nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒03‒22
24 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Unemployment Insurance Reforms in a Search Model With Endogenous Labor Force Participation By Johannes Goensch; Andreas Gulyas; Ioannis Kospentaris
  2. Trust Shocks, Financial Crises, and Money By Jia, Pengfei
  3. The Macro Impact of Noncompete Contracts By Liyan Shi
  4. A Theory of Foreign Exchange Interventions By Sebastián Fanelli; Ludwig Straub
  5. Twin Default Crises By Caterina Mendicino; Kalin Nikolov; Juan Rubio-Ramirez; Javier Suarez; Dominik Supera
  6. Non-compete agreements, wages and efficiency: theory and evidence from Brazilian football By Bernardo Guimaraes; Joao Paulo Pessoa; Vladimir Ponczek
  7. Are firing costs important for business cycles? Lessons from Bulgaria (1999-2018) By Aleksandar Vasilev
  8. Risk shocks and divergence between the Euro area and the US in the aftermath of the Great Recession By Brand, Thomas; Tripier, Fabien
  9. The “Matthew effect” and market concentration: Search complementarities and monopsony power By Jesús Fernández-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti
  10. Duopolistic competition and monetary policy By Kozo Ueda
  11. Liquidity traps in a world economy By Robert Kollmann
  12. Macroeconomic Policy Adjustments due to COVID-19: Scenarios to 2025 with a Focus on Asia By Fernando, Roshen; McKibbin, Warwick J.
  13. The macroeconomic effects of commodity price uncertainty By Trung Duc Tran
  14. Gender Gaps in Latin American Labor Markets: Implications from an Estimated Search Model By Tejada, Mauricio; Piras, Claudia; Flabbi, Luca; Bustelo, Monserrat
  15. Directed Search with Phantom Vacancies By James Albrecht; Bruno Decreuse; Susan Vroman
  16. Optimal Monetary Policy Under Bounded Rationality By Benchimol, Jonathan; Bounader, Lahcen
  17. Hartz IV and the Decline of German Unemployment: A Macroeconomic Evaluation By Hochmuth, Brigitte; Kohlbrecher, Britta; Merkl, Christian; Gartner, Hermann
  18. Implications of the slowdown in trend growth for fiscal policy in a small open economy By Alexander Beames; Mariano Kulish; Nadine Yamout
  19. Efficient Solution and Computation of Models With Occasionally Binding Constraints By Gregor Boehl
  20. Cross-country Disparities in Skill Premium and Skill Acquisition By Anurag Banerjee; Parantap Basu; Elisa Keller
  21. The Greek Great Depression from a neoclassical perspective By Dimitris Papageorgiou; Stylianos Tsiaras
  22. Endogenous Education and Long-Run Factor Shares By Gene M Grossman; Elhanan Helpman; Ezra Oberfield; Thomas Sampson
  23. Softening the blow: US state-level banking deregulation and sectoral reallocation after the China trade shock By Mathias Hoffmann; Lilia Ruslanova
  24. American business cycles 1889-1913: An accounting approach By Dou Jiang; Mark Weder

  1. By: Johannes Goensch; Andreas Gulyas; Ioannis Kospentaris
    Abstract: This paper develops a life-cycle search model with a labor force participation decision of workers, job-to-job transitions and endogenous job creation to study unemployment insurance (UI) reforms. The calibrated model replicates the aggregate and life-cycle patterns of labor market flows from the Current Population Survey, as well as the worker labor market histories over four months. The model predicts that an UI extension to 99 weeks leads to a slight decrease in labor productivity, the employment to population ratio and the labor force participation rate, but to a non-trivial increase in the unemployment rate. An equally expensive increase in UI benefits, holding the eligibility duration unchanged, yields a smaller increase in the unemployment rate and a smaller decrease in the labor force participation rate. We show that disregarding the effect of flows in and out of the labor force and job-to-job transitions would significantly bias the response of the unemployment rate and labor productivity to UI reforms.
    Keywords: Unemployment Insurance; Labor Market Flows; Directed Search
    JEL: E24 J63 J64 J65 J68
    Date: 2021–02
  2. By: Jia, Pengfei
    Abstract: A precondition for a well-functioning monetary system is trust. This paper develops a neoclassical general equilibrium model in which public and private money coexist and the impact of trust shocks on the macroeconomy is examined. In this paper, trust is modelled as limited commitment between borrowers and lenders. A borrower who issues private money can credibly commit to repay at most a fraction of his or her future output. The paper shows that a lack of trust can engineer a financial crisis, with substantial effects on both the real and monetary variables. In the model, an unexpected drop in the trust parameter causes young workers to divert less of their savings into investment goods and more of their savings into consumption goods. A fall in capital investment in turn leads to a decline in real output. I also show that trust shocks can have detrimental effects on both workers and entrepreneurs. In addition, the model shows that, to clear the money market, an increase in the real demand for government money causes the price level to fall, inducing transitory deflation. This is in line with the low inflation episodes during and following the Great Recession. The decline in capital investment and the price level also implies that the amount of deposits has to shrink in a financial crisis. Finally, once trust shocks hit the economy, the money multiplier drops. This is due to the decrease in capital investment and the increase in the real demand for government money.
    Keywords: Trust shocks, Financial crises, Public money, Private money.
    JEL: E31 E32 E41 E44 E51
    Date: 2021–02–26
  3. By: Liyan Shi (EIEF)
    Abstract: This paper studies the macro impact of noncompete employment contracts, assessing the trade-off between restricting worker mobility and encouraging firm investment. I develop an on-the-job search model in which firms and workers sign dynamic wage contracts with noncompete clauses and _firms invest in their worker's general human capital. The incumbent employers use noncompete clauses to enforce buyout payments when their workers depart, ultimately extracting rent from future employers. The model implies that this rent extraction is socially excessive and restrictions on these clauses can improve efficiency. I quantitatively evaluate the model in the managerial labor market, using a novel dataset of executive employment contracts. I find that the optimal restriction on noncompete duration is close to a ban.
    Date: 2020
  4. By: Sebastián Fanelli (CEMFI, Centro de Estudios Monetarios y Financieros); Ludwig Straub (Harvard University)
    Abstract: We study a real small open economy with two key ingredients: (i) partial segmentation of home and foreign bond markets and (ii) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry-trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (a) the optimal policy leans against the wind, stabilizing the exchange rate; (b) it involves smooth spreads but allows exchange rates to jump; (c) it partly relies on “forward guidance”, with non-zero interventions even after the shock has subsided; (d) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.
    Keywords: foreign exchange interventions, limited capital mobility, reserves, coordination.
    JEL: F31 F32 F41 F42
    Date: 2020–09
  5. By: Caterina Mendicino (European Central Bank); Kalin Nikolov (European Central Bank); Juan Rubio-Ramirez (Emory University); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros); Dominik Supera (Wharton School)
    Abstract: We study the interaction between borrowers' and banks' solvency in a quantitative macroeconomic model with financial frictions in which bank assets are a portfolio of defaultable loans. We show that ex-ante imperfect diversification of bank lending generates bank asset returns with limited upside but significant downside risk. The asymmetric distribution of these returns and their implications for the evolution of bank net worth are important for capturing the frequency and severity of twin default crises - simultaneous rises in firm and bank defaults associated with sizeable negative effects on economic activity. As a result, our model implies higher optimal capital requirements than common specifications of bank asset returns, which neglect or underestimate the impact of borrower default on bank solvency.
    Keywords: Bank default, firm default, financial crises, bank capital requirements.
    JEL: G01 G28 E44
    Date: 2020–06
  6. By: Bernardo Guimaraes; Joao Paulo Pessoa; Vladimir Ponczek
    Abstract: We propose a model to study non-compete agreements and evaluate their quantitative effects. We explore an exogenous policy change that removed non-compete clauses in the market for Brazilian footballers, the Pele Act of 1998. The Act raised players' lifetime income but changed the wage profile in a heterogeneous way, reducing young players' salaries. We structurally estimate the model's parameters by matching wages and turnover profiles in the post Act period. By changing a single parameter related to the non-compete friction, we can match the changes in the age-earnings profile. We then show that the bulk of income gains is due to distributional forces, with efficiency gains playing a minor role.
    Keywords: labor mobility, labor frictions, wage profile, labor turnover
    JEL: J30 J41 J60 K31 Z22
    Date: 2021–03
  7. By: Aleksandar Vasilev (Lincoln International Business School, UK.)
    Abstract: We introduce firing costs into a real-business-cycle setup augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2018). We investigate the importance of such labor market frictions for cyclical fluctuations in Bulgaria. Firing costs decrease employment volatility and pro-cyclicality, where both effects come at odds with data. Besides those, we do not find other important effects of firing costs for business cycle fluctuations in Bulgaria.
    Keywords: business cycle fluctuations, labor markets, firing costs, Bulgaria.
    JEL: E24 E32
    Date: 2021–03
  8. By: Brand, Thomas; Tripier, Fabien
    Abstract: Highly synchronized during the Great Recession of 2008-2009, the Euro area and the US have diverged in the period that followed. To explain this divergence, we provide a structural interpretation of these episodes through the estimation for both economies of a business cycle model with financial frictions and risk shocks, measured as the volatility of idiosyncratic uncertainty in the financial sector. Our results show that risk shocks have stimulated US growth in the aftermath of the Great Recession and have been the main driver of the double-dip recession in the Euro area. They play a positive role in the Euro area only after 2015. Risk shocks therefore seem well suited to account for the consequences of the sovereign debt crisis in Europe and the subsequent positive effects of unconventional monetary policies, notably the ECB's Asset Purchase Programme (APP).
    Keywords: Great Recession, Business cycles, Uncertainty, Divergence, Risk Shocks
    Date: 2021–03
  9. By: Jesús Fernández-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti
    Abstract: This paper develops a dynamic general equilibrium model with heterogeneous firms that face search complementarities in the formation of vendor contracts. Search complementarities amplify small differences in productivity among firms. Market concentration fosters monopsony power in the labor market, magnifying profits and further enhancing high-productivity firms’ output share. Firms want to get bigger and hire more workers, in stark contrast with the classic monopsony model, where a firm aims to reduce the amount of labor it hires. The combination of search complementarities and monopsony power induces a strong “Matthew effect” that endogenously generates superstar firms out of uniform idiosyncratic productivity distributions. Reductions in search costs increase market concentration, lower the labor income share, and increase wage inequality.
    Keywords: Market concentration, superstar firms, search complementarities, monopsony power in the labor market
    JEL: C63 C68 E32 E37 E44 G12
    Date: 2021–02
  10. By: Kozo Ueda
    Abstract: A standard macroeconomic model based on monopolistic competition (Dixit-Stiglitz) does not account for the strategic behaviors of oligopolistic firms. In this study, we construct a tractable Hotelling duopoly model with price stickiness to consider the implications for monetary policy. The key feature is that an increase in a firm’s reset price increases the optimal price set by the rival firm in the following periods, which, in turn, influences its own optimal price in the current period. This dynamic strategic complementarity leads to the following results. (1) The steady-state price level depends on price stickiness. (2) The real effect of monetary policy under duopolistic competition is larger than that in a Dixit-Stiglitz model, but the difference is not large. (3) A duopoly model with heterogeneous transport costs can explain the existence of temporary sales, which decreases the real effect of monetary policy considerably. These results show the importance of understanding the competitive environment when considering the effects of monetary policy.
    Keywords: Duopoly, monetary policy, strategic complementarities, New Keynesian model
    JEL: D43 E32 E52
    Date: 2021–01
  11. By: Robert Kollmann
    Abstract: This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These “expectations-driven” liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a “fundamentals-driven” liquidity trap.
    Keywords: Zero lower bound, expectations-driven and fundamentals-driven liquidity traps, domestic and international shock transmission, terms of trade, exchange rate, net exports
    JEL: E3 E4 F2 F3 F4
    Date: 2021–01
  12. By: Fernando, Roshen (Asian Development Bank Institute); McKibbin, Warwick J. (Asian Development Bank Institute)
    Abstract: We update the analysis of the global macroeconomic consequences of the COVID-19 pandemic in earlier papers by the authors with data as of late October 2020. It also extends the focus to Asian economies and explores four alternative policy interventions that are coordinated across all economies. The first three policies relate to fiscal policy: an increase in transfers to households of an additional 2% of the GDP in 2020; an increase in government spending on goods and services in all economies of 2% of their GDP in 2020; and an increase in government infrastructure spending in all economies in 2020. The fourth policy is a public health intervention similar to the approach of Australia that successfully manages the virus (flattens the curve) through testing, contact tracing, and isolating infected people coupled with the rapid deployment of an effective vaccine by mid-2021. The policy that is most supportive of a global economic recovery is the successfully implemented public health policy. Each of the fiscal policies assists in the economic recovery with public sector infrastructure having the most short-term stimulus and longer-term growth benefits.
    Keywords: COVID-19; pandemics; infectious diseases; risk; macroeconomics; DSGE; CGE; G-Cubed
    JEL: C54 C68 F41
    Date: 2021–03–02
  13. By: Trung Duc Tran
    Abstract: This paper studies the macroeconomic effects of commodity price uncertainty (CPU) shocks. Using Australia as a case study, an econometric-based CPU index is proposed to reveal that Australia has experienced an unprecedented increase in uncertainty from the commodity market recently. Evidence from a VAR model shows that CPU shocks have a larger recessionary impact than other relevant uncertainty shocks such as financial, economic and trade policy uncertainty. The empirical results are then interpreted in a non-linear multisector DSGE model of the Australian economy by estimating key parameters in the DSGE model to match its responses to the VAR responses. CPU shocks in the DSGE model, via foreign commodity export demand with price rigidity, trigger a precautionary response and cause a decline in real economic activity.
    Keywords: Commodity Price Uncertainty, Small Open Economy, VAR-DSGE
    JEL: C32 F41 E32
    Date: 2021–01
  14. By: Tejada, Mauricio (Universidad Alberto Hurtado); Piras, Claudia (Inter-American Development Bank); Flabbi, Luca (University of North Carolina, Chapel Hill); Bustelo, Monserrat (Inter-American Development Bank)
    Abstract: We develop and estimate a search model that captures the specific characteristics of Latin America and Caribbean (LAC) labor markets and the crucial differences between men and women. Labor force participation decisions are integrated in the labor market dynamics, taking into account sample selection over unobservables. The model is estimated on four LAC countries (Argentina, Chile, Colombia and Mexico) and on three education levels (Primary, Secondary and Tertiary). We use the estimated model to study changes in gender gaps and in output implied by policies that increase the labor force participation of women. We focus on four policies: an increase in the provision of child care, an increase in average female productivity, a gender-based contribution rate for formal employees, and changes in formality and informality costs. We find that the impact on the extensive margin of the female labor supply is the main channel responsible for the policy-induced increase in output.
    Keywords: gender gaps, female labor force participation, labor market frictions, search and matching, Nash bargaining, informality
    JEL: J24 J3 J64 O17
    Date: 2021–03
  15. By: James Albrecht (Department of Economics, Georgetown University); Bruno Decreuse (Aiz-Marseille School of Economics); Susan Vroman (Department of Economics, Georgetown University)
    Abstract: When vacancies are filled, the ads that were posted are often not withdrawn, creating "phantom" vacancies. The existence of phantoms implies that older job listings are less likely to represent true vacancies than are younger ones. We assume that job seekers direct their search based on the listing age and so equalize the expected benefit of a job application across listing age. Forming a match with a vacancy of age a creates a phantom of age a with probability beta and this leads to a negative informational externality that affects all vacancies of age a and older. Thus, the magnitude of this externality decreases with the age of the listing when the match is formed. Relative to the constrained e¢ cient search behavior, the directed search of job seekers leads them to over-apply to younger listings. We illustrate the model using US labor market data. The contribution of phantoms to overall frictions is large, but, conditional on the existence of phantoms, the social planner cannot improve much on the directed search allocation. Classification- D83, J64
    Keywords: Unemployment, directed search, phantom vacancies
    Date: 2021–03–15
  16. By: Benchimol, Jonathan; Bounader, Lahcen
    Abstract: We build a behavioral New Keynesian model that emphasizes different forms of myopia for households and firms. By examining the optimal monetary policy within this model, we find four main results. First, in a framework where myopia distorts agents’ inflation expectations, the optimal monetary policy entails implementing inflation targeting. Second, price level targeting emerges as the optimal policy under output gap, revenue, or interest rate myopia. Given that bygones are not bygones under price level targeting, rational inflation expectations are a minimal condition for optimality in a behavioral world. Third, we show that there are no feasible instrument rules for implementing the optimal monetary policy, casting doubt on the ability of simple Taylor rules to assist in the setting of monetary policy. Fourth, bounded rationality may be associated with welfare gains.
    Keywords: Behavioral macroeconomics; Central bank policy; Cognitive discounting; Heterogeneous expectations; Optimal simple rules
    JEL: C53 E37 E52 D01 D11
    Date: 2021–03
  17. By: Hochmuth, Brigitte (Friedrich-Alexander University of Erlangen-Nürnberg (FAU) and Institute for Advanced Studies Vienna, Austria (IHS)); Kohlbrecher, Britta (Friedrich-Alexander University of Erlangen-Nürnberg (FAU)); Merkl, Christian (Friedrich-Alexander University of Erlangen-Nürnberg (FAU) and IZA); Gartner, Hermann (Friedrich-Alexander University of Erlangen-Nürnberg (FAU) and Institute for Employment Research (IAB))
    Abstract: This paper proposes a new approach to evaluate the macroeconomic effects of the “Hartz IV” reform, which reduced the generosity of long-term unemployment benefits. We propose a model with different unemployment durations, where the reform initiates both a partial effect and an equilibrium effect. We estimate the relative importance of these two effects and the size of the partial effect based on the IAB Job Vacancy Survey. Our approach does not hinge on an external source for the decline in the replacement rate for long-term unemployed. We find that Hartz IV was a major driver for the decline of Germany’s steady state unemployment and that partial and equilibrium effect were nearly of equal importance. In addition, we provide direct empirical evidence on labor selection, one potential dimension of recruiting intensity.
    Keywords: Unemployment benefits reform, search and matching, Hartz reforms
    JEL: E24 E00 E60
    Date: 2021–03
  18. By: Alexander Beames; Mariano Kulish; Nadine Yamout
    Abstract: We set up and estimate a small open economy model with fiscal policy in which trend growth can permanently change. The magnitude and timing of the change in trend growth are estimated alongside the structural and fiscal policy rule parameters. Around 2003:Q3, trend growth in per capita output is estimated to have fallen from just over 2 per cent to 0.6 per cent annually. The slowdown brings about a lasting transition which in the short-run decreases consumption tax revenues but increases them in the long-run changing permanently the composition of tax revenues and temporarily increasing the government debt-to-output ratio.
    Keywords: Open economy, trend growth, fiscal policy, real business cycles, estimation, structural breaks
    JEL: E30 F43 H30
    Date: 2021–02
  19. By: Gregor Boehl
    Abstract: Structural macroeconometric analysis and new HANK-type models with extremely high dimensionality require fast and robust methods to efficiently deal with occasionally binding constraints (OBCs), especially since major developed economies have again hit the zero lower bound on nominal interest rates. This paper shows that a linear dynamic rational expectations system with OBCs, depending on the expected duration of the constraint, can be represented in closed form. Combined with a set of simple equilibrium conditions, this can be exploited to avoid matrix inversions and simulations at runtime for significant gains in computational speed. An efficient implementation is provided in Python programming language. Benchmarking results show that for medium-scale models with an OBC, more than 150,000 state vectors can be evaluated per second. This is an improvement of more than three orders of magnitude over existing alternatives. Even state evaluations of large HANK-type models with almost 1000 endogenous variables require only 0.1 ms.
    Keywords: Occasionally Binding Constraints, Effective Lower Bound, Computational Methods
    Date: 2021–01
  20. By: Anurag Banerjee (Durham University Business School); Parantap Basu (Durham University Business School); Elisa Keller (University of Exeter)
    Abstract: Skilled individuals are rewarded more in poor countries than in rich countries. Why aren’t more individuals acquiring skills in poor countries? We study the role of unemployment risk. In a sample of 33 countries, we document that the unemployment rate of the skilled net of that of the unskilled decreases with a country’s level of development. Using a matching model of endogenous occupational choice and skill acquisition, we argue that the cost of doing business is a first order determinant of these unemployment rates and, therefore, of the skill acquisition decision. We then quantify the model and find that decreasing each country’s gap in the cost of doing business to the US by 10% decreases the gap in skill acquisition between rich and poor countries of between 48% and 63%.
    Keywords: Skill acquisition, Unemployment, Business cost
    JEL: O11 J31 J24 E24
    Date: 2021–01
  21. By: Dimitris Papageorgiou (Bank of Greece); Stylianos Tsiaras (European University Institute)
    Abstract: This paper follows the great depression methodology of Kehoe and Prescott (2002, 2007) to study the importance of total factor productivity (TFP) in the Greek economic crisis over the period 2008-2017. Using growth accounting and the neo- classical growth model, the paper shows that exogenous changes in TFP are crucial for the Greek depression. The theoretical model reproduces quite well the decline in economic activity over 2008-2013 and the subsequent period of slow recovery found in the data. Nevertheless, it is less successful in predicting the magnitude of the decline in output and the labour factor. In addition, including financial frictions and risk shocks into the neoclassical growth model, does not significantly improve the model’s performance.
    Keywords: Great Depression; Greece; Growth Accounting; DSGE
    JEL: D81 G01 G21 G33 E44 E52 E58
    Date: 2021–02
  22. By: Gene M Grossman (Princeton University); Elhanan Helpman (Harvard University); Ezra Oberfield (Princeton University); Thomas Sampson (London School of Economics)
    Abstract: We study the determinants of factor shares in a neoclassical environment with capital-skill complementarity and endogenous education. When more physical capital raises the marginal product of skills relative to that of raw labor, an increase in a broad measure of embodied human capital raises the capital share in national income for any given rental rate. When education is chosen optimally, a dynamic equilibrium is characterized by an inverse relationship between the level of human capital and both the rental rate on capital and the difference between the interest rate and the growth rate of wages. As a consequence,estimates of the elasticity of substitution that fail to account for levels of human capital will be biased upward. We develop a model with overlapping generations, ongoing increases in educational attainment, and technology-driven neoclassical growth, and show that for a class of production functions with capital-skill complementarity, a balanced growth path exists and is characterized by an inverse relationship between the rates of capital- and labor-augmenting technological progress and the capital share in national income.
    Keywords: neoclassical growth, balanced growth, human capital, education, techno-logical progress, capital-skill complementarity, labor share, capital share
    JEL: E25 I26
    Date: 2020–09
  23. By: Mathias Hoffmann; Lilia Ruslanova
    Abstract: U.S. state-level banking deregulation during the 1980’s mitigated the impact of the China trade shock (CTS) on local economies (states and commuting zones) a decade later, in the 1990s. Local economies, where local banking markets opened up earlier, were also effectively financially more integrated by the 1990’s and saw smaller declines in house prices, wages, and income following the CTS. We explain this pattern in a theoretical model that emphasizes the stabilizing effect of financial integration on demand for housing and on housing prices: faced with an adverse shock to their region’s terms-of-trade (i.e. the CTS), households in more open states can more easily access credit to smooth consumption. This stabilizes consumer demand for housing, keeps the relative price of housing up, stabilizes wages in the non-tradable sector and thus facilitates the sectoral reallocation of labor away from import-exposed manufacturing towards the housing sector. This in turn stabilizes income and consumption. We corroborate these predictions of our model in state- and commuting zone level data. Then, using granular bank-county-level data, we show that household consumption smoothing in response to the CTS was easier in financially open areas, because geographically diversified banks were more elastic in their lending response to household’s increased demand for credit. Our findings highlight that household access to finance is important to ease adjustment after asymmetric terms-of- trade shocks in monetary unions, in particular when the geographical mobility of labor is limited.
    Keywords: banking deregulation, China trade shock, sectoral reallocation, house prices, consumer access to finance
    JEL: F16 F41 G18 G21 J20
    Date: 2021–02
  24. By: Dou Jiang; Mark Weder
    Abstract: This paper quantitatively investigates the Depression of the 1890s and the 1907 recession in the United States. Business Cycle Accounting decomposes economic fluctuations into their contributing factors. The results suggest that both the 1890s and the 1907 recessions were primarily caused by factors that affect the efficiency wedge, i.e. slumps in the economy’s factor productivity. Distortions to the labor wedge played a less important role. Models with financial market frictions that translate into the efficiency wedge are the most promising candidates for explaining the recessionary episodes.
    Keywords: Business cycles, Depression of the 1890s, Recession of 1907
    JEL: E32 E44 N11
    Date: 2021–01

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