Estimating How the Macroeconomy Works

List of Tables ix List of Figures xi Preface xiii Abbreviations xv Introduction 1(15) Outline of the Book 1(3) Methodology 4(1) Macro Theory 5(1) Notation and 2SLS Estimation 6(1) Testing Single Equations 7(6) Testing Complete Models 13(1) Solving Optimal Control Problems 14(1) The FP Program and the Website 15(1) The MC Model 16(45) The Model in Tables 16(2) Treatment of Expectations 18(1) An Overview of the Model 18(4) The US Stochastic Equations 22(25) The Row Stochastic Equations 47(14) Interest Rate Effects 61(6) Introduction 61(1) The Test 61(4) The Results 65(2) Testing the NAIRU Model 67(13) Introduction 67(1) The NAIRU Model 67(2) Tests for the United States 69(6) Tests for the Row Countries 75(2) Properties 77(1) Nonlinearities 78(2) U.S. Wealth Effects 80(5) Introduction 80(1) The Effects of CG 80(2) Changing AA by 1,000 82(3) Testing for a New Economy in the 1990s 85(16) Introduction 85(5) End-of-Sample Stability Tests 90(1) No Stock Market Boom: Counterfactual 90(7) Aggregate Productivity 97(3) Conclusion 100(1) A ``Modern'' View of Macroeconomics 101(7) Introduction 101(2) Estimated Effects of a Positive Inflation Shock 103(3) The FRB/US Model 106(1) Conclusion 107(1) Estimated European Inflation Costs 108(6) Introduction 108(1) The Experiment 109(4) Conclusion 113(1) Stochastic Simulation and Bootstrapping 114(16) Stochastic Simulation 114(2) Bootstrapping 116(1) Distribution of the Coefficient Estimates 117(3) Analysis of Models' Properties 120(2) Bias Correction 122(1) An Example Using the US Model 122(7) Conclusion 129(1) Certainty Equivalence 130(4) Introduction 130(1) Analytic Results 130(1) Relaxing the CE Assumption 131(1) Results Using the US Model 132(2) Evaluating Policy Rules 134(13) Introduction 134(1) The Effects of a Decrease in RS 135(3) Stabilization Effectiveness of Four Rules 138(3) Optimal Control 141(4) Adding a Tax Rate Rule 145(1) Conclusion 146(1) EMU Stabilization Costs 147(7) Introduction 147(1) The Stochastic-Simulation Procedure 148(1) Results for the non-EMU Regime 148(2) Results for the EMU Regime 150(2) Conclusion 152(2) RE Models 154(9) Introduction 154(1) The RE Model 155(1) Solution of RE Models 155(2) Optimal Control for RE Models 157(1) Stochastic Simulation of RE Models 158(1) Stochastic Simulation and Optimal Control 159(1) Coding 160(1) An Example: An RE Version of the US(EX, PIM) Model 161(1) Conclusion 162(1) Model Comparisons 163(10) Introduction 163(1) The US+ Model 163(1) The VAR Model 164(1) The AC Model 164(1) Outside Sample RMSEs 165(1) FS Tests 166(4) Sources of Uncertainty 170(2) Conclusion 172(1) Conclusion 173(6) The U.S. Economy in the 1990s 173(1) Price Equations 173(1) Monetary Policy 174(1) EMU Stabilization Costs 175(1) Bootstrapping 175(1) Certainty Equivalence and Optimal Control 175(1) Rational Expectations 176(1) Testing Equations and Models 176(3) Appendix A The US Model 179(60) A.1 About Tables A.1--A.10 179(1) A.2 The Raw Data 180(1) A.3 Variable Construction 181(6) A.4 The Identities 187(52) Appendix B The ROW Model 239(46) B.1 About Tables B.1--B.6 239(1) B.2 The Raw Data 240(1) B.3 Variable Construction 240(2) B.4 The Identities 242(1) B.5 The Linking Equations 243(1) B.6 Solution of the MC Model 243(42) References 285(8) Index 293