On the stability of Calvo-style price-setting behavior

Lhuissier, St Ephane; Zabelina, Margarita

doi:10.1016/j.jedc.2015.05.002

Cited by 10 publications

(5 citation statements)

References 73 publications

(76 reference statements)

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“…More recently, following the work of Bianchi (2013), an increasing literature embeds both Markov-switching changes in the conduct of policy and heteroskedasticity in DSGE models to study the variability of macroeconomic fluctuations [Davig and Doh (2014); Bianchi and Ilut (forthcoming); Lhuissier and Zabelina (2015)]. Interestingly, our results seem to be in line with those of Bianchi (2013), who finds that although the estimates support the possibility of changes in monetary policy, these are not enough to explain the substantial reduction in macroeconomic volatility.…”

Section: Introductionsupporting

confidence: 65%

The Regime-Switching Volatility of Euro Area Business Cycles

Lhuissier

2017

Macroecon. Dynam.

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We document the strong evidence of time variation in the volatility of Euro Area business cycles since 1970. Then we provide the quantitative sources of these changes using a medium-scale DSGE model allowing time variation in structural disturbance variances. We show that (1) the size of different types of shock oscillates, in a synchronized manner, between two regimes over time, with the high-volatility regime prevailing predominantly in the 1970s, sporadically in the 1980s and 1990s, and during the Great Recession; (2) their relative importance remains, however, unchanged across regimes, where neutral technology shocks and marginal efficiency of investment shocks are the dominant sources of business cycle fluctuations; and 3) these investment shocks, which affect the transformation of savings into productive capital, can be interpreted as an indicator of credit conditions.

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Section: Introductionsupporting

confidence: 65%

The Regime-Switching Volatility of Euro Area Business Cycles

Lhuissier

2017

Macroecon. Dynam.

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“…Second, our MS-SVAR model properly takes into account the heteroskedasticity in U.S. macroeconomic disturbances, while their model does not. Indeed, Sims (2001), and more recently Lhuissier and Zabelina (2015), have shown the importance of capturing heteroskedasticity before allowing changes in economic dynamics in order to avoid misleading results. In Lindé, Smets, and Wouters (2016), only the monitoring cost parameter is allowed to change over time while shock variances remain constant.…”

Section: Further Discussion Of μmentioning

confidence: 99%

“…From a methodological standpoint, this paper is related to a growing literature dealing with the estimation and simulation of DSGE models in which stochastic volatilities and structural parameters are allowed to follow Markov-switching processes. This literature includes, among others, Zha (2011), Bianchi (2013), Davig and Doh (2014), Lhuissier and Zabelina (2015), Melosi (2017), andLhuissier (2018). The standard approach for inference in MS-DSGE models employed by all of these papers is to build the state-space representation of the MS-DSGE models adapted from the standard Kim and Nelson (1999) filter.…”

Section: Literature Reviewmentioning

confidence: 99%

Regime‐dependent effects of uncertainty shocks: A structural interpretation

Lhuissier

Tripier

2021

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Using a Markov‐switching VAR, we show that the effects of uncertainty shocks on output are four times higher in a regime of economic distress than in a tranquil regime. We then provide a structural interpretation of these facts. To do so, we develop a business cycle model in which agents are aware of the possibility of regime changes when forming expectations. The model is estimated using a Bayesian minimum distance estimator that minimizes, over the set of structural parameters, the distance between the regime‐switching VAR‐based impulse response functions and those implied by the model. Our results point to worsening credit‐market conditions that amplify shocks during distress periods. Finally, we show that the expectation effect of regime switching in financial conditions is an important component of the financial accelerator mechanism. If agents are more pessimistic about future financial conditions, then the output effects of shocks are amplified.

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“…1 The assumption in the standard New Keynesian model is that the interest rate rule followed by the central bank does not change across the business cycle. Theoretical studies such as Barthélemy and Marx (2017), Best and Hur (2017), Bianchi (2013), Chang and Kwak (2017), Davig and Doh (2014), Foerster (2016), Lhuissier and Zabelina (2015), Liu et al (2009), Liu et al (2011), Schorfheide (2005), and others now consider switches in monetary policy and their macroeconomic implications in Dynamic Stochastic General Equilibrium (DSGE) frameworks. Notably, Choi and Foerster (2016) find that monetary policy rules with switching can provide welfare gains relative to constant rules.…”

Section: Introductionmentioning

confidence: 99%

Timing and Signals of Monetary Regime Switching

Soques

2020

Macroecon. Dynam.

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This study investigates if the reaction function of the Federal Reserve switches between two distinct policy rules. Using a time-varying transition probability framework, we also determine if forward-looking macroeconomic or financial covariates signal an impending monetary regime switch. We find that US monetary policy is best described by a Markov-switching model with two regime processes, one of which controls for heteroskedasticity in the shocks to the policy rule. We find that the Fed switches between an aggressive regime with a relatively high weight on inflation and a dovish regime that is less responsive to inflationary pressures. We find that an increase in private forecasters’ expectations of an impending recession signals a switch from the more aggressive policy regime to the less aggressive regime. A recovery in equity returns signals a return back to the more aggressive regime.

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On the stability of Calvo-style price-setting behavior

Cited by 10 publications

References 73 publications

The Regime-Switching Volatility of Euro Area Business Cycles

The Regime-Switching Volatility of Euro Area Business Cycles

Regime‐dependent effects of uncertainty shocks: A structural interpretation

Timing and Signals of Monetary Regime Switching

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