nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒03‒29
twenty papers chosen by



  1. Essential and non-essential goods: a dynamic stochastic general equilibrium modeling of the infectious disease coronavirus (COVID-19) outbreak By Nuno José Henriques Baetas da Silva; António Manuel Portugal Duarte
  2. On the accuracy of linear DSGE solution methods and the consequences for log-normal asset pricing By Meyer-Gohde, Alexander
  3. Globalization, trade imbalances and labor market adjustment By Rafael Dix-Carneiro; Joao Paulo Pessoa; Ricardo Reyes-Heroles; Sharon Traiberman
  4. Is Automatic Enrollment Consistent with a Life Cycle Model? By Jason Scott; John B. Shoven; Sita Slavov; John G. Watson
  5. Production, Investment and Wealth Dynamics under Financial Frictions: An Empirical Investigation of the Selffinancing Channel By Alvaro Aguirre; Matias Tapia; Lucciano Villacorta
  6. The Wife's Protector: A Quantitative Theory Linking Contraceptive Technology with the Decline in Marriage By Jeremy Greenwood; Nezih Guner; Karen A. Kopecky
  7. Optimal Bailouts in Banking and Sovereign Crises By Sewon Hur; César Sosa-Padilla; Zeynep Yom
  8. Life-Cycle Welfare Losses from Rules-of-Thumb Asset Allocation By Fabio C. Bagliano; Carolina Fugazza; Giovanna Nicodano
  9. Time Preferences over the Life Cycle and Household Saving Puzzles By Wataru Kureishi; Hannah Paule-Paludkiewicz; Hitoshi Tsujiyama; Midori Wakabayashi
  10. The Transmission Channels of Government Spending Uncertainty By Anna Belianska; Aurélien Eyquem; Céline Poilly
  11. Forbearance vs foreclosure in a general equilibrium model By Barbaro, Bianca; Tirelli, Patrizio
  12. Do Elite Colleges Matter? The Impact on Entrepreneurship Decisions and Career Dynamics By Naijia Guo; Charles Ka Yui Leung
  13. Reforming the Individual Income Tax in Spain By Nezih Guner; Javier Lopez-Segovia; Roberto Ramos
  14. Optimal notional defined contributions By Costa, Carlos Eugênio da; Santos, Marcelo Rodrigues dos
  15. The Worker-Job Surplus By Ilse Lindenlaub; Fabien Postel-Vinay
  16. Labor Market Frictions and Lowest Low Fertility By Nezih Guner; Ezgi Kaya; Virginia Sánchez Marcos
  17. Hartz IV and the Decline of German Unemployment: A Macroeconomic Evaluation By Brigitte Hochmuth; Britta Kohlbrecher; Christian Merkl; Hermann Gartner
  18. Monetary dynamics in a network economy By Antoine Mandel; Vipin Veetil
  19. Risk Shocks and Divergence between the Euro Area and the US in the aftermath of the Great Recession By Thomas Brand; Fabien Tripier
  20. Optimal Regional Labor Market Policies By Jung, Philip; Korfmann, Philipp; Preugschat, Edgar

  1. By: Nuno José Henriques Baetas da Silva (Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra); António Manuel Portugal Duarte (University of Coimbra, Centre for Business and Economics CeBER and Faculty of Economics)
    Abstract: Making use of a two-country, two-sector, New Keynesian model with essential and nonessential goods we assess the macroeconomic consequences of a labor supply shock in the Euro Area. Our model incorporates health status in the households' maximization problem which depends on the time devoted to leisure. Health status is linked to the consumption of non-essential goods, such that the demand for non-essentials is decreasing with contemporaneous health. After calibrating the model for the case of Portugal and the rest of the Euro Area, our simulations show that, a labor supply shock aecting only the latter, reduces the demand for non-essential goods, generates ination in the Portuguese economy and pushes both regions into economic recession, depriving households from essential goods. If the labor supply shock aects both economies, the negative income eect dominates the decreased demand eect for non-essential goods and that stagation is a plausible scenario. In addition, our calibration scheme allows us to conclude that the asymmetric eects across economies may be due to dierent price rigidities between sectors and to dierent production structures between countries.
    Keywords: Essential goods, Non-essential goods, COVID-19, DSGE, Euro Area..
    JEL: E12 E32 F41 F42
    Date: 2021–04
    URL: http://d.repec.org/n?u=RePEc:gmf:papers:2021-04&r=all
  2. By: Meyer-Gohde, Alexander
    Abstract: This paper demonstrates a failure of standard, generalized Schur (orQZ) decomposition based solutions methods for linear dynamic stochastic general equilibrium (DSGE) models when there is insufficient eigenvalue separation about the unit circle. The significance of this is demonstrated in a simple production-based asset pricing model with external habit formation. While the exact solution afforded by the simplicity of the model matches post-war US consumption growth and the equity premium, QZ-based numerical solutions miss the later by many annualized percentage points.
    Keywords: Numerical accuracy,Production-based asset pricing,DSGE,Solution methods
    JEL: C61 C63 E17
    Date: 2021
    URL: http://d.repec.org/n?u=RePEc:zbw:imfswp:154&r=all
  3. By: Rafael Dix-Carneiro; Joao Paulo Pessoa; Ricardo Reyes-Heroles; Sharon Traiberman
    Abstract: We study the role of global trade imbalances in shaping the adjustment dynamics in response to trade shocks. We build and estimate a general equilibrium, multi-country, multi-sector model of trade with two key ingredients: (a) Consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances; (b) labor market frictions across and within sectors, leading to unemployment dynamics and sluggish transitions to shocks. We use the estimated model to study the behavior of labor markets in response to globalization shocks, including shocks to technology, trade costs, and inter-temporal preferences (savings gluts). We find that modeling trade imbalances changes both qualitatively and quantitatively the short- and long-run implications of globalization shocks for labor reallocation and unemployment dynamics. In a series of empirical applications, we study the labor market effects of shocks accrued to the global economy, their implications for the gains from trade, and we revisit the "China Shock" through the lens of our model. We show that the US enjoys a 2.2% gain in response to globalization shocks. These gains would have been 73% larger in the absence of the global savings glut, but they would have been 40% smaller in a balanced-trade world.
    Keywords: global trade imbalances, labor market disruption
    JEL: F16
    Date: 2021–03
    URL: http://d.repec.org/n?u=RePEc:cep:cepdps:dp1754&r=all
  4. By: Jason Scott; John B. Shoven; Sita Slavov; John G. Watson
    Abstract: We examine optimal retirement saving for young adults in a life cycle model. We find that for liquidity-constrained young adults who anticipate significant earnings growth, optimal retirement saving is zero. Specifically, we find that with a plausible wage profile for college-educated workers, retirement saving does not begin until the late 30s or early 40s, even with standard employer matching. In fact, inducing workers in their mid 20s to participate in a retirement plan requires employer match rates of more than 1000 percent. In contrast, workers facing a flat wage profile begin saving much earlier in life. We also find that participating may be optimal for younger workers facing steeper wage profiles if they anticipate switching jobs and cashing out after 1-2 years. Our results suggest that automatically enrolling workers, regardless of age or anticipated future earnings, in defined contribution plans is not consistent with optimizing behavior in a life cycle model.
    JEL: D14 D15 J26
    Date: 2021–01
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:28396&r=all
  5. By: Alvaro Aguirre; Matias Tapia; Lucciano Villacorta
    Abstract: The ability of firms to accumulate wealth and build collateral is key to overcome financial frictions. The strength of this self-financing channel depends on the productivity process faced by firms and the parameters associated with the production function, and may be quantified by the elasticity of wealth accumulation to productivity shocks. We propose a framework to jointly estimate the production function, the productivity process, and the wealth accumulation process that is robust to financial frictions. We show that standard methods (e.g. Olley-Pakes) fail under financial frictions: they overestimate the labor elasticity and underestimate the capital elasticity of the production function, and underestimate the persistence and dispersion of the productivity process. We apply our method to the universe of Chilean firms and confirm these predictions, with factor elasticities varying around 25%, and productivity volatility more than doubling. We find evidence that is in line with the self-financing channel: (i) the reaction of investment to productivity shocks is contingent on the stock of collateral, with larger responses from unconstrained firms; (ii) highly productive firms accumulate wealth after positive and persistent productivity shocks, with a larger effect in wealthpoor firms.
    Date: 2021–03
    URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:904&r=all
  6. By: Jeremy Greenwood (University of Pennsylvania); Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros); Karen A. Kopecky (FRB Atlanta)
    Abstract: The 19th and 20th centuries saw a transformation in contraceptive technologies and their take up. This led to a sexual revolution, which witnessed a rise in premarital sex and out-of-wedlock births, and a decline in marriage. The impact of contraception on married and single life is analyzed here both theoretically and quantitatively. The analysis is conducted using a model where people search for partners. Upon ?nding one, they can choose between abstinence, marriage, and a premarital sexual relationship. The model is confronted with some stylized facts about premarital sex and marriage over the course of the 20th century. Some economic history is also presented.
    Keywords: Age of marriage, contraceptive technology, history, never-married population, number of partners, out-of-wedlock births, premarital sex, singles.
    Date: 2019–12
    URL: http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2019_1912&r=all
  7. By: Sewon Hur; César Sosa-Padilla; Zeynep Yom
    Abstract: We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold government debt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with government sometimes finding it optimal to extend guarantees over bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions and increase output, but also imply increasing government fiscal needs and possible heightened default risk (i.e., they create a ‘diabolic loop’). We find that the optimal bailouts exhibit clear properties. Other things equal, the fraction of banking losses that the bailouts would cover is: (i) decreasing in the level of government debt; (ii) increasing in aggregate productivity; and (iii) increasing in the severity of the bank- ing crisis. Even though bailouts mitigate the adverse effects of banking crises, we find that the economy is ex ante better off without bailouts: the ‘diabolic loop’ they create is too costly.
    JEL: E32 F34
    Date: 2021–01
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:28412&r=all
  8. By: Fabio C. Bagliano; Carolina Fugazza; Giovanna Nicodano
    Abstract: How should workers invest over the life-cycle? Should they follow some typical prescriptions (“rules of thumb”) in personal finance implying higher equity investments when young? We show that the answer hinges on the risk of long-term unemployment spells, entailing permanent declines in workers’ future earnings prospects. Absent unemployment risk, extant prescriptions deliver portfolios that are close to optimal, implying negligible welfare losses. They instead lead to sizable welfare losses (3-9% of annual consumption) when the risk of human capital depreciation following long term unemployment is considered and realistically calibrated to the U.S. labor market. These losses stem from excess risk taking when young investors face uncertainty about future labor and pension incomes. This result points to a new design for pension plans offered by long-term institutional investors.
    Keywords: welfare, life-cycle portfolio choice, unemployment risk, long term unem ployment, age rules.
    JEL: D15 E21 G11
    Date: 2020
    URL: http://d.repec.org/n?u=RePEc:cca:wpaper:616&r=all
  9. By: Wataru Kureishi; Hannah Paule-Paludkiewicz; Hitoshi Tsujiyama; Midori Wakabayashi
    Abstract: Most economic models assume that time preferences are stable over time, but the evidence on their long-term stability is lacking. We study whether and how time preferences change over the life cycle, exploiting representative long-term panel data. We provide new evidence that discount rates decrease with age and the decline is remarkably linear over the life cycle. Decreasing discounting helps a canonical life-cycle model to explain the household saving puzzles of undersaving when young and oversaving after retirement. Relative to the model with constant discounting, the model’s fit to consumption and asset data profiles improves by 40% and 30%, respectively.
    Keywords: time preferences, preference stability, discount rates, household saving puzzles
    JEL: D15 D91 E21 J10
    Date: 2021
    URL: http://d.repec.org/n?u=RePEc:ces:ceswps:_8935&r=all
  10. By: Anna Belianska (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Aurélien Eyquem (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche); Céline Poilly (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR, DIW Berlin - German Institute for Economic Research)
    Abstract: Higher uncertainty about government spending generates a persistent decline in the economic activity in the Euro Area. This paper emphasizes the transmission channels explaining this empirical fact. First, a Stochastic Volatility model is estimated on European government consumption to build a measure of government spending uncertainty. Plugging this measure into a SVAR model, we stress that government spending uncertainty shocks have recessionary, persistent and humped-shaped effects. Second, we develop a New Keynesian model with financial frictions applying to a portfolio of equity and long-term government bonds. We argue that a portfolio effect-resulting from the imperfect substitutability among both assets-acts as a critical amplifier of the usual transmission channels.
    Keywords: government spending uncertainty,stochastic volatility,portfolio adjustment cost
    Date: 2021–02
    URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03160370&r=all
  11. By: Barbaro, Bianca; Tirelli, Patrizio
    Abstract: We build a business cycle model characterized by endogenous firms dynamics, where banks may prefer debt renegotiation, i.e. non-performing exposures, to outright borrowers default. We find that debt renegotiations only do not have adverse effects in the event of financial crisis episodes, but a large share of non-performing firms is associated with a sharp deterioration of economic activity in two cases. First, if there are congestion effects in banks ability to monitor non-performing loans. Second, if such loans adversely affect the commercial banks’ moral hazard problem due to their opacity. Aggressive interest rate reductions and quantitative easing limit defaults and the output contraction caused by a financial crisis, without ad- verse effects on the entry of new, more productive firms. The model shows that the observed long-run trend in the share of non-performing loans might be caused by the persistent reduction in technological advancements which drive firm entry rates and firms turnover. JEL Classification: E32, E44, E50, E58
    Keywords: DSGE model, financial frictions, firms entry, non-performing loans, quantitative easing
    Date: 2021–03
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212531&r=all
  12. By: Naijia Guo; Charles Ka Yui Leung
    Abstract: Elite college attendance significantly impacts students' entrepreneurship decisions and career dynamics. We find that an elite college degree is positively correlated with entrepreneurship (i.e., owning an incorporated business) but not with other self-employment forms. Our overlapping generations model captures self-selection in education and career choices based on heterogeneous ability and family wealth endowments over the life-cycle. Our estimates show that (1) entrepreneurs and other self-employed individuals require different types of human capital, and (2) elite colleges generate considerably more human capital gain than ordinary colleges, particularly for entrepreneurs. Distinguishing between elite and ordinary colleges improves our prediction of entrepreneurship decisions. Providing subsidies for elite colleges is more efficient than subsidizing their ordinary counterparts to encourage entrepreneurship, enhance intergenerational mobility, and enhance welfare. In contrast, although start-up subsidy increases entrepreneurship, it does not improve their performance, and it is inferior to education subsidy in generating efficiency, equality, and intergenerational mobility.
    Date: 2021–03
    URL: http://d.repec.org/n?u=RePEc:dpr:wpaper:1126&r=all
  13. By: Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros); Javier Lopez-Segovia (CEMFI, Centro de Estudios Monetarios y Financieros); Roberto Ramos (Banco de España)
    Abstract: We study how much revenue can be generated by more progressive personal income taxes in Spain. We build a life-cycle economy with uninsurable labor productivity risk and endogenous labor supply. Individuals face progressive taxes on labor and capital incomes and proportional taxes that capture social security, corporate income, and consumption taxes. An increase (decrease) in labor income taxes for individuals who earn more (less) than the mean labor income generates a small additional revenue. The revenue from labor income taxes is maximized at an e ective marginal tax rate of 51.6% (38.9%) for the richest 1% (5%) of individuals, versus 46.3% (34.7%) in the benchmark economy. The additional revenue from labor income taxes is only 0.82% higher, while the total tax revenue declines by 1.55%. The total tax revenue is higher if marginal taxes are raised only for the top earners. The increase, however, must be substantial and cover a large segment of top earners. The new tax collection from a 3 percentage points increase on the top 1% is just 0.09%. A 10 percentage points increase on the top 10% of earners (those who earn more than e41,699) raises the total taxes by 2.81%.
    Keywords: Taxation, progressivity, top earners, labor supply, Laffer curve.
    JEL: E21 E6 H2 J2
    Date: 2020–06
    URL: http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2020_2007&r=all
  14. By: Costa, Carlos Eugênio da; Santos, Marcelo Rodrigues dos
    Abstract: Notional Defined Contributions (NDC) systems mimic the incentive structure of fully funded social security while preserving the Pay-as-you-go nature of most current systems. We study size-preserving social reforms which replace the current US system with alternative NDCs with many alternative contribution rules and deficit/GDP ratios. If one retains the current mandatory age-independent contribution rules we find change to an NDC to reduce welfare: the sacrifices in distributive and insurance properties are not compensated by the efficiency gains. NDCs are, however, flexible enough to allow for alternative contribution rules which increase welfare while preserving actuarial fairness. Contributions ought to be age-dependent and concentrated later on a worker’s career. The incentive structure induces an increase in capital accumulation that results, through general equilibrium effects, in welfare gains which are larger for low productivity workers, despite the increase in income inequality as captured by the Gini coefficient.
    Date: 2021
    URL: http://d.repec.org/n?u=RePEc:fgv:epgewp:822&r=all
  15. By: Ilse Lindenlaub; Fabien Postel-Vinay
    Abstract: The worker-job surplus — the sum of the worker's and the employer's net values of an employment relationship — is the object that drives decisions in most matching models of the labor market. In this paper, we develop a theory-based empirical method to determine which of the observable worker and job characteristics impact the worker-job surplus in the data. To do so, we exploit the mobility choices of employed workers. Our method further indicates whether workers sort along those surplus-relevant attributes when searching for jobs. It also provides a test of the commonly used single-index assumption, according to which worker and job heterogeneity can each be summarized by scalar indices. We implement our method on US data using the Survey of Income and Program Participation and the O*NET. The results suggest that a relatively sparse model underlies the data. On the job side, a cognitive and an interpersonal skill requirement impact the surplus along with the (dis)amenity of work duration as well as the workplace size. On the worker side, we find that most of the relevant characteristics are symmetric to the selected job requirements. We reject the existence of a single-index representation of these relevant multi-dimensional worker and job attributes. We then use our results in a new approach to defining the economy's labor submarkets, highlighting a potentially important application of our methodology.
    JEL: E24 J0 J20
    Date: 2021–01
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:28402&r=all
  16. By: Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros); Ezgi Kaya (Cardiff Business School); Virginia Sánchez Marcos (Universidad de Cantabria)
    Abstract: The total fertility rate is well below its replacement level of 2.1 children in high-income countries. Why do women choose such low fertility levels? We study how labor market frictions affect the fertility of college-educated women. We focus on two frictions: uncertainty created by dual labor markets (the coexistence of jobs with temporary and open-ended contracts) and inflexibility of work schedules. Using rich administrative data from the Spanish Social Security records, we show that women are less likely to be promoted to permanent jobs than men. Temporary contracts are also associated with a lower probability of first birth. With Time Use data, we also show that women with children are less likely to work in jobs with split-shift schedules, which come with a fixed time cost. We then build a life-cycle model in which married women decide whether to work or not, how many children to have, and when to have them. In the model, women face a trade-off between having children early and waiting and building their careers. We show that reforms that reduce the labor market duality and eliminate split-shift schedules increase the completed fertility of college-educated from 1.52 to 1.88. These reforms enable women to have more children and have them early in their life-cycle. They also increase the labor force participation of women and eliminate the employment gap between mothers and non-mothers.
    Keywords: Fertility, labor market frictions, temporary contracts, split-shift schedules.
    JEL: E24 J13 J21 J22
    Date: 2019–12
    URL: http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2019_1913&r=all
  17. By: Brigitte Hochmuth; Britta Kohlbrecher; Christian Merkl; Hermann Gartner
    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
    URL: http://d.repec.org/n?u=RePEc:ces:ceswps:_8933&r=all
  18. By: Antoine Mandel (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Vipin Veetil (IIT Madras - Indian Institute of Technology Madras)
    Abstract: We develop a tractable model of price dynamics in a general equilibrium economy with cash-in-advance constraints. The dynamics emerge from local interactions between firms that are governed by the production network underlying the economy. We analytically characterise the influence of network structure on the propagation of monetary shocks. In the long run, the model converges to general equilibrium and the quantity theory of money holds. In the short run, monetary shocks propagate upstream via nominal changes in demand and downstream via real changes in supply. Lags in the evolution of supply and demand at the micro level can give rise to arbitrary dynamics of the distribution of prices. Our model provides an explanation of the price puzzle: a temporary rise in the price level in response to monetary contractions. In our setting, the puzzle emerges under two assumptions about downstream firms: they are disproportionally affected by monetary contractions and they account for a sufficiently small share of the wage bill. Empirical evidence supports the two assumptions for the US economy. Our model calibrated to the US economy using a data set of more than fifty thousand firms generates the empirically observed magnitude of the price level rise after monetary contractions.
    Keywords: JEL Codes C63,C67,D80,E31,E52 Price Puzzle,Production Network,Money,Monetary Non-Neutrality,Out-of-Equilibrium Dynamics
    Date: 2021–04
    URL: http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-03165773&r=all
  19. By: Thomas Brand; Fabien Tripier
    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 ?nancial frictions and risk shocks, measured as the volatility of idiosyncratic uncertainty in the ?nancial 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 e?ects of unconventional monetary policies, notably the ECB’s Asset Purchase Programme (APP).
    Keywords: Great recession;Business cycles;Uncertainty;Risk Shocks;Divergence
    JEL: E3 E4 G3
    Date: 2021–03
    URL: http://d.repec.org/n?u=RePEc:cii:cepidt:2021-04&r=all
  20. By: Jung, Philip (TU Dortmund); Korfmann, Philipp (TU Dortmund); Preugschat, Edgar
    Abstract: We document large and persistent spatial dispersion in unemployment rates, vacancies, labor market tightness, labor market flows, and wages for Germany on a granular regional level. We show that in the 1990s differences in inflows from employment to unemployment were the key driver of regional dispersion in unemployment rates while in the 2000s outflows became more important. To account for the documented regional dispersion we develop a spatial search and matching model with risk-averse agents, endogenous separations and unobservable search effort that leads to moral hazard and quantify the relative importance of 4 potential structural driving forces: dispersion in productivity, in the bargaining strength of workers, in idiosyncratic risk components and in regional matching efficiency. Based on region-specific estimates of these factors we then study the resulting policy trade-off between insurance, regional redistribution and efficiency. We design (optimal) region-specific labor market policies that can be implemented using hiring subsidies, layoff taxes, unemployment insurance benefits and transfers financed by social insurance contributions. We find that a move towards an optimal tax system that explicitly conditions on regional characteristics could lead to sizable welfare and employment gains.
    Keywords: optimal labor market policies, regional unemployment
    JEL: J50
    Date: 2021–03
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp14204&r=all

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