nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2016‒07‒23
34 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Involuntary Unemployment and the Business Cycle By Mathias Trabandt; Karl Walentin; Lawrence Christiano
  2. Fundamental shock selection in DSGE models By Stefano Grassi; Miguel Leon-Ledesma; Filippo Ferroni
  3. Recall and Unemployment By Shigeru Fujita; Giuseppe Moscarini
  4. Advance Information and Distorted Beliefs in Macroeconomic and Financial Fluctuations By Kyle Jurado
  5. Income Inequality and Sovereign Default By Kiyoung Jeon; Zeynep Kabukcuoglu
  6. Monetary-Fiscal Policy Interaction and Fiscal Inflation: A Tale of Three Countries By Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
  7. Fiscal and Monetary Policy Interactions in Pakistan Using a Dynamic Stochastic General Equilibrium Framework By Shahid, Muhammad; Qayyum, Abdul; Shahid, Waseem
  8. Public Employment Effects over the Business Cycle: the Czech Case By Vedunka Kopecna
  9. Macroeconomic effectiveness of non-standard monetary policy and early exit. A model-based evaluation By Lorenzo Burlon; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  10. Heterogeneity in Decentralized Asset Markets By Julien HUGONNIER; Benjamin LESTER; Pierre-Olivier WEILL
  11. The Risky Steady State and the Interest Rate Lower Bound By Taisuke Nakata; Sebastian Schmidt; Timothy Hills
  12. Exit Expectations and Debt Crises in Currency Unions By Kriwoluzky, Alexander; Müller, Gernot J.; Wolf, Martin
  13. Economic growth and complementarity between stages of human capital* By Ferreira, Pedro Cavalcanti; Delalibera, Bruno Ricardo
  14. Labor Market Frictions, Human Capital Accumulation, and Consumption Inequality By Michael Graber; Jeremy Lise
  15. Renewable Technology Adoption and the Macroeconomy By Ted Temzelides; Borghan Narajabad; Bernardino Adao
  16. Time-varying Volatility, Financial Intermediation and Monetary Policy By Eickmeier, Sandra; Metiu, Norbert; Prieto, Esteban
  17. A Double Counting Problem in the Theory of Rational Bubbles By Hajime Tomura
  18. Work Incentives of Medicaid Beneficiaries and the Role of Asset Testing By Svetlana Pashchenko; Ponpoje Porapakkarm
  19. Search costs and the severity of adverse selection By Francesco Palazzo
  20. On the Distribution of the Welfare Losses of Large Recessions By Krueger, Dirk; Mitman, Kurt; Perri, Fabrizio
  21. Payment Instruments, Enforceability and Development: Evidence from Mobile Money Technology By Thorsten Beck; Ravindra Ramrattan; Haki Pamuk; Burak R. Uras
  22. Job Creation in a Multi-Sector Labor Market Model for Developing Economies By Basu, Arnab; Chau, Nancy H; Fields, Gary S; Kanbur, Ravi
  23. Volatility Risk Pass-Through By Yang Liu; Mariano Croce; Ivan Shaliastovich; Ric Colacito
  24. Dynamic Effects of Educational Assortative Mating on Labor Suppy By Rania Gihleb
  25. The Risky Capital of Emerging Markets By Ina Simonovska; Espen Henriksen; Joel David
  26. Human Capital and Employment Risks Diversification By Pascal ST-AMOUR
  27. Optimal automatic stabilizers By Alisdair McKay; Ricardo Reis
  28. Life Cycle Responses to Health Insurance Status By Florian PELGRIN; Pascal ST-AMOUR
  29. Correlation, Consumption, Confusion, or Constraints: Why do Poor Children Perform so Poorly? By Lance Lochner; Elizabeth Caucutt
  30. Efficiency in Decentralized Markets with Aggregate Uncertainty By Lucas Maestri; Dino Gerardi; Braz Camargo
  31. Limited Commitment and the Demand for Money By Aleksander Berentsen
  32. Medicaid Insurance in Old Age By Eric French
  33. Endogenous Sector-Biased Technological Change and Industrial Policy By Berthold Herrendorf
  34. Advertising, Innovation and Economic Growth By Pau Roldan; Laurent Cavenaile

  1. By: Mathias Trabandt (Freie Universität Berlin); Karl Walentin (Sveriges Riksbank (Bank of Sweden)); Lawrence Christiano (Northwestern University)
    Abstract: Can a model with limited labor market insurance explain standard macro- and labor market data jointly? We seek to construct a monetary model in which: i) the unemployed are worse off than the employed, i.e. unemployment is involuntary and ii) the labor force participation rate varies with the business cycle. To illustrate key features of our model, we start with the simplest possible New Keynesian framework with no capital. We then integrate the model into a medium sized DSGE model and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to these three shocks.
    Date: 2016
  2. By: Stefano Grassi (University of Kent); Miguel Leon-Ledesma (University of Kent); Filippo Ferroni (Banque de France)
    Abstract: DSGE models are typically estimated assuming the existence of certain structural or fundamental shocks that drive macroeconomic fluctuations. We analyze the consequences of introducing shocks that are non-fundamental for the estimation of DSGE model parameters. We then propose a method to select the structural shocks driving macroeconomic uncertainty. We show that forcing the existence of non-fundamental structural shocks produces a downward bias in the estimated internal persistence of the model. We then show how these distortions can be reduced by allowing the covariance matrix of the structural shocks to be rank deficient using priors for standard deviations whose support includes zero. The method allows us to accurately select fundamental shocks and estimate model parameters with precision. Finally, we revisit the empirical evidence on an industry standard medium-scale DSGE model model and find that government, price, and wage markup shocks are non-fundamental.
    Date: 2016
  3. By: Shigeru Fujita (Federal Reserve Bank of Philadelphia); Giuseppe Moscarini (Yale University)
    Abstract: Using data from the Survey of Income and Program Participation (SIPP) covering 1990-2013, we document that a surprisingly large number of workers return to their previous employer after a jobless spell, and experience very different unemployment and employment outcomes than job switchers. Furthermore, the probability of recall is much less cyclical and volatile than the probability of finding a new job. Building on these facts, we introduce a recall option in a canonical search-and-matching business- cycle model of the labor market. The recall option is lost when the unemployed worker accepts a new job. New matches are mediated by a matching function, which brings together costly vacancy postings and costly search effort by unemployed workers. In contrast, recalls are frictionless and free, and triggered both by aggregate and job-specific shocks. A quantitative version of the model captures well our cross-sectional and cyclical facts through selection of recalled matches. Model analysis shows that recall and search effort significantly amplify the cyclical volatility of job finding and separation rates.
    Date: 2016
  4. By: Kyle Jurado (Duke University)
    Abstract: Fluctuations in the beliefs of economic agents can be driven by current fundamentals, advance information about future fundamentals, or distortions resulting from informational or psychological limitations. This paper presents a dynamic stochastic general equilibrium (DSGE) model that jointly considers all three possibilities and estimates their relative importance for explaining macroeconomic and financial data. To discipline the estimation, direct data on subjective forecasts is included in the set of observable variables. Results indicate that both advance information and distorted beliefs are important. On average about two-thirds of the fluctuations in endogenous variables can be attributed to these two sources. While they are equally important for output and employment, advance information is most important for explaining inflation and investment, and distorted beliefs are most important for explaining stock returns and consumption.
    Date: 2016
  5. By: Kiyoung Jeon (Research Department, Bank of Korea); Zeynep Kabukcuoglu (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: In this paper, we study the role of income inequality in government's borrowing and default decisions. We consider a standard endogenous sovereign debt default model and extend it to allow for heterogeneous agents. In addition to shocks to the average income level, we consider the effect of shocks to income distribution. Consistent with the data, income dispersion across individuals increases during a recession and decreases during an expansion. The model is calibrated to match a number of stylized facts for Argentina. We show that (i) rising income inequality within a country increases the probability of default significantly; (ii) the effect of output shocks is larger than the effect of inequality shocks; (iii) the joint effect of these two shocks can generate a high default probability consistent with the Argentine data; (iv) the model can match the high volatility of consumption of the poor relative to the rich; (v) progressive income taxes can reduce the default risk.
    Keywords: Sovereign Debt; Default; Income Inequality; Redistribution
    JEL: F3 F4 E5 D5
    Date: 2016–07
  6. By: Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
    Abstract: We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation.
    Keywords: time-varying VAR,inflation,public deficits
    JEL: E42 E58 E61
    Date: 2015
  7. By: Shahid, Muhammad; Qayyum, Abdul; Shahid, Waseem
    Abstract: Currently Pakistan’s economy is under stress and registered a sluggish growth for many years in a row. The performance of major economic indicators is not satisfactory. Low investment, double digit inflation, fiscal imbalances and low external capital inflows indicates the severity of the grave economic situation. This paper investigates fiscal and monetary policy interaction in Pakistan using dynamic stochastic general equilibrium model. Finding of the paper reveals that fiscal and monetary policy interacts with each other and with other macroeconomic variables. Inflation responds to fiscal policy shocks in the form of government spending, revenue and borrowing shocks. Monetary authority’s decisions are also affecting fiscal policy variables. It is also evident that fiscal discipline is critical for the effective formulation and execution of monetary policy.
    Keywords: Monetary Policy, Fiscal Dominance, DSGE, Pakistan
    JEL: E5 E52 H3
    Date: 2016–07
  8. By: Vedunka Kopecna (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: The paper contributes to understanding the effects stemming from the public sector employment changes in the Czech Republic and their impacts on the labor market through the lens of a New Keynesian dynamic stochastic general equilibrium model with search and matching frictions. The size of the public sector has been generally expanding over the last decade contrary to many other European countries with the exception of the years 2011 - 2012 when the economic crisis became more evident even in the otherwise financially stable Czech Republic. We model the labor market dynamics across the business cycle and examine the impacts of the varying number of public workers on the labor market variables as private employment, unemployment rate and market tightness as well as on the overall economic growth. We aim at determining whether a portion of unemployment can be explained by either the increased public hiring or shrinking of the number of public employees in the last decade. As the results suggest, in re cessionary times the expansion of the public sector managed to keep the unemployment rate from attaining higher values. However, the following turnover of government size development threw the labor market into a deeper crisis than it would have been if the public sector size had remained unaltered.
    Keywords: search and matching frictions, DSGE, labor market, public employment
    JEL: E37 J21 J45 J48 J64
    Date: 2016–07
  9. By: Lorenzo Burlon (Bank of Italy); Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of the Eurosystem’s expanded Asset Purchase Programme (APP) under alternative strategies as regards (i) the unwinding of asset positions accumulated under the APP and (ii) communication of current and future paths of the policy rate (forward guidance). To this purpose, we simulate a New Keynesian model of the euro area. Our results are as follows. First, as the monetary authority brings forward the selling of long-term sovereign bonds, the stimulus from the APP on inflation and economic activity is correspondingly reduced. In particular, if the bonds are sold immediately after purchases end, the impact on inflation is negligible. Second, if the monetary authority communicates that it will hold the policy rate constant for one year instead of two, the APP is less effective, and the inflation increase is halved. Third, the subdued impact of the APP associated with an early exit from the programme delays the return to a standard monetary policy regime.
    Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound
    JEL: E43 E52 E58
    Date: 2016–07
  10. By: Julien HUGONNIER (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute); Benjamin LESTER (Federal Reserve Bank of Philadelphia); Pierre-Olivier WEILL (University of California, Los Angeles and NBER)
    Abstract: We study a search and bargaining model of an asset market, where investors’ heterogeneous valuations for the asset are drawn from an arbitrary distribution. Our solution technique renders the analysis fully tractable and allows us to provide a full characterization of the equilibrium, in closed form, both in and out of steady state. We use this characterization for two purposes. First, we establish that the model can naturally account for a number of stylized facts that have been documented in empirical studies of over-the-counter asset markets. In particular, we show that heterogeneity among market participants implies that assets are reallocated through “intermediation chains,” ultimately producing a core-periphery trading network and non-trivial distributions of prices and trading times. Second, we show that the model generates a number of novel results that underscore the importance of heterogeneity in decentralized markets. We highlight two: first, heterogeneity magnifies the price impact of search frictions; and second, search frictions have larger effects on price levels than on price dispersion. Hence, quantifying the price discount or premium created by search frictions based on observed price dispersion can be misleading.
    Keywords: Search frictions, bargaining, continuum of types, price dispersion
    JEL: G11 G12 G21
  11. By: Taisuke Nakata (Federal Reserve Board); Sebastian Schmidt (European Central Bank); Timothy Hills (New York University)
    Abstract: Even when the policy rate is currently not constrained by its effective lower bound (ELB), the possibility that the policy rate will become constrained in the future lowers today's inflation by creating tail risk in future inflation and thus reducing expected inflation. In an empirically rich model calibrated to match key features of the U.S. economy, we find that the tail risk induced by the ELB causes inflation to undershoot the target rate of 2 percent by as much as 45 basis points at the economy's risky steady state. Our model suggests that achieving the inflation target may be more difficult now than before the Great Recession, if the recent ELB experience has led households and firms to revise up their estimate of the ELB frequency.
    Date: 2016
  12. By: Kriwoluzky, Alexander; Müller, Gernot J.; Wolf, Martin
    Abstract: We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation.
    Keywords: currency union,exit,sovereign debt crisis,fiscal policy,redenomination premium,euro crisis,regime-switching model
    JEL: E52 E62 F41
    Date: 2015
  13. By: Ferreira, Pedro Cavalcanti; Delalibera, Bruno Ricardo
    Abstract: We study the impact of the different stages of human capital accumulation on the evolution of labor productivity in a model calibrated to the U.S. from 1961 to 2008. We add early childhood education to a standard continuous time life cycle economy and assume complementarity between educational stages. There are three sectors in the model: the goods sector, the early childhood sector and the formal education sector. Agents are homogenous and choose the intensity of preschool education, how long to stay in formal school, labor effort and consumption, and there are exogenous distortions to these four decisions. The model matches the data very well and closely reproduces the paths of schooling, hours worked, relative prices and GDP. We find that the reduction in distortions to early education in the period was large and made a very strong contribution to human capital accumulation. However, due to general equilibrium effects of labor market taxation, marginal modification in the incentives for early education in 2008 had a smaller impact than those for formal education. This is because the former do not decisively affect the decision to join the labor market, while the latter do. Without labor taxation, incentives for preschool are significantly stronger.
    Date: 2016–06–29
  14. By: Michael Graber (UCL); Jeremy Lise (University College London)
    Abstract: We develop a frictional model of the labor market with stochastic human capital accumulation and incomplete markets. The stochastic process for human capital may be heterogeneous across workers as well as depend on the firm type where the worker is employed. We establish nonparametric identification of the model, and estimate it using matched employer-employee data from Germany. We provide a decomposition of lifecycle inequality in earnings and consumption resulting from heterogeneity in ability, heterogeneity in the rate of human capital accumulation, search frictions (the random allocation of similar workers to different jobs) and the interaction of human capital and search friction (a worker’s history of job opportunities may differentially affect her human capital accumulation opportunities).
    Date: 2016
  15. By: Ted Temzelides (Rice University); Borghan Narajabad (Federal Reserve); Bernardino Adao (Banco de Portugal)
    Abstract: We study the adaptation of new technologies by renewable energy-producing firms in a dynamic general equilibrium model where energy is an input in the production of goods. Energy can come from fossil or renewable sources. Both require the use of capital, which is also needed in the production of final goods. Renewable energy firms can invest in improving the productivity of their capital stock. The actual improvement is subject to spillovers and comes at the cost of some renewable energy output. Together with spill-overs, this leads to under-investment in improving the productivity of renewable energy capital. In the presence of environmental externalities, the optimal allocation can be implemented through a Pigouvian tax on fossil fuel, together with a policy which promotes adaptation of new renewable technologies. We study numerical examples using world-economy data.
    Date: 2016
  16. By: Eickmeier, Sandra; Metiu, Norbert; Prieto, Esteban
    Abstract: We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. Exogenous policy changes are identified by adapting an external instruments approach to the non-linear model. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods. To rationalize our robust empirical results, we use a macroeconomic model in which financial intermediaries endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, financial intermediaries lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods, banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy. Hence, we provide a novel explanation for the non-linear effects of monetary stimuli observed in the data, linking the effectiveness of monetary policy to the procyclicality of leverage.
    Keywords: monetary policy,credit spread,non-linearity,intermediary leverage,financial accelerator
    JEL: C32 E44 E52
    Date: 2016
  17. By: Hajime Tomura (Faculty of Political Science and Economics,Waseda University,)
    Abstract: In a standard overlapping generations model, the unique equilibrium price of a Lucas' tree can be decomposed into the present discounted value of dividends and the stationary monetary equilibrium price of fiat money, the latter of which is a rational bubble. Thus, the standard interpretation of a rational bubble as the speculative component in an asset price double-counts the value of pure liquidity that is already part of the fundamental price of an interest-bearing asset.
    Keywords: rational bubbles; liquidity.
    JEL: E3
    Date: 2016–05
  18. By: Svetlana Pashchenko (University of Surrey); Ponpoje Porapakkarm (National Graduate Institute for Policy Studies)
    Abstract: Should asset testing be used in means-tested programs? These programs target low-income people, but low income can result not only from low productivity but also from low labor supply. We aim to show that in the asymmetric information environment, there is a positive role for asset testing. We focus on Medicaid, one of the largest means-tested programs in the US, and we ask two questions: 1) Does Medicaid distort work incentives? 2) Can asset testing improve the insurance-incentives trade-off of Medicaid? Our tool is a general equilibrium model with heterogeneous agents that matches many important features of the data. We find that 23% of Medicaid enrollees do not work in order to be eligible. These distortions are costly: if individuals' productivity was observable and could be used to determine Medicaid eligibility, this results in substantial ex-ante welfare gains. When productivity is unobservable, asset testing is effective in eliminating labor supply distortions, but to minimize saving distortions, asset limits should be different for workers and non-workers. This work-dependent asset testing can produce welfare gains close to the case of observable productivity.
    Keywords: means-tested programs, health insurance, Medicaid, asset testing, general equilibrium, life-cycle model
    JEL: D52 D91 E21 H53 I13 I18
    Date: 2016–07
  19. By: Francesco Palazzo (Bank of Italy)
    Abstract: In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If instead search costs are not negligible and buyers receive sufficiently precise signals, sellers’ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can avoid to exacerbate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading.
    Keywords: dynamic adverse selection, decentralized markets, search theory, time on market observability
    JEL: D47 D82 D83
    Date: 2016–07
  20. By: Krueger, Dirk (University of Pennsylvania); Mitman, Kurt (Stockholm University); Perri, Fabrizio (Federal Reserve Bank of Minneapolis)
    Abstract: How big are the welfare losses from severe economic downturns, such as the U.S. Great Recession? How are those losses distributed across the population? In this paper we answer these questions using a canonical business cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find that the welfare cost of losing one’s job in a severe recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low-wealth households. The cost increases to approximately 8% for low-wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but hurts households that keep their job, even in a version of the model in which output is partly demand determined, and therefore unemployment insurance stabilizes aggregate demand and output.
    Keywords: Great Recession; Wealth inequality; Social insurance; Welfare loss from recessions
    JEL: E21 E32 J65
    Date: 2016–07–18
  21. By: Thorsten Beck; Ravindra Ramrattan (Innovations for Poverty Action); Haki Pamuk (Development Economics Group, Wageningen University); Burak R. Uras (Tilburg University)
    Abstract: The relationship between efficient payment instruments and enforcement constraints is studied in the context of economic development. Using a novel enterprise survey from Kenya, we document a strong positive association between the use of mobile money as a method to pay suppliers and access to trade credit. We propose a dynamic general equilibrium model with heterogeneous entrepreneurs, limited financial commitment and the risk of theft to account for this empirical pattern. Mobile money dominates fiat money as a medium of exchange in its capacity to avoid theft, but it comes with electronic transaction costs. The interaction between risk of theft and limited enforcement of trade credit contracts generates demand for mobile money as a payment method with suppliers. The use of mobile money in turn reinforces valuation of trade credit contracts and relaxes enforcement constraints. Calibrating the stationary equilibrium of the model to match a set of moments in Kenyan enterprise data, the importance of the endogenous interactions between mobile money and trade credit on entrepreneurial performance and macroeconomic development is investigated.
    Date: 2016
  22. By: Basu, Arnab; Chau, Nancy H; Fields, Gary S; Kanbur, Ravi
    Abstract: This paper proposes an overlapping generations multi-sector model of the labor market for developing countries with three heterogeneities - heterogeneity within self-employment, heterogeneity in ability, and heterogeneity in age. We revisit an iconic paradox in a class of multisector labor market models in which the creation of high-wage employment exacerbates unemployment. Our richer setting allows for generational differences in the motivations for job search to be reflected in two distinct inverted U-shaped relationships between unemployment and high-wage employment, one for youth and a different one for adults. In turn, the relationship between overall unemployment and high-wage employment is shown to be non-monotonic and multi-peaked. The model also sheds light on the implications of increasing high-wage employment on self-employed workers, who make up most of the world's poor. Nonmonotonicity in unemployment notwithstanding, increasing high-wage employment has an unambiguous positive impact on high-paying self-employment, and an unambiguous negative impact on free-entry (low-wage) self-employment.
    Keywords: Harris- Todaro Model.; Multisector Labor Market; Overlapping Generations; Poverty Reduction
    JEL: I32 O17
    Date: 2016–07
  23. By: Yang Liu (University of Pennsylvania); Mariano Croce (University of North Carolina at Chapel H); Ivan Shaliastovich (University of Pennsylvania); Ric Colacito (University of North Carolina, Chapel Hil)
    Abstract: We produce novel empirical evidence on the relevance of output volatility (vol) shocks for both currency and international quantity dynamics. Focusing on G-17 countries, we document that: (1) consumption and output vols are imperfectly correlated within countries; (2) across countries, consumption vol is more correlated than output vol; (3) the pass-through of relative output vol shocks onto relative consumption vol is significant, especially for small countries; and (4) consumption differentials vol and exchange rate vol are disconnected. We rationalize these findings in a frictionless model with multiple goods and recursive preferences featuring a novel and rich risk-sharing of vol shocks.
    Date: 2016
  24. By: Rania Gihleb
    Abstract: In 30% of young American couples the wife is more educated than the husband. Those women are characterized by a substantially higher employment (all else equal), which in turn amplifies income inequality across couples. Using NLSY79, we formulate and structurally estimate a dynamic life-cycle model of endogenous marriage and labor supply decisions in a collective framework. We establish that the education gap at the time of marriage, produces dynamic effects due to human capital accumulation and implied wage growth. Inequality between couples is largely driven by the persistence in labor supply choices and only slightly affected by assortative matching.
    Date: 2016–01
  25. By: Ina Simonovska (University of California, Davis); Espen Henriksen (UC Davis); Joel David (USC)
    Abstract: Poor and emerging markets exhibit (1) high average returns to capital and (2) large exposures to movements in US returns, measured by the ‘beta’ of the returns to the foreign asset on the returns to its US counterpart. We document these facts in detail for two asset classes - stock market returns and the return to aggregate capital - and we provide further evidence from a third class - sovereign bonds. We use a series of endowment economies to explore whether consumption-based risk faced by a US investor can reconcile these findings. We find that long-run risk, i.e., risk due to uncertainty over economic growth rates abroad, is a promising channel - our calibrated model implies return disparities at least 55% as large as those in the data. From the perspective of the US investor, fact (2), although not a sufficient statistic, is informative about the extent of long-run risk in foreign assets, and so about fact (1).
    Date: 2016
  26. By: Pascal ST-AMOUR (University of Lausanne and Swiss Finance Institute)
    Abstract: Both educational expenditures and attainment have increased sharply over the last decades, despite rising prices of education, and stagnating income returns to human capital. This paper emphasizes conditional employment risks diversification as additional motivation for education demand. Job risk protection through education is strongly evidenced in the data, yet is absent from the Human Capital (HC) literature, whereas dynamic HC choices by agents are not considered in standard unemployment Search and Matching models. A benchmark HC model is thus modified to allow for lower job displacement risk, and higher re-employment probability, in addition to higher income for the better educated. Numerical solutions for optimal dynamic investment in human capital are consistent with observed patterns, such as unemployment duration dependence (stigma), post-re-employment income loss (scarring), and cyclical co-movements in education expenditures. The effects of permanent shifts affecting human capital returns in employment risks diversification, and income returns are investigated and shown to be consistent with rising educational expenditures and attainment.
    Keywords: Demand for education; unemployment duration dependence; unemployment stigma; income scarring; work displacement; re-employment probability
    JEL: I26 J24 J64 J65
  27. By: Alisdair McKay; Ricardo Reis
    Abstract: Should the generosity of unemployment benefits and the progressivity of income taxes de- pend on the presence of business cycles? This paper proposes a tractable model where there is a role for social insurance against uninsurable shocks to income and unemployment, as well as inefficient business cycles driven by aggregate shocks through matching frictions and nominal rigidities. We derive an augmented Baily-Chetty formula showing that the optimal generosity and progressivity depend on a macroeconomic stabilization term. Using a series of analytical examples, we show that this term typically pushes for an increase in generosity and progressivity as long as slack is more responsive to social programs in recessions. A calibration to the U.S. economy shows that taking concerns for macroeconomic stabilization into account raises the optimal unemployment benefits replacement rate by 13 percentage points but has a negligible impact on the optimal progressivity of the income tax. More generally, the role of social insurance programs as automatic stabilizers affects their optimal design.
    Keywords: Counter-cyclical fiscal policy; redistribution; distortionary taxes.
    JEL: E62 H21 H30
    Date: 2016–06–17
  28. By: Florian PELGRIN (EDHEC Business School); Pascal ST-AMOUR (University of Lausanne and Swiss Finance Institute)
    Abstract: Health insurance status can change over the life cycle for exogenous reasons (e.g. Medicare for the elders, PPACA for younger agents, termination of coverage at retirement in employer-provided plans). Durability of the health capital, endogenous mortality and morbidity, as well as backward induction suggests that these changes should affect the dynamic life cycle beyond the period at which they occur. The purpose of this paper is to study these lifetime effects on the optimal allocation (consumption, leisure, health expenditures), status (health, wealth and survival rates), and welfare. We analyse the impact of young (resp. old) insurance status conditional on old (resp. young) coverage through the structural estimation of a dynamic model with endogenous death and sickness risks. Our results show that young insurees are healthier, wealthier, consume more health care yet are less exposed to OOP risks, and substitute less (more) leisure before (after) retirement. Old insurees show similar patterns, except for lower precautionary wealth balances. Compulsory health insurance is unambiguously optimal for elders, and for young agents, except early in the life cycle. We draw other implications for public policy such as Medicare and PPACA.
    Keywords: Household Finance, Endogenous Morbidity and Mortality Risks, Demand for Health, Medicare and Patient Protection and Affordable Care Act, Simulated Moments Estimation
    JEL: D91 G11 I13
  29. By: Lance Lochner (University of Western Ontario); Elizabeth Caucutt (University of Western Ontario)
    Abstract: Early developing and persistent gaps in child achievement by family income combined with the importance of adolescent skill levels for educational attainment and lifetime earnings suggest that a key component of intergenerational economic and social mobility is determined by the time individuals enter school. After providing new evidence of important differences in early child investments by family income, we study four leading mechanisms thought to explain these gaps: an intergenerational correlation in ability, a consumption value of investment, information frictions, and credit constraints. Specifically, we evaluate the extent to which these mechanisms are consistent with other important stylized facts related to the marginal returns on investments and the effects of parental income on child investments and skills.
    Date: 2016
  30. By: Lucas Maestri (FGV/EPGE); Dino Gerardi (Collegio Carlo Alberto); Braz Camargo (Sao Paulo School of Economics - FGV)
    Abstract: We study efficiency in decentralized markets with aggregate uncertainty and one-sided private information. There is a continuum of mass one of uninformed buyers and a continuum of mass one of informed sellers. Buyers and sellers are randomly and anonymously matched in pairs over time, and buyers make the offers. We show that all equilibria become efficient as trading frictions vanish.
    Date: 2016
  31. By: Aleksander Berentsen (University of Basel)
    Abstract: Understanding money demand is important for our comprehension of macroeconomics and monetary policy. Its instability has made this a challenge. Common explications for the instability are financial regulations and financial innovations that shift the money demand function. We provide a complementary view by showing that a model where borrowers have limited commitment can significantly improve the fit between the theoretical money demand function and the data. Limited commitment can also explain why the ratio of credit to M1 is currently so low, despite that nominal interest rates are at their lowest recorded levels. In a low interest rate environment, incentives to default are high and so credit constraints bind tightly, which depresses credit activities.
    Date: 2016
  32. By: Eric French (University College London)
    Abstract: The old age provisions of the Medicaid program were designed to insure re- tirees against medical expenses. We estimate a structural model of savings and medical spending and use it to compute the distribution of lifetime Medicaid transfers and Medicaid valuations across currently single retirees. Compensat- ing variation calculations indicate that current retirees value Medicaid insur- ance at more than its actuarial cost, but that most would value an expansion of the current Medicaid program at less than its cost. These findings suggest that for current single retirees, the Medicaid program may be of the approximately right size.
    Date: 2016
  33. By: Berthold Herrendorf (Arizona State University)
    Abstract: We build a model of structural transformation with endogenous sector-biased technological change. We show that if the return to specialization is larger in the goods sector than in the service sector, then the equilibrium has the following properties: aggregate growth is balanced; the service sector receives more innovation but the goods sector experiences more productivity growth; structural transformation takes place from goods to services. Compared to the efficient allocation the laissez-faire equilibrium has too much labor in the goods sector, implying that optimal industrial policy should aim to increase, not decrease, the pace of structural transformation.
    Date: 2016
  34. By: Pau Roldan (New York University); Laurent Cavenaile (New York University)
    Abstract: We develop a model of firm dynamics through product innovation that explicitly incorporates advertising decisions by firms. We model advertising by constructing a framework that unifies a number of facts identified by the empirical marketing literature. The model is then used to explain several empirical regularities across firm sizes using U.S. data. Through a novel interaction between R&D and advertising, we are able to explain empirically observed deviations from Gibrat’s law, as well as the behavior of advertising expenditures across firms, the degree of substitution between R&D and advertising expenditures as firms grow large, and broadly the effects of advertising on both firm and economic growth. We find that smaller firms can be both more innovation- and advertising-intensive as in the data even when there exist increasing returns to scale in research.
    Date: 2016

This nep-dge issue is ©2016 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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