Papers by Christopher Otrok
We adopt a statistical approach to identify the shocks that explain most of the fluctuations of t... more We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one single shock can explain the majority of all unpredictable movements in the slope over a 10-year forecast horizon. Impulse response functions lead us to interpret this shock as news about future
World Economic Outlook, Sep 1, 2006
ABSTRACT News shocks about future increases in Total Factor Productivity (TFP) lead to a large an... more ABSTRACT News shocks about future increases in Total Factor Productivity (TFP) lead to a large and persistent drop in ination and the Federal Funds rate while driving up the slope of the term structure of interest rates (Kurmann and Otrok, 2011). In this paper, we …rst show that a monetary DSGE model with a standard parametrization along the lines of Smets and Wouters (2007) is unable to replicate these dynamics. We then formally estimate the model with a limited-information procedure that is designed to match as closely as possible the impulse responses of key macroeconomic aggregates, ination and the term structure to TFP news shocks. When we restrict parameters to economically meaningful values, the model is unable to generate the large drop in ination and the Federal Funds rate that causes the slope of the term structure to increase. This failure to quantitatively account for the impact of TFP news shocks represents a challenge for modern DSGE models because TFP news shocks explain a signi…cant portion of the variation in ination, the Federal Funds rate and the term structure of interest rate as well as medium-run uctuations in future real activity.
To establish that our model is a reasonable description of the data we estimate the model using B... more To establish that our model is a reasonable description of the data we estimate the model using Bayesian methods and then evaluate its fit along a number of standard dimensions. The Bayesian approach to estimating the model parameters is especially important for providing discipline on the parameters in the financial friction and nominal rigidities. As a technical contribution, we estimate the model using non-linear likelihood methods based on the “particle” filter. Since the model itself is inherently nonlinear, it cannot be solved using a linear approximation, nor it is appropriate to use a linear approximation to the likelihood function. To our knowledge this paper is the first likelihood-based empirical assessment of sudden stop models.
Economic Quarterly Federal Reserve Bank of Richmond, 1994
Using longitudinal microdata we implement a Bayesian dynamic latent factor model to analyze the c... more Using longitudinal microdata we implement a Bayesian dynamic latent factor model to analyze the cyclical properties of real wages. Contrary to previous econometric models our model does not impose an a priori structure on the relationship of wages with the business cycle. The factors and the parameters are sampled from posterior distributions using Markov Chain Monte Carlo methods. We show that the comovement of real wages can be related to a common factor that exhibits a negative correlation with the growth rate of real GDP. Our …ndings indicate that the common factor explains only 14% of wage variation which cannot justify claims of a strong systematic relationship between wages and the business cycle. The latter suggests that wage dynamics are more consistent with models of labor contracting. We also con…rm …ndings of previous We thank Julie Yates (Bureau of Labor Statistics) and Steve McClaskie (National Longitudinal Surveys user services) for information and help with the data.
In a recent paper published in this Review, Mark E. Fisher and John J. Seater (1993) (henceforth,... more In a recent paper published in this Review, Mark E. Fisher and John J. Seater (1993) (henceforth, FS) derive reduced-form tests of long-run neutrality (LRN) and long-run superneutrality (LRSN) that do not re-quire specific assumptions about the under-lying structure of the ...
Working Papers, 2011
We show that two models of the labor market, a Walrasian model and a labor contracting model, bot... more We show that two models of the labor market, a Walrasian model and a labor contracting model, both have an approximate dynamic factor structure. We use this result to motivate our empirical approach to estimating the cyclical properties of real wages, which does not ...
Economic Review, Feb 1, 1992
We study optimal policy in a small-open economy in which a foreign borrowing constraint binds occ... more We study optimal policy in a small-open economy in which a foreign borrowing constraint binds occasionally. The objective of the paper is to develop an optimal policy rule for both crisis periods when the borrowing constraints binds, and for periods of relative tranquility away from the crisis. Our approach to optimal policy allows us to determins the extent to
We develop a generalization of the Hansen-Jagannathan (1991) volatility bound that (i) incorporat... more We develop a generalization of the Hansen-Jagannathan (1991) volatility bound that (i) incorporates the serial correlation properties of return data and (ii) allows us to calculate a spectral version of the bound. This generalization enables us to judge whether models match important aspects of the data in the long run, at business cycle frequencies, seasonal frequencies, etc. Our generalization is
This paper studies the dynamic properties of international house prices, stock prices, interest r... more This paper studies the dynamic properties of international house prices, stock prices, interest rates and macroeconomic aggregates in industrial countries. While the dynamics of stock market returns and interest rates have been studied previously, we use a new dataset to gain insight into both the comovement of house price across industrial countries and the relationship between the fluctuations of house price with the fluctuations of financial asset returns and macroeconomic aggregates. Despite the fact that housing is the quintessential nontradable asset, we find a large degree of synchronization or comovement in the growth rate of real house prices in industrialized countries. We then show that much of this comovement can be related to a common dynamic component in interest rates across these countries. While we confirm the existence of a great degree of comovement in macroeconomic aggregates (namely, real output, consumption, and residential investment), we find little evidence that these aggregates are important sources of house price fluctuations. Instead, we find that house prices have an effect on macroeconomic aggregates. Given the important role that interest rates play for asset prices and macroeconomic fluctuations in industrial countries, we examine the role of monetary policy shocks--both domestic and global--in driving movement in these variables using an identified VAR augmented with our latent factors. We find evidence of a strong but delayed impact of U.S. monetary shocks on housing price growth both in the U.S. and internationally. We also document differences in the response of the U.S. economy and the global economy to these shocks.
Cep Discussion Papers, 2010
In this paper we investigate the cyclicality of real wages. The approach we take is to search for... more In this paper we investigate the cyclicality of real wages. The approach we take is to search for the largest possible common cyclical component in a statistical sense. This contrasts with the existing literature which uses observable variables to proxy for a common cycle. We do so by using a Bayesian dynamic latent factor model and longitudinal microdata. We …nd that the comovement of real wages can be related to a common factor that exhibits a signi…cant but far from perfect correlation with the national unemployment rate. Our …ndings indicate that (i) the common factor explains, on average, no more than 9% of wage variation, (ii) the common factor accounts for 20% or less of the wage variability for 88% of the workers in the sample and (iii) roughly half of the wages move procyclically while half move countercyclically. These facts are inconsistent with claims of a strong systematic relationship between real wages and the business cycle. We show that these results are inconsistent with models of Walrasian labor markets typically used in DSGE models. We also con…rm …ndings of previous studies in which skilled and unskilled wages exhibit roughly the same degree of cyclical variation. JEL Classi…cation Codes: C11, C13, C22, C23, C81, C82, J31
This paper studies monetary and macro-prudential policies in a simple model with both a nominal r... more This paper studies monetary and macro-prudential policies in a simple model with both a nominal rigidity and a financial friction that give rise to price and financial stability objectives. We find that lowering the degree of nominal rigidity or increasing the strength of the interest rate response to inflation is always welfare increasing in the model, despite a tradeoff between
We develop a dynamic factor model with time-varying factor loadings and stochas- tic volatility i... more We develop a dynamic factor model with time-varying factor loadings and stochas- tic volatility in both the latent factors and idiosyncratic components. We apply this novel measurement,tool to study the evolution of international business cycles during the post-Bretton Woods period in terms of changes in both volatility and synchro- nization, using a panel of output growth rates for 19
This paper introduces efficiency wages into a sticky price dynamic general equilibrium model.
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Papers by Christopher Otrok