nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒11‒05
29 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Heterogeneity, Rigidity and Convergence of Labor Markets in the Euro Area By Jocelyn Maillard
  2. Redistribution and Fiscal Uncertainty Shocks By Hikaru Saijo
  3. Macroeconomic Effects of Financial Uncertainty By Dlugoszek, Grzegorz
  4. Early childhood education and economic growth By Delalibera, Bruno Ricardo; Ferreira, Pedro Cavalcanti
  5. The limits to robust monetary policy in a small open economy with learning agents By Marine Charlotte André; Meixing Dai
  6. The Fiscal Theory of the Price Level in non-Ricardian Economy By Rym Aloui; Michel Guillard
  7. A Real-Business-Cycle model with endogenous discounting and a government sector By Vasilev, Aleksandar
  8. Unemployment Insurance and Labour Productivity over the Business Cycle By W. Similan Rujiwattanapong
  9. The Real Term Premium in a Stationary Economy with Segmented Asset Markets By Chien, YiLi; Lee, Junsang
  10. A Monetary Model of Blockchain By Almosova, Anna
  11. Nonlinear household earnings dynamics, self-insurance, and welfare By De Nardi, Mariacristina; Fella, Giulio; Paz-Pardo, Gonzalo
  12. State dependence in labor market fluctuations: evidence, theory, and policy implications By Pizzinelli, Carlo; Theodoridis, Konstantinos; Zanetti, Francesco
  13. Predetermined interest rates in an analytical RBC model By Patrick Fève; Alban Moura; Olivier Pierrard
  14. Highly Skilled International Migration, STEM Workers, and Innovation By Anelí Bongersy; Carmen Díaz-Roldán; José L. Torres
  15. Technological Progress, the Supply of Hours Worked, and the Consumption-Leisure Complementarity By Irmen, Andreas
  16. Understanding Why Fiscal Stimulus Can Fail through the Lens of the Survey of Professional Forecasters By Kim, Hyeongwoo; Zhang, Shuwei
  17. Transmission of monetary policy with heterogeneity in household portfolios By Luetticke, Ralph
  18. Fiscal stimulus with learning-by-doing By d’Alessandro, Antonello; Fella, Giulio; Melosi, Leonardo
  19. E-money: Legal Restrictions Theory and Monetary Policy By Ohik Kwon; Jaevin Park
  20. Fixed-Rate Loans and the Effectiveness of Monetary Policy By Sung Ho Park
  21. Optimal capital controls and real exchange rate policies: a pecuniary externality perspective By Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R.
  22. Vacancy Durations and Entry Wages: Evidence from Linked Vacancy-Employer-Employee Data By Andreas Kettemann; Andreas I. Mueller; Josef Zweimüller
  23. Unemployment and Development By Ying Feng; David Lagakos; James E. Rauch
  24. How Wage Announcements Affect Job Search: A Field Experiment By Belot, Michèle; Kircher, Philipp; Muller, Paul
  25. Accounting for the Sources of the Recent Decline in Korea's Exports to China By Moon Jung Choi; Kei-Mu Yi
  26. How Will Persistent Low Expected Returns Shape Household Economic Behavior? By Vanya Horneff; Raimond Maurer; Olivia S. Mitchell
  27. Intermediation in a directed search model By Kultti, Klaus; Takalo, Tuomas; Vähämaa, Oskari
  28. Fiscal Sustainability in Japan: What to tackle? By Selahattin İMROHOROĞLU; KITAO Sagiri; YAMADA Tomoaki
  29. Effect of Aging on Housing Prices: A Perspective from an Overlapping Generation Model By Sun, Tianyu; Chand, Satish; Sharpe, Keiran

  1. By: Jocelyn Maillard (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper investigates the welfare consequences of labor market convergence reforms for a large range of calibrations in a two-country monetary union DSGE model with search and matching frictions. The model features trade in consumption and investment goods, price stickiness, firing costs and is calibrated to reflect the structural asymmetries of flexible and rigid countries of the Euro Area in terms of size and labor market variables. Across steady states, convergence brings welfare gains for the rigid country and welfare losses for the flexible country in most situations. The higher the flexibility induced by the convergence, the higher the gains for the rigid country and the lower the losses for the flexible country. Taking into account the transition path brings results that are qualitatively similar, but have a lower magnitude in terms of welfare gains/losses. Indeed, wage bargaining has a short-term negative impact on the rigid country and a short-term positive impact on the flexible country. As such, I conclude that convergence in labor markets can lead to substantial welfare gains in a monetary union, but only if the implementation is carefully designed.
    Keywords: Unemployment,Monetary Union,Labor Market Reform
    Date: 2018
  2. By: Hikaru Saijo (University of California, Santa Cruz (E-mail:
    Abstract: This paper studies the macroeconomic impact of an uncertainty shock about fiscal policy in a dynamic general equilibrium framework. Motivated by the observation that many fiscal policies are redistributive and that a sizable fraction of U.S. households do not own capital, I introduce household heterogeneity in the form of limited capital market participation. I show that household heterogeneity significantly magnifies the aggregate effect and induces co-movement of macroeconomic variables in a contraction that is generated by a fiscal uncertainty shock. This is because the limited capital market participation model captures individual uncertainty about redistribution that is absent in representative agent models. When agents are ambiguity averse, this uncertainty about redistribution has first-order effects because it shows up as heterogeneous worst-case scenarios. As a result, the model matches the empirical responses of macro variables to fiscal uncertainty shocks better than the representative agent counterpart.
    Keywords: fiscal policy uncertainty, ambiguity, limited stock market participation, redistribution
    JEL: E32 E62
    Date: 2018–10
  3. By: Dlugoszek, Grzegorz
    Abstract: This paper investigates the macroeconomic effects of uncertainty originating in the financial sector. My contribution is twofold. First, I document empirical relevenace of financial uncertainty using SVAR methods. Then, I employ the DSGE framework developed by Gertler and Karadi (2011) to uncover the underlying transmission mechanism. The model generates macroeconomic dynamics that are consistent with the SVAR evidence. In particular, an increase in financial uncertainty raises the risk premium and leads to a decline in output, consumption, investment and hours worked. This outcome arises mainly because of an endogenous tightening of the financial constraint, which in turn triggers the financial accelerator mechanism. Finally, internal habit formation and nominal rigidities act as additional amplification mechanisms for financial uncertainty shocks.
    Keywords: Stochastic Volatility,Financial Frictions,Financial Uncertainty
    JEL: E32 E44 E32 E44 E21
    Date: 2018
  4. By: Delalibera, Bruno Ricardo; Ferreira, Pedro Cavalcanti
    Abstract: We study the effects of early childhood skill formation on productivity and schooling. We add early childhood human capital to a standard continuous time life cycle economy and assume complementarity between educational stages. Agents are homogenous and choose the intensity of preschool education, how long to stay in formal school, labor effort and consumption. The model is calibrated to the U.S. from 1961 to 2008 and matches the data very well We study the effects of early childhood skill formation on productivity and schooling. We add early childhood human capital to a standard continuous time life cycle economy and assume complementarity between educational stages. Agents are homogenous and choose the intensity of preschool education, how long to stay in formal school, labor effort and consumption. The model is calibrated to the U.S. from 1961 to 2008 and matches the data very well and closely reproduces the paths of schooling, hours worked, relative prices and GDP. We find that early childhood education can explain a large part of the observed increase of years of schooling in the U.S. since 1961, and it was as important as formal education for the increase of labor productivity in the period. Furthermore, we show that small reallocations of public expenditures from formal education to early childhood education would have sizable impacts on income per capita and productivity.
    Date: 2018–10–18
  5. By: Marine Charlotte André; Meixing Dai
    Abstract: We study in a small open economy New Keynesian model the consequences of adaptive learning for the design of optimal robust monetary policy. Compared to the rational expectations equilibrium, we find that the possiblity to conduct robust monetary policy is extremely limited in the open economy when private agents are learning. The misspecification that can be introduced into all equations of the model is very small and approaches zero at high speed as the learning gain rises.
    Keywords: Robust control, model uncertainty, adaptive learning, optimal monetary policy, small open economy.
    JEL: C62 D83 D84 E52 E58
    Date: 2018
  6. By: Rym Aloui (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Michel Guillard (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne)
    Abstract: The Fiscal Theory of the Price Level (FTPL) is an important theory that recognizes the interaction between monetary and fiscal policy. In its simplest form, the FTPL assumes that the government commits to a fixed and exogenous present value of primary surpluses implying the adjustment of the price level to equate the real government debt to the present value of primary surpluses. The FTPL relies on the presence of primary surpluses to work. We show that this condition is not necessary in a non-Ricardian economy. The FTPL still hold even when exogenous primary surpluses are null. We consider an overlapping generations of infinitely-lived dynasties model with simple fiscal and monetary policies, where the effective lower bound on nominal interest rates is taken into account. A bubble-like component of government debt appears inducing the determination of the price level by the fiscal policy, when the effective lower bound on nominal interest rates is binding and even when the government primary surpluses equal zero.
    Keywords: Public Debt,Wealth Effects,Liquidity Trap,Deflation,Zero Lower Bound,Fiscal Theory of the Price Level,Monetary and Fiscal Rules
    Date: 2018
  7. By: Vasilev, Aleksandar
    Abstract: We introduce an endogenous discount factor as in Uzawa (1968) and Schmitt-Grohe and Uribe (2003) into a real-business-cycle setup with Greenwood et al. (1988) preferences and augment the model with a detailed government sector. We calibrate the arti ficial economy to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016). We investigate the quantitative importance of endogenous discounting for the propagation cyclical fluctuations in Bulgaria. The presence of an endogenous discount factor improves the model performance against data, and in addition this extended setup dominates the standard RBC model framework with a constant discount factor, e.g., Vasilev (2009).
    Keywords: Business cycles,Uzawa preferences,endogenous discounting,Bulgaria
    Date: 2018
  8. By: W. Similan Rujiwattanapong (Centre for Macroeconomics (CFM); Aarhus University)
    Abstract: This paper quantifies the effects of the increasing maximum unemployment insurance (UI) duration during recessions no the drop in the correlation between output and labour productivity in the U.S. since the early 1980’s – the so-called productivity puzzle. Using a general equilibrium search and matching model with stochastic UI duration, heterogeneous match quality, variable search intensity and on-the-job search. I demonstrate that the model can explain over 40 percent of the drop in this correlation (28 percent when the Great Moderation is taken into account). More generous UI extensions during recent recessions cause workers to be more selective with job offers and lower job search effort. The former channel raises the overall productivity in bad times. The later prolongs UI extensions since in the U.S. they are triggered by high unemployment.
    Keywords: Business cycles, Labour productivity, Unemployment insurance
    JEL: E32 J24 J64 J65
    Date: 2018–08
  9. By: Chien, YiLi (Federal Reserve Bank of St. Louis); Lee, Junsang (Sungkyunkwan University)
    Abstract: This paper proposes an equilibrium model to explain the positive and sizable term premia observed in the data. We introduce a slow mean-reverting process of consumption growth and a segmented asset market mechanism with heterogeneous trading technology to otherwise a standard heterogeneous agent general equilibrium model. First, a slow mean-reverting consumption growth process implies that the expected consumption growth rate is only slightly countercyclical and the process can exhibit a near zero first-order autocorrelation as seen in the data. The very small countercyclicality of the expected consumption growth rate suggests that the long term bonds are risky and hence the term premia are positive. Second, the segmented asset market mechanism amplifies the size and the magnitude of term premia since the aggregate risk is concentrated into a small fraction of marginal traders who demand high risk premia. For sensitivity analysis, the role of each assumption is further investigated by taking each factor out one by one.
    Keywords: Limited Participation; Term Premia; Portfolio Heterogeneity; Household Finance
    JEL: E30 G11 G12
    Date: 2018–04–03
  10. By: Almosova, Anna
    Abstract: The recent emergence of blockchain-based cryptocurrencies has received a considerable attention. The growing acceptance of cryptocurrencies has led many to speculate that the blockchain technology can surpass a traditional centralized monetary system. However, no monetary model has yet been developed to study the economics of the blockchain. This paper builds a model of the economy with a single generally acepted blockchain-based currency. In the spirit of the search and matching literature I use a matching function to model the operation of the blockchain. The formulation of the money demand is taken from a workhorse of monetary economics - Lagos and Wright (2005). I show that in a blockchain-based monetary system money demand features a precautionary motive which is absent in the standard Lagos-Wright model. Due to this precautionary money demand the monetary equilibrium can be stable for some calibrations. I also used the developed model to study how the equilibrium return on money is dependent on the blockchain parameters such as mining costs and rewards.
    Keywords: Blockchain,Miners,Cryptocurrency,Matching function
    JEL: E40 E41 E42
    Date: 2018
  11. By: De Nardi, Mariacristina; Fella, Giulio; Paz-Pardo, Gonzalo
    Abstract: Earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative (Social Security Administration) and survey (Panel Study of Income Dynamics) data. We study the implications of two processes for household, post-tax earnings in a standard life-cycle model: a canonical earnings process (that includes a persistent and a transitory shock) and a rich earnings dynamics process (that allows for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age). Allowing for richer earnings dynamics implies a substantially better fit of the evolution of cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. Richer earnings dynamics also imply lower welfare costs of earnings risk, but, as the canonical earnings process, do not generate enough concentration at the upper tail of the wealth distribution.
    Keywords: earnings risk; savings; consumption; inequality; life cycle
    JEL: D14 D31 E21 J31
    Date: 2018–06–15
  12. By: Pizzinelli, Carlo; Theodoridis, Konstantinos; Zanetti, Francesco
    Abstract: This paper documents state dependence in labor market fluctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-specific idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low-productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity.
    Keywords: search and matching models; state dependence in business cycles; threshold vector autoregression.
    JEL: C11 E24 E32 J64
    Date: 2018–08
  13. By: Patrick Fève; Alban Moura; Olivier Pierrard
    Abstract: We solve a version of the analytical Real Business Cycle (RBC) model with a predetermined rate of return on household saving. The solution differs from that of the benchmark RBC model along two dimensions: (i) Policy functions depend on the variance of the technology shock. (ii) There is a suboptimal pattern of excess saving. We discuss the economic intuition underlying these properties. We also demonstrate that unconditional welfare can be higher in the suboptimal model with predetermined interest rates, providing a clear illustration of the pitfall with unconditional welfare comparisons.
    Keywords: RBC model, predetermined interest rates, over-saving, conditional and unconditional welfare.
    JEL: E13 E21 E32 E43
    Date: 2018–09
  14. By: Anelí Bongersy (Universidad de Málaga); Carmen Díaz-Roldán (Universidad de Castilla-La Mancha); José L. Torres (Universidad de Málaga)
    Abstract: This paper studies the implications of highly skilled labor international migration in a two-country Dynamic Stochastic General Equilibrium model. The model considers hree types of workers: STEM workers, non-STEM college educated workers, and non-college educated workers. Only high skilled workers can move internationally from the relative low productivity (sending) country to the high productivity (host) country. Aggregate productivity in each economy is a function of innovations, which can be produced only by STEM workers. The model predicts i) the existence of a wage premium of STEM workers relative to non-STEM college educated workers, ii) this wage premium is higher in the destination country and increases with positive technological shocks, iii) a reduction in migration costs increases output, wages and total labor in the destination country, with opposite effects in the country of origin, and iv) high skilled immigrants reduce skilled native labor and do not affect unskilled labor.
    Keywords: STEM workers; Migration; Dynamic Stochastic General Equilibrium models; Innovation
    JEL: F43 J61 O31
    Date: 2018–02
  15. By: Irmen, Andreas
    Abstract: At least since 1870 hours worked per worker declined and real wages increased in many of today’s industrialized countries. The dual nature of technological progress in conjunction with a consumption-leisure complementarity explains these stylized facts. Technological progress drives real wages up and expands the amount of available consumption goods. Enjoying consumption goods increases the value of leisure. Therefore, individuals demand more leisure and supply less labor. This mechanism appears in an OLG-model with two-period lived individuals equipped with per-period utility functions of the generalized log-log type proposed by Boppart-Krusell (2016). The optimal plan is piecewise defined and hinges on the wage level. Technological progress moves a poor economy out of a regime with low wages and an inelastic supply of hours worked into a regime where wages increase further and hours worked continuously decline.
    Keywords: technological change,capital accumulation,endogenous labor supply,OLG-model
    JEL: D91 J22 O33 O41
    Date: 2018
  16. By: Kim, Hyeongwoo; Zhang, Shuwei
    Abstract: This paper shows that fiscal policy in the U.S. has become ineffective due to lack of coordination between monetary and fiscal policy. We present a New Keynesian model that generates strong output effects of government spending shocks only when monetary policy coordinates well with fiscal policy. Employing the post-war U.S. data, we report strong stimulus effects of fiscal policy during the pre-Volcker era, which rapidly dissipate when we shift the sample period to the post-Volcker era. Finding a negligible role of the real interest rate in the propagation of government spending shocks, we propose an alternative explanation using a consumer sentiment channel. Employing the Survey of Professional Forecasters data, we show that forecasters tend to systematically over-estimate real GDP growth in response to positive innovations in government spending when policies coordinate well with each other. On the other hand, they are likely to formulate pessimistic forecasts when the monetary authority maintains a hawkish stance that conflicts with the fiscal stimulus. The fiscal stimulus, under such circumstances, may generate consumer pessimism, which decreases private spending and ultimately weakens the output effects of fiscal policy. We also provide statistical evidence that confirms an important role of the sentiment channel under different regimes of policy coordination.
    Keywords: Fiscal Policy; Time-varying Effectiveness; Policy Coordination; Consumer Sentiment; Survey of Professional Forecasters
    JEL: E32 E61 E62
    Date: 2018–10
  17. By: Luetticke, Ralph
    Abstract: Monetary policy affects both intertemporal consumption choices and portfolio choices between liquid and illiquid assets. The monetary transmission, in turn, depends on the distribution of marginal propensities to consume and invest. This paper assesses the importance of heterogeneity in these propensities for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different degrees of liquidity. Liquidity-constrained households have high propensities to consume but low propensities to invest, which makes consumption more and investment less responsive to monetary shocks compared to complete markets. Redistribution through earnings heterogeneity and the Fisher channel from unexpected inflation further amplifies the consumption response but dampens the investment response.
    Keywords: monetary policy; heterogeneous agents; general equilibrium
    JEL: E21 E32 E52
    Date: 2018–06–21
  18. By: d’Alessandro, Antonello; Fella, Giulio; Melosi, Leonardo
    Abstract: Using a Bayesian SVAR analysis, we document that an increase in government purchases raises private consumption, the real wage and total factor productivity (TFP) while reducing inflation. Each of these facts is hard to reconcile with both neoclassical and New-Keynesian models. We extend a standard New-Keynesian model to allow for skill accumulation through past work experience, following Chang, Gomes and Schorfheide (2002). An increase in government spending increases hours and induces skill accumulation and higher measured TFP and real wages in subsequent periods. Future marginal costs fall lowering future expected inflation and, through the monetary policy rule, the real interest rate. Consumption increases as a result.
    Keywords: fiscal policy transmission; consumption; real wage
    JEL: E62 E63
    Date: 2018–05
  19. By: Ohik Kwon (Economic Research Institute, The Bank of Korea); Jaevin Park (Department of Economics, The University of Mississippi)
    Abstract: This paper studies the efficiency of electronic money system by focusing on the decentralized setting of issuance. In the model competitive money issuers can create small denominated money (or e-money) backed by large denominated government bonds. Under the decentralized environment the issuers can also produce counterfeit collateral at a proportional cost. This moral hazard incentive requires the more government bonds for the issuers to provide the same amount of money. In general equilibrium the individual money issuers do not internalize the aggregate effect of money supply. Thus the equilibrium allocation is constrained inefficient with the moral hazard incentives. We suggest a pigouvian tax on money supply to correct the externality in aggregate money supply.
    Keywords: Limited Commitment, Moral Hazard, Externality, Open-market Operations
    JEL: E4 E5
    Date: 2018–06–19
  20. By: Sung Ho Park (Economic Research Institute, The Bank of Korea)
    Abstract: Fixed-rate loans may contribute to financial stability because they lower the volatility of interest rates. This reduced volatility of interest rates, however, may undermine the effectiveness of monetary policy. Fixed-rate loans, also, may change the steady-states of economy because fixed interest rates are usually higher than variable interest rates, which can alter incentives of borrowers for loans. This paper tests how fixed-rate loans affect the steady-states of economy and the effectiveness of monetary policy, using the DSGE model. The steady-states in the economy are shown to vary in the ratio of fixed-rate loans. When the ratio of fixed-rate loans rises, borrowers bear more burden of interests because fixed interest rates are higher than variable interest rates. Therefore, borrowers reduce their loans, which lead into decreased weight of financial sector in the economy. Total output, however, remains almost unchanged regardless of the ratio of fixed-rate loans because households increase labor supply to compensate for their financial losses. The similar phenomenon happens when the mark-up of fixed interest rates over variable interest rates increases. Effects of fixed-rate loans on monetary policy turn out to be different in financial economy and real economy. Financial economy variables, such as interest rates and loans, respond differently to monetary policy shocks when the ratio of fixed-rate loans increases. These differences, however, are offset by each other within financial economy and not transmitted to real economy. That is, real economy variables, such as output, consumption, and price, react virtually the same to monetary policy shocks regardless of the ratio of fixed-rate loans. The same results occur when I vary the mark-up of fixed interest rates or the stickiness of fixed interest rates.
    Keywords: Fixed-rate loans, Monetary policy, DSGE model, Financial stability, Interest rate stickiness
    JEL: E43 E44 E52 E58
    Date: 2018–07–26
  21. By: Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R.
    Abstract: A new literature studies the use of capital controls to prevent financial crises. Within this new framework, we show that when exchange rate policy is costless, there is no need for capital controls. However, if exchange rate policy entails efficiency costs, capital controls become part of the optimal policy mix. When exchange rate policy is costly, the optimal mix combines prudential capital controls in tranquil times with policies that limit exchange rate depreciation in crisis times. The optimal mix yields more borrowing, fewer and less severe financial crises, and much higher welfare than with capital controls alone.
    Keywords: capital controls; exchange rate policy; financial frictions; financial crises; financial stability; optimal taxation; macro-prudential policies
    JEL: N0 F3 G3
    Date: 2016–12–01
  22. By: Andreas Kettemann; Andreas I. Mueller; Josef Zweimüller
    Abstract: This paper explores the relationship between the duration of a vacancy and the starting wage of a new job, using unusually informative data comprising detailed information on vacancies, the establishments posting the vacancies and the workers eventually filling the vacancies. We find that vacancy durations are negatively correlated with the starting wage and that this negative association is particularly strong with the establishment component of the starting wage. We also confirm previous findings that growing establishments fill their vacancies faster. To understand the relationship between establishment growth, vacancy filling and entry wages, we calibrate a model with directed search and ex-ante heterogeneous workers and firms. We find a strong tension between matching the sharp increase in vacancy filling for growing firms and the response of vacancy filling to firm-level wages. We discuss the implications of this finding as well as potential resolutions.
    JEL: E24 J31 J63
    Date: 2018–10
  23. By: Ying Feng; David Lagakos; James E. Rauch
    Abstract: This paper draws on household survey data from countries of all income levels to measure how average unemployment rates vary with income per capita. We document that unemployment is increasing with GDP per capita. Furthermore, we show that this fact is accounted for almost entirely by low-educated workers, whose unemployment rates are strongly increasing in GDP per capita, rather than by high-educated workers, whose unemployment rates are not correlated with income. To interpret these facts, we build a model with workers of heterogeneous ability and two sectors: a traditional sector, in which self-employed workers produce output without reward for ability; and a modern sector, in which firms hire in frictional labor markets, and output increases with ability. Countries differ exogenously in the productivity level of the modern sector. The model predicts that as productivity rises, the traditional sector shrinks, as progressively less-able workers enter the modern sector, leading to a rise in overall unemployment and in the ratio of low-educated to high-educated unemployment rates. Quantitatively, the model accounts for around one third of the cross-country patterns we document.
    JEL: E24 E26 O11 O41
    Date: 2018–10
  24. By: Belot, Michèle (European University Institute); Kircher, Philipp (University of Edinburgh); Muller, Paul (University of Gothenburg)
    Abstract: We study how job seekers respond to wage announcements by assigning wages randomly to pairs of otherwise similar vacancies in a large number of professions. High wage vacancies attract more interest, in contrast with much of the evidence based on observational data. Some applicants only show interest in the low wage vacancy even when they were exposed to both. Both findings are core predictions of theories of directed/competitive search where workers trade off the wage with the perceived competition for the job. A calibrated model with multiple applications and on-the-job search induces magnitudes broadly in line with the empirical findings.
    Keywords: online job search, directed search, wage competition, field experiments
    JEL: J31 J63 J64 C93
    Date: 2018–09
  25. By: Moon Jung Choi (Economic Research Institute, The Bank of Korea); Kei-Mu Yi (Economics Department, University of Houston)
    Abstract: Following a two-decade period of double-digit growth, South Korean exports to China have declined since 2013. We investigate the sources of this recent decline using two complementary methodologies, an accounting decomposition and a model-based decomposition. First, we decompose the changes in Korea's exports to China as a share of output into within-industry and between-industry effects using disaggregated industry-level data. Our results show that during the high export growth period of 1990-2009, the within effect dominated; in the export slowdown period of 2010-2014, the within effect contributed to the slowdown in that individual sectors, on net, exported a smaller fraction of their output to China. Second, we apply a dynamic multi-sector, multi-country general equilibrium model to decompose the shocks that cause the decline in Korea's exports to China. The results reveal that in 2013-2016 China experienced a sharp reduction in its desire to accumulate capital and to consume manufactured goods. All else equal, these forces would imply fewer imports by China from Korea of manufactured goods. Given that Korea's exports to China are highly concentrated in manufactured intermediate and capital goods, these shocks could, in principle, explain most of the decline in Korea's exports to China during this period.
    Keywords: Korea, China, Export decline, Shocks, Decomposition
    JEL: F1 F4 O53
    Date: 2018–08–14
  26. By: Vanya Horneff; Raimond Maurer; Olivia S. Mitchell
    Abstract: Many believe that global capital markets will generate lower returns in the future versus the past. We examine how persistently lower real returns will reshape work, retirement, saving, and investment behavior of older persons using a calibrated dynamic life cycle model. In a low return regime, workers build up less wealth in their tax-qualified 401(k) accounts versus the past, claim social security benefits later, and work more. Moreover, the better-educated are more sensitive to real interest rate changes, and the least-educated alter their behavior less. Interestingly, wealth inequality is lower in periods of persistent low expected returns.
    JEL: D14 D91 G11 G22
    Date: 2018–10
  27. By: Kultti, Klaus; Takalo, Tuomas; Vähämaa, Oskari
    Abstract: We study the ability of competitive coordination service platforms (such as auction sites and real estate agents) to facilitate trade in a directed search model where buyers have unit demands and each seller only has one good to sell. The sellers’ capacity constraint leads to a coordination problem as in a symmetric equilibrium without intermediation some sellers receive multiple buyers while some are left without any customers. We compare this equilibrium to one where sellers and buyers can choose to become intermediaries who coordinate the meetings. We find that roughly 20 percent of agents become intermediaries. As a result, a large part of the supply and demand in the economy vanishes. Moreover, the large amount of intermediaries actually reduces the meeting efficiency. Jointly, these effects imply that the gains from trade are roughly 25 percent lower than in the economy without intermediation.
    JEL: D4 L1
    Date: 2018–10–26
  28. By: Selahattin İMROHOROĞLU; KITAO Sagiri; YAMADA Tomoaki
    Abstract: Japan leads all advanced economies in terms of aging and has the highest debt to gross domestic product (GDP) ratio. The public pension, medical and long-term care (LTC) expenditures are projected to far outpace revenues and create significant fiscal burdens. In this paper, we develop a detailed overlapping generations model that incorporates the social insurance programs in detail, use most recent estimates from Japanese micro data and government demographic projections to discipline the earnings and labor supply profiles of heterogeneous agents and their cohort shares, and simulate future paths of fiscal and macroeconomic indicators. Our numerical results suggest that absent any change in current policies, Japan will continue to run large pension, public health, LTC, and basic deficits and the debt to GDP ratio will continue to reach unprecedented highs, with interest payments on the debt becoming increasingly larger. Although no single policy tool can address fiscal consolidation, a combination of policies is found to achieve sustainability: raise the retirement age to 67, cut pensions by 10%, raise copays of health and LTC insurances to 20%, find policies to propel female employment and earnings to the levels of their male counterparts, and increase the consumption tax rate to 15%. Under these changes, the debt to output ratio in 2050 would be lower than that in 2020.
    Date: 2018–09
  29. By: Sun, Tianyu; Chand, Satish; Sharpe, Keiran
    Abstract: This paper investigates the effect of aging on housing prices. It provides a theoretical explanation to address the on-going debate about this issue. The analysis demonstrates that aging has divergent effects on housing prices, depending on the net effects of a fall in fertility vis-à-vis a rise in longevity on demand for housing. In addition, the results suggest that aging could cause a turning point in the price dynamics. Before this turning point, aging would boost the prices; however, after this point, the prices are depressed because of aging. Furthermore, inequality of household utility is enlarged during the aging processes.
    Keywords: Aging Population; OLG Model; House Prices; Land Prices; Turning Point
    JEL: E21 E31 J11 R21 R31
    Date: 2018–02–10

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