nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒06‒27
six papers chosen by
Christian Zimmermann
University of Connecticut

  1. Worker Flows, Job Flows and Unemployment in a Matching Model By Simon Burgess; Helene Turon
  2. The Cyclical Behavior of Equilibrium Unemployment and Vacancies – A Comment By Simon Burgess; Helene Turon
  3. Sticky Prices, Limited Participation or Both? By Niki Papadopoulou
  4. Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version By Stephanie Schmitt-Grohe; Martin Uribe
  5. Retraining the Unemployed in a Matching Model with Turbulence By Felix Reichling
  6. Globalization, the volatility of intermediate goods prices and economic growth By Thomas M. Steger; Lucas Bretschger

  1. By: Simon Burgess; Helene Turon
    Abstract: Standard matching models of unemployment assume that workers and job flows are identical. This is in stark contrast to empirical evidence that job flows in fact only account for a fraction of worker ßows, that unemployment exits only account for a fraction of hires and that these fractions vary over the cycle. In this paper, we develop and calibrate a model based on the Mortensen and Pissarides approach but that emphasises this issue. We show that this matters - that it has very different implications for our view of unemployment dynamics. The key features of our model relate to the search options of the worker, and the job creation decision by firms. We allow workers to search whilst employed, and firms to re-advertise jobs that have been quit from. This leads us to use a different job creation process, whereby potential vacancies, or job 'ideas', arise at a finite rate per period over a range of idiosyncratic productivities. In the standard setting, there is an unlimited supply of potential vacancies at the top idiosyncratic productivity. The main results are as follows. First, the presence of on-the-job search has a substantial impact on labour market equilibrium, whereby equilibrium unemployment is lower and exhibits a higher turnover rate. On-the-job search renders the unemployment inflow rate more sensitive to the cycle: in all cases, the inflow rate is found to be more cyclically sensitive than the outflow rate, suggesting that most unemployment dynamics occur through this channel. This confrms empirical results for Great Britain (Burgess and Turon (2005)). Second, our model offers some insight into a (two-way) relationship between job-to-job flows, which drives the difference between worker and job flows, and the extent of wage dispersion. More wage dispersion increases the incentive to search on-the-job and more on-the-job search widens the range of viable productivities and leads to lower wages at the bottom of the wage distribution, thereby increasing wage dispersion. Third, changes in the model's exogenous parameters impact unemployment to a considerable degree by changing the level of employed job search.
    Keywords: Unemployment, on-the-job search, worker flows, job flows, matching.
    JEL: J64
    Date: 2005–01
  2. By: Simon Burgess; Helene Turon
    Abstract: The Mortensen-Pissarides model is an attractive model because it is tractable, delivers some intuitive comparative statics and permits policy analysis. However, Shimer (2005) shows that the model generates far too little volatility in its key variables - unemployment and vacancies - relative to the variation in the shock variables. Shimer identifes the flexibility of wages as the key issue. In this Comment, we show that it is possible to generate suffcient volatility in unemployment and vacancies whilst retaining the standard wage determination process. We set out a model with two important changes from the Mortensen-Pissarides approach: job search by the employed is allowed, and the vacancy creation condition is changed to allow churning of workers. Calibrating the model to UK data, we show that our model can produce volatility in the unemployment and vacancy series to match the data; we confirm for the UK that the Mortensen-Pissarides model cannot, as shown by Shimer for the US.
    Keywords: Unemployment, on-the-job search, worker flows, job flows, matching.
    JEL: J64
    Date: 2005–01
  3. By: Niki Papadopoulou
    Abstract: This paper investigates the micro mechanisms by which monetary policy affects and is transmitted through the U.S economy, by developing a unified, dynamic, stochastic, general equilibrium model that nests two classes of models. The first sticky prices and the second limited participation. Limited participation is incorporated by assuming that households’ are faced with quadratic portfolio adjustment costs. Monetary policy is characterized by a generalized Taylor rule with interest rate smoothing. The model is calibrated and investigates whether the unified model performs better in replicating empirical stylized facts, than the models that have only sticky price or limited participation. The unified model replicates the second moments of the data better than the other two types of models. It also improves on the ability of the sticky price model to deliver the hump-shaped response of output and inflation. Moreover, it also delivers on the ability of the limited participation model to replicate the fall in profits and wages, after a contractionary monetary policy.
    JEL: E31 E32 E44 E52
  4. By: Stephanie Schmitt-Grohe; Martin Uribe
    Abstract: In this paper, we study Ramsey-optimal fiscal and monetary policy in a medium-scale model of the U.S.\ business cycle. The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate fluctuations. The main result of the paper is that price stability appears to be a central goal of optimal monetary policy. The optimal rate of inflation under an income tax regime is half a percent per year with a volatility of 1.1 percent. This result is surprising given that the model features a number of frictions that in isolation would call for a volatile rate of inflation---particularly nonstate-contingent nominal public debt, no lump-sum taxes, and sticky wages. Under an income-tax regime, the optimal income tax rate is quite stable, with a mean of 30 percent and a standard deviation of 1.1 percent. Simple monetary and fiscal rules are shown to implement a competitive equilibrium that mimics well the one induced by the Ramsey policy. When the fiscal authority is allowed to tax capital and labor income at different rates, optimal fiscal policy is characterized by a large and volatile subsidy on capital.
    JEL: E52 E61 E63
    Date: 2005–06
  5. By: Felix Reichling (Stanford University)
    Abstract: I investigate to what degree differences in retraining opportunities are responsible for the divergence of unemployment rates between the U.S. and Europe since the early 1980s. I provide some evidence for higher retraining rates in the U.S. as compared to Europe and further show that there is tremendous heterogeneity across OECD countries with respect to retraining. In my model, unemployed workers not only search for jobs but also for suitable retraining programs. I find that when it becomes more difficult to find suitable retraining programs, enrollment rates, productivity and the unemployment rate decline. Furthermore, this paper is the first attempt to investigate the role of retraining in economies that are subject to economic turbulences as described by Ljungqvist and Sargent (1998, 2004). Using a similar parametrization as Ljungqvist and Sargent (2004), I find that the generosity of unemployment benefits, the main driving force in their model, is not an important determinant of unemployment, even during tumultuous economic times, if sufficiently good retraining institutions are available. Economies with more flexible retraining institutions adjust better to economic turbulence, and as a result, feature lower unemployment rates and higher productivity and output. My results suggest that differences in retraining opportunities play an important role in explaining cross-country differences in unemployment rates.
    Keywords: Retraining the Unemployed, European Unemployment, Economic Turbulence
    JEL: E24 J64
    Date: 2005–06–17
  6. By: Thomas M. Steger (Institute of Economic Research (WIF), Swiss Federal Institute of Technology Zurich (ETH)); Lucas Bretschger (Institute of Economic Research (WIF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: We set up a dynamic stochastic model of a stylized economy comprising a final output sector (with traditional and modern firms) and an intermediate goods sector. It is shown that market integration reduces the volatility of the rate of return of capital invested in modern firms. The induced portfolio decision of households then leads to reallocation of capital from traditional to modern firms. Despite the presence of a reverse precautionary saving channel, the growth rate unambiguously increases due to the reallocation of capital. Empirical estimates for OECD countries confirm the theoretical results
    Keywords: globalization, trade in intermediate goods, portfolio decisions, economic growth
    JEL: F1 O4
    Date: 2005–05

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