This paper introduces the concepts of time-specific weak and strong cross section dependence. A double-indexed process is said to be cross sectionally weakly dependent at a given point in time, t, if its weighted average along the cross section dimension (N) converges to its expectation in quadratic mean, as N is increased without bounds for all weights that satisfy certain ‘granularity’ conditions. Relationship with the notions of weak and strong common factors is investigated and an application to the estimation of panel data models with an infinite number of weak factors and a finite number of strong factors is also considered. The paper concludes with a set of Monte Carlo experiments where the small sample properties of estimators based on principal components and CCE estimators are investigated and compared under various assumptions on the nature of the unobserved common effects.

We document that the recent decline in aggregate volatility has been accompanied by a large increase in firm level risk. The negative relationship between firm and aggregate risk seems to be present across industries in the US, and across OECD countries. Firm volatility increases after deregulation. Firm volatility is linked to research and development spending as well as access to external financing. Further, R&D intensity is also associated with lower correlation of sectoral growth with the rest of the economy. Paper Written for the NBER’s Twentieth Annual Conference on Macroeconomics ∗ We thank Ted Rosenbaum for excellent research assisstance. We are grateful to Mark Gertler and Ken

The US economy has become more stable. At the same time, US firms have become more volatile. I present the evidence and I propose a common explanation, based on the idea that goods markets have become more competitive. Competition between firms magnifies the effects of idiosyncratic productivity shocks: This can explain the rise in firm volatility. On the other hand, for given nominal adjustment costs, competitive pressures will induce firms to increase the frequency of their price adjustments. As a result, the economy will be more resilient to aggregate demand shocks. My calibration suggests that competitive pressures may have reduced the impact of demand shocks by 40%.

2 Past and present..................................................................................................................... 5 2.1 From rags to riches......................................................................................................... 5 2.2 Privatisation and liberalisation....................................................................................... 6

All economies face “shocks ” – unexpected events provoking some sort of response. Shocks affect households and firms at the micro level, and the path of economic growth and inflation at the macro level. For a small and open economy like New Zealand, many of the shocks

The views expressed in this paper are those of the authors and do not necessarily represent the views of the Bank for International Settlements or the Bangko Sentral ng Pilipinas. We would like to thank Magdalena Erdem for excellent research assistance. The communication survey was coordinated by Philip Wooldridge as part of the BIS Over the past decade or so, there has been increased emphasis on transparency and greater communication in the conduct of monetary policy among central banks in advanced industrial and emerging market economies alike. Indeed transparency and communication have increasingly taken on central roles in modern monetary