nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2015‒07‒25
25 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. A Dynamic Stochastic General Equilibrium Model for India By Shesadri Banerjee and Parantap Basu
  2. Small DSGE Model with Financial Frictions By Melesse Wondemhunegn Ezezew
  3. Wage Posting and Business Cycles: a Quantitative Exploration By Giuseppe Moscarini; Fabien Postel-Vinay
  4. Illiquidity in Sovereign Debt Markets By Juan Passadore
  5. The South African Economic Response to Monetary Policy Uncertainty By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  6. Coordinating Business Cycles By Mathieu Taschereau-Dumouchel; Edouard Schaal
  7. Financial Frictions and Export Dynamics in Large Devaluations By David Kohn; Fernando Leibovici; Michal Skup
  8. Human Capital Risk, Contract Enforcement, and the Macroeconomy By Tom Krebs; Moritz Kuhn; Mark Wright
  9. German wage moderation and European imbalances: Feeding the global VAR with theory By Bettendorf, Timo; León-Ledesma, Miguel A.
  10. Labor market reforms and unemployment dynamics By Fabrice Murtin; Jean-Marc Robin
  11. Progressive Taxation, Endogenous Growth, and Macroeconomic (In)stability By Jang-Ting Guo; Shu-Hua Chen
  12. Disaster risk and preference shifts in a New Keynesian model By Isoré, Marlène; Szczerbowicz, Urszula
  13. Who Works for Whom? Worker Sorting in a Model of Entrepreneurship with Heterogeneous Labor Markets By Hubert Janicki; Henry Hyatt; Emin Dinlersoz
  14. Towards a “New” Inflation Targeting Framework: The Case of Uruguay By Matias Escudero; Martin Gonzalez-Rozada; Martin Sola
  15. Innovation, Deregulation, and the Life Cycle of a Financial Service Industry By Hayashi, Fumiko; Li, Grace; Wang, Zhu
  16. Financial frictions and new exporter dynamics By David Kohn; Fernando Leibovici; Michal Skup
  17. Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?* By Blanchard, Olivier; Erceg, Christopher J.; Lindé, Jesper
  18. Optimal Monetary Interventions in Credit Markets By Tai-Wei Hu; Luis Araujo
  19. Endogenous Uncertainty and Credit Crunches By Robert Ulbricht; Ludwig Straub
  20. Interactions between job search and housing decisions: a structural estimation By Rendon, Sílvio; Quella-Isla, Núria
  21. Stock Market Investment: The Role of Human Capital By Athreya, Kartik B.; Ionescu, Felicia; Neelakantan, Urvi
  22. Efficiency and Distortions in a Production Economy with Heterogeneous Beliefs By Johan Walden; Christian Heyerdahl-Larsen
  23. Labor Market Polarization, the Decline of Routine Work, and Technological Change: A Quantitative Evaluation By Christian vom Lehn
  24. Trends and Cycles in China's Macroeconomy By Kaiji Chen
  25. Innovation, Reallocation and Growth By William Kerr; Ufuk Akcigit; Nicholas Bloom; Daron Acemoglu

  1. By: Shesadri Banerjee and Parantap Basu (National Council for Applied Economic Research)
    Abstract: Over the last decade, the Dynamic Stochastic General Equilibrium (DSGE) framework has become a workhorse for macroeconomic analysis in both academic and policy circles. Following this emerging trend, we aim to expand our research capacity in macroeconomics at NCAER by introducing a baseline DSGE model for the Indian economy. This working paper comes out as a part of this process. In this paper, we make two contributions. First, we explore the empirical regularities of the Indian business cycle and establish a few stylized facts. Second, we produce a baseline DSGE model that can serve as an analytical framework for understanding these stylized facts. The model has a small open economy feature with a clear demarcation between consumption and investment goods sectors. We simulate the model with plausible parameterization based on the DSGE literature. Our results show that the baseline model can replicate the stylized facts reasonably well.
    Keywords: DSGE, Indian Economy, IST and TFP Shocks
    JEL: E2 E6
    Date: 2015–07
  2. By: Melesse Wondemhunegn Ezezew (Department of Economics, University Of Venice Cà Foscari)
    Abstract: In the last few years, macroeconomic modelling has emphasised the role of credit market frictions in magnifying and transmitting nominal and real disturbances and their implication for macro-prudential policy design. In this paper, we construct a modest New Keynesian general equilibrium model with active banking sector. In this set-up, the financial sector interacts with the real side of the economy via firm balance sheet and bank capital conditions and their impact on investment and production decisions. We rely on the financial accelerator mechanism due to Bernanke et al. (1999) and combine it with a bank capital channel as demonstrated by Aguiar and Drumond (2007). We calibrate the resulting model from the perspective of a low income economy reflecting the existence of relatively high investment adjustment cost, strong fiscal dominance, and underdeveloped financial and capital markets where the central bank uses money growth in stabilizing the national economy. Then we examine the impulse response of selected endogenous variables to shocks stemming from the fiscal authority, the monetary policy process, and technological progress. The findings are broadly consistent with previous studies that demonstrated stronger role for credit market imperfections in amplifying and propagating monetary policy shocks. Moreover, we also compare the trajectory of the model economy under alternative monetary policy instruments. The results suggest that the model with money growth rule generates higher volatility in output and inflation than the one with interest rate rule.
    Keywords: Firm net worth, bank equity, monetary policy transmission, macro-prudential regulation, business cycle
    JEL: E32 E44 E50 C68
    Date: 2015
  3. By: Giuseppe Moscarini (Yale University); Fabien Postel-Vinay (Departement d'Economie de Sciences Po)
    Abstract: We provide a quantitative exploration of business cycles in a frictional labor market under contract-posting. The steady-state random search and wage-posting model of Burdett and Mortensen (1998) has become the canonical structural framework for empirical analysis of worker turnover and equilibrium wage dispersion. In this paper, we provide an efficient algorithm to simulate a dynamic stochastic equilibrium version of this model, the Stochastic Burdett-Mortensen (SBM) model, and evaluate its performance against empirical evidence on fluctuations in unemployment, vacancies and wages.
    Keywords: Equilibrium Job Search; Dynamic Contracts; Stochastic Dynamics; Business Cycles
    JEL: J64 J31 E32
    Date: 2014–12
  4. By: Juan Passadore (MIT)
    Abstract: We study debt policy of emerging economies accounting for credit and liquidity risk. To account for credit risk we study an incomplete markets model with limited commitment and exogenous costs of default following the quantitative literature of sovereign debt. To account for liquidity risk, we introduce search frictions in the market for sovereign bonds. In our model, default and liquidity will be jointly determined.This permits us to structurally decompose spreads into a credit and liquidity component. To evaluate the quantitative performance of the model we perform a calibration exercise using data for Argentina. We find that introducing liquidity risk does not harm the overall performance of the model in matching key moments of the data (mean debt to GDP, mean sovereign spread and volatility of sovereign spread). At the same time, the model endogenously generates bid ask spreads, that can match those for Argentinean bonds in the period of analysis. Regarding the structural decomposition,we find that the liquidity component can explain up to 50 percent of the sovereign spread during bad times; when the sovereign is not close to default, the liquidity component is negligible. Finally, regarding business cycle properties, the model matches key moments in the data.
    Date: 2015
  5. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey and Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We study the evolution of monetary policy uncertainty and its impact on the South African economy. We show that volatility is high and constant using a stochastic volatility model in a sign-restricted VAR setup. Stochastic volatility is model driven and there is an endogenous economic response to uncertainty. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. We study the transmission mechanism of uncertainty for South Africa using a nonlinear DSGE model. The model is calibrated based on the existing literature while the persistence and size of uncertainty is taken from the empirical VAR. The DSGE model shows that the size of the uncertainty shock matters - high uncertainty can lead to a severe contraction in output, inflation and interest rates.
    Keywords: Uncertainty, nonlinear DSGE, stochastic volatility
    JEL: C10 E52
    Date: 2015–07
  6. By: Mathieu Taschereau-Dumouchel (University of Pennsylvania - Wharton); Edouard Schaal (New York University)
    Abstract: We develop a quantitative theory of business cycles with coordination failures. Because of a standard aggregate demand externality, firms want to coordinate production. The presence of a non-convex capacity decision generates multiple equilibria under complete information. We use a global game approach to show that, under incomplete information, the multiplicity of equilibria disappears to give rise to a unique equilibrium with two stable steady states. The economy exhibits coordination traps: after a negative shock of sufficient size or duration, coordination on the good steady state is harder to achieve, leading to quasi-permanent recessions. In our calibration, the coordination channel improves on the neoclassical growth model in terms of business cycle asymmetries and skewness. The model also accounts for features of the 2007- 2009 recession and its aftermath. Government spending is harmful in general as the coordination problem magnifies the crowding out. It can, however, increase welfare -- without nominal rigidities -- when the economy is about to transition to the bad steady state. Simple subsidies implement the efficient allocation.
    Date: 2015
  7. By: David Kohn; Fernando Leibovici; Michal Skup
    Abstract: We study the role of financial frictions and balance-sheet effects in accounting for the dynamics of aggregate exports in large devaluations. In standard models of international trade, exports increase immediately following a large devaluation; in contrast, aggregate exports respond sluggishly in the data. We investigate a small open economy with heterogeneous firms and idiosyncratic productivity shocks, where firms face financing constraints and debt can be denominated in domestic or foreign units. In our model, a real depreciation affects firms through two channels. On the one hand, it increases the returns to selling internationally, making exporting more profitable. On the other hand, it tightens the borrowing constraint by increasing the value of foreign debt relative to firms’ net worth. We calibrate the model to match key features from plant-level data and use it to quantify the importance of these channels. We find that financial frictions slow down the response of aggregate exports, and foreign-denominated debt amplifies this effect by decreasing firms’ net worth on impact. When accounting for the observed heterogeneity in export intensity across exporters, these channels explain a large share of the gap between the data and the frictionless model.
    Keywords: international trade, financial frictions, borrowing constraints, large devaluations, export elasticity, export dynamics, quantitative
    JEL: F1 F4 G32
    Date: 2015–05
  8. By: Tom Krebs (Universitat Mannheim); Moritz Kuhn (University of Bonn); Mark Wright (University of California, Los Angeles)
    Abstract: We use data from the Survey of Consumer Finance and Survey of Income Program Participation to show that young households with children are under-insured against the risk that an adult member of the household dies. We develop a tractable macroeconomic model with human capital risk, age-dependent returns to human capital investment, and endogenous borrowing constraints due to the limited pledgeability of human capital. We show analytically that, consistent with the life insurance data, in equilibrium young households are borrowing constrained and under-insured. A calibrated version of the model can quantitatively account for the life-cycle variation of life-insurance holdings, financial wealth, earnings, and consumption inequality observed in the US data. Our analysis implies that a reform that makes consumer bankruptcy more costly, like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, leads to a substantial increase in the volume of both credit and insurance.
    Keywords: human capital risk, limited enforcement, life insurance
    JEL: E21 E24 D52 J24
    Date: 2015–07
  9. By: Bettendorf, Timo; León-Ledesma, Miguel A.
    Abstract: German labor market reforms in the 1990s and 2000s are generally believed to have driven the large increase in the dispersion of current account balances in the Euro Area. We investigate this hypothesis quantitatively. We develop an open economy New Keynesian model with search and matching frictions from which we derive robust sign restrictions for a wage bargaining shock. We then impose these restrictions on a Global VAR consisting of Germany and 8 EMU countries to identify a wage bargaining shock in Germany. Our results show that, although the German current account was significantly affected by wage bargaining shocks, their contribution to European current account imbalances was negligible. We conclude that the reduction in bargaining power of German unions after labor market reforms cannot be the lone driver of European imbalances.
    Keywords: european imbalances,German wage moderation,DSGE,Global VAR,sign restrictions
    JEL: F10 F32 F41
    Date: 2015
  10. By: Fabrice Murtin (Departement d'Economie de Sciences Po); Jean-Marc Robin (Département d'économie)
    Abstract: In this paper, we quantify the contribution of labor market reforms to unemployment dynamics in nine OECD countries (Australia, France, Germany, Japan, Portugal, Spain, Sweden, the United Kingdom and the United States). We build and estimate a dynamic stochastic search-matching model with heterogeneous workers, where aggregate shocks to productivity fuel up the cycle, and unanticipated policy interventions shift structural parameters and displace the long-term equilibrium. We show that the heterogeneous-worker mechanism proposed by Robin (2011) to explain unemployment volatility by productivity shocks works well in all countries. The amount of resources injected into placement and employment services, the reduction of UI benefits and product market deregulation stand out as the most prominent policy levers for unemployment reduction. All other LMPs have a significant but lesser impact. We also find that business cycle shocks and LMPs explain about the same share of unemployment volatility (except for Japan, Portugal and the US).
    Keywords: Unemployment Dynamics; Turnover; Labor Market Institutions; Job Search; Matching Function
    JEL: E24 E31 J21
    Date: 2014–01
  11. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Shu-Hua Chen (National Taipei University)
    Abstract: In the context of a standard one-sector AK model of endogenous growth, we show that the economy exhibits equilibrium indeterminacy and belief-driven aggregate fluctuations under progressive taxation of income. When the tax schedule is regressive or flat, the economy's balanced growth path displays saddle-path stability and equilibrium uniqueness. These results imply that in sharp contrast to a conventional automatic stabilizer, progressive income taxation may destabilize an endogenously growing macroeconomy by generating cyclical fluctuations driven by agents' self-fulfilling expectations or sunspots.
    Keywords: Progressive Income Taxation, Endogenous Growth, Equilibrium (In)determinacy.
    JEL: E62 O41
    Date: 2015–07
  12. By: Isoré, Marlène; Szczerbowicz, Urszula
    Abstract: This paper analyzes the effects of a change in a small but time-varying “disaster risk” à la Gourio (2012) in a New Keynesian model. In a real business cycle framework, the disaster risk has been successful in replicating observed moments of equity premia. However, responses of macroeconomic variables critically depend on the value of the elasticity of intertemporal substitution (EIS). In particular, we show here that an increase in the probability of disaster causes a recession only in case of an EIS larger than unity, which may be arbitrarily large. Nevertheless, we also find that incorporating sticky prices allows to conciliate recessionary effects of the disaster risk with a plausible value of the EIS. A higher disaster risk is then also associated with an increase in the discount factor and with deflation, making it consistent with the preference shock literature (Christiano et al., 2011).
    Keywords: disaster risk, rare events, uncertainty, asset pricing, DSGE models, New Keynesian models, business cycles
    JEL: E20 E31 E32 E44 G12 Q54
    Date: 2015–07–15
  13. By: Hubert Janicki (U.S. Census Bureau); Henry Hyatt (US Census Bureau); Emin Dinlersoz (U.S. Census Bureau)
    Abstract: Compared with mature firms, young firms, most of which represent entrepreneurial activity, disproportionately hire younger, nonemployed individuals, and provide them with lower earnings. Furthermore, in recent years the number of young firms has been declining, along with their employment share, employee size, and worker earnings. To account for these facts, this paper introduces heterogeneous labor markets with search frictions to a dynamic model of entrepreneurship. Individuals differ in productivity and wealth. They can choose not to work, become entrepreneurs, or work in one of two sectors: a corporate versus an entrepreneurial sector. The differences in production technology and labor market frictions across the sectors lead to sector-specific wages. Worker sorting across sectors arises, as individuals with lower assets and higher productivity tend to take lower-paying jobs in the entrepreneurial sector because they do not have enough savings to smooth consumption while unemployed until the arrival of a higher-paying corporate sector job offer. This sorting is found to be consistent with the data on the average net worth of workers in young versus mature firms. The model is also used to explore potential mechanisms behind the recent decline in entrepreneurship in the U.S.
    Date: 2015
  14. By: Matias Escudero; Martin Gonzalez-Rozada; Martin Sola
    Abstract: Using a dynamic stochastic general equilibrium model with financial frictions we study the effects of a rule that incorporates not only the interest rate but also the legal reserve requirements as instruments of the monetary policy. We evaluate the effectiveness of both instruments to accomplish the inflationary and/or financial stability objectives of the Central Bank of Uruguay. The main findings are that: (i) reserve requirements can be used to achieve the inflationary objectives of the Central Bank. However, reducing inflation using this instrument, it also produces a real appreciation of the Uruguayan peso; (ii) when the Central Bank uses the monetary policy rate as an instrument, the effect of the reserve requirements is to contribute to reduce the negative impact over consumption, investment and output of an eventual increase in this rate. Nevertheless, the quantitative results in terms of inflation reduction are rather poor; and (iii) the monetary policy rate becomes more effective to reduce inflation when the reserve requirement instrument is solely directed to achieve financial stability and the monetary policy rate used to achieve the inflationary target. Overall, the main policy conclusion of the paper is that having a non-conventional policy instrument, when well-targeted, can help effectively inflation control. Moving reserve requirements can also be instrumental in offsetting the impact of monetary policy on the real exchange rate.
    Keywords: dynamic stochastic general equilibrium models, financial frictions, monetary policy, reserve requirements, inflation targeting, non-conventional policy instruments
    JEL: E52 E58
    Date: 2014–01
  15. By: Hayashi, Fumiko (Federal Reserve Bank of Kansas City); Li, Grace (International Monetary Fund); Wang, Zhu (Federal Reserve Bank of Richmond)
    Abstract: This paper examines innovation, deregulation, and fi rm dynamics over the life cycle of the U.S. ATM and debit card industry. In doing so, we construct a dynamic equilibrium model to study how a major product innovation (introducing the new debit card function) interacted with banking deregulation drove the industry shakeout. Calibrating the model to a novel data set on ATM network entry,exit, size, and product offerings shows that our theory fits the quantitative pattern of the industry well. The model also allows us to conduct counterfactual analyses to evaluate the respective roles that innovation and deregulation played in the industry evolution.
    JEL: G2 L10 O30
    Date: 2015–07–20
  16. By: David Kohn; Fernando Leibovici; Michal Skup
    Abstract: This paper studies the role of nancial frictions as a barrier to international trade. We study new exporter dynamics to identify how these frictions aect export decisions. We introduce a borrowing constraint and working capital requirements into a standard model of international trade, with exports more working-capital-intensive than domestic sales. Our model can quantitatively account for new exporter dynamics, in contrast to a model with sunk export entry costs. We provide additional evidence in support of our mechanism. We nd that nancial frictions reduce the impact of trade liberalization, suggesting that they constitute an important trade barrier.
    Keywords: international trade, firm dynamics, new exporter, plant-level data, financial frictions, borrowing constraints, working capital, trade credit, liberalization
    JEL: F1 F14 F4 G32
    Date: 2014–04
  17. By: Blanchard, Olivier (International Monetary Fund); Erceg, Christopher J. (Federal Reserve Board); Lindé, Jesper (Research Department, Central Bank of Sweden)
    Abstract: We show that a fiscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under our preferred model specification, an expansion of core government spending equal to one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, about half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and inflation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefits are considerably smaller under a utility-based welfare measure, reflecting in part that higher net exports play a material role in raising periphery GDP.
    Keywords: Monetary Policy; Fiscal Policy; Liquidity Trap; Zero Bound Constraint; DSGE Model; Currency Union
    JEL: E52 E58
    Date: 2015–07–01
  18. By: Tai-Wei Hu (MEDS); Luis Araujo (Michigan State University)
    Abstract: In an environment based on Lagos and Wright (2005) but with two rounds of pairwise meetings, we introduce imperfect monitoring that resembles operations of unsecured loans. We characterize the set of implementable allocations satisfying individual rationality and pairwise core in bilateral meetings. We introduce a class of expansionary monetary policies that use the seignorage revenue to purchase privately issued debts that resemble unconventional monetary policies. We show that under the optimal trading mechanism, both money and debt circulate in the economy and the optimal inflation rate is positive, except for very high discount factors under which money alone achieves the first-best. Our model captures the view that unconventional monetary policy encourages lending while it may create inflation.
    Date: 2015
  19. By: Robert Ulbricht (Toulouse School of Economics); Ludwig Straub (MIT)
    Abstract: This paper examines the relationship between uncertainty and financial crises. In particular, we present a model where the amount of funding a firm receives depends on how financial markets assess the firm's business conditions. Financial agents endogenously learn about a firm's business conditions from local business indicators, but financial constraints impair the usefulness of this information when a firm is short of funds. This is because financially constrained firms respond less to their private information, reducing the informativeness of business indicators. As a result, a temporary aggregate shock to the economy's financial capacity causes a persistent cycle of uncertainty and financial constraints, where financial markets grow increasingly uncertain about firms without funding. While this feedback loop bears little effect on firms with access to funds, the severe effects it has on constrained firms generate a deep and long-lasting aggregate recession, characterized by an increased misallocation of credit, an increased cross-sectional dispersion of output across firms, and highly volatile and pessimistic financial markets.
    Date: 2015
  20. By: Rendon, Sílvio (Federal Reserve Bank of Philadelphia); Quella-Isla, Núria (Barnard College, Columbia University)
    Abstract: In this paper, we investigate to what extent shocks in housing and financial markets account for wage and employment variations in a frictional labor market. To explain these interactions, we use a model of job search with accumulation of wealth as liquid funds and residential real estate, in which house prices are randomly persistent. First, we show that reservation wages and unemployment are increasing in total wealth. And, second, we show that reservation wages and unemployment are also responsive to the composition of wealth. Specifically, when house prices are expected to rise, holding a larger share of wealth as residential real estate tends to increase reservation wages, which deteriorates employment transitions and increases unemployment. We estimate our model structurally using National Longitudinal Survey of Youth data from 1978 to 2005, and we find that more relaxed house financing conditions, in particular lower down payment requirements, decrease employment rates by 5 percentage points in the short run and by 2 percentage points in the long run. We also find that worse labor market conditions immediately increase homeownership rates by up to 5 percent points, whereas in the long run homeownership decreases by 8 percentage points.
    Keywords: Job search; Housing; Savings; Structural estimation
    JEL: E21 E24 J64 R21
    Date: 2015–07–21
  21. By: Athreya, Kartik B. (Federal Reserve Bank of Richmond); Ionescu, Felicia (Federal Reserve Board); Neelakantan, Urvi (Federal Reserve Bank of Richmond)
    Abstract: Portfolio choice models counter factually predict (or advise) almost universal equity market participation and a high share for equity in wealth early in life. Empirically consistent predictions have proved elusive without participation costs, informational frictions, or non standard preferences. We demonstrate that once human capital investment is allowed, standard theory predicts portfolio choices much closer to those empirically observed. Two intuitive mechanisms are at work: For participation, human capital returns exceed financial asset returns for most young households and, as households age, this is reversed. For shares, risks to human capital limit the household's desire to hold wealth in risky financial equity.
    JEL: E21 G11 J24
    Date: 2015–07–20
  22. By: Johan Walden (University of California at Berkeley); Christian Heyerdahl-Larsen (London Business School)
    Abstract: In a production economy, in which agents have heterogeneous beliefs and a social planner has incomplete knowledge about which beliefs are correct, we introduce the concept of Incomplete Knowledge (IK) efficiency. IK-inefficient allocations can be improved upon without taking a stand on which belief, among a whole set of reasonable beliefs, is correct. We show that competitive equilibrium under heterogeneous beliefs is always IK-inefficient, and decompose this inefficiency into investment and speculative distortions. Overinvestment occurs in economies in which agents' elasticity of intertemporal substitution is high, whereas underinvestment arises when their elasticity is low. Using the IK concept to define mispricing, we show that equilibrium mispricing never arises intratermporally, but that intertemporal mispricing is generically present in economies with rich state spaces and heterogeneous beliefs. Finally, we argue that investment distortions may be easier to address by a social planner than speculative distortions in economies with idiosyncratic endowment shocks, and also show that transaction taxes may be welfare decreasing in such economies.
    Date: 2015
  23. By: Christian vom Lehn (Brigham Young University)
    Abstract: Technological change is a prominent hypothesis for the recent polarization of the labor market and the related decline for occupations specializing in performing routine tasks. In this paper, I provide a quantitative evaluation of this hypothesis. To do so, I build an extension of the standard growth model which allows for endogenous determination of the demand and supply for occupational labor in response to investment specific technological change. I further evaluate the extent to which this channel of technological change can account for recent declines in aggregate employment and the labor share of income. My analysis finds that technological change is able to account for a large fraction of changes in occupational employment and earnings, as well as the decline in the labor share, through the year 2000, but is unable to reconcile many of these patterns in the subsequent decade. In particular, after 2000, the model significantly overpredicts wages and hours for higher skilled occupations. This is at odds with both the recent measured slowdown in demand for these occupations as well as the hypothesis that slowing technological change can account for this phenomenon.
    Date: 2015
  24. By: Kaiji Chen (Emory University)
    Abstract: We make three contributions in this paper. First, we provide a core of macroeconomic time series usable for systematic studies on China's macroeconomy. Second, we document, through various empirical methods, the robust findings about the striking patterns of trend and cycle. Third, we build a theoretical model that accounts for these facts. The model's mechanism and assumptions are supported by institutional details and disaggregated time series distinctive of Chinese characteristics.
    Date: 2015
  25. By: William Kerr (Harvard University); Ufuk Akcigit (University of Pennsylvania); Nicholas Bloom (Stanford); Daron Acemoglu (Massachusetts Institute of Technology)
    Abstract: We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.
    Date: 2015

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