American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 3 3 July 2011 http://www.aeaweb.org/issue.php?journal=MAC&volume=3&issue=3 Journal Article Front Matter i vi http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.3.i 10.1257/mac.3.3.i American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 3 3 July 2011 http://www.aeaweb.org/issue.php?journal=MAC&volume=3&issue=3 Articles Estimating the Market-Perceived Monetary Policy Rule James D.HamiltonU CA, San Diego SethPruittFederal Reserve Board ScottBorgerUS Office of Immigration Statistics 1 28 We introduce a novel method for estimating a monetary policy rule using macroeconomic news. We estimate directly the policy rule agents use to form their expectations by linking news' effects on forecasts of both economic conditions and monetary policy. Evidence between 1994 and 2007 indicates that the market-perceived Federal Reserve policy rule changed: the output response vanished, and the inflation response path became more gradual but larger in long-run magnitude. These response coefficient estimates are robust to measurement and theoretical issues with both potential output and the inflation target. (JEL C51, E31, E43, E52, E58) http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.3.1 10.1257/mac.3.3.1 http://www.aeaweb.org/aej/mac/data/2009-0151_data.zip http://www.aeaweb.org/aej/mac/app/2009-0151_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 3 3 July 2011 http://www.aeaweb.org/issue.php?journal=MAC&volume=3&issue=3 Articles Optimal Inflation for the US Economy Roberto M.BilliFederal Reserve Bank of Kansas City 29 52 This paper studies the optimal long-run inflation rate (OIR) in a small New Keynesian model, where the only policy instrument is a short-term nominal interest rate that may occasionally run against a zero lower bound (ZLB). The model allows for worst-case scenarios of misspecification. The analysis shows first, if the government optimally commits, the OIR is below 1 percent annually. Second, if the government re-optimizes each period, the OIR rises markedly to 17 percent. Third, if the government commits only to an inertial Taylor rule, the inflation bias is eliminated at very low cost in terms of welfare for the representative household. (JEL E12, E31, E43, E52, E58) http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.3.29 10.1257/mac.3.3.29 http://www.aeaweb.org/aej/mac/data/2008-0080_data.zip American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 3 3 July 2011 http://www.aeaweb.org/issue.php?journal=MAC&volume=3&issue=3 Articles CONDI: A Cost-of-Nominal-Distortions Index StefanoEusepiFederal Reserve Bank of New York BartHobijnFederal Reserve Bank of San Francisco AndreaTambalottiFederal Reserve Bank of New York 53 91 We construct a PCE-based price index whose weights minimize the welfare costs of nominal distortions: a cost-of-nominal-distortions index. We compute these weights in a multi-sector New Keynesian model, calibrated to match US data on price stickiness, labor shares, and inflation across sectors. The CONDI weights mostly depend on price stickiness. Moreover, CONDI stabilization leads to negligible welfare losses compared to the optimal policy and is better approximated by core rather than headline inflation targeting. An even better approximation can be obtained with an adjusted core index. (JEL C14, E12, E25, E31, E52). http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.3.53 10.1257/mac.3.3.53 http://www.aeaweb.org/aej/mac/data/2009-0200_data.zip American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 3 3 July 2011 http://www.aeaweb.org/issue.php?journal=MAC&volume=3&issue=3 Articles Education and Catch-Up in the Industrial Revolution Sascha O.BeckerU Warwick and Ifo Institute for Economic Research, Munich ErikHornungIfo Institute for Economic Research, Munich LudgerWoessmannU Munich and Ifo Institute for Economic Research, Munich 92 126 Research increasingly stresses the role of human capital in modern economic development. Existing historical evidence -- mostly from British textile industries -- however, rejects that formal education was important for the Industrial Revolution. Our new evidence from technological follower Prussia uses a unique school enrollment and factory employment database linking 334 counties from pre-industrial 1816 to two industrial phases in 1849 and 1882. Using pre-industrial education as instrument for later education and controlling extensively for pre-industrial development, we find that basic education is significantly associated with nontextile industrialization in both phases of the Industrial Revolution. Panel data models with county fixed effects confirm the results. (JEL I20, J24, N13, N33, N63) http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.3.92 10.1257/mac.3.3.92 http://www.aeaweb.org/aej/mac/data/2010-0021_data.zip http://www.aeaweb.org/aej/mac/app/2010-0021_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 3 3 July 2011 http://www.aeaweb.org/issue.php?journal=MAC&volume=3&issue=3 Articles Structural Change Out of Agriculture: Labor Push versus Labor Pull FranciscoAlvarez-CuadradoMcGill U and CIREQ MarkusPoschkeMcGill U and CIREQ 127 58 A declining agricultural employment share is a key feature of economic development. Its main drivers are: improvements in agricultural technology combined with Engel's law release resources from agriculture ("labor push"), and improvements in industrial technology attract labor out of agriculture ("labor pull"). We present a model with both channels and evaluate the importance using data on 12 industrialized countries since the nineteenth century. Results suggest that the "pull" channel dominated until 1920 and the "push" channel dominated after 1960. The "pull" channel mattered more in countries in early stages of the structural transformation. This contrasts with modeling choices in recent literature. (JEL E23, N10, N53, O10, O47). http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.3.127 10.1257/mac.3.3.127 http://www.aeaweb.org/aej/mac/data/2010-0032_data.zip http://www.aeaweb.org/aej/mac/app/2010-0032_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 3 3 July 2011 http://www.aeaweb.org/issue.php?journal=MAC&volume=3&issue=3 Articles Learning about Risk and Return: A Simple Model of Bubbles and Crashes William A.BranchU CA, Irvine George W.EvansU OR and U St Andrews 159 91 This paper demonstrates that an asset pricing model with least-squares learning can lead to bubbles and crashes as endogenous responses to the fundamentals driving asset prices. When agents are risk-averse they need to make forecasts of the conditional variance of a stock's return. Recursive updating of both the conditional variance and the expected return implies several mechanisms through which learning impacts stock prices. Extended periods of excess volatility, bubbles, and crashes arise with a frequency that depends on the extent to which past data is discounted. A central role is played by changes over time in agents' estimates of risk. (JEL D81, D83, E32, G01, G12) http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.3.159 10.1257/mac.3.3.159 http://www.aeaweb.org/aej/mac/data/2008-0128_data.zip http://www.aeaweb.org/aej/mac/app/2008-0128_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 3 3 July 2011 http://www.aeaweb.org/issue.php?journal=MAC&volume=3&issue=3 Articles Interest Rate Risk and Other Determinants of Post-WWII US Government Debt/GDP Dynamics George J.HallBrandeis U Thomas J.SargentNYU 192 214 This paper uses a sequence of government budget constraints to motivate estimates of returns on the US Federal government debt. Our estimates differ conceptually and quantitatively from the interest payments reported by the US government. We use our estimates to account for contributions to the evolution of the debt-GDP ratio made by inflation, growth, and nominal returns paid on debts of different maturities. (JEL E23, E31, E43, G12, H63) http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.3.192 10.1257/mac.3.3.192 http://www.aeaweb.org/aej/mac/data/2010-0028_data.zip http://www.aeaweb.org/aej/mac/app/2010-0028_app.pdf