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We describe how capital accumulation and the network structure of US production interact to amplify the effects of sectoral trend growth rates in total factor productivity and labor on trend GDP (gross domestic product) growth. We...
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We describe how capital accumulation and the network structure of US production interact to amplify the effects of sectoral trend growth rates in total factor productivity and labor on trend GDP (gross domestic product) growth. We derive expressions that conveniently summarize this long-run amplification effect by way of sectoral multipliers. We estimate that sector-specific factors have historically accounted for approximately three-fourths of long-run changes in GDP growth. Trend GDP growth fell by nearly 3 percentage points over the postwar period, with especially significant contributions from the Construction sector in 1950–80 and the Durable Goods sector in 2000–2018. No sector has contributed any steady significant increase to the trend growth rate of GDP in the past 70 years.
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Differences between yields on comparable-maturity U.S. Treasury nominal and real debt, the so-called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expe...
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Differences between yields on comparable-maturity U.S. Treasury nominal and real debt, the so-called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage-free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long-term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average.
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In response to the global financial crisis that started in August 2007, central banks provided extraordinary amounts of liquidity to the financial system. To investigate the effect of central bank liquidity facilities on term inte...
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In response to the global financial crisis that started in August 2007, central banks provided extraordinary amounts of liquidity to the financial system. To investigate the effect of central bank liquidity facilities on term interbank lending rates near the start of the crisis, we estimate a six-factor arbitrage-free model of U.S. Treasury yields, financial corporate bond yields, and term interbank rates. This model can account for fluctuations in the term structure of credit and liquidity spreads observed in the data. A significant shift in model estimates after the announcement of the liquidity facilities suggests that these central bank actions did help lower the liquidity premium in term interbank rates.
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We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of f...
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We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of federal grant distributions among states, we construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. We find that shocks to federal highway funding positively affect local GDP both on impact and after six to eight years. However, we find no permanent effect (as of ten years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. Our results suggest that the transmission channel for these responses operates through initial funding leading to building, over several years, of public highway capital, which then temporarily boosts private sector productivity and local demand. To help interpret these findings, we develop an open economy new Keynesian model with productive public capital in which regions are part of a monetary and fiscal union. We show that our empirical responses are qualitatively consistent with an initial effect due to nominal rigidities and a subsequent medium-term productivity effect that arises once the public capital is put in place and available for production.
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We propose a new approach to estimating central bank preferences,including the implicit inflation target,that requires no priors on the underlying macroeconomic structure nor observation of monetary policy actions.Our approach ent...
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We propose a new approach to estimating central bank preferences,including the implicit inflation target,that requires no priors on the underlying macroeconomic structure nor observation of monetary policy actions.Our approach entails directly estimating the central bank's objective function from the sentiment expressed by policymakers in their internal meetings.We apply the approach to the objective function of the U.S.Federal Open Market Committee(FOMC).The results challenge two key aspects of conventional wisdom regarding FOMC preferences.First,the FOMC had an implicit inflation target of approximately 1 1/2 % on average over our baseline 2000-11 sample period,significantly below the commonly assumed value of 2.Second,the FOMC's loss depends strongly on output growth and stock market performance and less so on their perception of current economic slack.
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We show that cyclical fluctuations in search and recruiting intensity are quantitatively important for explaining the weak job recovery from the Great Recession. We demonstrate this result using an estimated labor search model tha...
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We show that cyclical fluctuations in search and recruiting intensity are quantitatively important for explaining the weak job recovery from the Great Recession. We demonstrate this result using an estimated labor search model that features endogenous search and recruiting intensity. Since the textbook model with free entry implies constant recruiting intensity, we introduce a cost of vacancy creation, so that firms respond to aggregate shocks by adjusting both vacancies and recruiting intensity. Fluctuations in search and recruiting intensity driven by shocks to productivity and the discount factor help bridge the gap between the actual and model-predicted job filling rate.
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We show that conventional dynamic term structure models (DTSMs) estimated on recent U.S. data severely violate the zero lower bound (ZLB) on nominal interest rates and deliver poor forecasts of future short rates. In contrast, sha...
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We show that conventional dynamic term structure models (DTSMs) estimated on recent U.S. data severely violate the zero lower bound (ZLB) on nominal interest rates and deliver poor forecasts of future short rates. In contrast, shadow-rate DTSMs account for the ZLB by construction, capture the resulting distributional asymmetry of future short rates, and achieve good forecast performance. These models provide more accurate estimates of the most likely path for future monetary policy-including the timing of policy liftoff from the ZLB and the pace of subsequent policy tightening. We also demonstrate the benefits of including macroeconomic factors in a shadow-rate DTSM when yields are constrained near the ZLB.
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We examined the effect of foreign entry into bond market underwriting activity using issue-level data from the Japanese "Samurai" and euro-yen bond markets. We found that the fees charged by Japanese underwriters were higher on av...
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We examined the effect of foreign entry into bond market underwriting activity using issue-level data from the Japanese "Samurai" and euro-yen bond markets. We found that the fees charged by Japanese underwriters were higher on average than those of foreign underwriters, but the difference could be explained by conditioning on issue characteristics. Our results also suggest that bond issuers sorted properly across underwriters, as switching across underwriter nationalities would be expected to result in higher fees. However, the savings enjoyed by firms issuing with foreign underwriters were modest and statistically insignificant, while those of firms issuing with Japanese underwriters were substantial and statistically significant. This result suggests that Japanese underwriters priced their services aggressively over the sample period, perhaps in an effort to retain or gain market share. This conjecture is supported by a matching exercise that examined the liberalization of foreign underwriter access to the Samurai bond market, using euro-yen bond issues as a control. Foreign entry led to a statistically and economically significant decrease of 16 basis points on average in underwriting fees in the Samurai bond market. Overall, our results suggest that the international market for Japanese bond underwriting services was partially segmented by nationality as issuers appear to have preferred habitats, but that liberalization increased overall market competition.
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For over two decades, researchers have provided evidence that the yield curve, specifically the spread between long- and short-term interest rates, contains useful information for signaling future recessions. Despite these finding...
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For over two decades, researchers have provided evidence that the yield curve, specifically the spread between long- and short-term interest rates, contains useful information for signaling future recessions. Despite these findings, forecasters appear to have generally placed too little weight on the yield spread when projecting declines in the aggregate economy. Indeed, we show that professional forecasters are worse at predicting recessions a few quarters ahead than a simple real-time forecasting model that is based on the yield spread. This relative forecast power of the yield curve remains a puzzle. The appendix is included online as supplementary material.
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Since the end of the Great Recession in mid-2009, the unem-ployment rate has recovered slowly, falling by only 1 percentage point from its peak by September 2011. We find that the lackluster labor market recovery can be traced in ...
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Since the end of the Great Recession in mid-2009, the unem-ployment rate has recovered slowly, falling by only 1 percentage point from its peak by September 2011. We find that the lackluster labor market recovery can be traced in large part to weakness in aggregate demand; only a small part seems attributable to increases in labor market frictions. This continued labor market weakness has led to the highest level of long-term unemployment in the postwar period and a blurring of the distinction between unemployment and nonparticipation in the labor force. We show that flows from nonparticipation to unemployment are important for understanding recent changes in the dura-tion distribution of unemployment. Simulations that account for these flows suggest that the labor market is unlikely to be subject to high levels of struc-tural long-term unemployment after aggregate demand recovers.
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