U.S. Evolving Macroeconomic Dynamics: A Structural Investigation

By Luca Benati, Haroon Mumtaz. Social Science Research Network, 2007

130 citations recorded by the source corpus.

We fit a Bayesian time-varying parameters structural VAR with stochastic volatility to the Federal Funds rate, GDP deflator inflation, real GDP growth, and the rate of growth of M2. We identify 4 shocks–monetary policy, demand non-policy, supply, and money demand–by imposing sign restrictions on the estimated reduced-form VAR on a period-by-period basis. The evolution of the monetary rule in the structural VAR accords well with narrative accounts of post-WWII U.S. economic history, with (e.g.) significant increases in the long-run coefficients on inflation and money growth around the time of the Volcker disinflation. Overall, however, our evidence points towards a dominant role played by good luck in fostering the more stable macroeconomic environment of the last two decades. First, the Great Inflation was due, to a dominant extent, to large demand non-policy shocks, and to a lower extent to supply shocks. Second, imposing either Volcker or Greenspan over the entire sample period would only have had a limited impact on the Great Inflation episode, while imposing Burns and Miller would have resulted in a counterfactual inflation path remarkably close to the actual historical one. Although the systematic component of monetary policy clearly appears to have improved over the sample period, this does not appear to have been the dominant influence in post-WWII U.S. macroeconomic dynamics. JEL Classification: E32, E47, E52, E58

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/7289fcf835cf32458f36e4edbef4aa9f90ae3e67

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Citations in the corpus

Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces (2010, unknown): “The parameters of the distribution are the same as in Cogley and Sargent (2005) and Benati and Mumtaz (2007).”
Testing for Structural Breaks in Dynamic Factor Models (2011, background): ““Good luck” is based on the observation that smaller shocks hit the economy after the considered break date (cf. Benati and Mumtaz 2007).”
Evolving U.S. Monetary Policy and the Decline of Inflation Predictability (2008, unknown): “…used to simulate the posterior distribution of the hyperparameters and the states conditional on the data, and the method we use to assess the convergence of the Markov chain– are identical to those used in Benati (2007a) and Benati and Mumtaz (2007), to which the interested reader is referred.”
Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference (2010, unknown): “…or four structural shocks to be identiﬁed, the efﬁciency gain can be as high as the 10-1 ratio when our algorithm is compared with the algorithms of Uhlig (2005) and Canova and DeNicol´o (2002) (see, for example, Benati and Mumtaz (2006) for an application of our algorithm in their DSGE model).”
The Role of Time-Varying Price Elasticities in Accounting for Volatility Changes in the Crude Oil Market (2013, methodology): “We consider the following VAR(p) model with time-varying parameters and stochastic volatility in the spirit of Cogley and Sargent (2005), Primiceri (2005), Benati and Mumtaz (2007), and Canova and Gambetti (2009):”
THE INTERNATIONAL TRANSMISSION OF VOLATILITY SHOCKS: AN EMPIRICAL ANALYSIS (2015, unknown): “The evolution of the volatility of the federal funds rate shock is very similar to the estimate in Benati and Mumtaz (2007), with large increases during the great inflation of the mid-1970s and then during Paul Volcker’s experiment of targeting non-borrowed reserves at the end of the 1970s.”
Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound (2012, unknown): “However, as noted by Benati and Mumtaz (2007) and more formally demonstrated in Baumeister and Peersman (2012, 2013) by means of a Monte Carlo study, drifting-coefficient models in practice are able to capture such discrete breaks if they occur.”
Time-Varying Effects of Oil Supply Shocks on the US Economy (2008, unknown): “With regard to the prior speci cation of 0 and h0 we follow Primiceri (2005) and Benati and Mumtaz (2007).”
A quasi-Bayesian local likelihood approach to time varying parameter VAR models (2019, background): “For more details, see for instance Benati and Mumtaz (2007).”