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Department of Economics

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Economics Department
Kansas State University
327 Waters Hall
1603 Old Claflin Place
Manhattan, KS 66506
785-532-6919 fax



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: Yes, it does. This paper extends a variant of the asymmetric preference model suggested by Ruge-Murcia (2003a) to investigate the use of real-time data available to policy makers when making their decisions and revised data which more accurately measure economic performance (Croushore, 2011). 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. Moreover, we allow for an asymmetric central bank response to real-time data depending on whether the economy is doing good or not. Our model identifies several new potential sources of inflation bias due to data revisions. Our empirical results suggest that the Federal Reserve focuses on targeting revised inflation during good economic times, but it weighs heavily real-time inflation during bad economic times. Moreover, the inflation bias due to data revisions is comparable in magnitude to the bias from asymmetric monetary planner preferences with the bias being somewhat larger during poor economic times.

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, both of which begin in 1955:1. The short sample ends in 1995:2 and is most similar to the one used by Bohn (1998), whereas the full sample ends in 2013:3. Our estimation results show that the full sample period is sufficiently different from the short sample period, that the asymmetric (non-linear) empirical models used in this paper are important and that the sustainability of US government debt topic needed to be revisited. Indeed, the short sample provides evidence of fiscal policy sustainability in line with Bohn's (1998) findings. However, when considering the full sample, US fiscal policy is found sustainable during good economic times only according to the best fitting nonlinear model, but unsustainable for all specifications studied during times of distress. With regard to cyclicality, both samples show policy is asymmetric. Moreover, both samples show countercyclical policy during times of distress and the full sample results show some evidence that policy may be procyclical during good economic times.

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.

Does consumer confidence affect durable goods spending during bad and good economic times equally?

Abstract: Recent econometric analysis shows that consumer confidence innovations have long lasting effects on economic activities like consumption. Using US data, we show this conclusion is more nuanced when considering an economy that has different potential states. In particular, using regime-switching models, we show that the connection between consumer confidence to some types of consumer purchases is important during good economic times, but is relatively unimportant during bad economic times. Our regime-switching models use the unemployment rate as the indicator distinguishing bad and good economic times and investigate impulse responses, Granger Causality and variance decompositions. We consistently find that the impact of consumer confidence is dependent on the state of the economy for durable goods purchases. We also use this type of model to investigate the connection between news and consumer confidence and this connection is also state dependent. These findings have important implications for recent policy debates which consider whether confidence boosting policies, like raising inflation expectations on big-ticket items such as automobiles or business equipment would lead to a faster recovery.

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