nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒08‒12
27 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Input-output structure and the general equilibrium dynamics of inflation and output By K. Huang; Z. Liu
  2. Staggered contracts, intermediate goods and the dynamic effects of monetary shocks on output, inflation and real wages By K. Huang; Z. Liu; L. Phaneuf
  3. The term structure of interest rates in a DSGE model By Marina Emiris
  4. Staggered price-setting, staggered wage-setting, and business cycle persistence By K. Huang; Z. Liu
  5. Staggered contracts and business cycle persistence By K. Huang; Z. Liu
  6. Vertical international trade as a monetary transmission mechanism in an open economy By K. Huang; Z. Liu
  7. The Cyclical Dynamics and Volatility of Australian Output and Employment By Robert Dixon; David Shepherd
  8. On the Effects of Fiscal Policies in Portugal By Alfredo M. Pereira; Oriol Roca Sagales
  9. Monetary Transmission Mechanism in Transition Economies: Surveying the Surveyable By Balázs Égert; Ronald MacDonald
  10. Instability of the Eurozone? On Monetary Policy, House Prices and Structural Reforms By Ansgar Belke; Daniel Gros
  11. How does monetary policy affect aggregate demand? A multimodel approach for Hungary By Zoltán M. Jakab; Viktor Várpalotai; Balázs Vonnák
  12. Inflation Band Targeting and Optimal Inflation Contracts By Frederic S. Mishkin; Niklas J. Westelius
  13. "How the Maastricht Regime Fosters Divergence as Well as Fragility" By Joerg Bibow
  14. The Tax System Incidence on Unemployment: A Country-Specific Analysis for the OECD Economies By José Ramón García; Hector Sala
  15. The Level and Composition of Consumption Over the Business Cycle: The Role of %u201CQuasi-Fixed%u201D Expenditures By Kerwin Kofi Charles; Melvin Stephens, Jr.
  16. "Banking, Finance, and Money: A Socioeconomics Approach" By L. Randall Wray
  17. Regional Macroeconomic Outcomes Under Alternative Arrangements for the Financing of Urban Infrastructure By James Giesecke; Peter B. Dixon; Maureen T. Rimmer
  18. Household Saving and Asset Valuations in Selected Industrialised Countries By Paul Hiebert
  19. Demographics and the politics of capital taxation in a life-cycle economy By Mateos-Planas, Xavier
  20. Is public capital productive in Europe? By Jerome Creel; Gwenaëlle Poilon
  21. Using Micro Data to Estimate the Intertemporal Substitution Elasticity for Labor Supply in an Implicit Contract Model By John C. Ham; Kevin T. Reilly
  22. Sudden Stops, Financial Crises, and Original Sin in Emerging Countries: Déjà vu? By Michael D. Bordo
  23. The U.S. Treasury yield curve: 1961 to the present By Refet S. Gurkaynak; Brian Sack; Jonathan H. Wright
  24. The Chinese GDP Growth Rate Puzzle: How Fast Has the Chinese Economy Grown? By Harry X. Wu
  25. Product Market Regulation and Endogenous Union Formation By Monique Ebell; Christian Haefke
  26. Uncertainty and Investment Dynamics By Nick Bloom; John Van Reenen; Stephen Bond
  27. Rejuveniles and Growth By Barnett, Richard; Bhattacharya, Joydeep

  1. By: K. Huang; Z. Liu
    Abstract: Recent empirical studies reveal that monetary shocks cause persistent fluctuations in inflation and aggregate output. In the literature, few mechanisms have been identified to generate such persistence. In this paper, we propose a new mechanism that does so. Our model features an input-output structure and staggered price contracts. Working through the input-output relations and the timing of firms’ pricing decisions, the model generates smaller fluctuations in marginal cost facing firms at later stages than at earlier stages and hence persistent responses of both the inflation rate and aggregate output following a monetary stock. The persistence is larger, the greater the number of production stages. With a sufficient number of stages, the real persistence is arbitrarily large.
    Keywords: Input-output structure, staggered price contracts, persistence, monetary policy
    JEL: E31 E32 E52
  2. By: K. Huang; Z. Liu; L. Phaneuf
    Abstract: This paper investigates the contributions of staggered price contracts, staggered wage contracts, and an input-output production structure in generating the observed persistence of real output and inflation, and the weak but persistent response of real wages following monetary shocks. It examines the interactions of these three mechanisms in a dynamic general equilibrium (DGE) environment, with pricing decision and wage setting rules derived from individual optimization. Following a monetary shock, (i) a staggered wage model generates more persistence in both inflation and output than does a staggered price model when intermediate goods are used in production; (ii) adding intermediate goods causes a tradeoff between output persistence and inflation persistence: it magnifies the autocorrelations of output while reducing those of inflation in both the short and medium horizons; (iii) a combination of staggered prices and staggered wages is required to generate the observed weak but persistent response of real wages to a monetary shock, and incorporating intermediate goods in such a model is essential to make the real wage response weakly procyclical.
    Keywords: Staggered contracts, input-output structure, business cycle persistence, monetary policy
    JEL: E31 F32 F52
  3. By: Marina Emiris (National Bank of Belgium, Research Department)
    Abstract: The paper evaluates the implications of the Smets and Wouters (2004) DSGE model for the US yield curve. Bond prices are modelled in a way that is consistent with the macro model and the resulting risk premium in long term bonds is a function of the macro model parameters exclusively. When the model is estimated under the restriction that the implied average 10-year term premium matches the observed premium, it turns out that risk aversion and habit only need to rise slightly, while the increase in the term premium is achieved by a drop in the monetary policy parameter that governs the aggressiveness of the monetary policy rule. A less aggressive policy increases the persistence of the reaction of inflation and the short interest rate to any shock, reinforces the covariance between the marginal rate of substitution of consumption and bond prices, turns positive the contribution of the inflation premium and drives the term premium up. The paper concludes that by generating persistent inflation the presence of nominal rigidities can help in reconciling the macro model with the yield curve data.
    Keywords: term structure of interest rates, policy rules, risk premia
    JEL: E43 E44 G12
    Date: 2006–07
  4. By: K. Huang; Z. Liu
    Abstract: Staggered price-setting and staggered wage-setting are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks. In this paper, we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework. We show that, although the dynamic price-setting and wage-setting equations are alike, a key parameter governing persistence is linked to the underlying preferences and technologies in different ways. Under staggered wage-setting, an intertemporal smoothing incentive in labor hours prevents the households from adjusting their wages too quickly in response to an aggregate demand shock, while such incentives are absent under staggered price-setting. With reasonable parameter values, the staggered price mechanism by itself is incapable of, while the staggered wage mechanism plays an important role in generating persistence.
    Keywords: staggered contracts; business cycle persistence; monetary policy
    JEL: E24 E32 E52
  5. By: K. Huang; Z. Liu
    Abstract: Staggered price and staggered wage contracts are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks. In this paper, we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework. We show that, although the dynamic price setting and wage setting equations are alike, a key parameter governing persistence is linked to the underlying preferences and technologies in different ways. Under the staggered wage mechanism, an intertemporal smoothing incentive in labor supply creates a real rigidity that is absent under the staggered price mechanism. Consequently, the two mechanisms have different implications on persistence. While the staggered price mechanism by itself does not contribute to, the staggered wage mechanism plays an important role in generating persistence.
    Keywords: Staggered contracts, business cycle persistence, monetary policy
    JEL: E24 E32 E52
  6. By: K. Huang; Z. Liu
    Abstract: This paper analyzes a two-country general equilibrium model with multiple stages of production and sticky prices. Working through the cross-country input-output relations and endogenous price stickiness, the model generates the observed patterns in international aggregate comovements following monetary shocks. In particular, both output and consumption comove across countries, and output correlation is larger than consumption correlation, as in the data. The model also generates persistent fluctuations of real exchange rates. Thus, vertical international trade plays an important role in propagating monetary shocks in an open economy.
    Keywords: Vertical international trade, monetary policy, international comovements, real exchange rate persistence
    JEL: E32 F31 F41
  7. By: Robert Dixon; David Shepherd
    Abstract: In this paper we examine the volatility of aggregate output and employment in Australia with the aid of a frequency filtering method (the Butterworth filter) that allows each time series to be decomposed into trend, cycle and noise components. This analysis is compared with more traditional methods based simply on the examination of first differences in the logs of the raw data using cointegration-VAR modelling. We show that the application of univariate AR and bivariate VECM methods to the data results in a detrended series which is dominated by noise rather than cyclical variation and gives break points which are not robust to alternative decomposition methods. Also, our conclusions challenge accepted wisdom in relation to output volatility in Australia which holds that there was a once and for all sustained reduction in output volatility in or around 1984. We do not find any convincing evidence for a sustained reduction in the cyclical volatility of the GDP (or employment) series at that time, but we do find evidence of a sustained reduction in the cyclical volatility of the GDP (and employment) series in 1993/4. We also find that there is a clear association between output volatility and employment volatility. We discuss the key features of the business cycle we have identified as well as some of the policy implications of our results.
    Keywords: Business cycles, volatility, inflation targeting, Australia
    JEL: E32 E37 E52 C22 C32
    Date: 2006
  8. By: Alfredo M. Pereira (Department of Economics, College of William and Mary); Oriol Roca Sagales (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: This paper estimates the effects on output of different fiscal policies in the context of a VAR model that includes several public spending and taxation variables. Empirical results suggest that the effects of fiscal policies are within the Keynesian paradigm for both direct and indirect taxes and for some but not all expenditure instruments. Indeed, while the results for public wages and public investment are Keynesian in nature, non-Keynesian effects dominate in the case of public transfers and possibly in the case of intermediate consumption. Finally, public investment shows particularly strong positive effects while direct taxation shows particularly strong negative effects.
    Keywords: Fiscal policy, budgetary restraint
    JEL: E62 H60
    Date: 2006–07–25
  9. By: Balázs Égert (Oesterreichische Nationalbank; EconomiX at the University of Paris X-Nanterre and William Davidson Institute.); Ronald MacDonald (University of Glasgow and CESIfo.)
    Abstract: This paper surveys recent advances in the monetary transmission mechanism (MTM). In particular, while laying out the functioning of the separate channels in the MTM, special attention is paid to exploring possible interrelations between different channels through which they may amplify or attenuate each others’ impact on prices and the real economy. We take stock of the empirical findings especially as they relate to countries in Central and Eastern Europe, and compare them to results reported for industrialised countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance and potential development of the different channels.
    Keywords: Monetary transmission, transition, Central and Eastern Europe, credit channel, interest rate channel, interest rate pass-through, exchange rate channel, exchange rate pass-through, asset price channel.
    JEL: E31 E51 E58 F31 O11 P20
    Date: 2006
  10. By: Ansgar Belke; Daniel Gros
    Date: 2006
  11. By: Zoltán M. Jakab (Magyar Nemzeti Bank); Viktor Várpalotai (Magyar Nemzeti Bank); Balázs Vonnák (Magyar Nemzeti Bank)
    Abstract: This paper assesses the effect of monetary policy on major components of aggregate demand. We use three different macromodels, all estimated on Hungarian data of the past 10 years. All three models indicated that after an unexpected monetary policy tightening investments decrease quickly. The response of consumption is more ambiguous, but it is most likely to increase for several years, which may be explained by the slow adjustment of nominal wages. On the other hand, we could not detect any significant change in net exports during the first couple of years after the shock. The weak response of net exports can be due to the fact that the drop in exports is coupled with a fall in imports of almost the same magnitude, highlighting the relative importance of the income-absorption effect, as opposed to the expenditure-switching effect.
    Keywords: monetary transmission mechanism, macromodels, VAR, impulse responses.
    JEL: E20 E27 E52
    Date: 2006
  12. By: Frederic S. Mishkin; Niklas J. Westelius
    Abstract: In this paper we examine how target ranges work in the context of a Barro-Gordon (1983) type model, in which the time-inconsistency problem stems from political pressures from the government. We show that target ranges turn out to be an excellent way to cope with the time-inconsistency problem, and achieve many of the benefits that arise under practically less attractive solutions such as the conservative central banker and optimal inflation contracts. Our theoretical model also shows how an inflation targeting range should be set and how it should respond to changes in the nature of shocks to the economy.
    JEL: E52 E58
    Date: 2006–07
  13. By: Joerg Bibow
    Abstract: This paper investigates the phenomenon of persistent macroeconomic divergence that has occurred across the eurozone in recent years. Optimal currency area theory would point toward asymmetric shocks and structural factors as the foremost candidate causes. The alternative hypothesis pursued here focuses on the working of the Maastricht regime itself, making it clear that the regime features powerful built-in destabilizers that foster divergence as well as fragility. Supposed adjustment mechanisms actually have turned out to undermine the operation of the currency union by making it less “optimal,” that is, less subject to a “one-size-fits-all” monetary policy and common nominal exchange rate, in view of the resulting business cycle desynchronization and related build-up of financial imbalances. The threats of fragility and divergence reinforce each other. Without regime reform these developments could potentially spiral out of control, threatening the long-term survival of EMU.
    Date: 2006–07
  14. By: José Ramón García (Universitat de València); Hector Sala (Universitat Autònoma de Barcelona and IZA Bonn)
    Abstract: This paper provides a detailed analysis on the incidence of the tax structure on the labor market. To do so it goes beyond the traditional examination of the ‘level’ effect of the fiscal wedge and considers a ‘composition’ effect defined as a payroll tax bias (PTB): the proportion of payroll taxes paid by employees with respect to the one paid by firms. We develop a right-to-manage model encompassing different wage bargaining systems and the incidence of different type of taxes. Controlling for demand-side and supply-side determinants of unemployment, we show that the PTB plays a significant role in explaining unemployment in the continental European countries, but not in the Nordic nor the Anglo- Saxon ones. We also show that there is no relationship between the incidence of the PTB and unemployment persistence, even though there is a positive one with respect to the level of the fiscal wedge.
    Keywords: unemployment, unemployment persistence, fiscal wedge, payroll tax bias
    JEL: E24 E62
    Date: 2006–07
  15. By: Kerwin Kofi Charles; Melvin Stephens, Jr.
    Abstract: We study how the level and composition of household expenditures changes over the business cycle for households at different positions in the income distribution. Using data from the Consumer Expenditure Survey, we find that transitory, state-specific increases in unemployment causes lower income groups to lower their total expenditure outlays, contrary to the prediction of the textbook account of consumption behavior. In addition, in bad economic times these groups raise the share of their total outlays devoted to relative fixed outlays like home or car payments. These adjustments are primarily concentrated among reductions in outlays devoted to entertainment and personal care expenditures. We find no similar effects for households at higher positions in the income distribution. It is difficult to attribute these differences across households to differences in credit constraints, both because the specific results for credit holdings are imprecisely estimated and because income losses experienced by higher SES households are so small that there is, for them, little need to adjust consumption.
    JEL: D12 E21 E24
    Date: 2006–07
  16. By: L. Randall Wray
    Abstract: This paper briefly summarizes the orthodox approach to banking, finance, and money, and then points the way toward an alternative based on socioeconomics. It argues that the alternative approach is better fitted to not only the historical record, but also sheds more light on the nature of money in modern economies. In orthodoxy, money is something that reduces transaction costs, simplifying “economic life” by lubricating the market mechanism. Indeed, this is the unifying theme in virtually all orthodox approaches to banking, finance, and money: banks, financial instruments, and even money itself originate to improve market efficiency. However, the orthodox story of money's origins is rejected by most serious scholars outside the field of economics as historically inaccurate. Further, the orthodox sequence of “commodity (gold) money” to credit and fiat money does not square with the historical record. Finally, historians and anthropologists have long disputed the notion that markets originated spontaneously from some primeval propensity, rather emphasizing the important role played by authorities in creating and organizing markets. By contrast, this paper locates the origin of money in credit and debt relations, with the money of account emphasized as the numeraire in which credits and debts are measured. Importantly, the money of account is chosen by the state, and is enforced through denominating tax liabilities in the state’s own currency. What is the significance of this? It means that the state can take advantage of its role in the monetary system to mobilize resources in the public interest, without worrying about “availability of finance.” The alternative view of money leads to quite different conclusions regarding monetary and fiscal policy, and it rejects even long-run neutrality of money. It also generates interesting insights on exchange rate regimes and international payments systems.
    Date: 2006–07
  17. By: James Giesecke; Peter B. Dixon; Maureen T. Rimmer
    Abstract: Many studies have found that the economic benefits from investment in urban infrastructure are substantial. In Australia, much of the responsibility for the provision of urban infrastructure rests with regional governments. Throughout the1990's many of these governments embarked on a program of fiscal restraint, seeking to restore financial positions weakened by exposure to failed government enterprises. A large proportion of this fiscal adjustment appears to have been borne by spending on public infrastructure. Today, regional government policy attention is again focussing on public infrastructure. In spite of the now robust fiscal positions of Australia's regional governments, they remain reluctant to finance infrastructure through debt, and raising the rates of existing taxes is perceived as politically unpopular. Instead, governments are exploring alternative financing instruments, such as developer charges and public-private partnerships. This paper uses a dynamic multi-regional CGE model (MMRF) to evaluate the regional macroeconomic consequences of four methods of financing a program of regional government infrastructure provision. The methods are developer charges, debt, payroll tax and residential rates. We demonstrate that the net gains from a program of urban infrastructure development are quite sensitive to the chosen financing means. The net gains tend to be greatest under rates and debt financing, and least under developer charges.
    Keywords: multi-regional CGE, dynamic CGE, infrastructure finance,regional policy
    JEL: D58 R13 R51 R53
    Date: 2005–01
  18. By: Paul Hiebert (European Central Bank)
    Abstract: Over the past decade, a fairly synchronised and steady decline in household saving rates has been witnessed in some OECD countries but not in others. In these English-speaking countries, which share many similar institutional and cultural features, declines in household or personal saving appear to have been correlated with large capital gains and rapid financial innovation. An empirical investigation based on quarterly macroeconomic data indicates that gains in the valuation of asset holdings have indeed been important as a substitute for traditional household saving (that is, personal saving as defined in the national accounts) in these countries over the last decades, and in some cases that this effect has been intensifying through time. Existing studies analysing private saving have tended to either focus on individual countries, finding the importance of wealth effects in certain cases, or a panel of OECD countries in which other common factors tend to dominate the wealth effect. In the latter case, it is possible that the lack of a significant wealth effect could be attributable to heterogeneity across countries.
    Keywords: household saving; wealth valuation; error-correction
    JEL: C22 E21
    Date: 2006–08
  19. By: Mateos-Planas, Xavier
    Abstract: This paper investigates the consequences of changes in the age composition of the population for the mix of tax rates on labour and capital income when these policies are decided through democratic institutions. The analysis is conducted within a general equilibrium, overlapping-generations model where agents live for many periods, and tax rates are determined through voting by forward looking agents. A version of the model calibrated to the US economic conditions and 1990 age structure is used to study quantitatively the effects of past and projected demographic shifts in the US. The younger voting-age population in 1990 relative to 1965 can account for the large decline in the relative capital tax rate observed between these two years. The older voting-age population expected in 2025 is shown to lead to a sharp increase in capital taxation. These results reflect the tension between the induced changes in the decisive voter's age and in macroeconomic conditions.
  20. By: Jerome Creel (Observatoire Français des Conjonctures Économiques); Gwenaëlle Poilon (Sciences Po)
    Abstract: This paper addresses the issue of whether and by how much public investment or public capital can enhance economic performance. In comparison with the literature on the subject, we apply many different methodologies to answer these questions. A VAR model (for France, Italy, Germany, the UK and the USA), a panel composed of 6 European countries (Austria, Belgium, France, Germany, Italy and the Netherlands) and a regional panel (French regions) are therefore estimated. Public investment is shown to be a significant determinant of output; this is also true for public capital but to a lesser extent than public investment with a VAR methodology. The size of the estimated coefficient is also more realistic than those obtained in the literature. This empirical result confirms that the focus of some economists on safeguarding the level of public investment is not misplaced. The debate on the introduction of a “golden rule of public finance” in EMU is legitimate.
    Keywords: public capital, VAR model, panel, European economies
    JEL: C32 E62 H54
    Date: 2006
  21. By: John C. Ham; Kevin T. Reilly
    Abstract: Economists have devoted substantial resources to estimating the intertemporal substitution elasticity for labor supply because this elasticity plays a crucial role in the real business cycle literature. Generally, the estimates of the elasticity have been too low to explain business cycles. Economists have responded by trying to modify real business cycle models to allow for smaller elasticities, but they have experienced mixed success at best. However, the standard intertemporal substitution model has not done well when tested, and if this model is incorrect, so will be the estimated labor supply elasticities based upon it. An equilibrium alternative to the standard intertemporal labor supply model is the implicit contract model. In this latter model firms and workers bargain over state-contingent contracts denominated in terms of consumption and hours of work. Further, the price of leisure is the marginal product of labor or the shadow wage, which differs from the observed wage. A number of studies have found that the data are compatible with an implicit contract model; in particular in Ham and Reilly (2002) we found that we could reject a separable (within period) implicit contract model but not a non-separable one. If an implicit contract model is appropriate, this is the context in which we should try to estimate the intertemporal labor supply elasticity. However this estimation is potentially quite difficult with micro data since the shadow wage (marginal product of labor) is unobserved. In this paper we first develop a procedure that allows one to estimate the intertemporal substitution elasticity in an implicit contract model from micro data. We then implement this procedure using the Panel Study of Income Dynamics (PSID) and the Consumer Expenditure Survey (CES). We obtain statistically significant elasticities of 0.9 with the PSID and 1.0 with the CES. The consistency of the estimate across the data sets is impressive given that we use different estimation approaches (micro data versus synthetic cohorts) and different consumption measures (food consumption versus total nondurable consumption) in the two data sets. These results are three times larger than existing estimates based on the standard intertemporal supply elasticity from this data set and thus offer more hope that equilibrium perspectives on the labor market are capable of tracking the data. Given that the implicit contract model is less likely to be rejected than the standard model in our work and other research, we believe that our approach should prove to be quite useful.
    JEL: E30 J22 J60
    Date: 2006–07
  22. By: Michael D. Bordo
    Abstract: The current pattern of sudden stops and financial crises in emerging markets has great resonance to events in the first era of globalization, from 1870-1913. In this paper I present descriptive statistics on capital flows, current account reversals and financial crises during the period 1870-1913 and compare them with the recent experience. I analyze the incidence of crises and measure their effects on real output losses. Furthermore, I consider the influence of openness to trade, original sin and currency mismatches on the pattern of sudden stops and financial crises. I find strikingly similar patterns across both eras of globalization. The pre-1914 sudden stops were associated with significant output losses comparable with the recent events, and their effects differed considerably depending on a country’s economic circumstances, just as they do today.
    JEL: E44 F32 N1 N20
    Date: 2006–07
  23. By: Refet S. Gurkaynak; Brian Sack; Jonathan H. Wright
    Abstract: The discount function, which determines the value of all future nominal payments, is the most basic building block of finance and is usually inferred from the Treasury yield curve. It is therefore surprising that researchers and practitioners do not have available to them a long history of high-frequency yield curve estimates. This paper fills that void by making public the Treasury yield curve estimates of the Federal Reserve Board at a daily frequency from 1961 to the present. We use a well-known and simple smoothing method that is shown to fit the data very well. The resulting estimates can be used to compute yields or forward rates for any horizon. We hope that the data, which are posted on the website and which will be updated periodically, will provide a benchmark yield curve that will be useful to applied economists.
    Date: 2006
  24. By: Harry X. Wu
    Abstract: The Chinese statistical authorities have recently adjusted the Chinese GDP level and growth rate for the period 1993-2004 following China's first national economic census. However, their methodology used in the adjustment is opaque. Using a trend-deviation interpolation approach, this study has managed to replicate the basic procedures of the adjustment and reproduced the official estimates. Through this exercise, it has found that the estimates that could be obtained by the normal interpolation procedures were significantly and arbitrarily modified to satisfy certain needs. Based on some political economy argument, we attempt to explain why the adjustment had to leave the growth rate of 1998 intact and why it had to bypass the price issue and directly work on the real growth rate adjustment. Based on previous studies and other observations, we also challenge the census results on non-service industries.
    Date: 2006–07
  25. By: Monique Ebell (Humboldt University of Berlin); Christian Haefke (Institute for Advanced Studies, Vienna, Instituto de Análisis Económico, CSIC and IZA Bonn)
    Abstract: We contribute to the growing literature which aims to link product market regulation and competition to labor market outcomes, in an attempt to explain the divergent US and continental European labor market performance over the past two decades. The main contributions of this paper are threefold. First, we show that the choice of bargaining regime is crucial for the effect of product market competition on unemployment rates, being substantial under collective bargaining and considerably more modest under individual bargaining. Since the choice of bargaining institution is so important, we endogenize it. We find that the bargaining regime which emerges endogenously depends crucially on the degree of product market competition. When product market competition is low, collective bargaining is stable, while individual bargaining emerges as the stable institution under high degrees of product market competition. This also allows us to link product market competition and collective bargaining coverage rates. Our results suggest that the strong decline in collective bargaining coverage and unionization in the US and UK over the last two decades might have been a direct consequence of the Reagan/Thatcher product market reforms of the early 80’s. Finally, we calibrate the model to assess the quantitative magnitude of our results. We find that moving from the US low regulation-individual bargaining economy to the EU high regulation-collective bargaining economy leads to a substantial increase in equilibrium unemployment rates from 5.5% to 8.9 % in the model economy.
    Keywords: product market competition, European Unemployment Puzzle, overhiring, wage bargaining
    JEL: E24 J63 L16
    Date: 2006–07
  26. By: Nick Bloom; John Van Reenen; Stephen Bond
    Abstract: This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impact effect of demand shocks on investment. Uncertainty increases real option values making firms more cautious when investing or disinvesting. This is confirmed both numerically for a model with a rich mix of adjustment costs, time-varying uncertainty, and aggregation over investment decisions and time, and also empirically for a panel of manufacturing firms. These cautionary effects of uncertainty are large – going from the lower quartile to the upper quartile of the uncertainty distribution typically halves the first year investment response to demand shocks. This implies the responsiveness of firms to any given policy stimulus may be much lower in periods of high uncertainty, such as after major shocks like OPEC I and 9/11.
    JEL: D92 E22 D8 C23
    Date: 2006–07
  27. By: Barnett, Richard; Bhattacharya, Joydeep
    Abstract: Rejuveniles are "grown-ups who cultivate juvenile tastes in products and entertainment". In this note, we study a standard AK growth model of overlapping generations populated by rejuveniles. For our purposes, rejuveniles are old agents who derive utility from "keeping up" their consumption with that of the current young. We find that such cross-generational keeping up is capable of generating interesting equilibrium growth dynamics, including growth cycles. No such growth dynamics is possible either in the baseline model, one where no such generational consumption externality exists, or for almost any other form of keeping up. Steady-state growth in a world with rejuveniles may be higher than that obtained in the baseline model.
    Keywords: Growth cycles, keeping up preferences, overlapping generations
    JEL: E0
    Date: 2006–08–05

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