We investigate the behavior of the long-run U.S./U.K. real exchange rate from 1885 to 1995. Our long-run real exchange rate series is derived from an unobserved components model which divides the real exchange rate into permanent and transitory components. The transitory component is modeled as...

The paper estimates a model for the real U.S/U.K. exchange rate. The Kalman filter is used to identify a permanent and transitory component. We find the variance of the transitory component shifts among three states according to a Markov-switching process. The model is estimated by Gibbs...

The literature documents that low stock returns are associated with increased volatility, but two competing explanations have proved difficult to disentangle. A negative return increases leverage making equity value more volatile. However, volatility feedback increases the risk premium when a...

We model the firm's decision to invest in liquid assets when external financing is costly. The optimal amount of liquidity is determined by a tradeoff between the low return earned on liquid assets and the benefit of minimizing the need for costly external financing. The model predicts that the...

The existing literature on U.S. monetary policy provides no sense of a consensus regarding the existence of a monetary policy regime. This article explores the evolution of U.S. monetary policy regimes via the development of a Markov-switching model predicated on narrative and statistical...

In this paper, we relax the assumption of constant regime-specific mean growth rates in Hamilton's (1989) two-state Markov-switching model of the business cycle. We first present a benchmark model, in which each regime-specific mean growth rate evolves according to a random walk process over...

We use counterfactual experiments to investigate the sources of the large volatility reduction in US real GDP growth in the 1980s. Contrary to an existing literature that conducts counterfactual experiments based on classical estimation and point estimates, we consider Bayesian analysis that...

This paper investigates the dynamic relationship between permanent and transitory components of post-war U.S. business cycles. We specify a time-series model for real GNP and consumption in which the two share a common stochastic trend and transitory component, and Markov-regime switching is...