|
on Dynamic General Equilibrium |
| By: | Kjetil Storesletten (University of Oslo); Fabrizio Zilibotti (University of Zurich); Andreas Mueller (University of Oslo) |
| Abstract: | We construct a dynamic model of sovereign debt related to Arellano (2008), where the economy's aggregate income and the cost of default is stochastic, and the outstanding debt is periodically renegotiated in equilibrium as in Bulow and Rogoff (1989). Like in Krugman (1989), in a recession the sovereign can provide effort to increase the probability of recovery, however part of the gains of good performance will go to the creditors, causing moral hazard. We characterize analytically the equilibrium in terms of the price of the non state-contingent sovereign debt, the probability of renegotiation and the consumption and reform effort dynamics. We find that during a recession, in the decentralized equilibrium, the government's limited commitment to repay the sovereign debt induces excessive consumption volatility in comparison to the constrained optimal allocation. Moreover, the government underprovides reform effort, thus the expected duration of the recession is too long compared to the first-best as well as the second-best allocation. This inefficiencies leave potential for external intervention. To this end, we study a small open economy in a persistent recession with an endogenous probability of recovery (let's say Greece), and evaluate the effect of several assistance programs run by an international authority (e.g., the IMF, ECB, or the EU) that can provide a guarantee for the repayment of the sovereign debt conditional on repeated compliance, and possibly fiscal austerity and reform effort. We find that successful assistance programs require reform effort control, and allow the debtor to renegotiate terms whenever conditions favor leaving the program. The welfare losses caused by ill-designed assistance programs can be substantial. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1066&r=all |
| By: | Ija Trapeznikova (Royal Holloway, University of London); Juan Pablo Rud (Royal Holloway, University of London) |
| Abstract: | Labor markets in least developed countries are characterised by small wage sectors and low productivity and wages. Using household level data for many countries in Sub-Saharan Africa, we document that they also show a greater level of wage dispersion. This is in stark contrast with the positive correlation between income mean and income inequality for the same countries. We propose a labor search and matching framework with entry costs and firm heterogeneity that delivers endogenously the negative correlation between (i) wage dispersion and size of the wage sector and (ii) wage dispersion and wage mean. We also show that this model can reconcile the differences between wage and income inequality by accounting for labor reallocations between wage and self-employment sectors. We focus on three channels to explain these phenomena in Sub-Saharan Africa: entry costs (e.g. regulations, financial constraints to starting a business), differences in countries' underlying productivity distribution (e.g. due to lower capital intensity, or poor infrastructure) and labor market frictions. A numerical simulation shows that the model does a good job in reproducing the main stylised facts and reveals how these different constraints interact to reduce labor market performance. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1005&r=all |
| By: | Pavol Majher |
| Abstract: | This paper studies the role of rms' entry and exit for business cycle dynamics in an environment, where physical capital is partially sunk. Extending a heterogeneous-rm model a la Hopenhayn (1992) by aggregate productivity shocks and partially irreversible investment yields substantial endogenous amplication and propagation. A positive aggregate productivity shock increases the number of entrants and their initial investment levels, because the expected entry value outweighs the implicit sunk cost associated with investment irreversibility. The endogenous propagation of an exogenous stimulus arises via a built-in selection device, as the production growth of new businesses over their lifecycle exceeds the decay due to exits of the least productive rms. |
| JEL: | D92 E22 E37 L11 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1513&r=all |
| By: | Shaofeng Xu |
| Abstract: | This paper examines the welfare cost of rare housing disasters characterized by large drops in house prices. I construct an overlapping generations general equilibrium model with recursive preferences and housing disaster shocks. The likelihood and magnitude of housing disasters are inferred from historic housing market experiences in the OECD. The model shows that despite the rarity of housing disasters, Canadian households would willingly give up 5 percent of their non-housing consumption each year to eliminate the housing disaster risk. The evaluation of this risk, however, varies considerably across age groups, with a welfare cost as high as 10 percent of annual non-housing consumption for the old, but near zero for the young. This asymmetry stems from the fact that, compared to the old, younger households suffer less from house price declines in disaster periods, due to smaller holdings of housing assets, and benefit from lower house prices in normal periods, due to the negative price effect of disaster risk. |
| Keywords: | Asset Pricing, Economic models, Housing |
| JEL: | E21 E44 G11 R21 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-26&r=all |
| By: | Veronika Selezneva (Northwestern University); Martin Schneider (Stanford University); Matthias Doepke (Northwestern University) |
| Abstract: | We assess the distributional consequences of monetary policy in the current economic environment in the United States. Through its effect on inflation, monetary policy affects the real value of nominal assets and liabilities, and therefore redistributes wealth between borrowers and lenders in the economy. In addition, unconventional policies such as 'quantitative easing' affect real interest rates and the availability of credit, once again leading to redistributional effects. We first document the potential exposure to redistribution effects on the U.S. economy using recent data from the Flow of Funds accounts and the Survey of Consumer Finance. We then quantify the redistribution effects of monetary policy using a rich life-cycle model with idiosyncratic risk, financial constraints, a housing sector, and nominal borrowing and lending. We also discuss the extent to which the recent financial crisis, which has lowered net worth of many households and tightened financial constraints, has changed the nature of distributional consequences of monetary policy. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1099&r=all |
| By: | Dale T. Mortensen (NA); Rasmus Lentz (University of Wisconsin-Madison) |
| Abstract: | In Lentz et al. (2008), we formulate and estimate a market equilibrium model of endogenous growth through product innovation. In this paper, we provide quantitative equilibrium solutions to the model based on our parameter estimates, and compare them with a social planner's solution. We find that the socially optimal growth rate is double that of the market equilibrium growth rate when firm differences in the ability to create productive products are highly persistent as a consequence of the 'business stealing externality present in the model. The welfare loss of the decentralized economy relative to that of the planner is equivalent to a 20% tax on the planner consumption path. The planner's solution differs from the decentralized economy in that it discourages innovation by low ability innovators as well as entry. We introduce two mechanisms that temper the strength of the negative externality: Transitory firm types and the possibility of buyouts. We show that both sharply reduce the inefficiency due to innovation by low ability innovators. But with caveats: If firm types are completely transitory, then the notion of firm heterogeneity is for practical purposes lost. Buyouts improve efficiency, but the efficiency gain depends significantly on the strength of the innovator's ability to extract rents from incumbents through the buyout. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1025&r=all |
| By: | Daria Finocchiaro; Giovanni Lombardo; Caterina Mendicino; Philippe Weil |
| Abstract: | This paper revisits the equilibrium and welfare effects of long-run inflation in the presence of distortionary taxes and financial constraints. Expected inflation interacts with corporate taxation through the deductibility of i) capital expenditures at historical value and ii) interest payments on debt. Through the first channel, inflation increases firms' taxable profits and further distorts their investment decisions. Through the second, expected inflation affects the effective real interest rate, relaxes firms' financial constraints and stimulates investment. We show that, in the presence of collateralized debt, the second effect dominates. Therefore, in contrast to earlier literature, we find that when the tax code creates an advantage of debt financing, a positive rate of long-run inflation is beneficial in terms of welfare as it mitigates the financial distortion and spurs capital accumulation. |
| Keywords: | optimal monetary policy, Friedman rule, credit frictions, tax benefits of debt |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:520&r=all |
| By: | Julien Champagne |
| Abstract: | This paper considers a real business cycle model with labor search frictions where two types of incentive pay are explicitly introduced following the insights from the micro literature on performance pay (e.g. Lazear, 1986). While in both schemes workers and firms negotiate ahead of time-t information, the object of the negotiation is different. The first scheme is called an “efficiency wage,” since it follows closely the intuition of the shirking model by Shapiro and Stiglitz (1984), while the second is called a “performancepay” wage, since the negotiation occurs over a wage schedule that links the worker’s wage to the worker’s output. The key feature here is that the worker can then adjust the level of effort (i.e. performance) provided in any period. I simulate a shift toward performance-pay contracts as experienced by the U.S. labor market to assess whether it can account simultaneously for two documented business cycle phenomena: the increase in relative wage volatility and the Great Moderation. While the model yields higher wage volatility when performance pay is more pervasive in the economy, it produces higher volatility of output and higher procyclicality of wages, two results counterfactual to what the U.S. economy has experienced during the Great Moderation. These results pose a challenge to the idea that higher wage flexibility through an increase in performance-pay schemes can account for business cycle statistics observed over the past 30 years. |
| Keywords: | Business fluctuations and cycles; Labour markets |
| JEL: | E24 J33 J41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-35&r=all |
| By: | Simon Mongey (NYU); Gianluca Violante (NYU); Alessandro Gavazza (London School of Economics) |
| Abstract: | Labor market data show a substantial deterioration of aggregate matching efficiency around the Great Recession, even after controlling for compositional changes among job seekers. We augment the multiworker-firm version of the equilibrium random-matching model of the labor market with endogenous firm entry and exit, a choice of recruiting intensity when hiring, and a dividend constraint that induces some firms to borrow and some of those with debt to default. We use the model to study whether aggregate financial shocks can account for the observed drop in matching efficiency--and the ensuing shift in the Beveridge curve--through a reduction in the average recruiting intensity in the economy. Central to this mechanism is the role of young firms which contribute disproportionately to job creation, display the highest recruitment effort per vacancy and, at the same time, are heavily dependant on external finance. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1079&r=all |
| By: | Josef Falkinger; Sabrina Studer; Yingnan Zhao |
| Abstract: | This paper presents a 3x3 general equilibrium model of an OLG-economy with technological uncertainty, heterogeneous agents and quasi-homothetic preferences to analyze structural change between the real and the financial sector as well as within the financial sector. Besides the consumption and investment good two types of financial services are produced. The three factors of production are: Capital, skilled and unskilled labor. Financial services are needed for transforming savings into future consumption possibilities. The financial market provides deposits and an incomplete set of securities. Payoffs of assets are determined by the future profitability of the technolo- gies in which they are invested. We show the channels through which structural change and inequality reinforce each other and show how they simultaneously emerge from rising per-capita income, an increase in skill supply and technical change. |
| Keywords: | Structural change, financialization, quasi-homothetic portfolio decision, inequality |
| JEL: | O16 J31 D90 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:206&r=all |
| By: | Xavier Raurich (Departament de Teoria Econòmica and CREB Universitat de Barcelona - Departament de Teoria Econòmica and CREB Universitat de Barcelona); Thomas Seegmuller (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université) |
| Abstract: | The aim of this paper is to study the interplay between long term productive investments and more short term and liquid speculative ones. A three-period lived overlapping generations model allows us to make this distinction. Agents have two investment decisions. When young, they can invest in productive capital that provides a return during the following two periods. When young or in the middle age, they can also invest in a bubble. Assuming, in accordance with the empirical evidence, that the bubbleless economy is dynamically efficient, the existence of a stationary bubble raises productive investment and production. Indeed, young agents sell short the bubble to increase productive investments, whereas traders at middle age transfer wealth to the old age. We outline that a technological change inducing either a larger return of capital in the short term or a similar increase in the return of capital in both periods raises productive capital, production and the bubble size. This framework also allows us to discuss several economic applications: the effects of both regulation on limited borrowing and fiscal policy on the occurrence of bubbles, the introduction of a probability of market crash and the effect of bubbles on income inequality. |
| Keywords: | bubble,efficiency,vintage capital,short sellers,overlapping generations |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01214689&r=all |
| By: | Donal Smith |
| Abstract: | This paper establishes a transmission mechanism between credit constraints and persistently low real interest rates. In doing so, it establishes a link between two strands of macroeconomic literature that have become prominent since the nancial crisis; nancial frictions literature and zero lower bound literature. In order to analyse the credit constraints and interest rate interaction, the paper presets a perpetual youth overlapping generations model, which is extended to incorporate an endogenous nancial friction in the form of a collateral constraint. Analytical expressions and elementary diagrams are presented to illustrate the results of the model. It is found that a tightening of the nancial friction reduces the steady state rate of interest, and that non-lineaities exist in this relationship. This result occurs endogenously in the model subsequent to a change in the constraint. The model also supports hypotheses from the secular stagnation literature by way of illustrating that population ageing and higher debt levels canleave an economy more likely to encounter episodes of persistent low interest rates. |
| Keywords: | Financial Frictions, Overlapping Generations, Interest Rate |
| JEL: | E21 E43 D91 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:15/22&r=all |
| By: | Kateryna Bornukova |
| Abstract: | In the recent decades aggregate labor productivity in the U.S. became countercyclical (labor productivity puzzle). At the same time the U.S. experienced dramatic changes in the structure of households due to increased female labor force participation. I show that changes in the household structure and corresponding changes in labor supply behavior can explain the labor productivity puzzle. I build a model with heterogeneous one- and two-earner households and aggregate technology shocks and calibrate it to the current U.S. data. I impose the household structure change in the model and show that the behavior of labor productivity changes from procyclical to countercyclical, as in the U.S. I also show that individual labor supply volatility depends on the role of the earner in the household. Increase in the proportion of multiple-earner households leads to increase in aggregate labor supply volatility. |
| Keywords: | business cycles, family labor supply, multiple-earner households |
| JEL: | C68 E32 E24 J22 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:bel:wpaper:26&r=all |
| By: | Laurent Clerc (Banque de France); Alexis Derviz (Czech National Bank); Caterina Mendicino (Banco de Portugal); Stéphane Moyen (Deutsch Bundesbank); Kalin Nikolov (European Central Bank); Livio Stracca (European Central Bank); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros); Alexandros P. Vardoulakis (Board of Governors of the Federal Reserve System) |
| Abstract: | We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This "3D model" shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance. We apply it to the analysis of capital regulation. |
| Keywords: | Default risk, financial frictions, macroprudential policy. |
| JEL: | E3 E44 G01 G21 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2014_1408&r=all |
| By: | Derek Stacey (Ryerson University) |
| Abstract: | A model of a decentralized market is developed that features search frictions, advertised prices and bargaining. Sellers can post ask prices to attract buyers through a process of directed search, but ex post there is the possibility of renegotiation. Similarly, buyers can advertise negotiable bid prices to attract sellers. Even though transaction prices often differ from quoted prices, advertised bid and ask prices play a crucial role in directing search and reducing trading frictions. The features and predictions of the model align well with aspects of the secondary market for transferable taxicab license plates in Toronto. This provides a useful and unique context for studying the relationships between advertised and actual prices in a decentralized market. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1011&r=all |
| By: | Pengfei Wang (Hong Kong University of Science and Tech); Jing Zhou (HKUST); Jianjun Miao (Boston University) |
| Abstract: | This paper provides a theory of credit-driven housing bubbles in an infinite-horizon production economy. Entrepreneurs face idiosyncratic investment tax distortions and credit constraints. Housing is an illiquid asset and also serves as collateral for borrowing. A housing bubble can form because houses command a liquidity premium. The housing bubble can provide liquidity and relax credit constraints, but can also generate inefficient overinvestment. Its net effect is to reduce welfare. Property taxes, Tobin's taxes, macroprudential policy, and credit policy can prevent the formation of a housing bubble. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1056&r=all |
| By: | Amador, Manuel (Federal Reserve Bank of Minneapolis); Aguiar, Mark (Princeton University) |
| Abstract: | We study optimal fiscal policy in a small open economy (SOE) with sovereign and private default risk and limited commitment to tax plans. The SOE's government uses linear taxation to fund exogenous expenditures and uses public debt to inter-temporally allocate tax distortions. We characterize a class of environments in which the tax on labor goes to zero in the long run, while the tax on capital income may be non-zero, reversing the standard prediction of the Ramsey tax literature. The zero labor tax is an optimal long run outcome if the economy is subject to sovereign debt constraints and the domestic households are impatient relative to the international interest rate. The front loading of tax distortions allows the economy to build a large (aggregate) debt position in the presence of limited commitment. We show that a similar result holds in a closed economy with imperfect inter-generational altruism, providing a link with the closed-economy literature that has explored disagreement between the government and its citizens regarding inter-temporal tradeoffs. |
| Keywords: | Fiscal policy; Sovereign debt; Limited commitment |
| JEL: | E62 F32 F34 |
| Date: | 2015–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:518&r=all |
| By: | Sarolta Laczo (Bank of England and IAE-CSIC); Arpad Abraham (European University Institute) |
| Abstract: | The objective of this paper is to study the optimal property division upon divorce in a framework where spouses share risk subject to limited commitment. First, we consider a simple model, where marriage is beneficial for two reasons: (i) it provides (partial) insurance against individual income shocks, and (ii) spouses may enjoy direct individual benefits from the match, `love,' which is stochastic, as in Voena (AER, forthcoming). We highlight analytically that the optimal property division rule is subject to a trade-off between intra-household risk sharing and insurance across marital statuses. Allocating less household assets to the party filing for divorce improves risk sharing while married, but worsens consumption smoothing for divorcees. Second, we turn to a quantitative/empirical exercise, where the key parameters are estimated using panel data from the United Kingdom. Then the optimal policy, as well as counterfactuals are computed. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1041&r=all |
| By: | Nicolas Coeurdacier (Département d'économie); Stéphane Guibaud (Département d'économie); Keyu Jin (London School of Economics and Political Science (LSE)) |
| Abstract: | We show that in an open-economy OLG model, the interaction between growth differentials and household credit constraints—more severe in fast-growing countries—can explain three prominent global trends: a divergence in private saving rates between advanced and emerging economies, large net capital outflows from the latter, and a sustained decline in the world interest rate. Micro-level evidence on the evolution of age-saving profiles in the US and China corroborates our mechanism. Quantitatively, our model explains about a third of the divergence in aggregate saving rates, and a significant portion of the variations in age-saving profiles across countries and over time. |
| Keywords: | Global Economu; Economical Growth; Credit Constraints |
| JEL: | E21 E22 F21 F32 F41 O16 P24 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/169d87l3e88rpoi5e1tgckfi6a&r=all |
| By: | P. Andrade; G. Gaballo; E. Mengus; B. Mojon |
| Abstract: | We analyze the effects of forward guidance when agents have heterogeneous interpretations of whether forward guidance contains a commitment on future policy actions. Using survey expectations, we document that forward guidance lowered disagreement about future short-term interest rates to historically low levels while it did not affect much disagreement about future inflation and future consumption. We introduce heterogenous beliefs on future policy and fundamentals in an otherwise standard New-Keynesian model. We show that, because the commitment type of the central bank is unobserved, agreement on the future path of interest rates can coexist with disagreement on the length of the trap. Such heterogeneity of beliefs can strongly mitigate the effectiveness of forward guidance. It also alters the optimal policy at the zero lower bound compared to a situation where beliefs are homogenous. |
| Keywords: | monetary policy, forward guidance, communication, heterogeneous beliefs, disagreement. |
| JEL: | E31 E52 E65 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:573&r=all |
| By: | Luk, Paul; Vines, David |
| Abstract: | This paper studies the coordination of monetary and fiscal policy in a simple New Keynesian model. We show that, in such a setup and when the policymaker acts with commitment, it is optimal not to use fiscal policy to stabilise inflation. We illustrate this result using additively separable preferences and Greenwood-Hercowitz-Huffman (1988) preferences, and we discuss the intuition behind this result. |
| Keywords: | fiscal policy; monetary policy; New Keynesian model |
| JEL: | E52 E61 E62 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10895&r=all |
| By: | Marcelo dos Santos (Insper); Tiago Cavalcanti (University of Cambridge) |
| Abstract: | In an economy in which the public sector is productive and factor inputs are rewarded according to their marginal productivity in both the public and the private sectors, the presence of a large government does not generate necessarily any allocation problem. When the provision of public infrastructure is below its optimal scale, then an increase in the size of the government can lead to an increase in total factor productivity (TFP). There is, however, a large body of evidence showing that for many countries the structure of wages and pensions and the labor law legislation are different for public and private employees. Such differences affect the occupational decision of agents and might generate some type of misallocation in the economy. We develop an equilibrium model with endogenous occupational choice, heterogeneous agents and imperfect enforcement to study the implications of an overpaid public sector. The model is estimated to be consistent with micro and macro evidence for Brazil and our counterfactual exercises show that public-private earnings premium can generate important allocation effects and sizeable productivity losses. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1094&r=all |
| By: | Thomas Eisenbach (Federal Reserve Bank of New York); Martin Schmalz (University of Michigan); Marianne Andries (Toulouse School of Economics) |
| Abstract: | We study general equilibrium asset prices in a multi-period endowment economy when agents' risk aversion is allowed to depend on the maturity of the risk. In our pseudo-recursive preference framework, agents are time inconsistent for their intra- temporal decision making, though time consistent for inter-temporal decisions. We find, in the absence of jumps and under log-normal consumption growth, horizon- dependent risk aversion preferences affect the term structure of risk premia if and only if volatility is stochastic. When risk aversion decreases with the horizon (as lab experiments indicate), and the elasticity of intertemporal substitution is greater than one, our model results in a downward slopping (in absolute value) pricing of volatility risk, which, in turns, can explain the recent empirical results on the term structure of risky asset returns. We confirm this prediction using index options data. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1069&r=all |
| By: | Don Schlagenhauf (Florida State University); Bryan Noeth (Federal Reserve Bank of St Louis); Carlos Garriga (Federal Reserve Bank of St. Louis) |
| Abstract: | This paper develops stylized facts on the dynamics of consumer credit in the United States in the period 2001-2013. The data allows to separate two distinct period: Pre and post Great Recession. We place special emphasis documenting the participation decision (extensive margin), the volume (intensive margin), and default. The analysis of the data reveals some key findings: Between 1999 and 2013, the fraction of individual with only unsecured debt has been decreasing in terms of participation and the size of their balances. The balances for individuals with mortgages increased until 2008, but then dramatically decreased during the Great Recession. The evidence allows to test existing theories of consumer (unsecured) credit by checking their consistency with the data (at the aggregate and distributional levels). This allows determining the relative importance of different factors driving the dynamics of credit. The baseline model calibrated for the period 2001-2008 and tested to capture the deleverage episode during the Great Recession. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1095&r=all |
| By: | Joel Wagner |
| Abstract: | This paper takes a full-information model-based approach to evaluate the link between investment-specific technology and the inverse of the relative price of investment. The two-sector model presented includes monopolistic competition where firms can vary the markup charged on their product depending on the number of firms competing. With these changes to the standard two-sector model, both total factor productivity as well as a series of non-technological shocks can impact the high-frequency volatility of the relative price of investment. Utilizing a Bayesian estimation approach to match the model to the data, we find that investment-specific technology can explain at most half of the growth rate of the relative price of investment. Last of all, we compare the benchmark model results with endogenous movement in the relative price of investment to a model where all movement in the relative price of investment is derived exogenously. This is done by allowing technologies across sectors to move together over time. Comparison of these two methods finds that the exogenous approach is incapable of capturing changes in the relative price of investment as found in the data. This paper adds to the growing list of research, like that of Fisher (2009) and Basu et al. (2013), that suggests that the quality-adjusted relative price of investment may be a poor indicator of investment-specific technology. |
| Keywords: | Business fluctuations and cycles |
| JEL: | E32 L11 L16 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-30&r=all |
| By: | Leonardo Melosi (Federal Reserve Bank of Chicago); Francesco Bianchi (Cornell University) |
| Abstract: | High uncertainty is an inherent implication of the zero lower bound, while deflation is not because of inflationary pressure due to uncertainty about how debt will be stabilized. We show that policy uncertainty empirically accounts for the absence of deflation in the US economy. Announcing fiscal austerity is detrimental in the short run, but it preserves macroeconomic stability. On the other hand, a recession can be mitigated by abandoning fiscal discipline, at the cost of increasing macroeconomic instability. The policy trade-off can be resolved by committing to inflating away only the portion of debt accumulated during the recession. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1035&r=all |
| By: | Howard Kung (London Business School); Francesco Bianchi (Cornell University) |
| Abstract: | We construct and estimate a model that features endogenous growth and technology diffusion. The spillover effects from research and development provide a link between business cycle fluctuations and long-term growth. Therefore, productivity growth is related to the state of the economy. Shocks to the marginal efficiency of investment explain the bulk of the low-frequency variation in growth rates. Transitory inflationary shocks lead to persistent declines in economic growth. During the Great Recession, technology diffusion dropped sharply, while long-term growth was not significantly affected. The opposite occurred during the 2001 recession. The growth mechanism induces positive comovement between consumption and investment. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1073&r=all |
| By: | Pedro Silos (Federal Reserve Bank of Atlanta); German Cubas (University of Houston) |
| Abstract: | Is risk priced in the labor market? We document a strong, robust, and positive correlation between average earnings and the variance of both temporary and permanent idiosyncratic shocks to earnings across 21 US industries. However, since workers are heterogeneous in their abilities, the correlation may be entirely driven by selection. What portion of the correlation is compensation for risk and what portion is compensation for unobserved abilities? We construct an equilibrium model with imperfect insurance of labor earnings shocks. The variance of shocks varies across industries. An industry-specific ability drives a worker's comparative advantage, which interacts with her risk aversion to determine an optimal career choice. We find that permanent shocks are highly priced, whereas temporary shocks are not. Two additional results arise. First, workers accumulate different levels of wealth depending on the employment industry. Second, compensation for risk explains a sizable fraction of observed cross-industry differences in labor earnings. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1036&r=all |
| By: | Berardino Palazzo (Boston University, School of management); Juliane Begenau (Harvard Business School) |
| Abstract: | This paper proposes a novel explanation for the secular increase in the cash holdings of public U.S. firms. We show that this fact results from a change in the composition of firms. Since the end of the 70s, the proportion of new economy firms that engage in R&D has increased dramatically. These types of firms enter the Compustat sample with more cash holdings. In contrast, old economy firms' cash holdings have remained stable over time. We use a firm industry model with endogenous entry in the stock market to explore three competing hypothesis: 1) a structural change in the composition of U.S. firms; 2) lower entry costs/better IPO conditions for new economy firms; 3) institutional reasons such as a change in the tax benefit of R&D activities. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1047&r=all |