This paper examines the relationship of business cycles, the terms of trade and Tobin's q using a three-sector dynamic stochastic general equilibrium model for a small open economy. Results show that terms of trade shocks account for half of actual volatility of GDP and stock market indices for...

This paper aims at identifying the main shocks, which cause movements in real GNP. It does so by searching for two shocks in the context of a VAR model, which explain the majority of the k-step ahead prediction error variances in real GNP for horizons between 0 and 5 years. We find that two...

In this paper we consider a model where some consumers act in a boundedly rational way by treating money as non-fungible (Kahneman and Tversky (1979) and (1984), Thaler (1987) and (1990). The budget is broken up into different expenditure groups (cookie-jars). Given the amount of resources...

The output gap plays a crucial role in thinking of many inflation targeting central banks yet, the real time estimates of the output gap undergo substantial revisions as more data become available. In this paper, we use the state space framework to augment the simple Hodrick-Prescott filter with...

Cyclical components in economic time series are analysed in a Bayesian framework, thereby allowing prior notions about periodicity to be used. The method is based on a general class of unobserved component models that allow relatively smooth cycles to be extracted. Posterior densities of...

Central banks behave purposefully when they set monetary policy, basing their decisions upon the data that is available and upon their understanding of the economy. At the same time, policy decisions affect economic outcomes, and the likelihood of observing a given state of the world. This paper...

Firms in poor countries often tend to rely on alternative sources of financing different than banks. We show that borrowing constraints lead to financial arrangements between firms that can amplify the effect of liquidity or productivity shocks in the economy. In particular, we focus on the...

Recent research shows that observed labor market flows can be explained in search and matching models only by assuming either implausibly large productivity shocks (Hall 2003) or an excessively high degree of real wage rigidity even for new hires (Shimer 2003). If this is not the case, the...

Interest rate rules for monetary policy and tax rules for fiscal policy change stochastically between two regimes. In the first regime monetary policy follows the Taylor principle and taxes rise strongly with increases in the real value of government debt; in the second regime the Taylor...

Inflation volatility has significantly declined over the last 20 years in the U.S. To find out why, I follow a structural approach. I estimate a complete New Keynesian model which imposes cross-equation restrictions on the time series of inflation, the output gap and the interest rate. I perform...