We develop an N-regime Markov-switching model in which the latent state variable driving the regime switching is endogenously determined with the model disturbance term. The models structure captures a wide variety of patterns of endogeneity and yields a simple test of the null hypothesis of exogenous switching. We derive an iterative filter that generates objects of interest, including the model likelihood function and estimated regime probabilities. Using simulation experiments, we demonstrate that the maximum likelihood estimator performs well in finite samples and that a likelihood ratio test of exogenous switching has good size and power properties. We provide results from two applications of the endogenous switching model: a three-state model of US business cycle dynamics and a three-state volatility model of US equity returns. In both cases, we find statistically significant evidence in favor of endogenous switching.

In this paper, we identify the technology shock at business cycle frequencies to improve the performance of structural vector autoregression models in small samples. To this end, we propose a new identification method based on the spectral decomposition of the variance, which targets the contributions of the shock in theoretical models. Results from a Monte-Carlo assessment show that the proposed method can deliver a precise estimate of the response of hours in small samples. We illustrate the application of our methodology using US data and a standard Real Business Cycle model. We find a positive response of hours in the short run following a non-significant, near-zero impact. This result is robust to a large set of credible parameterizations of the theoretical model.

Soon after the start of transition to a market economy in the early 1990s, Poland has experienced both a dramatic decline in the fertility rate and an increase in the share of students among young high-school graduates. These two processes significantly changed the age structure of population and average income characteristics of households. Using a general equilibrium model with heterogeneous households and uninsured income shocks, I try to assess the impact of these changes on the Polish economy as a whole and inequalities within it. I find that, in the long term, the positive effects of the educational change on output per capita will more than offset the negative impact of lower fertility. I also show that the educational change increases income and consumption inequalities, while the fertility change decreases inequality in assets.

This paper shows that money is a relevant macroeconomic indicator for the description of US monetary policy with simple rules. Empirical analysis based on novel real-time data reveals the economically and statistically significant effect of money on the federal funds rate during the Volcker–Greenspan era, highlighting an interest rate rule that better explains historical policy. The findings suggest that the bias against including money in mainstream macroeconomic models may be due to relying on an incorrect measure of money. A gradual deviation from this rule explains loose monetary policy prior to the Great Recession. Including money aggregates in rule-based policy presents a suitable framework to evaluate and guide Federal Reserve policy.

This paper provides estimates of the probability of an economy hitting its effective lower bound (ELB) on the nominal interest rate and of the expected duration of such an event for eight advanced economies. To that end, a mean-adjusted panel vector autoregression with static interdependencies and the possibility of regime change is estimated. The simulation procedure produces ELB risk estimates for both the short term, where the current phase of the business cycle plays an important role, and the medium term, where the occurrence of an ELB situation is determined mainly by the equilibrium values of macroeconomic variables. The paper also discusses the ELB event probability estimates with respect to previous approaches used in the literature.

The purpose of this paper is to focus directly on the phase shift. For one thing, we ask whether a New Keynesian sticky-price model economy can account for both countercyclical prices and procyclical inflation. We present findings in which the price level is countercyclical and the inflation rate is procyclical. We proceed to use the model economy as an identification mechanism. What set of individual shocks are necessary to account for the phase shift? That set contains the price markup shock. Next, we ask what set of shocks are sufficient to account for the phase shift. This set contains three elements: the price markup and wage markup shocks along with the government spending shock. The results are important as a building block. We infer that price stickiness is an important model feature; without price stickiness, we are in the real business cycle economies that Cooley and Hansen studied. But, it raises further questions. For instance, is price stickiness of the Calvo form—the one used here—necessary to explain the phase shift?

We analyze the welfare effects of asset bubbles in a model with income inequality and financial friction. We show that a bubble that emerges in the value of housing, a durable asset that is fundamentally useful for everyone, has regressive welfare effects. By raising the housing price, the bubble benefits high-income savers but negatively affects low-income borrowers. The key intuition is that, by creating a bubble in the market price, savers’ demand for the housing asset for investment purposes imposes a negative externality on borrowers, who only demand the housing asset for utility purposes. The model also implies a feedback loop: high-income inequality depresses the interest rates, facilitating the existence of housing bubbles, which in turn has regressive welfare effects.

Recent work on optimal monetary and fiscal policy in New Keynesian models has tended to focus on policy set by an infinitely lived benevolent policy maker, often with access to a commitment technology. In this paper, we explore deviations from this ideal, by allowing (time-consistent) policy to be set by a process of bargaining between two political players with different weights on elements of the social welfare function. We characterize the (linear) Markov perfect equilibrium and, in a series of numerical examples, we explore the resultant policy response to shocks which cannot be perfectly offset with the available instruments due to their fiscal consequences. We find that, even although the players, on average, have the socially desirable objective function, the process of bargaining implies an outcome which deviates from the time-consistent policy chosen by the benevolent policy maker. Moreover, the range of instruments available mean that policy makers will bargain across the entire policy mix, sometimes implying outcomes which are quite different from those that would be chosen by a single policy maker. These policy outcomes depend crucially on the nature of the conflict and also the level of government debt.

This paper studies the implications of price flexibility on output volatility under menu costs and finds price flexibility to be output-destabilizing under supply shocks, but not necessarily so under demand shocks. We illustrate that such a result hinges on the extent to which firms can adjust along both the intensive and the extensive margins, the latter of which is often absent in the literature.

This paper compares different implementations of monetary policy in a new-Keynesian setting. We can show that a shift from Ramsey optimal policy under short-term commitment (based on a negative feedback mechanism) to a Taylor rule (based on a positive feedback mechanism) corresponds to a Hopf bifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (inflation and output gap) are forward-looking variables in the new-Keynesian theory.