Firm-specific capital, inflation persistence and the sources of business cycles

Madeira, Joao

doi:10.1016/j.euroecorev.2014.12.004

Cited by 5 publications

(3 citation statements)

References 40 publications

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“…Addressing this critique has resulted in various "hybrid" variants of the NKPC featuring both forward and backward-looking components, which have been theoretically motivated in several ways (see e.g., Fuhrer and Moore (1995), Christiano et al (2005) and Galí and Gertler (1999)). Nevertheless, researchers continue to pursue more satisfying approaches to address inflation persistence (see Romer (2011) and Madeira (2015)). Another important criticism is the reliance of standard New Keynesian models on a strict form of rational expectations (RE) (see among others Rudd and Whelan (2006), and Carriero (2008) To address these criticisms, this paper relaxes the RE assumption and proposes a model of inflation dynamics characterized by behavioral heterogeneous expectations.…”

Section: Robert Solowmentioning

confidence: 99%

Behavioral Heterogeneity in U.S. Inflation Dynamics

Cornea,

Hommes,

Massaro

2013

SSRN Journal

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In this paper we develop and estimate a behavioral model of inflation dynamics with heterogeneous firms. In our stylized framework there are two groups of price setters, fundamentalists and random walk believers. Fundamentalists are forwardlooking in the sense that they believe in a present-value relationship between inflation and real marginal costs, while random walk believers are backward-looking, using the simplest rule of thumb, naive expectations, to forecast inflation. Agents are allowed to switch between these different forecasting strategies conditional on their recent relative forecasting performance. We estimate the switching model using aggregate and survey data. Our results support behavioral heterogeneity and the significance of evolutionary learning mechanism. We show that there is substantial time variation in the weights of forward-looking and backward-looking behavior. Although on average the majority of firms use the simple backward-looking rule, the market has phases in which it is dominated by either the fundamentalists or the random walk believers.

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Section: Robert Solowmentioning

confidence: 99%

Behavioral Heterogeneity in U.S. Inflation Dynamics

Cornea,

Hommes,

Massaro

2013

SSRN Journal

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“…Firm-specific production factors, as in Woodford (2005), are among the few frictions absent from the model. For an empirical assessment of firm-specific employment see Madeira (2014) and for firm specific capital see Madeira (2015).…”

Section: Introductionmentioning

confidence: 99%

Assessing the Empirical Relevance of Labour Frictions to Business Cycle Fluctuations

Madeira

2017

Oxf Bull Econ Stat

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This paper describes a dynamic stochastic general equilibrium model augmented with labour frictions, namely: indivisible labour, predetermined employment and adjustment costs. This improves the fit to the data as shown by a higher log marginal likelihood and closer match to key business cycle statistics. The labour frictions introduced are relevant for model dynamics and economic policy: the effect of total factor productivity shocks on most macroeconomic variables is substantially mitigated; fiscal policy leads to a greater crowding out of private sector activity and monetary policy has a lower impact on output. Labour frictions also provide a better match to impulse response functions from vector autoregressive models.

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“…4 4 The few empirically relevant rigidities not included in the model include firm‐specific capital (Madeira, 2015 and Woodford, 2005) and firm‐specific employment (Madeira, 2014). …”

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confidence: 99%

Extrapolative expectations and macroeconomic dynamics: Evidence from an estimated DSGE model

Bask

Madeira

2020

Int. J Fin Econ

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We outline a dynamic stochastic general equilibrium (DSGE) model with extrapolative expectations in asset pricing and fit the model to 50 years of quarterly U.S. macroeconomic time series data with Bayesian techniques. We conclude that extrapolative expectations in asset pricing are statistically significant, quantitatively relevant and result in a substantial improvement in the model's fit to the data. In particular, extrapolative expectations in asset pricing lead to more pronounced hump‐shaped responses in the asset price and investment to shocks, and the model matches the degree of persistence observed in the asset price data significantly better than the alternative DSGE models considered here, which are the Smets and Wouters (2007; American Economic Review, 97, 586–606) model, including a variant of the model with pre‐determined investment expenditures, and the Gilchrist, Ortiz, and Zakrajsek (2009; Credit risk and the macroeconomy: Evidence from an estimated DSGE model. Mimeo) financial frictions model. Our findings are confirmed by numerous robustness exercises, including different prior assumptions, different sample periods and different time series variables, both excluding asset price data and the use of different asset price measures.

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Firm-specific capital, inflation persistence and the sources of business cycles

Cited by 5 publications

References 40 publications

Behavioral Heterogeneity in U.S. Inflation Dynamics

Behavioral Heterogeneity in U.S. Inflation Dynamics

Assessing the Empirical Relevance of Labour Frictions to Business Cycle Fluctuations

Extrapolative expectations and macroeconomic dynamics: Evidence from an estimated DSGE model

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