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on Dynamic General Equilibrium |
| By: | Martin, Christopher |
| Abstract: | This paper analyses equilibrium unemployment in a model that combines efficiency wages with search and matching frictions in the labour market. We express equilibrium unemployment as the sum of a pure efficiency wage component and a component that reflects search frictions. Using standard values of calibrated parameters, we argue that over 85% of equilibrium unemployment is due to effciency wage effects. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:45163&r=dge |
| By: | Lien Laureys (Bank of England) |
| Abstract: | When workers are exposed to human capital depreciation during periods of unemployment, hiring affects the unemployment pool's composition in terms of skills, and hence the economy’s production potential. Introducing human capital depreciation during unemployment into an otherwise standard New Keynesian model with search frictions in the labour market leads to the finding that the flexible price allocation is no longer constrained-efficient even when the standard Hosios condition holds. This is because it generates a composition externality in job creation: firms ignore how their hiring decisions affect the extent to which the unemployed workers’ skills erode, and hence the output that can be produced by new matches. Consequently, it might be desirable from a social point of view for monetary policy to deviate from strict inflation targeting. But quantitative analysis shows that although optimal price inflation is no longer zero, strict inflation targeting stays close to the optimal policy. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:61&r=dge |
| By: | Eric Smith (University of Essex) |
| Abstract: | This paper studies an environment in which workers accumulate information about em- ployment contacts made while searching on-the-job. Workers use this search capital to improve wages and insure against job destruction. This behaviour generates voluntary and involuntary job-to-job transitions with both wage hikes and wage cuts. The equilibrium wage distribution becomes less disperse than when workers cannot recall previously met job opportunities. The impact on output depends on depreciation and the extent of on-the-job search, among other factors. If search capital does not depreciate too quickly, the insurance benets outweigh rent seeking costs and total output is higher with search capital. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:70&r=dge |
| By: | Timothy McQuade (Stanford University); Adam Guren (Boston University) |
| Abstract: | We present a dynamic search model in which foreclosures exacerbate housing busts and delay the housing marketÂ’s recovery. By raising the seller to buyer ratio and making buyers more selective, foreclosures freeze the market for non- foreclosures and reduce price and sales volume. Because negative equity is necessary for default, foreclosures can cause price-default spirals that amplify an initial shock. To quantitatively assess these channels, the model is calibrated to the recent bust. The estimated amplification is significant: foreclosures exacerbated aggregate price declines by 60 percent and non-foreclosure price declines by 24 percent. Furthermore, policies that slow foreclosures can be counterproductive. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:40&r=dge |
| By: | Shouyong Shi (Pennsylvania State University); Melanie Cao |
| Abstract: | By analyzing a stochastic equilibrium with endogenous liquidity in the capital market, this paper explains the puzzling fact that capital reallocation across firms is procyclical while dispersion in Tobin's q across firms is acyclical or counter cyclical. Capital is reallocated across firms through a frictional market modeled by search and matching. The market tightness captures liquidity in this market and is endogenously determined as buyers choose whether to enter the market. Capital creation is also endogenous as capital makers choose whether to incur a cost to make capital. When aggregate productivity increases, more capital is created. At the same time, more buyers enter the capital market to buy capital in an attempt to capture the increased value of a productive firm. As a result, market liquidity increases and more capital is reallocated. The price of capital increases, which increases q of low-value firms and reduces q of high-value firms. The mean and standard deviation in q across firms respond ambiguously to an increase in aggregate productivity. These results are robust to the addition of heterogeneity in firm-specific productivity. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:100&r=dge |
| By: | Krueger, Dirk; Ludwig, Alexander |
| Abstract: | In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the importance of two different channels through which academic talent is transmitted across generations (persistence of innate ability vs. the impact of parental education) for the optimal design of these policies and model different forms of labor as imperfect substitutes, thereby generating general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers. We show that subsidizing higher education has important redistributive benefits, by shrinking the college wage premium in general equilibrium. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium. |
| Keywords: | Progressive Taxation,Education Subsidy,Transitional Dynamics |
| JEL: | E62 H21 H24 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:110&r=dge |
| By: | Fang Yang (Louisiana State University); Mariacristina De Nardi (UCL and Federal Reserve Bank of Chicago) |
| Abstract: | This paper provides two main contributions. First, it proposes a new theory of wealth inequality that merges two sources of inequality previously proposed: bequests motives and inheritance of ability of across generations, and an earnings process that allows for more earnings risk for the richest. Second, it uses our calibrated framework to study the importance of parental background and the effects of changing estate taxation on inequality, aggregate capital accumulation, intergenerational mobility, welfare, and on family background as a source of inequality. Our calibrated model generates realistically skewed distributions for wealth, earnings, and bequests, and a correlation of lifetime earnings and wealth at retirement that is close to that in the data and is thus a good laboratory to use to study these questions. We find that parental background is a crucial determinant of one's expected lifetime utility. We also find that increasing estate taxation from its effective levels observed over many years, to levels that are closer to the statutory ones observed in year 2000, would significantly reduce wealth concentration in the hands of the richest few and the role of parental background in determining one's lot in life. The implied welfare gains of such a policy would be positive for 71% of the population. For those experiencing losses, their loss would be a one-time cost of the order of 11% of average income. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:92&r=dge |
| By: | Christopher Rauh (University of Cambridge) |
| Abstract: | High earnings inequality goes hand in hand with low intergenerational earnings mobility across developed countries. Public expenditure on education, which could mitigate this relationship, is negatively correlated with inequality across countries. In an overlapping generations model, which I calibrate to the US, early and college education policies are endogenized via probabilistic voting. I investigate two channels, a technological and a political explanation. First, considering differences across countries in tertiary education characteristics account for 65% of the differences in inequality. The higher college premium in the US translates into increased incentives to invest in early education due to dynamic complementarities, and also increases the gap between parents' ability to finance education. Second, I exploit cross-country variations in the bias in voter turnout towards the educated. Thereby, I replicate the negative relation between inequality and public education expenditure and account for nearly one-quarter of the differences in inequality and mobility. For the US, I find that compulsory voting could foster mobility, whereas the effect on pre-tax inequality is low. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:82&r=dge |
| By: | Nicolas Vincent (HEC Montréal); Oleksiy Kryvtsov (Bank of Canada) |
| Abstract: | Macroeconomists traditionally ignore temporary price mark-downs ("sales") under the assumption that they are unrelated to aggregate phenomena. We challenge this view. First, we provide evidence from the U.K. and U.S. CPI micro data that the frequency of sales is strongly countercyclical. Second, we build a general equilibrium model in which sales arise endogenously. In response to a monetary contraction, firms facing rigid regular prices post more sales, and households search more intensively. The resulting fall in the aggregate price level can be significantly larger than if sales were ignored, implying a much smaller response of real consumption to monetary shocks. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:46&r=dge |
| By: | Piotr Dworczak (Stanford); Haoxiang Zhu (MIT); Darrell Duffie (Stanford University) |
| Abstract: | We analyze the role of benchmarks in over-the-counter markets subject to search frictions. The publication of a benchmark can, under conditions, raise total social surplus by (i) increasing the volume of beneficial trade, (ii) facilitating more efficient trade matching between dealers and customers, and (iii) reducing total search costs. Although the improvement in market transparency caused by benchmarks may lower dealer profit margins on each trade, dealers may nevertheless introduce a benchmark such as LIBOR in order to encourage greater market participation by investors. In some cases, low-cost dealers may introduce a benchmark in order to increase their market share through reducing entry by high-cost dealers, a further source of efficiency gain. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:51&r=dge |
| By: | Marco Cozzi (Queen's University) |
| Abstract: | This paper formally compares the fit of various versions of the incomplete markets model with aggregate uncertainty, relying on a simple Bayesian empirical framework. The models differ in the degree of households' heterogeneity, with a focus on the role of preferences. For every specification, empirically motivated priors for the parameters are postulated to obtain the models' predictive distributions, which are interpreted as being the distributions of population moments. These are in turn contrasted with the posterior distributions of the same moments obtained from an atheoretical (Bayesian) econometric model. It is shown that aggregate data on consumption and income contain valuable information to determine which models are more likely to have generated the data. In particular, despite its generality, a model with both risk aversion and discount factor heterogeneity displays a very low marginal likelihood, and should not be employed for the design of macroeconomic policies and welfare analysis. It is also found that the other models display similar posterior odds, with the Bayes factors ranging between 1 and 3. Finally, it is shown that practitioners in the field should carefully calibrate the values of the unemployment rate in booms and expansions, as they heavily affect the autocorrelation of aggregate consumption and the correlation between consumption and income. This finding suggests that the magnitude of welfare effects computations is likely to be influenced considerably by these two parameters. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:32&r=dge |
| By: | Alexandre Kohlhas (Stockholm University) |
| Abstract: | This paper studies the effect of a central bank releasing public information about the state of the economy in a dispersed information business cycle model in which market participants learn from the distribution of prices, economy-wide output and the level of the interest rate. It demonstrates how central bank information disclosure can increase the information content of public signals by making expectations of future central bank actions closer to common knowledge. This effect is shown in a calibrated business cycle model to completely offset the standard learning externality of additional public information. Central bank information disclosure can thus decrease the level of uncertainty about the state of the economy for everyone -- even the central bank itself. This qualifies the "anti-disclosure" result in Morris and Shin (2005) and Amador and Weill (2010). |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:57&r=dge |
| By: | Dimitris Papanikolaou (Northwestern University) |
| Abstract: | We provide a theory of endogenous shocks to the marginal efficiency of investment that is based on a limited commitment friction in the creation of new capital. Inventors generate ideas but are inefficient at implementing them. When inventors collaborate with firms, their ideas can be implemented more efficiently. However, firms cannot commit to appropriately compensate inventors. The best ideas are those most at risk of theft, since reputational concerns are insufficient to always discipline firms. The fear of expropriation leads inventors to implement their best ideas inefficiently without firms. Good news about future technological progress increases the value of future business and thus disciplines firms away from expropriating better ideas, leading to increases in measured productivity and the returns to new investment. In contrast to standard models, this mechanism leads to an investment boom and increased economic growth in response to good news about future technologies. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:71&r=dge |
| By: | Aizawa, Naoki (Federal Reserve Bank of Minneapolis); Fang, Hanming (University of Pennsylvania) |
| Abstract: | We present and empirically implement an equilibrium labor market search model where risk averse workers facing medical expenditure shocks are matched with firms making health insurance coverage decisions. Our model delivers a rich set of predictions that can account for a wide variety of phenomenon observed in the data including the correlations among firm sizes, wages, health insurance offering rates, turnover rates and workers’ health compositions. We estimate our model by Generalized Method of Moments using a combination of micro datasets including Survey of Income and Program Participation, Medical Expenditure Panel Survey and Robert Wood Johnson Foundation Employer Health Insurance Survey. We use our estimated model to evaluate the equilibrium impact of the 2010 Affordable Care Act (ACA) and find that it would reduce the uninsured rate among the workers in our estimation sample from about 22% in the pre-ACA benchmark economy to less than 4%. We also find that income-based premium subsidies for health insurance purchases from the exchange play an important role for the sustainability of the ACA; without the premium subsidies, the uninsured rate would be around 18%. In contrast, as long as premium subsidies and health insurance exchanges with community ratings stay intact, ACA without the individual mandate, or without the employer mandate, or without both mandates, could still succeed in reducing the uninsured rates to 7.34%, 4.63% and 9.22% respectively. |
| Keywords: | Health; Health insurance; Health care reform; Labor market equilibrium |
| JEL: | G22 I11 I13 J32 |
| Date: | 2015–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:727&r=dge |
| By: | Robin Döttling (University of Amsterdam, the Netherlands); Enrico Perotti (University of Amsterdam, the Netherlands) |
| Abstract: | We explore how house prices evolve under technological progress, when housing serves for consumption as well as store of value. Technological change leads to human capital substituting physical capital and manual labor. Reduced use of physical capital implies that firms have less tangible collateral to pledge for external finance. This results in lower business demand for credit and a decline in interest rates. Over time, savings are redirected to mortgage credit, where houses serve as collateral. Under fixed land supply, house prices rise in real terms. The combination of growing wage inequality and mortgage credit leads to high household leverage for low-skill workers, increasing default rates and foreclosures. Restraining mortgage borrowing is more effective than subsidies to limit mortgage defaults, by containing both leverage and house price appreciation. It also leads to lower interest rates, supporting more corporate investment and higher wages. |
| Keywords: | Inequality; mortgage credit; housing; human capital; skill-biased technological change |
| JEL: | D33 E22 E44 R21 |
| Date: | 2015–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150079&r=dge |
| By: | Garibaldi, Pietro (University of Turin); Pfann, Gerard A. (Maastricht University) |
| Abstract: | Dismissal disputes occur mostly in recessions and often lead to long and costly contract termination procedures. This paper investigates how dispute procedures may affect the job-matching process. First we present a simple accounting frame- work that corresponds with general dismissal legislation, but is sufficiently flexible to accommodate country-specific legislation. Detailed information from a sample of 2,191 disputes that occurred in the Netherlands between 2006 and 2009 is used to adjust the framework to Dutch institutional specificity. The resulting equilibrium matching model is solved to explain endogenous sorting between lengthy and costly firing procedures. The model also rationalizes the longevity of the dual Dutch model and its political resilience. |
| Keywords: | disputes, firing, legislation, sorting |
| JEL: | E24 J08 J38 K31 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9148&r=dge |
| By: | Orazio Attanasio; Peter Levell; Hamish Low; Virginia Sánchez-Marcos |
| Abstract: | There is a renewed interest in the size of labour supply elasticities and the discrepancy between micro and macro estimates. Recent contributions have stressed the distinction between changes in labour supply at the extensive and the intensive margin. In this paper, we stress the importance of individual heterogeneity and aggregation problems. At the intensive margins, simple specifications that seem to fit the data give rise to non linear expressions that do not aggregate in a simple fashion. At the extensive margin, aggregate changes in participation are likely to depend on the cross sectional distribution of state variables when a shock hits and, therefore, are likely to be history dependent. We tackle these aggregation issues directly by specifying a life cycle model to explain female labour supply in the US and estimate its various components. We estimate the parameters of different component of the model. Our results indicate that (i) at the intensive margin, Marshallian and Hicksian elasticities are very heterogeneous and, on average, relatively large; (ii) Frisch elasticities are, as implied by the theory, even larger; (iii) aggregate labour supply elasticities seem to vary over the business cycle, being larger during recessions. |
| JEL: | D12 J22 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21315&r=dge |
| By: | Peter McAdam (European Central Bank); Jakub Muck (Narodowy Bank Polski); Jakub Growiec (Warsaw School of Economics & NBP) |
| Abstract: | Based on long US time series we document a range of empirical properties of the labor's share of GDP, including its substantial medium-run swings. We explore the extent to which these empirical regularities can be explained by a calibrated micro-founded long-run economic growth model with normalized CES technology and endogenous labor- and capital-augmenting technical change driven by purposeful directed R&D investments. It is found that dynamic macroeconomic trade-offs created by arrivals of both types of new technologies may lead to prolonged swings in the labor share due to oscillatory convergence to the balanced growth path as well as stable limit cycles via Hopf bifurcations. Both predictions are broadly in line with the empirical evidence. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:62&r=dge |
| By: | Garibaldi, Pietro; Pfann, Gerard Antonie |
| Abstract: | Dismissal disputes occur mostly in recessions and often lead to long and costly contract termination procedures. This paper investigates how dispute procedures may affect the job-matching process. First we present a simple accounting framework that corresponds with general dismissal legislation, but is sufficiently flexible to accommodate country-specific legislation. Detailed information from a sample of 2,191 disputes that occurred in the Netherlands between 2006 and 2009 is used to adjust the framework to Dutch institutional specificity. The resulting equilibrium matching model is solved to explain endogenous sorting between lengthy and costly firing procedures. The model also rationalizes the longevity of the dual Dutch model and its political resilience. |
| Keywords: | Disputes; Firing; Legislation; Sorting |
| JEL: | E24 J08 J38 K31 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10684&r=dge |
| By: | Deschamps, Pierre; de Sousa, José |
| Abstract: | This paper assesses the effects of labor mobility constraints on racial discrimination. Our equilibrium search model shows that these effects follow an inverted U-shaped relationship. In particular, when mobility constraints are low, we find that discrimination disappears. We test this prediction with an exogenous mobility shock on the European soccer labor market. The Bosman ruling by the European Court of Justice in 1995 lifted restrictions on soccer player mobility. Using a panel of all clubs in the English first division from 1981 to 2008, we compare the pre- and post-Bosman ruling market. Consistent with a taste-based explanation, we find evidence that wage discrimination disappears when constraints on worker mobility are lowered. |
| Keywords: | labor mobility; labor search; wage discrimination |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:docweb:1501&r=dge |