33rd International Seminar on Macroeconomics

June 18-19, 2010
NBER Research Associates Richard H. Clarida of Columbia University and Francesco Giavazzi of Bocconi University, Organizers

Morten O. Ravn, European University Institute, and Karel Mertens, Cornell University
Technology-Hours Redux: Tax Changes and the Measurement of Technology Shocks

A number of empirical studies find that permanent technological improvements give rise to a temporary drop in hours worked. This finding seriously questions the technology-driven business cycle hypothesis. Ravn and Mertens argue here that it is important to control for permanent changes in taxes, which invalidate the standard long-run identifying assumptions for technology shocks and induce low-frequency fluctuations in hours worked. Using the narrative data of Romer and Romer (2009), they find that tax shocks have significant long-run effects on aggregate hours, output, and labor productivity. They also find that, after controlling for tax shocks, permanent shocks to labor productivity generate short-run increases in hours worked and are an important source of fluctuations in U.S. output.

S. Boragan Aruoba, University of Maryland; Francis X. Diebold, University of Pennsylvania and NBER; and M. Ayhan Kose and Marco Terrones, International Monetary Fund
Globalization, the Business Cycle, and Real-Time Macroeconomic Monitoring

Aruoba, Diebold, Kose, and Terrones propose and implement a framework for characterizing and monitoring the global business cycle in real-time. Their framework uses high-frequency data, allows them to account for a potentially large amount of missing observations, and facilitates real-time updating of global activity as data releases and revisions become available. They apply this framework to the G-7 countries and study various aspects of national and global business cycles. They report three main results. First, their measure of the global business cycle - the G-7 real activity factor - is able to capture a significant amount of common variation across countries and displays the major global cyclical events of the past forty years. Second, the G-7 and idiosyncratic country factors appear to play different roles at different points in time in shaping national economic activity. Finally, the degree of G-7 business cycle synchronization among country factors has changed over time.

Thomas Laubach, Goethe University Frankfurt
Fiscal Policy and Interest Rates: The Role of Sovereign Default Risk

Recent events have highlighted the potential importance of nonlinear effects of fiscal variables (notably debt and deficits) on interest rates: while in times when government solvency is not a concern the standard crowding-out effects are of moderate magnitude, in times when default risk becomes an issue, the interest rate effects can become very large. Laubach provides new evidence on the magnitude of these effects. When default risk is not a concern, he uses an arbitrage-free term structure model to estimate the dynamic effects of fiscal policy shocks on interest rates along the entire maturity spectrum. When default risk becomes a concern (thereby violating a central assumption of the term structure model), he presents evidence based on EMU government bond spread regressions on time-varying effects of national fiscal policies on spreads, as well as the time-varying sensitivity of yield spreads to international risk aversion as a function of the state of fiscal policy.

Wouter J. den Haan and Matija Lozej, University of Amsterdam
Pigou Cycles in Closed and Open Economies

Models that are able to generate a Pigou cycle -- that is., a positive comovement in con sumption, investment, and employment in response to news about future macroeconomic developments -- typically require a number of non-standard features. Den Haan and Kaltenbrunner (2009) show that a simple labor market matching model can also generate Pigou cycles, but only for a small set of parameter values. Here den Haan and Lozej show that an open-economy version of this matching model with sticky interest rates can robustly generate Pigou cycles. Sticky interest rates reinforce the wealth effect if workers are hired on a spot market making it more difficult to generate Pigou cycles. In a matching model, however, both the demand and the supply of labor are investment decisions and sticky interest rates reinforce the increase in these investments following a positive news shock.

Michael W. Klein, Tufts University and NBER, and Linda S. Goldberg, Federal Reserve Bank of New York and NBER
Establishing Credibility: Evolving Perceptions of the European Central Bank (NBER Working Paper No. 11792, revised in 2006)

The perceptions of a central bank's inflation aversion may reflect institutional structure or, more dynamically, the history of its policy decisions. In this paper, Klein and Goldberg present a novel empirical framework that uses high frequency data to test for persistent variation in market perceptions of central bank inflation aversion. The first years of the European Central Bank (ECB) provide a natural experiment for this model. Tests of the effect of news announcements on the slope of yield curves in the euro-area, and on the euro/dollar exchange rate, suggest that the market's perception of the policy stance of the ECB during its first six years of operation significantly evolved, with a belief in its inflation aversion increasing in the wake of its monetary tightening. In contrast, tests based on the response of the slope of the United States yield curve to news offer no comparable evidence of any change in market perceptions of the inflation aversion of the Federal Reserve.

Stijn Claessens, M. Ayhan Kose, and Marco Terrones, International Monetary Fund
Financial Cycles: What? How? When?

Claessens, Kose, and Terrones provide a comprehensive analysis of financial cycles using a large database of more than 750 financial cycles in 21 advanced countries over the period 1960:1 to 2009:4. Specifically, they analyze cycles in credit, house prices, equity prices, and exchange rates. They report three main results. First, financial cycles tend to be long and severe, especially cycles in housing and equity markets. Second, financial cycles are highly synchronized within countries, particularly credit and house price cycles. The extent of synchronization of financial cycles across countries is high, mainly in the case of credit and equity cycles, and has been increasing over time. Third, financial cycles feed off of each other and become amplified, especially during downturns of credit and housing markets. Moreover, globally synchronized downturns tend to be associated with prolonged and more costly episodes, especially in the case of credit and equity cycles. In light of these findings, they examine the duration and amplitude of financial disruptions of the past two years.

Christopher J. Erceg and Jesper Linde, Federal Reserve Board
Asymmetric Shocks in a Currency Union with Monetary and Fiscal Handcuffs

Erceg and Linde investigate the impact of the asymmetric shocks within a currency union in a framework that takes account of the zero bound constraint on policy rates, and also allows for constraints on fiscal policy.

Travis Berge and Oscar Jorda, University of California, Davis, and Alan M. Taylor, University of California, Davis and NBER
Currency Carry Trades

A wave of recent research has studied the predictability of foreign currency returns. A wide variety of forecasting structures have been proposed, including signals such as carry, value, momentum, and the forward curve. Some of these have been explored individually, and others have been used in combination. Berge, Jorda, and Taylor use new econometric tools for binary classification problems to evaluate the merits of a general model encompassing all these signals. They find very strong evidence of forecastability using the full set of signals, both in sample and out-of-sample. The holds true for both an unweighted directional forecast and one weighted by returns. Their preferred model generates economically meaningful returns on a portfolio of nine major currencies versus the U.S. dollar, with favorably Sharpe and skewness characteristics. They also find no relationship between our returns and a conventional set of so-called risk factors.

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