Performance evaluation, Linear aggregation, Compensation contracts

This paper models occasional, discrete shifts in the growth rate of a nonstationary series. Algorithms for inferring these unobserved shifts are presented, a byproduct of which permits estimation of parameters by maximum likelihood. An empirical application of this technique suggests that the periodic shift from a positive growth rate to a negative growth rate is a recurrent feature of the U.S. business cycle, and indeed could be used as an objective criterion for defining and measuring economic recessions. The estimated parameter values suggest that a typical economic recession is associated with a 3 percent permanent drop in the level of GNP.

A lifetime utility model, in which the date of death is uncertain and in which bequests give utility, is analyzed and estimated. The parameter estimates imply that most bequests are accidental, the result of mortality risk, and that the shape of the desired consumption path is sensitive to variations in mortality rates. On average, the elderly in the sample dissave, which is consistent with a life-cycle model in which utility does not depend on bequests.

We investigate the pass-through from exchange rates to import prices when firms' future demands depend on current market shares. Foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily (i.e., the pass-through may be perverse) and import prices may be more sensitive to expected future than to current exchange rates. We explore whether expected future exchange rates provide a clue to the puzzling recent behavior of U.S. import prices.

Money is incorporated into a real business cycle model using a cash-in-advance constraint. The model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money. In addition, the welfare cost of the inflation tax is measured and the steady-state properties of high and low inflation economies are compared.