This paper provides a new growth model by considering strategic behaviour in the supply of labour. Workers form a labour union with the aim of manipulating wages for their own benefit. We analyse the implications on labour market dynamics at business cycle frequencies of getting away from the price-taking assumption. A calibrated monetary version of the union model does quite a reasonable job in replicating the dynamic features of labour market variables observed in post-war U.S. data.

This paper estimates a standard version of the New Keynesian Monetary (NKM) model in order to study the role played by stock market returns in the estimated U.S. monetary policy rule. The estimation procedure implemented is a classical structural method based on the indirect inference principle. The estimation results show that the Fed responds to stock market returns in addition to the standard macroeconomic indicators only under a backward-looking Taylor rule suggesting that monetary policy does not react independently to stock returns.

This paper analyzes the dynamic features displayed by alternative rational expectations equilibria in the context of a simple present value model with feedback. We show how these features change for small perturbations of the parameters characterizing the forcing variable process. Moreover, we derive some implications of the analysis for both econometric practice and econometric policy evaluation. In particular, our analysis illustrates scenarios where we cannot rule out the possibility that an economy may switch from a `Lucas proof' equilibrium to an equilibrium which is not immune to the Lucas Critique when some economic policies are implemented.

The intrinsic bubble characterizing the exchange rate dynamics in the discrete time version of target zone models is analyzed. It is found that the intrinsic bubble in the basic target zone model follows in general an explosive first-order autoregressive process. This result explains the U-shaped distribution of the exchange rate in this model. However, the nonlinear and the uniqueness properties so frequently associated with the intrinsic bubble are not robust for an important class of fundamental processes.

The model developed in this paper builds on Cagan's demand for money by considering that a share of government expenditure is spent on servicing foreign debt obligations and fixed in foreign currency. Given this fiscal policy the choice of the depreciation rate implies a passive money supply rule. We show in this model that two types of high-inflation path exist. One type is driven by crawling peg rules of the official exchange rate and is characterized by the saddle-stable path dynamics. The other type characterizes hyperinflationary dynamics. This latter type is a consequence of the global dynamics of the model. The existence of these two types of path can generate recurrent hyperinflation. Moreover, hyperinflation can arise independently of government spending.

Two versions of Cagan's model are estimated to analyse whether or not the money supply was endogenous during the German hyperinflation. The first version is the original version of Cagan's model with rational expectations. The second version, which is called alternative version, builds on Cagan's model by considering that the semi-elasticity of the demand for money is a time-varying parameter. The estimation results for both models support the hypotheses that the alternative version provides a better fit to the German hyperinflation data than the original version, and that the money supply was endogenous.

The model introduced assumes that the demand for money is a function of the expected inflation rate and expected depreciation rate of the domestic currency, characterizing the costs of holding money. In addition, the depreciation rate is assumed to follow a crawling peg rule in which the rate of depreciation is adjusted in proportion to the gap between the rate of inflation and the rate of depreciation. This model is estimated using a GMM technique called estimation by simulation. The empirical results show that the model introduced in this paper fits the data better than Cagan's model. Moreover, they show that foreign nominal assets were closer substitutes for domestic money than were real assets during German hyperinflation.

Using US data for the period 1967:5-2002:4 this paper empirically investigates the performance of a Fed funds rate reaction function (from now on, FRF) that (i) allows for the presence of switching regimes; (ii) considers the long-short term spread in addition to the typical variables; and (iii) uses an alternative monthly indicator of general economic activity suggested by Stock and Watson (1999). The estimation results show the existence of three switching regimes, two characterized by low volatility and the third by high volatility. Moreover, the scale of the responses of the Federal funds rate to movements in the rate of inflation and the economic activity index depends on the regime. The estimation results also show robust empirical evidence that the importance of the term spread in the FRF has increased over the sample period and the FRF was more stable during the term of office of Chairman Greenspan than in the pre-Greenspan period.

In this paper we estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure in order to analyze two issues. First, we analyze the effect of introducing an explicit term structure channel in the NKM model on the estimated parameter values of the model, with special emphasis on the interest rate smoothing parameter using data for the Eurozone. Second, we study the ability of the model to reproduce some stylized facts such as highly persistent dynamics, the weak comovement between economic activity and inflation, and the positive, strong comovement between interest rates observed in actual Eurozone data. The estimation procedure implemented is a classical structural method based on the indirect inference principle.

This paper empirically studies the dynamic relationship between monetary and fiscal policies by analyzing the comovements between the Fed funds rate and the primary deficit/output ratio. Simple economic thinking establishes that a negative correlation between Fed rate and deficit arises whenever the two policy authorities share a common stabilization objective. However, when budget balancing concerns lead to a drastic deficit reduction the Fed may reduce the Fed rate in order to smooth the impact of fiscal policy, which results in a positive correlation between these two policy instruments. The empirical results show (i) a significant negative comovement between Fed rate and deficit and (ii) that deficit and output gap Granger-cause the Fed funds rate during the post-Volcker era, but the opposite is not true.

This paper analyzes the performance of alternative versions of the New Keynesian Monetary (NKM) model in replicating the comovement observed between output and inflation. Following Den Haan (2000), we analyze comovement by computing the correlations of VAR forecast errors of the two variables at different forecast horizons. The empirical correlation is negative and marginally significant for the one-ahead forecast horizon, but the correlations are non-significant for the other forecast horizons studied. In contrast, a simple NKM model under a standard parameterization provides a high and significant negative comovement at all forecast horizons. However, a generalized version including habit formation and a forward-looking Taylor rule is able to mimic the observed weak comovement at medium- and long-term forecast horizons.

This paper compares the performance of a log-linear method and a parameterized expectations method in solving a dynamic general equilibrium endogenous growth model with human capital. Quantitative evaluation based on second moment statistics shows that the results provided by the two numerical methods are very similar in this framework whenever the propagation mechanism of technology shocks is weak. However, the cross correlations of some relevant variables in the RBC literature obtained from the two methods are significantly different when the model exhibits a strong propagation mechanism. The parameterized expectations method captures the sensitiviness of second moment statistics to the curvature of the utility function while the log-linear method does not.

This paper studies the comovement between output and prices in the EU15 countries. Following Den Haan (2000), I use the correlations of VAR forecast errors at different horizons in order to analyze the dynamics in the output-price relationship. The empirical results show that ten countries display a significant negative comovement between output and prices in the `long-run' whereas this is positive in the `short-run' only for three countries. Finally, four countries do not exhibit any significant comovement.

Farmer (1991) suggests that in a model in which there are multiple rational expectations equilibria agents may find it useful to coordinate their expectations in a unique rational expectations equilibrium which is supported by a self-fulfilling forecast rule having the property of being immune to the Lucas Critique. In this paper, we test Farmer's hypothesis using data from hyperinflationary episodes. We believe that those episodes are suitable for testing this hypothesis because an agent who lives in a hyperinflationary environment usually faces frequent changes in policy regime. The agent may thus choose a self-fulfilling forecast rule which is immune to the Lucas Critique as a way of hedging against unanticipated policy regime switches. The empirical results show mixed evidence on Farmer's hypothesis during the hyperinflationary episodes studied.

We develop an inflationary finance model where transaction costs of the type suggested by Barro (1976) are assumed. The model implies that there is a single unstable steady state. This result is in sharp contrast to those of traditional inflationary finance literature in which there exists the possibility of dual steady states and a high-inflation trap. In our model, inflation increases at an increasing rate along the hyperinflationary path, as it does during hyperinflationary episodes, until it reaches an upper bound. Moreover, we show that the inflation rate reaches a higher upper bound when the country is more financially developed and private resources are larger.

This paper analyzes the existence of an inflation-tax Laffer curve (ITLC) in the context of two standard optimizing monetary models where agents' preferences are characterized by a constant relative risk aversion utility function. Explosive hyperinflation rules out the presence of an ITLC. In the context of a cash-in-advance economy, this paper shows that explosive hyperinflation is feasible and thus an ITLC is ruled out whenever the relative risk aversion parameter is greater than one. In a money-in-the-utility function model, it is shown that (i) an ITLC is also ruled out and (ii) explosive hyperinflations are more likely when the transactions role of money is more important.

This paper analyzes the cyclical properties of a generalized version of the Uzawa-Lucas endogenous growth model. We study the dynamic features of different cyclical components of this model characterized by a variety of decomposition methods. The decomposition methods considered can be classified in two groups. On the one hand, we consider three statistical filters: the Hodrick-Prescott filter, the Baxter-King filter and Gonzalo-Granger decomposition. On the other hand, we use four model-based decomposition methods. The latter decomposition procedures share the property that the cyclical components obtained by these methods preserve the log-linear approximation of the Euler-equation restrictions imposed by the agent's intertemporal optimization problem. The paper shows that both model dynamics and model performance vary substantially across decomposition methods. A parallel exercise is carried out with a standard real business cycle model. The results should help researchers to better understand the performance of the Uzawa-Lucas model in relation to standard business cycle models under alternative definitions of the business cycle.

This paper analyzes the dynamic features displayed by alternative rational expectatioms equilibria in the context of the present value for stock prices with feedback. In particular, it shows that there exists a unique equilibrium implying cointegration and that equilibrium is characterized by either the fundamental or, alternatively, the backward solution depending on the size of the feedback parameter. It is shown analytically that the existence of switching equilibria induces large stock market swings. Using US data and structural estimation, the hypotheses of feedback and switching equilibria are tested. The empirical results provide evidence of both switching equilibria and feedback.

Farmer (1991) suggests that in a model in which there are multiple rational expectations (RE) equilibria agents may find it useful to coordinate their expectations in a unique RE equilibrium which is immune to the Lucas Critique. In this paper, we evaluate Lucas proof (LP) equilibrium performance in the context of the term structure of interest rates model by using post-war US data. Estimation results show that LP equilibrium exhibits some important features of the data that are not reproduced by the fundamental equilibrium. For instance, the short rate behaves as a random walk in a regime characterized by low conditional volatility, whereas the term spread Granger-causes changes in the short-rate in periods characterized by high conditional volatility.

This paper estimates a standard version of the New Keynesian monetary (NKM) model under alternative specifications of the monetary policy rule using U.S. and Eurozone data. The estimation procedure implemented is a classical method based on the indirect inference principle. An unrestricted VAR is considered as the auxiliary model. On the one hand, the estimation method proposed overcomes some of the shortcomings of using a structural VAR as the auxiliary model in order to identify the impulse response that defines the minimum distance estimator implemented in the literature. On the other hand, by following a classical approach we can further assess the estimation results found in recent papers that follow a maximum-likelihood Bayesian approach. The estimation results show that some structural parameter estimates are quite sensitive to the specification of monetary policy. Moreover, the estimation results in the U.S. show that the fit of the NKM under an optimal monetary plan is much worse than the fit of the NKM model assuming a forward-looking Taylor rule. We also find, in contrast to the literature, evidence of indeterminacy under the best fitting monetary policy rule under the Greenspan era. In contrast to the U.S. case,in the Eurozone the best fit is obtained assuming a backward-looking Taylor rule and determinacy holds, but the improvement is rather small with respect to assuming either a forward-looking Taylor rule or an optimal plan.