor of economists to understand these fluctuations. The first paper discusses, for a particular model, whether a result related to fluctuations would still hold if time were modeled as continuous rather than discrete. The two other papers focus on price stickiness. The second paper discusses why, after a large devaluation, prices of non-tradables may change by only a small amount in comparison to the magnitude of the devaluation. The third paper examines price adjustment in a model in which information is imperfect and it is costly to change prices.

Business Cycles of Non-mono-cultural Developing Economies: The Case of ASEAN Countries

Based on analyses of actual data, we reveal that many Asian developing economies own economic structural features of "non-mono-cultural economy" and the "large primary good sector", which have not been discussed in developing economies RBC literature. We also examine the input-output tables to develop a model reflecting actual developing economies' structures. Referring to the analyses, we construct RBC models of ASEAN countries. Based on the model, we find that approximately half of GDP volatility is attributable to domestic productivity shocks, and the remaining half is attributable to price shocks.

Business Cycles and Seasonal Cycles in Bangladesh

The empirical regularities of the Bangladesh business and seasonal cycles are documented in this study. Spectrums, seasonality, volatility, cyclicality, and persistence in the level and variance of macroeconomic variables in Bangladesh are explored using monthly and quarterly macroeconomic series. Most of the features of U.S. and East-Southeast Asian business cycles are common to Bangladeshi business cycles; however, there are some differences. As is seen in the U.S. and European economies, seasonal cycles accentuate the features of business cycles in Bangladesh. To our surprise, the seasonal cycles in Bangladesh embody the features of business cycles in the U.S. and East-Southeast Asian economies more thoroughly than they do the business cycles in Bangladesh.

Analogous Cycles with Lagged Co-movement: U.S. and East Asian Business Cycles

In selected East Asian economies, the behavior of detrended macroeconomic variables was found to be similar to that observed in the postwar U.S. economy. Consumption and investment are highly procyclical while the balance of trade and the price level are counter-cyclical in most of them. Labor productivity is procyclical in general. The high coherence between U.S. GDP and that of the East Asian economies suggests that business cycles in terms of frequency are also similar between the United States and East Asia. However, the GDP and consumption of East Asian countries do not necessarily co-move well with current U.S. and Japanese GDP and consumption, while East Asian consumption tends to co-move more with lagged U.S. and Japanese consumption.

Large Fluctuations in Consumption in Least Developed Countries

The objective of this paper is to shed light on mechanism which increases fluctuation in consumption of least developed countries. In general large fluctuation in consumption makes consumers worse off. This fact suggests that accumulation of knowledge on the generating mechanism of the large consumption fluctuation very likely contributes to welfare improvement of the least developed countries, through policies stabilizing consumption. We specifically investigated the fluctuation in consumption, through the numerical analysis with a dynamic macroeconomic model.

International real business cycles : a re-visit

It is well known that several quantitative properties of international real business cycle models with are at odds with the data. First, the cross-country correlations are much higher for consumption than for output, while in the data the opposite is true (the BKK puzzle). Second, cross-country correlations of employment and investment are negative, while in the data they are positive. This paper quantitatively shows that preferences with a zero income effect on labor supply help generate a correct cross-country correlation in employment even without any restrictions on financial markets. In a bond economy, a zero income effect in labor supply, combined with time-to-build investment, can generate a positive cross-country correlation in investment, and the BKK puzzle is also resolved when the inter-temporal elasticity of substitution in labor supply is low.

Inflation targeting in Korea, Indonesia, Thailand, and the Philippines : the impact on business cycle synchronization between each country and the world

This paper empirically analyzes whether and to what extent the adoption of inflation targeting (IT) in Korea, Indonesia, Thailand and the Philippines has affected their business cycle synchronization with the rest of the world. By employing the dynamic conditional correlation (DCC) model developed by Engle (2002), we find that IT in Asia has little effect on international business cycle synchronization and the effect is positive in some of the countries, if any. These findings basically seem to be consistent with the evidence from relevant literature.

Procyclical Productivity and Returns-to-Scale in Philippine Manufacturing

The Philippines is regarded as a highly oligopolistic economy, and it is argued that this is a cause of the relative stagnation of the economy to neighbouring East Asian economies. This presumption might be associated with increasing returns to scale and market power, which are consistent with the procyclical total factor productivity that is observed in the Philippines and the United States. However, this study found no strong evidence supporting increasing returns for aggregate manufacturing and three-digit manufacturing industries during 1956-1980 in the Philippines, based on data constructed by Hooley (1985). Further, this study does not support external effect discussed in Caballero and Lyons (1992).

Monetary Policy Effects in Developing Countries with Minimum Wages

Using a Dynamic General Equilibrium (DGE) model, this study examines the effects of monetary policy in economies where minimum wages are bound. The findings show that the monetary-policy effect on a binding-minimum-wage economy is relatively small and quite persistent. This result suggests that these two characteristics of monetary policy in the minimum-wage model are rather different from those in the union-negotiation model which is often assumed to account for industrial economies.

The impact of unstable aids on consumption volatility in developing countries

In recent years, a large and expanding literature has examined the properties of developing economies with regard to the macroeconomic cycle.1 One such property that is characteristic of developing economies is large fluctuations in consumption. Meanwhile, aid for the low income countries is extremely volatile, and under certain circumstances, the volatile aid amplifies the consumption volatility. This document examines whether it is possible that the volatile aid yields high consumption volatility in African countries that constitute the majority of the low income countries. Our numerical analysis reveals that the strongly influential aid disbursements yield a considerably large fluctuation in consumption.

Growth-cycle nexus

This research sheds light on the negative correlation between economic growth and business cycle in less developed economies. Whereas many previous studies explain the negative correlation from a viewpoint in which business cycle affects economic growth, we attempt to present a hypothesis based on the other influence direction in which economic growth affects business cycle. We investigate the validity of the hypothesis using two methods: econometric analysis and numerical analysis. We find that the econometric analysis supports our hypothesis. The numerical analysis shows that the effect of the proposed hypothesis produces the negative correlation between economic growth and business cycle.

International Business Cycles: What Are the Facts?

Modern business cycle theory involves developing models that explain stylized facts. For this strategy to be successful, these facts should be well established. In this paper, we focus on the stylized facts of international business cycles. We use the generalized method of moments and quarterly data from nineteen industrialized countries to estimate pairwise cross-country and within-country correlations of macroeconomic aggregates. We calculate standard errors of the statistics for our unique panel of data and test hypotheses about the relative sizes of these correlations. We find a lower cross-country correlation of all aggregates and especially of consumption than in previous studies. The cross-country correlations of consumption, output and Solow residuals are not significantly different from one another over the whole sample, but there are significant differences in the post-1973 subsample.