Band 13, Heft 1

This paper uncovers the response pattern to global shocks of euro area countries’ real effective exchange rates before and after the start of Economic and Monetary Union (EMU), a largely open ended question when the euro was created. We apply to that end a newly developed methodology based on high dimensional VAR theory. This approach features a dominant unit to a large set of over 60 countries’ real effective exchange rates and is based on the comparison of two estimated systems: one before and one after EMU. We find strong evidence that the pattern of responses depends crucially on the nature of global shocks. In particular, post-EMU responses to global US dollar shocks have become similar to Germany’s response before EMU, i.e., to that of the economy that used to issue Europe’s most credible legacy currency. By contrast, post-EMU responses of euro area countries to global risk aversion shocks have become similar to those of Italy, Portugal or Spain before EMU, i.e., of economies of the euro area’s periphery. Our findings also suggest that the divergence in external competitiveness among euro area countries over the last decade, which is at the core of today’s debate on the future of the euro area, is more likely due to country-specific shocks than to global shocks.

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.

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 consistent 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.

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.

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.

We study the Purchasing Power Parity (PPP) hypothesis and the PPP puzzle for a sample of seventeen OECD economies when real exchange rates (RERs) are subject to multiple structural breaks. Applying recent panel econometric methods, we first show that RERs are found to be I(1) non-stationary processes when the analysis neglects structural breaks, while they are characterized as I(0) stationary stochastic processes when structural breaks are accommodated. This indicates that ignoring structural breaks can lead to model misspecification, which can bias (upward) shocks’ persistence measures. After controlling for structural breaks, our half-life point estimates appear below one year for both idiosyncratic and common measures of persistence of deviation from the changing mean.

This paper compares the determinants of economic growth and ‘full’ income growth. Our main result is that determinants may differ or have very 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 might have a greater effect on the welfare of societies than one would think by looking at their impact on economic growth alone. The same goes for health institutions and a number of other factors. Initial income has a greater impact on ‘full’ income growth than on real income per capita growth, implying even faster convergence than previously found, after conditioning for economic, health-related, institutions-related, and geographic cross-country differences. Overall, we strongly reject the hypothesis that the coefficient estimates for the impact of our set of explanatory variables on ‘full’ income growth is the same as for income growth. We conclude that there exist systematic differences for the impact of a number of factors on economic versus welfare growth outcomes.

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.

We develop a theory of growth and cycles that endogenously relates job flows, worker flows 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 firm turnover are counter-cyclical, but labor 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.

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.

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.

Drawing upon the experiences of Brazil, Russia, India and China (BRIC), we apply the Business Cycle Accounting methodology to study the phenomenon of rapid economic growth. 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 recession in the 1990s to grow in the 2000s, while India and China were on a comparatively stable growth path. Our results suggest, at least for the BRICs examined, that while efficiency wedges play a major role in jump-starting recovery, investment wedges are equally important for sustaining the recovery. 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.

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 significantly exceeding the private optimum are effectively undone by adjustment of the contractual wage, and have only small allocational and welfare effects.

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.

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.

In this paper, we study the macroeconomic determinants of remittance flows. We place particular attention to fluctuations in remittance flows over the international business cycles. Estimating a dynamic panel data model using the system-GMM method over the period 1970–2007, we document that remittance inflows decrease with home country volatility. Contrarily, remittance inflows increase with the volatility in host countries, especially for middle-income countries. Lower interest rates in host countries lead to larger remittance outflows. Trade and capital account openness are the most important factors that determine both remittance inflows and outflows. We conclude that macroeconomic factors of both home and host countries are important for understanding remittance flows.

We provide evidence that positive industry-level productivity shocks cause hours worked 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 differences in comparison to the recent US literature. Significantly larger capital adjustment costs in the UK help account for the UK-US differences. Moreover, UK industries with higher investment elasticities (lower capital adjustment costs) have less negative impact effects of hours.

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.

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.

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.

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.

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.

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.

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.

This paper quantitatively investigates the role of reserve requirements as a credit policy tool. We build a monetary dynamic stochastic general equilibrium (DSGE) model with a banking sector in which an agency problem between households and banks leads to endogenous capital constraints for the latter. In this setup, a countercyclical required reserves ratio (RRR) rule that responds to expected credit growth is found to countervail the negative effects of the financial accelerator mechanism triggered by productivity and bank capital shocks. Furthermore, it reduces the procyclicality of the financial system compared to a fixed RRR policy regime. The credit policy is most effective when the economy is hit by a financial shock. A time-varying RRR policy reduces the intertemporal distortions created by the fluctuations in credit spreads at the expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability.

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.

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.

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.

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.

At the end of the 1960s, the US divorce law underwent major changes and the divorce rate almost doubled in all of the states. This paper shows that changes in property division, alimony transfers, and child custody assignments account for a substantial share of the increase in the divorce rate, especially for young, college educated couples with children. I solve and calibrate a model where agents make decisions on their marital status, savings, and labor supply. Under the new financial settlements, divorced men gain from a higher share of property, while women gain from an increase in alimony and child support transfers. The introduction of the unilateral decision to divorce has limited effects.

Based on the decline in real GDP growth, many economists now believe that the “Great Recession” is the deepest global economic contraction since the Great Depression. But as real-time real GDP data is typically revised, we investigate if the decline in, and total output loss (severity) of, G-7 real GDP during the “Great Recession” is really so different from the past. We use a GDP weighted average of, as well as a dynamic common factor extracted from, real-time G-7 real GDP data to verify if this is the case. Furthermore, we use a Mincer and Zarnowitz [Mincer, J., and V. Zarnowitz. 1969. “The Evaluation of Economic Forecasts.” NBER Volume: Economic Forecasts and Expectations: Analysis of Forecasting Behaviour and Performance , pp. 1–46.] forecast efficiency regression to predict the revision to G-7 real GDP growth during the “Great Recession,” based on outturns of unrevised variables. In real-time data, the depth and intensity of the “Great Recession” are similar to the mid-1970s recession. The Mincer and Zarnowitz model predicts significant revisions to G-7 real GDP for 2008Q4 and 2009Q1 of about 0.81% and 1.08%, respectively. Together these facts imply that G-7 real GDP growth during the “Great Recession” may yet be revised to be in line with past deep recessions.

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 business cycle accounting procedure for the Swedish economy. Both the 1990s and the 2008 recessions are given special focus. Evidence is provided for properties that structural extensions to the business cycle model need to have in order to replicate the movements in the data. Distortions to the labor market and movements in total factor productivity are the most determinant features to be modeled with respect to real variables as well as deviations from a Taylor rule for interest rate setting, though the latter plays little role for both the 1990s and the 2008 recessions. The distortions share a structural break during the 1990s crisis but not during the recent one.