Advanced Macroeconomics

Transcription

1 Advanced Macroeconomics Module 3: Empirical models & methods 1. Outline Stylized Facts Trends and Cycles in GDP Alessio Moneta Institute of Economics Scuola Superiore Sant Anna, Pisa March 2018 LM in Economics Scuola Superiore Sant Anna - Università di Pisa Macroeconomic fluctuations 1/43

2 Outline of the module: Empirical models & methods in macroeconomics Business cycles: definition and identification Stylized facts in macroeconomic fluctuations Trends and cycles in macroeconomic variables Empirical relationships: Income and unemployment Income (unemployment) and inflation (wages) Income and money (monetary policy rules) Income and fiscal policy Income and consumption Methodological issues: Causality (theory driven vs. data driven) Testing theoretical models Macroeconomic fluctuations 2/43

3 Business cycles: definition and identification Macroeconomic fluctuations 3/43

4 Industrial production index in US, (monthly, seasonally adj.) Macroeconomic fluctuations 4/43

5 Industrial production index in US, (monthly, seasonally adj.) logarithmic scale Macroeconomic fluctuations 5/43

6 Production in Total Manufacturing for Italy. Macroeconomic fluctuations 6/43

7 A definition of macroeconomics The central goal of macroeconomics is to provide coherent and robust explanations of aggregate movements of output, employment and the price level, in both the short run and the long run. (cfr. Snowdon and Vane, 2005: 304) Macroeconomic fluctuations 7/43

8 Business cycles Arthur Burns and Wesley Mitchell, Measuring the Business Cycles (1946): Business cycles are a type of fluctuations found in the aggregate economic activity of nations that organise their work mainly in business enterprises. A cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle: this sequence of changes is recurrent but not periodic, in duration business cycles vary from more than one year to ten or twelve years Main features: alternation of states (ups and downs) of the economy; recurrence; rough coherence between different measures of the economy. Macroeconomic fluctuations 8/43

9 Real GDP per capita, US , quarterly, seasonally adj. Macroeconomic fluctuations 9/43

10 Real GDP, US , quarterly, seasonally adj. Macroeconomic fluctuations 10/43

11 Real GDP, Italy , quarterly, seasonally adj. Macroeconomic fluctuations 11/43

12 GDP in US, Japan and Italy. 130 Gross Domestic Product by Expenditure in Constant Prices: Total Gross Domestic Product for Italy, 2001:Q1=100 Real Gross Domestic Product, 2001:Q1=100 Gross Domestic Product by Expenditure in Constant Prices: Total Gross Domestic Product for Japan, 2001:Q1= (Index) research.stlouisfed.org Macroeconomic fluctuations 12/43

13 Hourly labour productivity: Italy vs. Germany Sources: Manasse (2013), The roots of italian stagnation, Macroeconomic fluctuations 13/43

14 Terminology Trend: dominant path of a macroeconomic time series indicating economic activity (e.g. real GDP) Cycle: fluctuations around this trend alternating peaks and troughs Recession (aka slump, contraction, bust): period between peak and trough Macroeconomic fluctuations 14/43

15 Terminology Trend: dominant path of a macroeconomic time series indicating economic activity (e.g. real GDP) Cycle: fluctuations around this trend alternating peaks and troughs Recession (aka slump, contraction, bust): period between peak and trough Macroeconomic fluctuations 14/43

16 Terminology Trend: dominant path of a macroeconomic time series indicating economic activity (e.g. real GDP) Cycle: fluctuations around this trend alternating peaks and troughs Recession (aka slump, contraction, bust): period between peak and trough Macroeconomic fluctuations 14/43

17 Terminology NBER definition of recession for US: ( significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales CEPR definition of recession for euro area: ( a significant decline in the level of economic activity, spread across the economy of the euro area, usually visible in two or more consecutive quarters of negative growth in GDP, employment and other measures of aggregate economic activity for the euro area as a whole Macroeconomic fluctuations 15/43

18 Terminology NBER definition of recession for US: ( significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales CEPR definition of recession for euro area: ( a significant decline in the level of economic activity, spread across the economy of the euro area, usually visible in two or more consecutive quarters of negative growth in GDP, employment and other measures of aggregate economic activity for the euro area as a whole Macroeconomic fluctuations 15/43

19 Terminology Expansion (aka boom, recovery): period between trough and peak Depression: A particularly severe recession (in terms of percentage change and duration), e.g. US Great Depression of ; 2009-? Greek depression Growth recession (slowdown): period of slower than trend growth Cycle: (i) period between trough and next trough: (ii) period between peak and next peak. Macroeconomic fluctuations 16/43

20 A stylizes macroeconomic time series Source: Hoover K.D. (2012) Applied Intermediate Macroeconomics, Cambridge University Press, Figure 5.6. Macroeconomic fluctuations 17/43

21 Stylized facts about macroeconomic fluctuations Macroeconomic fluctuations 18/43

22 Facts about economic fluctuations 1 No clear and simple regularity in the cyclical pattern 2 Symmetries and asymmetries in output movements 3 Fluctuations are distributed very unevenly over the components of output 4 Co-movements 5 Some regularities in recessions Cfr. Romer D. (2012) op.cit, sec. 5.1 Macroeconomic fluctuations 19/43

23 1. Regular cycles? Table: Recessions in the United States since World War II Number of months Change in real GDP Highest Recession dates from peak to through from peak to through unemployment rate* Nov Oct % 7.9% July 1953-May Aug Apr Apr Feb Dec Nov Nov Mar Jan July July 1981-Nov July 1990-Mar Mar Nov Dec June *included the aftermath period of the recession Source: NBER Macroeconomic fluctuations 20/43

24 2. Symmetries and asymmetries In US output growth is distributed roughly symmetrically around its mean In US (post-world War II) the expansion phase is longer (about five times) than the recession phase Macroeconomic fluctuations 21/43

25 2. Symmetries and asymmetries Real GDP Growth Rates, US percent per year quarterly growth rate (compound annual) annual growth rate mean a. growth rate years Macroeconomic fluctuations 22/43

26 3 Heterogeneous behaviour of output components Table: Behaviour of the components of output in recessions Average share in fall Average share in GDP in recessions Components of GDP in real GDP relative to normal growth Consumption Durables 8.9% 14.6% Nondurables Services Investment Residential Fixed nonresidential Change in inventories Net exports Government purchases Source: Romer D. (2012) Advanced Macroeconomics, Mc Graw Hill, Table 5.2. Macroeconomic fluctuations 23/43

27 4. Co-movements Variable Direction Timing Production Industrial production Procyclical Coincident Expenditure Consumption Procyclical Coincident Business fixed investment Procyclical Coincident Residential investment Procyclical Leading Inventory investment Procyclical Leading Government purchase Procyclical - Labour market variables Employment Procyclical Coincident Unemployment Countercyclical No clear pattern Average labour productivity Procyclical Leading Real wage Procyclical - Money supply and inflation Money supply Procyclical Leading Inflation Procyclical Lagging Financial variables Stock prices Procyclical Leading Nominal interest rates Procyclical Lagging Real interest rates Acyclical - Source: Abel, A.B. and Bernanke, B.S. (2001) Macroeconomics, Addison-Wesley, p. 288 Snowdon B. and Vane, H.R. (2005) Modern Macroeconomics, Efward Elgar, p. 306 Macroeconomic fluctuations 24/43

28 Industrial Production Index (Index 2007=100) Source: Board of Governors of the Federal Reserve System (US) Shaded areas indicate US recessions research.stlouisfed.org Macroeconomic fluctuations 25/43

29 Civilian Unemployment Rate (Percent) Source: US. Bureau of Labor Statistics Shaded areas indicate US recessions research.stlouisfed.org Macroeconomic fluctuations 26/43

30 Civilian Employment 150, , ,000 (Thousands of Persons) 120, , ,000 90,000 80,000 70,000 60,000 50, Source: US. Bureau of Labor Statistics Shaded areas indicate US recessions research.stlouisfed.org Macroeconomic fluctuations 27/43

31 Nonfarm Business Sector: Real Compensation Per Hour Nonfarm Business Sector: Real Output Per Hour of All Persons (Index 2009=100) Shaded areas indicate US recessions research.stlouisfed.org Macroeconomic fluctuations 28/43

32 M2 Money Stock 12,000 8,000 6,000 4,000 (Billions of Dollars) 2,000 1,600 1, Source: Board of Governors of the Federal Reserve System (US) Shaded areas indicate US recessions research.stlouisfed.org Macroeconomic fluctuations 29/43

33 Personal Consumption Expenditures: Chain-type Price Index (Index 2009=100) Source: US. Bureau of Economic Analysis Shaded areas indicate US recessions research.stlouisfed.org Macroeconomic fluctuations 30/43

34 3-Month Treasury Bill: Secondary Market Rate (Percent) Source: Board of Governors of the Federal Reserve System (US) Shaded areas indicate US recessions research.stlouisfed.org Macroeconomic fluctuations 31/43

35 5. Regularities and recessions In US aggregate fluctuations do not appear dramatically different before the Great Depression than in the first four decades or so after World War II (Romer 2001 op.cit.:171) Regularities in the behaviour of some important macroeconomic variables during recessions E.g. Okun s law describes possible relationships between shortfalls in GDP and rises in unemployment rate. Macroeconomic fluctuations 32/43

36 Trends and cycles in macroeconomic variables Macroeconomic fluctuations 33/43

37 Measuring economic fluctuations NBER methodology local maxima and minima data on output, income, employment and trade (sectoral and aggregate levels) announcement with a lag Methods to isolate the cyclical component of time series Linear time trends and its limits Nelson and Plosser (1982): cycles vs. random walks Spectral analysis Baxter and King (1994) band-pass filter Hodrick and Prescott (1997) filter Methods to analyse co-movements cointegration common factors Cfr. Stock, J.H. and Watson, M.W. (1999) Business Cycle Fluctuations in US Macroeconomic Time Series, in Taylor, J.B. and M. Woodford (eds.), Handbook of Macroeconomics, Elsevier, vol. 1A, Ch. 1. Macroeconomic fluctuations 34/43

38 Cycles vs. Random Walks y White noise (normal) Random walk X :n :n Macroeconomic fluctuations 35/43

39 Cycles vs. Random Walks Random walk Random walk with drift X Z :n :n Macroeconomic fluctuations 35/43

40 Cycles vs. Random Walks Reversible cyclical fluctuations: Y t = g t + by t 1 + ɛ t 1 < b < 1 (1) where g t is a deterministic trend. E.g. linear trend: g t = a + ct. Fluctuations as stochastic trend: Y t = d + Y t 1 + ɛ t (2) Y t is a random walk with drift. Nelson and Plosser (JME 1980): GNP follows a random walk trend reverting vs. permanent shocks Macroeconomic fluctuations 36/43

41 White noise process: Y t = ɛ t E[ɛ t ] = 0 E[ɛ 2 t ] = σ 2 E[ɛ t ɛ τ ] = 0 for t = τ Random walk: Y t = Y t 1 + ɛ t ɛ t w.n. Y 1 = Y 0 + ɛ 1 Y 2 = Y 0 + ɛ 1 + ɛ 2 Y n = Y 0 + ɛ 1 + ɛ ɛ n Random walk with drift: Y t = d + Y t 1 + ɛ t ɛ t w.n. Y 1 = d + Y 0 + ɛ 1 Y 2 = d + d + Y 0 + ɛ 1 + ɛ 2 Y n = nd + Y 0 + ɛ 1 + ɛ ɛ n Macroeconomic fluctuations 37/43

42 Stationary autoregressive process (AR1): Y t = d + by t 1 + ɛ t ɛ t w.n. 1 < b < 1 Y 1 = d + by 0 + ɛ 1 Y 2 = d + b(d + by 0 + ɛ 1 ) + ɛ 2 Y 3 = d + b(d + b(d + by 0 + ɛ 1 ) + ɛ 2 ) + ɛ 3 = d + bd + b 2 d + b 3 Y 0 + b 2 ɛ 1 + bɛ 2 + ɛ 3 Y n = d(1 + b + b b n 1 ) + b n Y 0 + ɛ n + bɛ n 1 + b 2 ɛ n b n 1 ɛ 1 ( ) 1 = d + b n Y 1 b 0 + ɛ n + bɛ n 1 + b 2 ɛ n b n 1 ɛ 1 Macroeconomic fluctuations 38/43

43 Hodrick-Prescott (1997) filter: Decomposition ot time series y t in trend τ t and cycle c t : y t = τ t + c t + ɛ t Given the parameter λ find τ such that min τ ( T (y t τ t ) 2 + λ t=1 T 1 t=2 [(τ t+1 τ t ) (τ t τ t 1 )] 2 ) Hodrick, Robert J., and Edward C. Prescott. Postwar US business cycles: an empirical investigation. Journal of Money, credit, and Banking (1997): Macroeconomic fluctuations 39/43

44 Baxter-King (1994) filter: Based on the Fourier decomposition of a time series (spectral representation): π Y t = ξ(ω)d(ω) π Filter: π Y t = α(ω)ξ(ω)d(ω) π Baxter, Marianne, and Robert G. King. Measuring business cycles: approximate band-pass filters for economic time series. Review of economics and statistics 81.4 (1999): Macroeconomic fluctuations 40/43

45 The concept of potential output Potential output, as many notions in economics, is an abstract and idealized concept. It answers the question: how much output (i.e. GDP) would be produced if its inputs (i.e. Labour and Capital) were fully employed in an optimal way, given a state of technology. Potential output may be operationally estimated by assuming a production function: Y p = F(AL, K), where L is equal to the entire the labour force (LF), and K is capital at full capacity. The term A refers to technology. At full capacity the capacity utilization rate (CU) is equal to one: CU = index of industrial production industrial capacity index Macroeconomic fluctuations 41/43

46 The concept of potential output Given the definition of potential output we have: Y p = F(A LF, K) Actual output is (taking into account capital in effective use): Y = F(A L, CU K) Scaled output: Ỹ = Y Y p Example (Cobb-Douglas production function): Ỹ = ALα (CU K) 1 α ( ) L α A(LF) α K 1 α = CU 1 α LF Macroeconomic fluctuations 42/43

47 In sum, there are at least three different ways to estimate potential output (and output gap): Filtered trend (linear detrending, HP filter, band-pass filter) Potential output as Y p = F(A LF, K) CBO s potential output: Y pot t = A pot t [(1 NAIRU t ) LF] α Kt 1 α NAIRU: Nonaccelerating inflation rate of unemployment CBO: Congressional Budget Office Macroeconomic fluctuations 43/43