Household investment displays a robust leading indicator property over the US business cycle. It ... more Household investment displays a robust leading indicator property over the US business cycle. It has been challenging to account for this stylized fact. In this paper, we develop the hypothesis that consumer confidence drives household investment. Using a survey based consumer confidence measure for 1960Q1–2017Q4 we find that it leads household investment by two quarters and housing starts by one quarter, lending support to the hypothesis. We then use VAR analysis to identify a confidence shock. Household investment increases and follows a persistent hump-shaped response after a positive confidence shock. The responses of total hours-worked and output also show a persistent increase and so do real house prices. Confidence shocks account for a substantial share of variation in household investment, total hours-worked and output. We show that household investment plays a quantitatively important role in the transmission of confidence shocks in the economy. Moreover, confidence shocks ...
Carbon dioxide emissions are highly correlated with cyclical fluctuations in the U.S.economy; the... more Carbon dioxide emissions are highly correlated with cyclical fluctuations in the U.S.economy; they increase during booms and fall during busts. We examine this relationship focusing on the sources of business cycles identified using structural vector autoregression methodologies. Using data for 1973–2012, we find that emissionsfall after unanticipated technology and investment shocks, as well as anticipated technology shocks. Emissions, however, increase after an anticipated investment shock. Our findings have two implications for the emerging literature that examines the optimality of environmental policy using dynamic stochastic general equilibrium models with unanticipated technology shocks. First, the assumption that unanticipated technology shocks cause carbon emissions to move with the business cycle has little support in the data both at the aggregate and the state-level. Second, identifying the shocks that explain procyclical carbon emissions is an important first step for c...
Recent studies have considered the New Keynesian Phillips Curve under positive steady state infla... more Recent studies have considered the New Keynesian Phillips Curve under positive steady state inflation-the NKPC-PI. This note presents an explicit derivation of the NKPCPI. This specification derived reveals how positive steady state inflation affects the coefficients and structure of the Phillips curve relative to the standard NKPC (which assumes zero steady state inflation).
This paper is related to a large recent literature studying the Phillips curve in sticky-price eq... more This paper is related to a large recent literature studying the Phillips curve in sticky-price equilibrium models. It differs in allowing for the degree of price stickiness to be determined endogenously. A closed-form solution for short-term inflation is derived from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing originally developed by Dotsey, King and Wolman. This generalised Phillips curve encompasses the New Keynesian Phillips curve (NKPC) based on Calvo-type price- ...
We highlight that DSGE models with housing and collateralized borrowing predict a fall in both ho... more We highlight that DSGE models with housing and collateralized borrowing predict a fall in both house prices and consumption following positive government spending shocks. The quasi-constant shadow value of lenders' housing and the negative wealth effect of future tax increases on their consumption are the key reasons for this result. By contrast, we show house prices and consumption in the US rise after identified positive government spending shocks, using a structural vector autoregression methodology and accounting ...
We study the redistributive impact of a productivity shock in both the consumption goods and hous... more We study the redistributive impact of a productivity shock in both the consumption goods and housing sector in a life-cycle model that distinguishes between home owners and renters. Our model is able to replicate the heterogeneity of income and wealth and the qualitative life-cycle behavior of housing and consumption. The model clarifies how the interaction between the business cycle and housing affects inequality. In accordance with the experience of the Great Recession, we find that income inequality increases when house prices fall. Young homeowners with high debt are particularly vulnerable to an economic downturn.
The markup in Canada has exhibited non-stationary movements, rising steadily since the early 1990... more The markup in Canada has exhibited non-stationary movements, rising steadily since the early 1990s. This implies the presence of a permanent markup shock which causes the desired markup ratio to shift permanently. It is shown that after a permanent positive markup shock, output, per-capita hours, and the real wage decline both in the short and the long run. The effect on inflation dissipates quickly whereas the effect on wage inflation is relatively persistent. Increases in oil prices seem to substantially affect the ...
Household investment displays a robust leading indicator property over the US business cycle. It ... more Household investment displays a robust leading indicator property over the US business cycle. It has been challenging to account for this stylized fact. In this paper, we develop the hypothesis that consumer confidence drives household investment. Using a survey based consumer confidence measure for 1960Q1–2017Q4 we find that it leads household investment by two quarters and housing starts by one quarter, lending support to the hypothesis. We then use VAR analysis to identify a confidence shock. Household investment increases and follows a persistent hump-shaped response after a positive confidence shock. The responses of total hours-worked and output also show a persistent increase and so do real house prices. Confidence shocks account for a substantial share of variation in household investment, total hours-worked and output. We show that household investment plays a quantitatively important role in the transmission of confidence shocks in the economy. Moreover, confidence shocks ...
Carbon dioxide emissions are highly correlated with cyclical fluctuations in the U.S.economy; the... more Carbon dioxide emissions are highly correlated with cyclical fluctuations in the U.S.economy; they increase during booms and fall during busts. We examine this relationship focusing on the sources of business cycles identified using structural vector autoregression methodologies. Using data for 1973–2012, we find that emissionsfall after unanticipated technology and investment shocks, as well as anticipated technology shocks. Emissions, however, increase after an anticipated investment shock. Our findings have two implications for the emerging literature that examines the optimality of environmental policy using dynamic stochastic general equilibrium models with unanticipated technology shocks. First, the assumption that unanticipated technology shocks cause carbon emissions to move with the business cycle has little support in the data both at the aggregate and the state-level. Second, identifying the shocks that explain procyclical carbon emissions is an important first step for c...
Recent studies have considered the New Keynesian Phillips Curve under positive steady state infla... more Recent studies have considered the New Keynesian Phillips Curve under positive steady state inflation-the NKPC-PI. This note presents an explicit derivation of the NKPCPI. This specification derived reveals how positive steady state inflation affects the coefficients and structure of the Phillips curve relative to the standard NKPC (which assumes zero steady state inflation).
This paper is related to a large recent literature studying the Phillips curve in sticky-price eq... more This paper is related to a large recent literature studying the Phillips curve in sticky-price equilibrium models. It differs in allowing for the degree of price stickiness to be determined endogenously. A closed-form solution for short-term inflation is derived from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing originally developed by Dotsey, King and Wolman. This generalised Phillips curve encompasses the New Keynesian Phillips curve (NKPC) based on Calvo-type price- ...
We highlight that DSGE models with housing and collateralized borrowing predict a fall in both ho... more We highlight that DSGE models with housing and collateralized borrowing predict a fall in both house prices and consumption following positive government spending shocks. The quasi-constant shadow value of lenders' housing and the negative wealth effect of future tax increases on their consumption are the key reasons for this result. By contrast, we show house prices and consumption in the US rise after identified positive government spending shocks, using a structural vector autoregression methodology and accounting ...
We study the redistributive impact of a productivity shock in both the consumption goods and hous... more We study the redistributive impact of a productivity shock in both the consumption goods and housing sector in a life-cycle model that distinguishes between home owners and renters. Our model is able to replicate the heterogeneity of income and wealth and the qualitative life-cycle behavior of housing and consumption. The model clarifies how the interaction between the business cycle and housing affects inequality. In accordance with the experience of the Great Recession, we find that income inequality increases when house prices fall. Young homeowners with high debt are particularly vulnerable to an economic downturn.
The markup in Canada has exhibited non-stationary movements, rising steadily since the early 1990... more The markup in Canada has exhibited non-stationary movements, rising steadily since the early 1990s. This implies the presence of a permanent markup shock which causes the desired markup ratio to shift permanently. It is shown that after a permanent positive markup shock, output, per-capita hours, and the real wage decline both in the short and the long run. The effect on inflation dissipates quickly whereas the effect on wage inflation is relatively persistent. Increases in oil prices seem to substantially affect the ...
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