Recent Papers

Steve Ambler

January 2004

Papers are listed in (approximate) reverse chronological order of their latest versions.

Time Consistent Control in Non-Linear Models

with Florian Pelgrin

Abstract

This paper shows how to use optimal control theory to derive time-consistent optimal government policies in nonlinear dynamic general equilibrium models. It extends the insight of Cohen and Michel (1988), who showed that in linear models time-consistent policies can be found by imposing a linear relationship between predetermined state variables and the costate variables from private agents' maximization problems. We use an analogous procedure that replaces nonlinear functions of expected future costates by flexible functions of current states. This leads to a nonlinear relationship between current state and costate variables, which is verified in equilibrium to an arbitrarily close degree of approximation. The flexible functions can be found numerically by perturbation or projection methods. The optimal control problem of the government is recursive, unlike the Ramsey (1927) problem. We use a model of optimal public spending to illustrate the technique.
http://www.er.uqam.ca/nobel/r10735/timecont.pdf

Le Prix Nobel en Économique 2004

These are my overhead slides for a presentation to the association of Quebec professional economists (ASDEQ) on the 2004 Nobel prize awarded to Finn Kydland and Edward Prescott. They may be of some small pedagogical value.
http://www.er.uqam.ca/nobel/r10735/nobelsem.pdf

Optimal Taylor Rules in an Estimated Model of a Small Open Economy

With Ali Dib and Nooman Rebei

Abstract

We develop a model of a small open economy with three types of nominal rigidities (domestic goods prices, imported goods prices and wages) and eight different structural shocks. We estimate the model's structural parameters using a maximum likelihood procedure and use it to compute welfare-maximizing Taylor rules for setting domestic short-term interest rates. For these computations, we use a second-order approximation around the model's deterministic steady state, which allows the Taylor rule coefficients to affect the means of consumption, leisure and real balances as well as their variances. Welfare gains from moving to the optimal Taylor rule are substantial, but require a very precise knowledge of the values of the model's structural parameters.
http://www.er.uqam.ca/nobel/r10735/bank0002.pdf

Nominal Rigidities and Exchange Rate Pass-Through in a Structural Small Open Economy Model

With Ali Dib and Nooman Rebei

Abstract

We analyze exchange rate pass-through in an estimated structural model of a small open economy with three types of nominal rigidity (wages and the prices of domestically produced and imported goods) and eight different structural shocks. The model is estimated using quarterly data from Canada and the U.S. It predicts a remarkably similar dynamic relationship between the nominal exchange rate and prices in response to the different structural shocks: the nominal exchange rate overshoots its long run level, and exchange rate changes are passed through slowly to the domestic price level. While pricing to market (the slow adjustment of the domestic-currency price of imported goods) is necessary for slow pass-through to imported goods prices, it is not necessary for slow pass-through to the overall price level. Sticky domestic wages also generate slow pass-through to the PPI and CPI even without pricing to market.
http://www.er.uqam.ca/nobel/r10735/newtext2.pdf
A more detailed version of this paper is available as a Bank of Canada working paper:
http://www.bank-banque-canada.ca/en/res/2003/wp03-29.htm

Nominal Wage Rigidity as a Nash Equilibrium

Abstract

Models of the microfoundations of nominal price rigidities show that without strong real rigidities firms have strong incentives to adjust prices even if other firms do not: nominal price rigidity is not a Nash equilibrium unless the fixed cost of adjusting prices is implausibly high. This paper shows that nominal wage rigidity can be a Nash equilibrium with only modest adjustment costs. The size of the necessary adjustment costs remain modest if labor supply is inelastic, if different labor types are highly substitutable, and with decreasing returns to labor in production.
Revised version:
http://www.er.uqam.ca/nobel/r10735/fixwage2.pdf
CIRPEE working paper:
http://132.203.59.36/CIRPEE/cahierscirpee/2003/description/descrip0307.htm

Labor Market Imperfections and the Dynamics of Postwar Business Cycles

with Alain Guay and Louis Phaneuf

Abstract

An estimated dynamic general equilibrium model which features imperfectly competitive households, sticky nominal wages and costly labor input adjustment is shown to be consistent with several stylized aspects of U.S. postwar business cycle dynamics including the positive serial correlation of output, consumption, investment and employment growth over short horizons and the persistent, hump-shaped response of output to innovations in the temporary component.
Revised version:
http://www.er.uqam.ca/nobel/r10735/contrat8.pdf
An older version of this paper (with a different title) is available as a CREFE (Centre for Research on Ecnomic Fluctuations and Employment) working paper:
http://ideas.uqam.ca/ideas/data/Papers/crecrefwp69.html

Nominal Wage Rigidities in an Optimizing Model of an Open Economy

with Emmanuel Hakizimana
forthcoming in The New Open Economy Approach to Exchange Rate Dynamics: Theory and Evidence Jean-Olivier Hairault and Thepthida Sopraseuth, editors, London, Routledge

Abstract

We build a dynamic general equilibrium model of a semi-small open economy in which staggered wages are the only source of nominal rigidity. The model is capable of generating highly variable real and nominal exchange rates while predicting relative variabilities of prices and consumption that are broadly compatible with the data. The real and nominal exchange rates predicted by the model are both highly persistent and highly correlated with one another, as in the data.
Revised version:
http://www.er.uqam.ca/nobel/r10735/emmanue2.pdf
CREFE working paper:
http://ideas.uqam.ca/ideas/data/Papers/crecrefwp94.html

International Business Cycles: What are the Facts?

with Emanuela Cardia and Christian Zimmermann
forthcoming in Journal of Monetary Economics

Abstract

Modern business cycle theory involves developing models that explain stylized facts. For this strategy to be successful, these facts should be well established. In this paper, we focus on the stylized facts of international business cycles. We use the generalized method of moments and quarterly data from twenty industrialized countries to estimate pairwise cross-country correlations of macroeconomic aggregates. We calculate standard errors of the statistics for our unique panel of data and test hypotheses about the relative sizes of these correlations. A remarkable common feature of all the cross-country correlations emerges: these correlations are mostly positive, not too high and of a similar order of magnitude. The most important discrepancy with the theory is the low cross-country correlation of consumption.
Revised version:
http://www.er.uqam.ca/nobel/r10735/jmea.pdf
CREFE working paper:
http://ideas.uqam.ca/ideas/data/Papers/crecrefwp90.html

Optimal Time-Consistent Taxation with Overlapping Generations

Abstract

The paper analyzes optimal time-consistent taxation in an overlapping generations model with two-period lived households. The government chooses tax rates and borrowing to finance an exogenous stream of expenditures. It cannot commit to future policies, so announced policies that are not time consistent are not credible. Dynamic programming is used to derive Markov-perfect equilibria. In contrast to optimal fiscal policy in representative-agent models with commitment, optimal capital income tax rates are positive in the long run, and bounded below one in the short run for a wide range of parameter values.
revised version:
http://www.er.uqam.ca/nobel/r10735/twop2doc.pdf
CREFE working paper:
http://ideas.uqam.ca/ideas/data/Papers/crecrefwp111.html

latest update: 13/01/2005


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