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Volume
1, issue 1, November 1999
The
Research Agenda: Larry Christiano and Martin Eichenbaum
write about their current research program on the monetary
transmission mechanism
Lawrence
J. Christiano and Martin Eichenbaum are both Professors
of Economics at Northwestern University. They have collaborated
for many years studying the impact of monetary and fiscal
policies on business cycles and linking empirical results
to rigorous dynamic models. Here, they write about their
current research agenda. Christiano's
RePEc/IDEAS entry
and Eichenbaum's
RePEc/IDEAS entry.
Much
of our research focuses on the nature of the monetary
transmission mechanism. In part this reflects our desire
to understand the interaction between real and monetary
phenomena. And in part, this reflects our interest in
policy questions, such as: what causes periodic outbreaks
of high inflation and what are the causes of currency
and banking crises? Making progress on questions like
these requires empirically plausible models of the monetary
transmission mechanism. To construct such models, we
have looked at two types of evidence: US time series
data, as well as evidence from countries that have experienced
currency crises. In what follows we discuss what we
have learned from these two types of data and our ongoing
efforts to model the monetary transmission mechanism.
Evidence
From US Time Series
One
branch of our work develops and implements econometric
strategies for selecting between competing models of
the monetary transmission mechanism. In working with
US data, the strategy that we have emphasized is a limited
information one. Specifically, it involves comparing
the response of a model economy and the actual economy
to a particular shock. To be useful for diagnostic purposes,
the shock must satisfy two properties: different model
economies must react differently to it, and we must
know how the actual economy responds to it. In our view,
monetary policy shocks satisfy both properties. This
strategy has been implemented using other kinds of shocks.
For example, Gali (1999) studies the effects of technology
shocks, while Burnside, Eichenbaum & Fisher (1999a,b),
Edelberg, Eichenbaum & Fischer (1999), Ramey &
Shapiro (1999) and Rotemberg & Woodford (1992) consider
the effects of shocks to government purchases. It is
well known that different model economies react differently
to monetary policy shocks, see Christiano, Eichenbaum
& Evans [thereafter CEE] (1997). Moreover, much
progress has been made in understanding the economic
impact of a monetary policy shock. As a result, we know
a great deal about what it will take to have an empirically
plausible model of the monetary transmission mechanism.
A
second branch of work focuses more narrowly on particular
episodes such as the high inflation in the 1970's. Our
work on this begins with Chari, Christiano & Eichenbaum
(1998). Christiano has pursued this line further with
co-authors.
The
Facts
In
a series of papers, we have argued that the key consequences
of a contractionary monetary policy shock are as follows:
(i) interest rates, unemployment and inventories rise;
(ii) real wages fall, though by a small amount; (iii)
the price level falls by a small amount, after a substantial
delay; (iv) there is a persistent decline in profits
and the growth rate of various monetary aggregates;
(v) there is a hump-shaped decline in consumption and
output; and (vi) the US exchange rate appreciates and
there is an increase in the differential between US
and foreign interest rates. See CEE (1998b) for a discussion
of the literature and the role of identifying assumptions
that lie at the core of these claims.
Implications
for Models
What
kind of models are consistent with the facts? Some models
obviously are not.
Monetized
RBC, Misperception and Pure Sticky Wage Models
By
a monetized Real Buiness Cycle (RBC) model, we mean
an RBC model with no frictions other than a cash in
advance constraint or a transactions technology for
purchases that involves real balances. Simple monetized
RBC models cannot account for the sluggish response
of prices or the rise in the nominal interest rate that
follow in the wake of a contractionary policy shock.
The `monetary misperception' model (Lucas, 1972) is
also inconsistent with the facts. Its problem is that
movements in the price level are central to the mechanism
by which a monetary shock is transmitted to the real
economy. In reality, the price level isn't the first
thing to move. It's the last thing. Models in which
sticky nominal wages are the sole friction also run
afoul of this last observation. In those models, output
falls after a contractionary monetary policy shock because
a fall in the price level raises the real wage. There
are two problems with this story: prices don't fall
and the real wage doesn't rise.
Pure
Sticky Price Models
What
about models in which the only friction is stickiness
in goods prices? These models too, cannot account for
the facts. In our work, we have emphasized the failings
of these models for profits, prices, output and interest
rates. In CEE (1997) we argued that these models predict
that profits rise after contractionary monetary policy
shocks. In effect, these models imply that business
people should be crying out for a surprise monetary
contraction! This peculiar implication for profits reflects
the sharp fall in wages and capital costs that occurs
as output falls.
A
closely related problem is the inability of sticky goods
price models to reproduce the observed degree of price
inertia and persistence in output after a monetary policy
shock. In CEE (1997) we argued that both shortcomings
reflect the absence of strategic complementarity in
price setting. To be specific, imagine that an expansionary
monetary policy shock occurs in a particular period.
If all prices are sticky, then the shock will have no
effect on the price level and a large effect on output.
Now consider the next period, and imagine that a fraction
x of the firms can reset their prices. If x were unity,
prices would fully adjust and output would revert to
its pre-shock level. It turns out that the outcome is
not very different when x is small. The reason is simple.
The
1-x firms with preset prices must expand output. In
the act of doing so, they drive up factor prices and,
therefore, marginal costs. The x firms resetting prices,
respond to the higher marginal costs by raising prices
substantially and reducing output. This effect is greater,
the smaller is x. Put differently, the lower is x, the
less is the incentive of flexible price firms to act
like the firms with preset prices. This absence of strategic
complementarity among price setters means that the response
of aggregate prices and output in the period after a
shock is roughly the same whether x is unity or smaller.
An
additional problem with sticky goods price models is
that they have difficulty accounting both for the liquidity
effect and the hump-shaped fall in consumption that
are associated with a contractionary monetary policy
shock. This is because, absent asset market frictions,
the standard intertemporal Euler equation holds in these
models. For standard specifications of utility, this
implies that a hump-shaped fall in consumption is associated
with an immediate fall in the real interest rate. With
persistently sticky prices, this translates into an
immediate fall in the nominal interest rate. But, in
the data monetary contractions are associated with a
rise in the nominal interest rate.
Limited
Participation Models
A
different class of models that we have considered stress
frictions in households' portfolio decisions (see Lucas
(1990) and Fuerst (1992)). The effect of this friction
is that a monetary contraction creates a shortage of
liquidity in the financial sector, reducing the supply
of loanable funds. The resulting rise in interest rates
induces firms who need working capital to cut back on
their scale of operations and aggregate output declines.
In many ways, these models can be thought of as stylized
representations of the type of credit market frictions
emphasized in the lending channel model of the monetary
transmission mechanism, see for example Kashyap, Stein
& Wilcox (1993) and Bernanke, Gertler & Gilchrist
(1999). In effect, these credit market frictions mean
that a contractionary monetary policy shock acts on
the economy like a negative supply shock. Of course,
the model also imbeds the standard channel of monetary
policy, which operates via demand.
Versions
of these models that we have worked with can reproduce
a number of features of the stylized facts discussed
above. Because they break the standard intertemporal
Euler equation they are in principle compatible with
the liquidity effect and hump shaped decline in consumption
after a contractionary monetary policy shock. These
models can generate some sluggishness in prices and
persistent movements in output. To see this, think of
a contractionary monetary policy shock as a negative
shift to the nominal demand for goods. Other things
equal, this reduces the price level. But, it also reduces
the supply of goods. Other things equal, this raises
the price level. So, if the demand and supply effects
are equally strong, there is a substantial decline in
output and little movement in the price level, see CEE
(1997).
This
being said, there are at least two important problems
with such models: for the supply side effect to be strong
enough to cancel the demand side effect one must appeal
to a counterfactually large labor supply elasticity
and markup. And even then, these models cannot account
for the observed degree of sluggishness in the price
level.
Implications
for Future Research
The
discussion above suggests that single friction models
will not provide a convincing account of what happens
after a monetary policy shock. The obvious question
is: what combination of frictions will? To provide a
quantitative answer to this question, we are constructing
and estimating a model which incorporates limited participation
constraints and sticky prices. To place these on a symmetric
footing, we do two things. First, we model sticky prices
in the way suggested by Calvo (1983). Second, we capture
the portfolio restrictions implicit in the limited participation
assumption in the same way. Specifically, we imagine
that households can change their money holdings at stochastic
intervals of time.
We
also think it is important to allow for labor market
frictions into this extended framework. This is because
the problems of both the limited participation and sticky
goods price models revolve in part around their labor
market implications. The first model relied on implausibly
high labor supply elasticities, while the second model
foundered on the rock of highly cyclical marginal costs.
One
way to deal with both problems is to assume that wages
are sticky too. In practice, we will model these using
Calvo-style wage contracts. Perhaps a more interesting
route is to allow for efficiency wages, modeled along
the line of the general equilibrium shirking model in
Alexopoulous (1998). An attractive feature of that framework
is that real wages do not move in response to a monetary
policy shock, and changes in employment involve only
the extensive margin of unemployed workers.
The
Causes of High Inflation
An
important policy question is, why has inflation alternated
between periods of being high and periods of being low.
Christiano has studied this question in recent work
with co-authors (Stefania Albanesi and V.V. Chari in
one case, Christopher Gust in another).
Christiano
& Gust (1999) are studying the Great Inflation of
the 1970s. They consider the hypothesis that this episode
was due to an increase in expected inflation that became
self-fulfilling because of the nature of monetary policy.
They explore this hypothesis in the context of two models,
a sticky price model constructed by Clarida, Gali &
Gertler and the limited participation model of CEE (1998a).
Christiano & Gust (1999) find that the limited participation
model is a more reasonable explanation of this episode
because it is also consistent with the stagflation of
the time: inflation was high and output and employment
were low.
Albanesi,
Chari & Christiano (1999) study the potential for
the Inflation Bias Hypothesis to account for the high
and variable inflation that has been observed. This
hypothesis, originally due to Kydland & Prescott
and Barro & Gordon, is that high inflation reflects
a lack of commitment in monetary institutions. Albanesi,
Chari & Christiano begin by exploring the magnitude
of this bias in standard sticky price and limited participation
models. They find that, for a surprisingly wide range
of parameter values, the models predict that the inflation
bias is zero: models with and without commitment predict
the same inflation. So, these models imply that the
inflation bias hypothesis is rejected: it cannot account
for the high observed inflation rates. They argue that
this result reflects in part the poor implications of
these models for money demand. When money demand is
modified in a plausible direction, the model has the
potential to resolve several classic, outstanding puzzles
in the money demand literature. At the same time, the
inflation bias hypothesis is restored with these modifications.
In ongoing work, the authors are exploring in greater
detail the empirical implications for money demand of
their model. They are also exploring the empirical performance
of the version of their model that is potentially consistent
with the volatility of inflation.
Evidence
From Currency Crisis Countries
Another
strand of our research is motivated by evidence on the
nature of currency crises in the post-Bretton Woods
era. In our view, the key characteristics of these crises
are: (i) they have increasingly coincided with banking
crises, (ii) there are implicit government guarantees
to domestic and foreign bank creditors prior to these
crises, (iii) banks generally do not hedge exchange
rate risk and many go bankrupt following a currency
devaluation, (iv) a lending boom precedes the crises,
(v) after twin banking and currency crises, domestic
interest rates and the current account rise sharply,
while output declines dramatically. Accounting for these
observations is obviously an important task. At the
same time, any theory which can account for these facts
may also shed light on the monetary transmission in
countries like the US. In ongoing work, Eichenbaum and
co-authors (Craig Burnside and Sergio Rebelo) have been
exploring the role of government guarantees to foreign
and domestic bank creditors in precipitating twin banking
and currency crises. They proceed in three stages. First
they have explored the effects of banking crises on
currency crises. Second they study the effects of currency
crises on banking crises. Finally in ongoing work they
are endogenizing both types of crises as reflecting
government policy vis a vis the banking system.
Burnside,
Eichenbaum & Rebelo [thereafter BER] (1998) argues
that banking crises caused the recent currency crises
in Southeast Asia. It begins from the assumption that
the banks were in trouble in Southeast Asia prior to
the currency crises. According the BER model, private
agents realized this and assumed that governments would
eventually fund bank bailouts at least in part via seigniorage.
It implies that the fixed exchange rate regime should
have collapsed after agents understood that the banks
were failing, but before governments actually started
to monetize their deficits. In this way, their explanation
of the Asian crisis lays the blame at the feet of bad
government policy. Yet, the model is also consistent
with the fact that standard indicators of bad government
policy - high deficits, excessive money growth, etc.
- were not observed prior to the crises.
BER
(1999a) takes as given the probability of an exchange
rate collapse and investigates how government guarantees
to domestic and foreign bank creditors can convert a
currency crisis into a banking crisis. According to
BER's model, when there are government guarantees, it
is optimal for banks to not hedge foreign exchange risk.
Indeed, it may be optimal for banks to magnify their
exchange rate exposure. According to their analysis,
prior to an exchange rate collapse, government guarantees
act like a subsidy to domestic loans and reduce the
interest rate that firms must pay to fund their ongoing
operations. This leads to higher levels of output and
economic activity than would be the case absent government
guarantees. But, if there is a currency devaluation,
it is optimal for banks to declare bankruptcy and renege
on their foreign debt. Moreover, domestic interest rates
rise and there is a permanent decline in wages, employment
and output. In short, a currency crisis leads to a banking
crisis and a permanent decline in aggregate economic
activity.
Finally,
BER (1999b) endogenizes both types of crises as arising
from government guarantees to banks' creditors. The
key argument is that in the presence of government guarantees
to banks' creditors, a currency crisis transforms potential
government liabilities into actual government liabilities.
This opens up the possibility of self-fulfilling currency
attacks. In BER's model self-fulfilling currency attacks
are not possible in the absence of government guarantees.
But, in the presence of such guarantees, self-fulfilling
currency attacks occur almost surely. So, both fundamentals
and expectations play important roles in currency crises.
The former determine whether twin currency/banking crises
can occur. But, the latter determine the precise timing
of the crises.
In
work with co-authors (Christopher Gust and Jorge Roldos),
Christiano studies the nature of the monetary transmission
mechanism in the aftermath of financial crises. This
work does not investigate the causes of currency crises,
and simply assumes that it is a time when international
lenders suddenly impose binding collateral constraints.
The collateral constraints specify that the stock of
foreign debt cannot exceed the value of land and capital.
They carry out their analysis in the context of a small
2-sector traded goods, non-traded goods model modified
to incorporate features of the limited participation
model. In particular, firms require two forms of working
capital to conduct operations: domestic funds to finance
the wage bill and foreign funds to pay for imports of
an intermediate good. Just before the crisis the model
economy is in a steady state with a zero current account
balance, no collateral constraints and a large stock
of foreign debt relative to the value of domestic assets.
This steady state is hit by an unexpected imposition
of collateral constraints. If monetary policy does not
react, the current account responds by turning positive
as the foreign debt is paid off, now with a high shadow
cost because of the binding collateral constraint. At
equilibrium the foreign debt is reduced to exactly the
point where the collateral constraint becomes non-binding.
During the transition, output and employment are low
because the binding collateral constraint inhibits the
import of the intermediate good.
Building
on this baseline analysis, Christiano, Gust & Roldos
[thereafter CGR] ask what is the economic effect of
a monetary policy action which expands domestic liquidity
and reduces the domestic nominal interest rate. They
show that, under plausible circumstances, the policy
causes an even greater fall in output and employment
because the expansion of domestic liquidity operates
on the wrong margin in an economy in the aftermath of
a crisis. At a time like this, it is the shortage of
foreign liquidity that holds back economic activity.
Then, actions designed to expand domestic liquidity
may paradoxically just serve to further tighten the
constraint on foreign liquidity. The reasoning is simple.
The expansion of domestic liquidity reduces the cost
of labor. This has a relatively greater impact on the
marginal cost of producing nontraded goods, because
that sector is assumed to be relatively labor intensive.
As a result, there is a fall in the price of nontraded
versus traded goods. This in turn produces a real depreciation,
and a fall in the international value of the economy's
collateral. The latter causes the collateral constraint
to bind even more strongly, so that imports of the intermediate
good must be curtailed. The result is an amplification
in the drop in employment and output.
This
analysis is a response to observers who argue that the
appropriate way to cushion the fall in output in the
aftermath of a currency crisis is for the central bank
to cut the domestic rate of interest. Those arguments
appeal to the conventional wisdom, based on experience
in countries like the US, that interest rate cuts stimulate
economic activity. This holds in the CGR model, but
only in the version with no collateral constraints.
The imposition of binding collateral constraints fundamentally
changes the nature of the monetary transmission mechanism
in the model, reversing the conventional wisdom. This
suggests that experience with the effects of policy
actions in economies in `normal times', when collateral
constraints are not binding, may have little relevance
for predicting the effects of these actions in economies
in `crisis times', when collateral constraints are binding.
In continuing work, CGR are investigating the exact
nature of international lending contracts and the role
of collateral constraints in international lending during
normal and crisis times. They are also studying the
empirical plausibility of their model's assumptions
required to guarantee the results on the effects of
monetary policy with a binding collateral constraint.
The key assumptions are limited substitutability between
foreign intermediate goods and domestic factors in production
and the relative importance of labor in the nontraded
good sector.
References
M.
Alexopoulos, "Efficiency Wages, Unemployment and the
Business Cycle", manuscript, Northwestern University,
1998.
B.
Bernanke, M. Gertler and S. Gilchrist, "The Financial
Accelerator in a Quantitative Business Cycle Framework",
in: J. Taylor and M. Woodford (eds.), Handbook of
Macroeconomics, forthcoming.
C.
Burnside, M. Eichenbaum and J. Fisher,
"Assessing
the
Effects of Fiscal Shocks", manuscript,
Northwestern
University, 1998a.
C.
Burnside, M. Eichenbaum and J. Fisher, "Evaluating Efficiency
Wage Models Using Fiscal Policy Shocks as Natural Experiments",
in: Theory and Evidence in Macroeconomics, R.
Backhouse and A. Salanti (eds.), Oxford University Press,
forthcoming.
C.
Burnside, M. Eichenbaum and S. Rebelo, "Prospective Deficits
and the South East Asian Currency Crises", NBER
Working paper, no. 6758, 1998.
C.
Burnside, M. Eichenbaum and S. Rebelo, "Hedging and Financial
Fragility in Fixed Exchange Rate Regimes", NBER
Working paper no. 7143, 1999a.
C.
Burnside, M. Eichenbaum and S. Rebelo, "On the
Fundamentals
of Self Fulfilling Currency Attacks: The Role of Government
Guarantees to Foreign Bank Creditors",
manuscript, Northwestern
University, 1999b.
G.
Calvo, "Staggered Contracts in a Utility - Maximizing
Framework", Journal of Monetary Economics, Vol.
12 (3), pp. 383-398, 1983.
L.
Christiano, V. V. Chari and M. Eichenbaum, "Expectation Traps
and Discretion", Journal of Economic Theory,
Vol. 81(2), pages 462-492, 1998.
L.
Christiano, M. Eichenbaum and C. Evans, "Sticky Price
and Limited Participation Models of Money: A Comparison",
European Economic Review, Vol. 41(6), pages 1201-1249,
1997.
L.
Christiano, M. Eichenbaum and C. Evans, "Modelling
Money",
NBER Working Paper no. 637, 1998a.
L.
Christiano, M. Eichenbaum and C. Evans, "Monetary Policy
Shocks: What Have We Learned and to What End?",
Handbook of Monetary Economics, Michael Woodford
and John Taylor (eds.), forthcoming.
L.
Christiano and C. Gust, "The Great
Inflation of the
1970s", manuscript, Northwestern University,
1999.
L.
Christiano, C. Gust and J. Roldos, "Monetary
Policy
in the Aftermath of a Crisis", manuscript in
process,
1999.
M.
Eichenbaum, J. Fischer and W. Edelberg, "Understanding
the Effects of Shocks to Government Purchases",
Review of Economics Dynamics, Volume 2, pp. 166-206,
1999.
T.
S. Fuerst, "Liquidity, Loanable Funds, and Real Activity",
Journal of Monetary Economics, Vol. 29(1), pp.
3-24, 1992.
J.
Gali, "Technology,
Employment,
and the Business Cycle: Do Technology Shocks Explain
Aggregate Fluctuations?", American Economic Review,
Vol. 89 (1), pages 249-271, 1999.
A.
K. Kashyap, J. C. Stein and D. W. Wilcox, "Monetary Policy
and Credit Conditions: Evidence from the Composition
of External Finance", American Economic Review,
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R.
E. Lucas Jr., "Expectations and the Neutrality of Money",
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R.
E. Lucas Jr., "Liquidity and Interest Rates", Journal
of Economic Theory, Vol. 50(2), pp. 237-264, 1990.
V.
A. Ramey and M. D. Shapiro, "Costly Capital
Reallocation and the Effects of Government Spending",
Carnegie - Rochester Conference Series on Public
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J. Rotemberg and M. Woodford, "Oligopolistic
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Activity", Journal of Political Economy,
Vol. 100(6), pp. 1153-1207, 1992.
EconomicDynamics
Interview: David Backus on international business cycles
David
K. Backus is the Heinz Riehl Professor of Finance and
Economics at the Stern Business School of New York University.
He has published extensively on International Business
Cycles as well as on Foreign Exchange Theory. In particular,
he teamed with Patrick Kehoe and Finn Kydland to launch
the current research agenda around international real
business cycle (IRBC) models. His home page is at http://www.stern.nyu.edu/~dbackus/.
- EconomicDynamics:
Can IRBC modeling shed its "R", that is say something
about monetary phenomena, especially exchange rates?
-
-
David
Backus: I don't think there's much question that
RBC modeling shed its "R" long ago, and the same
applies to IRBC modeling. There's been an absolute
explosion of work on monetary policy, which I find
really exciting. It's amazing that we finally seem
to be getting to the point where practical policy
can be based on serious dynamic models, rather than
reduced form IS/LM or AS/AD constructs. Lots of
people have been involved, but names that cross
my mind are my colleagues Jordi Gali and Mark Gertler,
their coauthor Rich Clarida, and the team of Julio
Rotemberg and Mike Woodford.
So
we really need a better term than RBC. Maybe you
should take a poll.
-
ED:
In 1980, Feldstein and Horioka argued that if the
correlation of savings and investment rates was
close to one, markets must be incomplete. Cardia
(1991) and Baxter & Crucini (1993) showed that
this correlation could be high even with complete
markets. Do you think the issue is now closed?
-
DB:
Not! (as Finn Kydland would say). I think it's very
much an open issue, but let me explain why. What
Baxter and Crucini, Cardia, and others established
was a property of dynamic models with complete markets:
that in an "artificial" time series for a specific
country, saving and investment rates could be highly
correlated. (The word "could" is important. Our
initial paper showed, for example, that it depended
on the process for technology shocks.) Feldstein
and Horioka established a very different property
of data: that over long periods (in their case 14
years), averages of saving and investment rates
for OECD countries were pretty much the same. In
other words, there was very little in the way of
net international capital flows. This was surprising
then, and remains surprising now. My guess is that
you'd see greater flows over the last twenty years,
particularly in emerging economies, but that the
flows are still a lot less than you'd expect from
theory.
Tim
Kehoe had a nice example a few years ago. He estimated
how much the capital stock should increase in Mexico
to equate the marginal product of capital to that
of the US. The answer, as I recall, was about 50%,
an enormous number relative to what was viewed as
very large capital flows in the early 1990s.
-
ED:
What do you see as the next challenge of IRBC modeling?
-
DB:
I think you want to separate challenges from approaches.
Although one's approach may suggest interesting
questions, the best questions are often interesting
from lots of perspectives, whether RBC or something
else. As a profession we're probably better off
diversifying, with different people attacking different
problems with different methods, since we don't
know a priori which directions will turn out to
be the most fruitful.
On
challenges, I'd list the many facts suggesting frictions
to international capital flows (Feldstein and Horioka,
Tesar and Werner on portfolio diversification) and
the large question of how relative prices behave
- the magnitude and persistence of real exchange
rate movements and differences in behavior across
goods (traded and nontraded, for example). These
are classic issues, and I think they'll be with
us for a while yet.
On
approaches, I personally am fascinated by work on
models with endogenous borrowing constraints. This
started, I guess, with Eaton and Gersovitz, was
applied to the 1980s debt crisis by Bulow and Rogoff,
and has since been developed further along several
directions by (among many others) Alvarez-Jermann
and Kehoe-Perri. There's also been a lot of work
on models with imperfectly competitive firms in
goods markets, but I know a less about it.
-
ED:
Do you think therefore that the quantity and price
anomalies you have coined in the "Frontiers of Business
Cycle Research" volume are not important? Or solved?
[The quantity anomaly states that models cannot
replicate the fact that cross-country correlations
of output are higher than those of consumption,
the price anomaly states that model cannot achieve
the high volatility of the terms of trade observed
in the data.]
-
DB:
Honestly, I don't think they're solved, although
we've certainly taken some large bites out of them.
I'm extremely enthusiastic, though, about the state
of the profession: the quality of work in international
macroeconomics has never been higher. Given the
pace of change in the world economy and the amount
of human capital devoted to understanding it, I'm
confident that the next ten years will be just as
exciting as the last ten.
References
F.
Alvarez and U. Jermann, "Efficiency,
Equilibrium and
Asset Prices with Risk of Default",
University of Chicago
Working Paper, 1999.
D.
K. Backus, P. J. Kehoe, and F. E. Kydland, "International
Real Business Cycles", Journal of Political Economy,
vol. 100, pp. 745-775, 1992.
D.
K. Backus, P. J. Kehoe, and F. E. Kydland,
"Dynamics
of the Trade Balance and the Terms of Trade: The
J-Curve?"
American Economic Review, vol. 84, pp. 84-103,
1994.
D.
K. Backus, P. J. Kehoe, and F. E. Kydland, "International
Business Cycles: Theory and Evidence", in: T. F.
Cooley, ed., Frontiers of Business Cycle Research,
Princeton University Press, pp. 331-356, 1995.
M.
Baxter and M. J. Crucini, "Explaining
Saving-Investment
Correlations", American Economic
Review, vol.
83, pp. 416-436, 1993.
J.
Bulow and K. Rogoff, "A
Constant Recontracting
Model of Sovereign Debt", Journal of Political
Economy, pp. 155-178, 1989.
E.
Cardia, "The Dynamics of a Small Open Economy in Response
to Monetary, Fiscal, and Productivity Shocks", Journal
of Monetary Economics, vol. 28, no. 3, pp. 411-434,
1991.
R.
Clarida, J. Gali and M. Gertler, "The Science of
Monetary Policy: A New Keynesian Perspective", Journal
of Economic Literature, forthcoming.
J.
Eaton and M. Gersowitz, "LDC Participation in International
Financial Markets: Debts and Reserves", Journal of
Development Economics, pp. 3-21, 1980.
M.
Feldstein and Horioka, "Domestic Saving
and International Capital Flows", The Economic
Journal, pp. 314-329, 1980.
P.
J. Kehoe and F. Perri, "International
Business Cycles
with Endogenous Incomplete Markets",
University of Pennsylvania
Working Paper, 1998.
T.
J. Kehoe, "What Happened in Mexico in 1994-95?" in P.
J. Kehoe and T. J. Kehoe, eds., Modeling North American
Economic Integration, Boston: Kluwer Academic Publishers,
pp. 131-148, 1995.
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J. Rotemberg and M. Woodford, "Oligopolistic
Pricing and the Effects of Aggregate Demand on Economic
Activity", Journal of Political Economy,
vol. 100, pp. 1153-1207, 1992.
L.
Tesar and I. M. Werner, "International
Equity Transactions and U.S. Portfolio Choice",
in J. A. Frankel, ed, The Internationalization of
Equity Markets, University of Chicago Press, pp.
185-216, 1994.
L.
Tesar and I. M. Werner, "Home Bias and
the High Turnover", Journal of International
Money and Finance, pp 467-492, 1995.
The
Review of Economic Dynamics: A Progress Report
 As coordinating editor, I am
very happy to report that the Review of Economic Dynamics has been an enormous success
since its inception. We have now published two complete
volumes of very high quality papers. This past year
we received an award from the American Association of
Publishers, as the Best New Scholarly Academic Journal
in Business, Social Sciences, and Humanities in 1998.
Since
the journal's beginning, we have had several hundred
submissions and have now just completed Volume 2. Our inaugural Volume (#1) appeared in 1998. There were three
issues of contributed papers, and a special issue on
Technology that honored the contributions of Michael
Gort. Volume 2, 1999, included two issues of contributed
papers, and two special issues, one in memory of the
late S. Rao Aiyagari, and one on Social Security.
In
the new year, Volume #3 Issue #1, will include : "Entrepreneurship, Saving
and Social Mobility" (Vincenzo Quadrini); "Can Habit
Formation be Reconciled with Business Cycle Facts?"
(Martin Lettau and Harald Uhlig); "Investment-Saving
Co-movement and Capital Mobility: Evidence from Century
Long U.S. Time Series" (Daniel Levy); and "Human Capital
and International Real Business Cycles" (Marco Maffezzoli)
among others. We will have one special issues in Volume
3 (Issue #2, April 2000) focusing on Dynamic Games.
Some of the papers to appear: "Implementation, Elimination
of Weakly Dominated Strategies and Evolutionary Dynamics"
(Antonio Cabrales & Giovanni Ponti); "Private Experience
in Adaptive Learning Models" (Felipe Perez); "Equipment
Investment and the Relative Demand for Skilled Labor:
International Evidence" (Karnet Flug & Zvi Hercowitz);
"Correlation, Learning and the Robustness of Cooperation"
(Nicola Dimitri); "Mutual Insurance Individual Savings
and Limited Commitment" (Ethan Ligon, Jonathan Thomas
& Tim Worrall); and "Folk Theorem with One-Sided
Information" (Harrison Cheng).
The
success of the Review of Economic Dynamics is due entirely
to the hard work of the editors and associate editors, and referees, and due to the willingness
of the members of the Society to send us their outstanding
research. The management of the Review is intended to
be dynamic as the name would suggest. The initial editors
included myself, Roger Craine, David Levine, Ramon Marimon,
Dale Mortensen, Edward Prescott, and Thomas Sargent.
Tom Sargent stepped down at the end of 1998 and Boyan
Jovanovic joined us as an editor. This year Dale Mortensen
and Roger Craine will step down and Gary Hansen (an
Associate Editor since the beginning) and Timothy Kehoe
will join as editors. Among those who have served as
Associate Editors since 1996 are Michele Boldrin, VV
Chari, Lawrence Christiano, Jeremy Greenwood, Nobuhiro
Kiyotaki, Per Krusell, Wolfgang Pesendorfer, Richard
Rogerson, Aldo Rustichini, Manuel Santos, and Randy
Wright. In 1999, we added as new associate editors,
Martin Eichenbaum, Jordi Gali, Lee Ohanian, and Jose
Victor Rios-Rull. Beginning in the new year Christian
Zimmermann will join us and will have a special focus
on electronic publishing. In addition there will be
some planned turnover among the Associate editors.
We
have had a few lapses in our first two years but by
and large we have provided swift service and careful,
informed editing to authors. And of course, we are always
on the lookout for outstanding papers to publish in
future issues of RED. Please continue to support this
terrific journal by subscribing to it and by sending
us your outstanding papers.
Thomas
F. Cooley
Coordinating Editor
Review of Economic Dynamics
Society
for Economic Dynamics: Letter from the President
As
many of you remember, the 1999 SED meeting was held on June 27-30 in Alghero, Sardinia,
Italy. The meeting set new records both for the number
of participants and the number of papers presented.
The quality was pretty good too! Again I thank Tim Kehoe
and Antonio Merlo for organizing an exciting meeting
in a marvelous location. Particular thanks are also
due to the Sardinians who made all of us so welcome.
In
my view, the best news from Sardinia was the election
of Tom Cooley as the next President of the Society.
Tom serves as President-elect until his inauguration
at the 2000 meeting. The Council also endorsed a proposal
to start an e-newsletter as a supplement to the Review
of Economic Dynamics. Hopefully, you are reading this
message in the first edition of The EconomicDynamics
Newsletter. In addition to editing the Newsletter, its
founder, Christian Zimmermann, has taken over responsibility
for both the RED and SED web pages, now permanently
located on the web at http://www.economicdynamics.org/.
The
2000
meeting, the last meeting of century as anyone who
can count knows, will be held June 29 - July 1 in San
Jose, Costa Rica. Per Krusell will act as Program Chairman,
and Alberto Trejos is the organizer. INCAE is the hosting
institution, with the co-sponsorship of the Costa Rican
Central Bank. Information about submissions, hotels,
and extracurricular activities can also be found at
http://www.economicdynamics.org/.
This one promises to be another blockbuster meeting.
Don't miss it!
We
are in the process of considering locations for the
2001 meeting. If you are interested in proposing a site
and an organizing committee, please contact Tom Cooley
at cooleyto@ssb.rochester.edu.
Please
join again in support of the advancement of Economic
Dynamics. Information about how to pay your 2000 dues and your subscription
to the RED, the "best academic journal of 1998", is
available of the SED web site.
Sincerely,
Dale
T. Mortensen, President
Society for Economic Dynamics
Society
for Economic Dynamics: 2000 Meetings in Costa Rica
 The 2000 Meetings of the
Society for Economic Dynamics will be held June 29-July
2 (Thursday-Sunday), 2000 in San José, Costa Rica. The
conference is hosted by INCAE with the co-sponsorship of the Central Bank of Costa Rica. Registration and
welcome reception will be held on Wednesday, June 28,
2000. The conference director is Alberto Trejos and
the program organizer is Per Krusell. The
Society for Economic Dynamics solicits applications
for papers in all areas of dynamic economics to be presented
at this conference. Members and nonmembers are invited
to participate. The deadline for submissions is February
15, 2000. Please send an abstract, and a paper if available,
together with names, affiliations, addresses, and e-mail
addresses of all authors, either by mail, to
SED Conference
Institute for International Economic Studies
Stockholm University
S-106 91 Stockholm
SWEDEN
or
electronically. Electronic submissions have to satisfy
the following criteria in order to be considered:
- (i)
the file formats have to be postscript, pdf, dvi,
or Word;
- (ii)
the abstract has to be submitted as a separate file,
if a paper is also submitted; and
- (iii)
the file sizes are not to exceed 1 MB; file compression
is accepted, but please specify the compression
program.
The
address for electronic submissions is sed2000@iies.su.se.
Fax submissions will NOT be considered.
For
further information about the conference, and submission
and acceptance of papers, send an e-mail to sed2000@mail.incae.ac.cr (Alberto Trejos)
or sed2000@iies.su.se
(Per Krusell), or check the conference web page at http://www.incae.ac.cr/maestrias/sed/.
Software:
A new book on computational methods
While
the numerical analysis of stochastic dynamic equilibrium
models has made a lot of progress in the last decade
or two, the dissemination of this methodology has traditionally
been hampered by the relatively high investment necessary
to master its tools. To lower this cost, several chapters
in Thomas Cooley's "Frontiers of Business Cycle Research"
have been devoted to surveying and detailing some of
the computational methods available. The QM&RBC
home page (http:/dge.repec.org)
makes available some source code, but without much explanations.
The
recently published book entitled "Computational Methods
for the Study of Dynamic Economies", edited by Ramon
Marimon and Andrew Scott at Oxford University Press,
is entirely devoted to describing these methods and
in parallel provides example source codes on the web
at http://www.iue.it/Personal/Marimon/book/main.htm.
This book as emerged from the 1996 European Economic
Association Summer School and developed into a veritable
toolkit for economic researchers. It covers a wide range
of methods, from the standard iterative methods on linear
quadratic approximations, nonlinear methods using discrete
state-spaces or polynomials to solving highly complex
heterogeneous agent models, all detailed with examples.
EconomicDynamic
Links: The RePEc bibliographic database
RePEc
is a loose organization of volunteers who thrive to
increase the dissemination and availability of economic
research through the Internet. Participating institutions
contribute the data about their publications through
their Internet sites, data that is then included in
centralized databases. Currently, over 120 institutions
contribute to RePEc, totalling about 70'000 items of
research, 18'000 of which are available online. All
this information is available for free through several
popular services:
- BibEc,
http://netec.mcc.ac.uk/BibEc/, catalogs
items that are not online;
- WoPEc,
http://netec.mcc.ac.uk/WoPEc/, and
Inomics, http://www.inomics.com/,
catalog on line items;
- IDEAS,
http://ideas.repec.org/,
has all of them;
- NEP,
http://nep.repec.org/, is an
email
based notification service with about 40 field specific
mailing lists, including one on dynamic general
equilibrium.
Use
these services and encourage your institution or your
journal to have its research listed in RePEc!
Impressum
The
EconomicDynamics Newsletter is published twice a year
in April and November.
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