Research

• Labor-Market Volatility in the Search-and-Matching Model: The Role of Investment-Specific Technology Shocks (with Renato Faccini)
  May 23, 2009
  Abstract
  Shocks to investment-specific technology have been identified as a main source of U.S. aggregate output volatility. In this paper we assess the contribution of these shocks to the volatility of labor market variables, namely, unemployment, vacancies, tightness and the job-finding rate. Thus, our paper contributes to a recent body of literature assessing the ability of the search-and-matching model to account for the large volatility observed in labor market variables. To this aim, we solve a neoclassical economy with search and matching in the labor market, where neutral and investment-specific technologies are subject to shocks. The three key features of our model economy are: i) Firms are large, in the sense that they employ many workers. ii) Adjusting capital and labor is costly. iii) Wages are the outcome of an intra-firm Nash-bargaining problem between the firm and its workers. In our calibrated economy, we find that shocks to investment-specific technology explain 40 percent of the observed volatility in U.S. labor productivity. Moreover, these shocks generate relative volatilities in vacancies and the workers' job finding rate which match those observed in U.S. data. Relative volatilities in unemployment and labor market tightness are 55 and 75 percent of their empirical values, respectively.
  Keywords: Business Cycles; Labor Market Fluctuations; Investment-Specific Technical Change; Search and Matching; Adjustment Costs; Wage Bargaining.
  JEL Classification Numbers: E22; E24; E32; J41; J64; O33.
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• Markov-Perfect Optimal Fiscal Policy: The Case of Unbalanced Budgets (with Joana Pereira)
  November 18, 2009
  Abstract
  We study the optimal fiscal policy set by a benevolent government in a neoclassical economy
  with infinitely-lived households. The government makes sequential decisions on the provision
  of a valued public good, on income taxation and the issue of public debt. We characterize and
  compute Markov-perfect optimal fiscal policy in this economy with two payoff-relevant state
  variables: physical capital and public debt. We find two stable, steady-state equilibria: one
  with no income taxation and positive government asset holdings, and another with positive
  taxation and public debt issuances. We prove that the two steady states are associated
  with different policy rules, which implies a multiplicity of (expectation-driven) Markov-perfect
  equilibria. In the calibrated economy, optimal fiscal policy in the steady-state equilibrium with
  positive distortions yields a 20% income tax rate and a debt-GDP ratio of 60%.
  Keywords: Optimal taxation; optimal public debt; Markov-perfect equilibrium; Time-consistent policy.
  JEL Classification Numbers: E61; E62; H21; H63.
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• Markov-Perfect Optimal Taxation
  Review of Economic Dynamics, Vol. 9 (1), 2006
  Abstract
  In this paper we study optimal taxation in a dynamic game played by a sequence of governments and the private sector. We focus on the Markov-Perfect equilibrium of this game under two different assumptions on the extent of government's intraperiod commitment, which in turn define two within-period timing of actions. Our results show that the extent of government's intra-period commitment has important quantitative implications for policies, welfare, and macroeconomic variables, and consequently that it must be explicitly stated as one of the givens of the economy, alongside preferences, markets and technology. We see this as an important result, since most of the previous literature on Markovian optimal taxation has assumed, either interchangeably or unnoticeably, different degrees of government's intra-period commitment.
  Keywords: Markov-Perfect Optimal Taxation; Time-Consistent Policies; Instantaneous and Non-Instantaneous Commitment; Numerical Methods.
  JEL Classification Numbers: E61; E62.
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• Skills, Search and the Persistence of High Unemployment
  Journal of Monetary Economics, Vol. 53 (8), 2006
  Abstract
  The persistence of high unemployment rates in Europe has fueled theories advocating the existence of multiple natural rates of unemployment. Labor market institutions and increasing returns to scale have been singled out as the main causes of multiplicity and, therefore, of high unemployment traps. The contribution of this paper is both to expand the set of mechanisms leading to multiple natural rates of unemployment and to establish a minimum set of assumptions under which such multiplicity may arise. To this aim, a search-matching model is presented where households allocate time to market and non-market activities, and invest both in physical and human capital It is shown that under the standard assumption of concavity in production and matching such a model yields multiple long-run equilibria with different rates of unemployment. This result does not rely on labor market institutions or increasing returns to scale. Multiplicity in our model arises from differences in the intensity of use of human capital across time-consuming activities.
  Keywords: Frictional Unemployment; Economic Growth; Multiple Long-Run Equilibria; Unemployment
  Persistence
  JEL Classification Codes: E24, J64, J65.
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• Endogenous Business Cycles with Frictional Labour Markets (with Nigar Hashimzade)
  Economic Journal, March 2005
  Abstract
  In this paper we present a version of the neoclassical model of capital accumulation with frictional labour markets. We show that under standard parameter values the equilibrium of the model is indeterminate, and that it consequently displays expectations-driven business cycles —the so-called endogenous business cycles. We study the properties of such business cycles, and find that the model predicts the high autocorrelation in output growth and the hump-shaped impulse response of output found in US data —important business cycle features that existing endogenous-business-cycle models, as well as real business cycle models fail to explain. The indeterminacy of the equilibrium in our economy stems from the job search externalities, and does not rely on increasing returns to scale as in most models in the literature of endogenous business cycles.
  Keywords: Job Search; Endogenous Cycles; Output Dynamics.
  JEL Classification Codes: E32, J22, J23.
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