Stephen G. Cecchetti, Georgios Karras, Sources of Output Fluctuations During the Interwar Period: Further Evidence on the Causes of the Great Depression, The Review of Economics and Statistics, Vol. 76, No. 1 (Feb., 1994), pp. 80-102

This paper shows that, in several U.S. manufacturing industries, the seasonal variability of production and inventories varied with the state of the business cycle. The authors present a simple model which implies that, if firms reduce the seasonal variability of their production as the economy strengthens and they either hold constant or increase the stock of inventories they bring into the high-production seasons of the year, then they must be facing upward-sloping and convex marginal cost curves. The authors conclude that firms in a number of industries face upward-sloping and convex marginal-production-cost curves. Copyright 1997 by American Economic Association.

This paper shows that in several U.S. manufacturing industries, the seasonal variability of production and inventories varies with the state of the business cycle. We present a simple model which implies that if firms reduce the seasonal variability of their production as the economy strengthens, and they either hold constant or increase the stock of inventories they bring into the high-production seasons of the year, then they must be facing upward-sloping and convex marginal cost curves. We conclude that firms in a number of industries face upward-sloping and convex marginal-production-cost curves.

Since the early 1970's, both academic researchers and policymakers have devoted considerable attention to the macroeconomic effects of wage indexation. However, these two groups have focused on different effects. Starting with Jo Anna Gray (1976) and Stanley Fischer (1977a), formal models emphasize the role of indexation in stabilizing or destabilizing output. In contrast, informal policy discussions usually focus on the allegation that indexation is inflationary (e.g., Arthur Okun, 1971; Mario Simonsen, 1983; Eliana Cardoso and Rudiger Dornbusch, 1987). To reduce this gap, this paper presents a model of the effects of indexation on inflation and asks whether indexation raises economic welfare when these effects are taken into account. Until recently it was difficult to formalize the argument that indexation is inflationary, because economists lacked models of the sources of inflation. This paper applies the insight of Robert Barro and David Gordon (1983a) that, with discretionary policy, the employment gains from surprise inflation tempt the monetary authority to create positive trend inflation. As stressed by Fischer and Lawrence Summers (1989), policies that reduce the costs of inflation, such as indexation, cause Barro-Gordon policymakers to choose higher inflation. Indeed, inflation can rise so much that welfare falls despite greater protection against inflation. This effect is appealing because it captures the common argument that indexation weakens policymakers' will to fight inflation.1 This is not the end of the story, however, because wage indexation has a second effect: it reduces the employment effects of surprise inflation. That is, unlike most policies to reduce the costs of inflation, such as indexation of interest rates, wage indexation steepens the Phillips curve. In the BarroGordon model, a steeper Phillips curve reduces the temptation to inflate and hence reduces equilibrium inflation. Since indexation has one inflationary effect (lower costs of inflation) and one anti-inflationary effect (a steeper Phillips curve), the net effect appears ambiguous. Even if the net effect on inflation is determined, the welfare effect may remain unclear: if inflation rises, the welfare loss might or might not be outweighed by the lower cost of a given amount of inflation.2 These ambiguities cannot be resolved with the Barro-Gordon model alone, because the Phillips curve and the effect of inflation on welfare are ad hoc. It is plausible that indexation affects these relations, but the relative strengths of the effects are unclear. Resolving the ambiguities requires a more structural model in which the effects of indexation are derived, rather than assumed. This paper studies such a model; specifically, we use a model of staggered wagesetting based on Gray (1976), Fischer (1977a, b), and John Taylor (1980). The degree of indexation is an explicit parameter, and so we can derive its net effects on inflation and welfare. Section I of this paper presents our basic model and derives equilibrium inflation in

This paper demonstrates that negative serial correlation in long horizon stock returns is consistent with an equilibrium model of asset pricing. When investors display only a moderate desire to smooth their consumption, commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the Monte Carlo distributions implied by our equilibrium model. From this evidence, we conclude that the degree of serial correlation in the data could plausibly have been generated by our model.

Many Keynesian macroeconomic models are based on the assumption that firms change prices at different times. This paper presents an explanation for this "staggered" price setting. The authors develop a model in which firms have imperfect knowledge of the current state of the economy and gain information by observing the prices set by others. This gives each firm an incentive to set its price shortly after other firms set theirs. Staggering can be the equilibrium outcome. In addition, the information gains can make staggering socially optimal even though it increases aggregate fluctuations. Copyright 1988 by American Economic Association.

The Euler equations derived from intertemporal asset pricing models, together with the unconditional moments of asset returns, imply a lower bound on the volatility of the intertemporal marginal rate of substitution. This paper develops and implements statistical tests of these lower bound restrictions. While the availability of short time series of consumption data often undermines the ability of these tests to discriminate among different utility functions, the authors find that the restrictions implied by a number of widely studied financial data sets continue to pose quite a challenge to the current generation of intertemporal asset pricing theories.

Standard approaches to designing a futures hedge often suffer from two major problems. First, they focus only on minimizing risk, so no account is taken of the impact on expected return. Second , in estima ting the hedge ratio, no allowance is made for time variation in the distribution of cash and futures price changes. This paper describes a technique for estimating the optimal futures hedge that corrects these problems and illustrates its use in hedging Treasury bonds with T-bond futures. Copyright 1988 by MIT Press.

There is growing recognition that prolonged U.S. monetary policy easing has extraterritorial spillovers, driving up financial system leverage elsewhere in the world. Faced with financial stability threats that are not of their own making, what can these countries do? Specifically, is there a role for macroprudential tools, capital controls or foreign exchange intervention in safeguarding financial stability from risks arising externally? We examine the efficacy of these policy interventions by exploring whether preventative or reactive policy interventions can mitigate such risks. Using a sample of 950 bank and nonbank financial firms across 28 non-U.S. economies over the past two decades, we show that if policymakers are able to implement policies prior to an additional consecutive decline in U.S. interest rates, financial institutions do not increase their leverage by as much as they otherwise would. By contrast, it is more difficult to counter the spillovers with reactive policy interventions.