Showing papers in "B E Journal of Macroeconomics in 2013"

Productivity and Resource Misallocation in Latin America

Abstract: Total factor productivity (TFP) in Latin America has declined relative to the US since the mid-1970s. This paper applies a comparable methodology to firm-level data of ten Latin American countries to quantify the heterogeneity of firm productivity and the extent to which resource misallocation can explain lower aggregate TFP. In general, productivity heterogeneity and resource misallocation are found to be much larger than in the US. Achieving an efficient allocation of resources could boost manufacturing TFP between 41% and 122% depending on the countries and years considered. We also find that difficulty in access to capital and restrictive labor regulations explain distortions faced by firms.

International Business Cycles and Remittance Flows

Abstract: In this paper, we investigate the macroeconomic determinants and the effect of host country business cycles on remittance inflows. Estimating a dynamic panel data model by the system GMM, we document that remittance inflows are pro-cyclical to home country volatility but counter-cyclical to the volatility in host countries. This result does not hold for high income counties for which remittance inflows are acyclical to home country volatility but pro-cyclical to the volatility in host countries. For a host country, remittance outflows are counter-cyclical to the volatility of home countries. Trade openness is the single most important factor that determines both remittance inflows and outflows for the home and host countries, respectively.

In Search of Lost Time: the Neoclassical Synthesis

Abstract: Present-day macroeconomics has sometimes been dubbed ‘the new neoclassical synthesis’, suggesting that it constitutes a reincarnation of the neoclassical synthesis of the 1950s. This paper assesses this understanding. To this end, we examine the contents of the ‘old’ and the ‘new’ neoclassical syntheses. We show that the neoclassical synthesis originally had no fixed content, but two meanings gradually became dominant. First, it designates the program of integrating Keynesian and Walrasian theory. Second, it designates the methodological principle that in macroeconomics it is better to have alternative models geared towards different purposes than a hegemonic general equilibrium model. The paper documents that: (a) the first program was never achieved; (b) Lucas’s criticisms of Keynesian macroeconomics eventually caused the neoclassical synthesis program to vanish from the scene; (c) the rise of DSGE macroeconomics marked the end of the neoclassical synthesis mark II; and (d) contrary to present-day understanding, the link between the old and the new synthesis is at best weak.

Business cycle accounting of the BRIC economies

Abstract: We apply the Business Cycle Accounting methodology developed by Chari, Kehoe and McGrattan (2007) to study the economic resurgence of Brazil, Russia, India and China (BRIC) over the last decade. We document that while efficiency wedges do contribute in a large part to growth, especially in Brazil and Russia, there is an increasing importance of investment wedges especially in the late 2000s, noted in China and India. The results are typically related to the stages of development with Brazil and Russia coming off a crisis to grow in the 2000s, while India and China were on a comparatively stable growth path. Relating wedge patterns to institutional and financial reforms, we find that financial market developments and effective governance in BRICs in the last decade are consistent with improvements in investment and efficiency wedges that led to growth.

Required reserves as a credit policy tool

Abstract: This paper conducts a quantitative investigation of the role of reserve requirements as a macroprudential policy tool. We build a monetary DSGE model with a banking sector in which (i) an agency problem between households and banks leads to endogenous capital constraints for banks in obtaining funds from households, (ii) banks are subject to time-varying reserve requirements that countercyclically respond to expected credit growth, (iii) households face cash-in-advance constraints, requiring them to hold real balances, and (iv) standard productivity and money growth shocks are two sources of aggregate uncertainty. We calibrate the model to the Turkish economy which is representative of using reserve requirements as a macroprudential policy tool recently. We also consider the impact of financial shocks that affect the net worth of financial intermediaries. We find that (i) the time-varying required reserve ratio rule countervails the negative effects of the financial accelerator mechanism triggered by adverse macroeconomic and financial shocks, (ii) in response to TFP and money growth shocks, countercyclical reserves policy reduces the volatilities of key real macroeconomic and financial variables compared to fixed reserves policy over the business cycle, and (iii) a time-varying reserve requirement policy is welfare superior to a fixed reserve requirement policy. The credit policy is most effective when the economy is hit by a financial shock. Time-varying required reserves policy reduces the intertemporal distortions created by the credit spreads at expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability.

Strategic wage bargaining, labor market volatility, and persistence

Abstract: The textbook search and matching model suffers from too little amplification and weak internal propagation. We argue that the double failure is due to two negative feedback channels. Intuitively, a decline (rise) in unemployment (vacancies) rises both the wage rate, the “wage channel,” and the effective cost to fill a vacancy, the “hiring cost channel.” Therefore, we introduce hiring costs and strategic wage bargaining. The interaction between these two modifications limits the impact of both channels effectively and persistently. Thus, the modified model is able to closely match the (inversely) u-shaped impulse responses of vacancies and unemployment.

Business cycle dynamics across the US states

Abstract: The analysis of synchronization among regional or national business cycles has recently been attracting a growing interest within the economic literature. Far less attention has instead been devoted to a closely related issue: given a certain level of synchronization, some economies might be systematically ahead of others along the swings of the business cycle. We analyze this issue within a system of economies and show that leading (or lagging behind) is a feature that does not occur at random across the economies. In addition, we investigate the economic drivers that could explain this behavior. To do so, we employ data for 48 conterminous US states between 1990 and 2009.

Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium

Abstract: We build and parameterize a general equilibrium OLG model that explains hours worked by three active generations, education by the young, the retirement decision of older workers, and aggregate per capita growth as functions of the level and structure of taxes and government expenditures. We find that our model’s predictions match the facts remarkably well for all key variables in many OECD countries. We then use the model to investigate the effects of various fiscal policy shocks. To promote employment, especially among older workers, and economic growth, our results strongly prefer labor tax cuts targeted at older workers and higher productive government expenditures financed by a reduction of non-employment benefits and/or higher consumption taxes. We also evaluate the welfare effects for current and future generations of alternative policy changes.

Development accounting with wedges: the experience of six European countries

Abstract: The paper interprets the growth experience of three Western European countries (France, Germany and the UK) and three Central-Eastern European economies (the Czech Republic, Hungary, and Poland) through the lens of the neoclassical growth model. It combines the methodologies of Development Accounting (Caselli, F. 2005. “Accounting for Cross-Country Income Differences.” In Handbook of Economic Growth, Chapter 9, 679–741.) and Business Cycle Accounting (Chari, V. V., P. J. Kehoe, and E. R. McGrattan. 2007. “Business Cycle Accounting.” Econometrica 75 (3): 781–836.) to calculate distortions – “wedges” – in production efficiency, and in the labor and capital markets. The exercise sheds light on the extent and evolution of factor market distortions between 1996 and 2009. The main result of the paper is that capital and labor market distortions do not explain income differences across the two country groups, but are important to understand income differences within groups. In addition, observed labor and capital taxes are related to the measured wedges, but significant unexplained components remain. Reducing labor and capital market distortions would lead to significant output gains in all countries.

Monetary business cycle accounting for Sweden

Abstract: When creating competing models of economic fluctuations, researchers typically introduce frictions in their models aiming at replicating the observed movements in the data. This paper implements a ...

Small business loan guarantees as insurance against aggregate risks

Abstract: This paper assesses whether insurance against aggregate risk (such as the current economic downturn) could be an important rationale for popular government operated loan guarantee programs for small and medium enterprises (SMEs). We demonstrate in a model that firms could be credit-constrained due to aggregate uncertainty because financial institutions face high borrowing costs during economic downturns. Since it enjoys relatively lower borrowing costs during recession, the federal government could offer insurance in the form of loan guarantees to ease borrowing constraints for small businesses. Furthermore, we show that a guarantee program with a fixed fee is associated with adverse selection, and leads to the “over-lending” problem. We also show that under certain conditions, a program with a net present value of zero could be socially beneficial. Then, the high cost of obtaining guarantees and thorough qualification requirements can be viewed as tools to mitigate this problem.

Credit demand, credit supply, and economic activity

Abstract: In this paper, we attempt to identify the separate contributions of credit demand, supply of financial intermediation, and supply of funds to fluctuations in indicators of credit conditions and to fluctuations in economic activity. We estimate a common factor model in which the six factors correspond to supply of funds, financial intermediation, credit demand, aggregate uncertainty, real economic activity, and inflation. We use a simple model of financial intermediation to motivate restrictions on the factor loadings designed to identify supply of funds, uncertainty, credit demand, and financial intermediation factors. We find that the supply of funds and financial intermediation factors explain most of the variation in interest rates spreads, while the financial intermediation and credit demand factors typically contribute to most of the fluctuations in credit quantity variables. For credit indicators, the 2008–2009 financial crisis appears to be largely due to a decline in the financial intermediation. However, this decline in financial intermediation seems to have originated from output and uncertainty shocks, rather than shocks to financial intermediation itself.

Effects of Productivity Shocks on Hours-Worked: UK Evidence

Abstract: We provide evidence that positive industry-level productivity shocks cause hoursworked to fall in the short run in the UK economy. We use UK industry data, which covers both manufacturing and non-manufacturing industries, and identify productivity shocks using long-run restrictions and structural vector autoregression methodology. Our findings show that the unconditional correlation between growth rates of productivity and hours is negative in almost all the industries, and the correlation conditional on productivity shocks is negative in over three-quarters of the industries. After a positive productivity shock, hours fall in 26 of the 31 industries. The findings at the aggregate level are consistent with those at industry level. We note some striking dierences in

The macroeconomic effects of the 35-h workweek regulation in France

Abstract: The 35-h workweek regulation, fully adopted in France in 2000, has been one of the most significant regulatory shocks imposed on any large economy. Yet the effects of the regulation remain controversial. In this paper, we evaluate the effects of the 35-h workweek regulation on unemployment and real GDP in France using a counterfactual analysis. We exploit the dependence of unemployment and GDP growth among different economic entities and construct the counterfactuals using data from countries other than France. We find that the 35-h workweek regulation reduced France’s annual unemployment rate by 1.58% and raised the real GDP by 1.36% from 2000 to 2007.

Divorce Laws and Divorce Rate in the U.S.

Abstract: At the end of the 1960s, the U.S. divorce laws underwent major changes and the divorce rate more than doubled in all of the states. The new laws introduced unilateral divorce in most of the states and changes in divorce settlements in every state, such as property division, alimony transfers, and child custody assignments. The empirical literature so far has focused on the switch from consensual to unilateral divorce and found that this change cannot fully account for the increase in the divorce rate. Also, the divorce rate increased even in states where the decision remained consensual. In this paper, I consider the eects of other aspects of the legal change. I show that changes in divorce settlements provide economic incentives for both spouses to agree to divorce. Moreover, I describe a mechanism that can explain the dierent change in divorce rate by age of couples. I solve and calibrate a model where agents dier by gender, and make decisions on their marital status, investment and labor supply. Under the new nancial settlements, divorced men gain from a favorable division of property, while women gain from an increase in alimony and child support transfers. Since both of them are better o in the new divorce setting, the existing requirement of consent for divorce (consensual or unilateral) is no longer relevant. Results show that changes in divorce settlements account for a substantial amount of the increase in the aggregate divorce rate. I also nd that the increase in divorce rate of young couples with children contributes the most to the overall increase, which is consistent with the data.

Overeducation and skill-biased technical change

Abstract: There is evidence that rising overeducation has coincided with rapid skill-biased technical change (SBTC). This paper shows that a SBTC can cause a rise in overeducation as firms looking for educated workers become more selective and turn down the less skilled candidates. This result, while consist- ent with the evidence, is in contrast with the implications of recent search and matching models of the labor market. Here we present a model of a segmented labor market, with imperfect correlation between the individual ability and the observed education of workers, and a fixed cost of setting up a job. A numerical illustration for the US in the period 1970-1990 demonstrates that overeducation rises and that it can in turn be significant for the response of unemployment rates and wage inequality to a SBTC.

News-driven international business cycles

Abstract: This paper examines the international transmission effects of news about the total factor productivity (TFP) in the US on the Canadian and Japanese economies. I develop and estimate a two-country real business cycle model to generate booms in Canadian and Japanese variables in response to news about future US TFP. I find that international macroeconomic comovements can be generated by news about the future TFP in the US. Unlike previous studies, I show that the response of the Canadian or Japanese TFP to a US news shock is important for generating the boom observed in the empirical analysis. The estimated preference parameters indicate that eliminating the wealth effect on hours worked is important. I also show that a low elasticity of substitution between domestically and foreign-produced intermediate goods can also help explain the domestic boom created by a news shock.

Deconstructing Shocks and Persistence in OECD Real Exchange Rates

Abstract: This paper analyzes the persistence of shocks that affect the real exchange rates for a panel of seventeen OECD developed countries during the post-Bretton Woods era. The adoption of a panel data framework allows us to distinguish two different sources of shocks, i.e. the idiosyncratic and the common shocks, each of which may have di¤erent persistence patterns on the real exchange rates. We first investigate the stochastic properties of the panel data set using panel stationarity tests that simultaneously consider both the presence of cross-section dependence and multiple structural breaks that have not received much attention in previous persistence analyses. Empirical results indicate that real exchange rates are non-stationary when the analysis does not account for structural breaks, although this conclusion is reversed when they are modeled. Consequently, misspecification errors due to the non-consideration of structural breaks leads to upward biased shocks' persistence measures. The persistence measures for the idiosyncratic and common shocks have been estimated in this paper always turn out to be less than one year.

Bequest taxes, donations, and house prices

Abstract: This paper is an empirical investigation into the effect of bequest taxes (estate or inheritance tax, in the US) and inter vivos real estate donations taxes (gift tax, in the US) on (i) house prices, (ii) house donations, and (iii) market transactions. In a simple model with intergenerational altruism, a lower tax rate unambiguously increases (i) and has an ambiguous effect on (ii) and (iii). We test these predictions using an original and unique data set containing information on sales, donations and real estate prices in 13 large Italian cities between 1993 and 2004. This period spans a major reform that first decreased and then abolished the inter vivos real estate donations tax and bequest tax in Italy. We find that the reform is associated with cumulative real appreciation of about 5% between 2001 and 2004, an increase in donations, and a decrease in market transactions over the same period.

Output Growth and Unexpected Government Expenditures

Abstract: This paper takes into account the dynamic feedback between government expenditures and output in a model that separates the effects of expected and unexpected government expenditures on output. We allow for standard determinants based on Solow’s growth model, as well as financial globalization and trade openness measures for a sample of 56 industrial and emerging market economies over the 1970-2004 period. We find that unanticipated government expenditures have negative and significant effects on output growth, with higher effects in developed economies. Along with savings responses, we interpret these results based on how fiscal policy reacts to business cycles. Anticipated government expenditures have negative - but smaller effects - on output growth. These results are very robust to a recursive treatment of expectations, which reinforces the role of new information in an increasingly integrated world economy.

Monetary policy shocks and real commodity prices

Abstract: In this paper we document the effects of monetary policy shocks on real commodity prices. Based on a VAR estimated using long-run restrictions, an expansionary monetary policy shock causes real commodity prices and output both to rise sharply for a short period of time. We find that a simple dynamic equilibrium model of commodity supply and demand can give a realistic response of real commodity prices to monetary policy shocks, for a wide range of parameter values. Furthermore, we find that based on historical simulations, shocks to monetary policy played an important role in commodity price fluctuations during the Great Recession, but they have contributed negligibly to commodity price movements overall since 1970. Even though monetary policy shocks have a robust and large marginal effect on real commodity prices, most monetary policy shocks are small, and most fluctuations in real commodity prices are correspondingly small.

Privately optimal severance pay

Abstract: This paper constructs an equilibrium matching model with risk-averse workers and incomplete contracts to study both the optimal private provision of severance pay and the consequences of government mandates in excess of the private optimum. The privately-optimal severance payment is bounded below by the fall in lifetime wealth resulting from job loss. Despite market incompleteness, mandated minimum payments signicantly exceeding the private optimum are eectively undone by adjustment of the contractual wage, and have only small allocational and welfare eects. J.E.L. classication codes: J23, J64, J65.

A Contribution to the Empirics of Welfare Growth

Abstract: This paper compares the determinants of economic growth and welfare growth. Our main result is that determinants may differ or have different impact on welfare outcomes as compared to economic outcomes. Human capital plays a bigger role in determining the former, so that policies targeting human capital can have a greater effect on the welfare of societies than one would think by looking at their impact on economic growth alone. Institutions also have a greater effect on welfare growth compared to their impact on economic growth, consistent with the importance of government stability for the uninterrupted provision of health-related inputs and information. Finally, initial income has a greater impact on welfare growth than on real income per capita growth, implying even faster convergence than in Becker, Philipson, and Soares (2005) after adding a number of economic, health-related, institutions-related, and geographic variables. We conclude that there exist systematic differences for the impact of a number of factors on economic relative to welfare outcomes.

Information and communication technologies over the business cycle

Abstract: This paper quantifies the relative importance of different sources of technological progress as determinants of short-run fluctuations in the US economy. In particular, it focuses on the role of the technical innovations associated with information and communication technologies (ICT). The paper points to three main findings. First, neutral technical change is the main determinant of the US aggregate fluctuations, and its contribution remained constant throughout the postwar sample. Second, the importance of ICT increased significantly during the last decades of the considered sample, which nowadays is responsible for approximately 1/5 of GDP fluctuations. Third, the variance reduction of exogenous shocks typically associated with the last decades of the postwar sample, mainly comes from ICT and neutral shocks, whereas the volatility of innovations in traditional capital remained relatively stable. Overall, we conclude that attention should be focused on identifying those incentives behind the adoption of knowledge and technology, an issue related to the neutral progress, rather than the quality or technology embedded in capital goods such as ICT assets.

Exchange rate pass-through and fiscal multipliers

Abstract: This paper develops a small open economy model with nominal rigidities and search-matching frictions to study the implications of the degree of exchange rate pass-through for fiscal multipliers. I allow for delayed pass-through to both imported consumption goods prices and imported intermediate goods prices. The result shows that incomplete exchange rate pass-through to imported goods prices dampens the fiscal impact on output and unemployment. However, incomplete pass-through to imported input prices has little effect on the output and unemployment multipliers.

International technology adoption, R&D, and productivity growth

Abstract: International knowledge diffusion is considered an important source of productivity growth. However, direct observations on such diffusion have not been available at the macro level. We analyze novel data on international technology trade. Our empirical analyses indicate a positive association between payments for international technology adoption and the growth of labor productivity. Those payments appear to be a stronger contributor than research and development (R&D) investments for a large group of economies. For economies with high productivity, technology adoption payments tend to be complementary to R&D investments.

Households’ uncertainty about Medicare policy

Abstract: Interest in the implications of policy uncertainty has been recently growing, as policy uncertainty increases during recession episodes. In this paper, we study how households behave when they are uncertain about future Medicare policies. Medicare represents the main form of insurance against medical expenditure risk for older Americans. However, the challenge raised by the Medicare budget increases households’ awareness of possible future Medicare reforms. Households are uncertain about the types and timing of those reforms. To analyze the effects of that policy uncertainty, we build a life-cycle model where households face several risks. Based on reasonable assumptions about policy uncertainty, we find that, due to that uncertainty, households mainly increase savings, with older households saving up to 3.5% more in the short run. The average welfare loss is about $10,000 in wealth-equivalent, with the largest losses concentrated among older households.

Implementation cycles, growth and the labor market

Abstract: We develop a theory of growth and cycles that endogenously relates job ‡ows, worker ‡ows and wages over the cycle to the processes of restructuring, innovation and implementation that drive long–run growth. Expansions are the result of clustered implementation of new ideas and recessions are the negative consequence of the restructuring that anticipates them. Due to incentive problems, production workers are employed via relational contracts and experience involuntary unemployment. Separation rates and …rm turnover are counter-cyclical, but labour productivity growth and hiring rates are procyclical. Our framework also highlights the counter-cyclical forces on wages due to restructuring, and illustrates the relationship between the cyclicality of wages and long–run productivity growth.

A prior predictive analysis of the effects of Loss Aversion/Narrow Framing in a macroeconomic model for asset pricing

Abstract: In a macroeconomic framework, I quantitatively evaluate the theory of Loss Aversion/Narrow Framing (LANF) as a resolution to the Equity Premium Puzzle (EPP). The EPP is where the neoclassical asset pricing model cannot be reconciled with the empirical fact that stocks have much higher returns than risk-free assets. The prior predictive analysis employed follows a Bayesian approach that draws realizations for preferences that describe the degree of LANF characterizing consumer’s tastes. The analysis is also extended along two more dimensions: the variance of aggregate uncertainty and the elasticity of labor. The priors used are carefully defined from previous works in the literature. This Monte Carlo procedure finds that the theory is unable to jointly describe the equity premium and labor’s elasticity of supply. That is, only when the labor supply elasticity is unreasonably low can LANF preferences generate any equity premiums. Alternatively, when the elasticity is more realistically high, LANF preferences fail to generate significant premiums. My analysis therefore concludes that a resolution to the EPP via a theory of LANF must be modified along the description of labor’s choices. As ancillary result, the hybrid perturbation-projection method developed for this experiment is shown to be a robust technique.

Distortions, structural transformation and the Europe-US income gap

Abstract: This paper uses a model of structural transformation with sectoral distortions to study the convergence of income between Western Europe and the United States (US). It shows that in addition to income effects and growth differentials in sectoral total factor productivities (TFP), sectoral distortions are important for understanding the reallocation of resources across sectors. Allowing for a growing wedge between the marginal revenue product of labor relative to capital can explain the rapid decline in the manufacturing share of hours for the US that started in the 1980s. The distortions are also important for explaining the paths of sectoral hours for many European countries. However, the distortions lead to a misallocation of resources across sectors, which helps explain why the rapid Europe-US income convergence that started in the 1950s stopped in the early 1980s.