The purpose of this paper is to construct a leading index for the United States by deriving a set of weights based on Kalman filters. The weights have certain optimality properties and are related to the existing weighting methods of A. F. Burns and W. C. Mitchell (1946), S. H. Hymans (1973), and A. J. Auerbach (1982). The Kalman filter leading index is compared with the CIBCR leading composite index and an index suggested by Auerbach by subjecting all indexes to a number of tests. The results of the tests are mixed, but suggest that the use of Kalman filters as a way of constructing leading indexes is encouraging. Copyright 1990 by MIT Press.

We simulate the impact on the nonbank liabilities of banks in a multiplex interbank environment arising from changes in currency exposure. Currency shocks as a source of financial contagion in the banking sector have not, so far, been considered. Our model considers two sources of contagion: shocks to nonbank assets and exchange rate shocks. Interbank loans can mature at different times. We demonstrate that a dominant currency can be a significant source of financial contagion. We also find evidence of asymmetries in losses stemming from large currency depreciations versus appreciations. A variety of scenarios are considered allowing for differences in the sparsity of the banking network, the relative size and number of banks, changes in nonbank assets and equity, the possibility of bank breakups, and the dominance of a particular currency. Policy implications are also drawn.

In dynamic models of unemployment in which the employed consume more than the unemployed, workers are finitely lived, and jobs are lasting, employment transfers consumption from future generations to those currently alive, resulting in a social surplus. That is, these transfers allow the current generation to consume more than its share of the output produced during its lifetime, without the increased consumption coming at the expense of future generations. Moreover, due to these intergenerational transfers, the allocation that maximizes steady-state output is Pareto dominated by another feasible allocation with a higher level of steady-state employment.

Recently developed methods in the analysis and measurement of latent factor models for time series are utilised to study international business cycles and their relationship to international stockmarket price behaviour. An advantage of these methods is that the duality properties between time domain and frequency domain approaches for investigating the properties of time series can be exploited to identify and model business cycles. The empirical results show that the six countries studied, which include the United States, Australia, Canada, United Kingdom, Germany and Japan, exhibit coherent national business cycles, although these cycles are not all alike. It is also found that international coherence in economic activity has increased in the flexible exchange rate period, although it is not as strong as it is for the national business cycles. The coherence between stockmarket prices and business cycles is not strong, both nationally and internationally, but international stockmarkets appear to show greater mutual coherence than do the corresponding economies.

This paper studies a New Keynesian business cycle model with agents who are averse to ambiguity (Knightian uncertainty). Shocks to confidence about future TFP are modeled as changes in ambiguity. To assess the size of those shocks, our estimation uses not only data on standard macro variables, but also incorporates the dispersion of survey forecasts about growth as a measure of confidence. Our main result is that TFP and confidence shocks together can explain roughly two thirds of business cycle frequency movements in the major macro aggregates. Confidence shocks account for about 70 percent of this variation. (JEL D81, D84, E12, E32)