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Department of Economics

Dr. Steven Cassou | Working Papers

Government Capital and Production: Industry Level Estimates.

Abstract: This paper estimates sectoral level production functions using U.S. data for nine industry groups. It is shown that the public capital elasticity differs across industries. This implies that not all industries are equally impacted by public capital spending and that using a single generic production function with constant returns to scale to represent all industries is not appropriate.

Optimal monetary policy: Does considering real-time data change things?

Abstract: Croushore (2011) and others have noted that monetary policy may be sensitive to inconsistencies between real-time data available to policy makers when making their decisions and revised data which more accurately measure economic performance. This paper extends a variant of the asymmetric preference model suggested by Ruge-Murcia (2003a) in order to focus on these inconsistencies which arise because of the long lag between the real-time data release and the revised data release. In our extended model, the central banker targets a weighted average of revised and real-time inflation together with a weighted average of revised and real-time output. Our model identifies several new potential sources of inflation bias due to data revisions in addition to the ones previously suggested in the literature. Our empirical results suggest that the Federal Reserve Bank mainly focuses on targeting revised data, but it does weigh real-time data too. As a consequence, the inflation bias induced by real-time data increases by 12.6 basis points on average, but this figure becomes roughly twice as large at the start of recessions.

Fiscal policy asymmetries and the sustainability of US government debt revisited

Abstract: This paper empirically investigates US fiscal policy sustainability and cyclicality in an empirical structure that allows fiscal policy responses to exhibit asymmetric behavior. We investigate this over two quarterly intervals of data, both of which begin in 1955. The short sample, which ends in the second quarter of 1995, was investigated to demonstrate that the financial crisis and Great Recession are sufficiently different from this earlier period, which is most analogous to the one used by Bohn (1998), that the asymmetric empirical methods used in this paper are important and that the sustainability of US government debt topic needed to be revisited. For the full sample, US fiscal policy is asymmetrical in regard to both sustainability and cyclicality. Regarding fiscal policy sustainability, the best fitting models show evidence of fiscal policy sustainability for the short sample. However, the fiscal sustainability question does become less clear for the full sample that includes the recent financial crisis and the Great Recession. Regarding fiscal policy cyclicality, we find that during times of distress, policy is strongly countercyclical, but during good times the results are more mixed with some models showing that fiscal policy can be procyclical.

Threshold cointegration between inflation and US capacity utilization

Abstract: An analogue to the Phillips curve shows a positive relationship between inflation and capacity utilization. Some recent empirical work has shown that this relationship has broken down when using data after the mid 1980s. We empirically investigate this issue using several threshold error correction models. We find, in the long run, a 1% increase in the rate of inflation leads to approximately a 0.004% increase in capacity utilization. The asymmetric error correction structure shows that changes in capacity utilization show significant corrective measures only during booms while changes in inflation correct during both phases of the business cycle with the corrections being stronger during recessions. We also find that, in the short run, changes in the inflation rate do Granger cause capacity utilization while changes in capacity utilization do not Granger cause inflation. The Granger causality from inflation to capacity utilization can be interpreted as supporting recent calls made in the popular press by some economists that it may be desirable for the Fed to try to induce some inflation. The lack of Granger causality from capacity utilization to inflation casts doubt on the older view that capacity utilization could be a leading indicator for future inflation.

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