"Labor Market Dynamics and the Business Cycle: Structural Evidence for the United States", 2008, Scandinavian Journal of Economics, 109(4), pp.743-77. (with Saverio Simonelli).
We use a 12-dimensional VAR to examine the dynamic effects on the labour
market of four structural technology and policy shocks. For each shock, we
examine the dynamic effects on the labour market, the importance of the
shock for labour market volatility, and the comovement between labour market
variables and other key aggregate variables in response to the shock. We
document that labour market indicators display "hump-shaped" responses to
the identified shocks. Technology shocks and monetary policy shocks are
important for labour market volatility but the ranking of their importance is
sensitive to the VAR specification. The conditional correlations at business
cycle frequencies are similar in response to the four shocks apart from the
correlations between hours worked, labour productivity and real wages. To
account for the unconditional correlations between these variables, a mixture
of shocks are required.
You want to replicate the results? Download the Excel data file
"The Macroeconomics of Subsistence Points", 2008.Macroeconomic Dynamics, 12(S1), pp.136-47 (with Stephanie Schmitt-Grohe and Martin Uribe)
We examine the macroeconomic consequences of preferences displaying goods-specific subsistence points. We show that this simple feature makes the price elasticity of demand for individual goods procyclical. As a result, markups behave countercyclically in equilibrium.
CEPR DP version.
"The Consumption - Tightness Puzzle", 2008. NBER International Seminar on Macroeconomics 2006
This paper introduces a labor force participation choice into a labor market matching model embedded in a dynamic stochastic general equilibrium set-up
with production and savings. The participation choice is modelled as a tradeoff between forgoing the expected benefits of being search active and engaging
in costly labor market search. We show that this set-up gives rise to a linear relationship between labor market tightness and the marginal utility of consumption. We refer to the latter as
the “consumption - tightness puzzle” because (a) it gives rise to a number of counterfactual implications, and (b) it is a robust implication of theory.
Amongst the counterfactual implications are very low volatility of tightness, procyclical unemployment, and a positively sloped Beveridge curve. These
implications all derive from procyclical variations in participation rates that follow from allowing for the extensive search margin.
EUI WP version, CEPR DP version.
"Pricing to Habits and the Law of One Price", 2007, American Economic Review vol. 97(2), pp. 232-38 (P&P). (with Stephanie Schmitt-Grohe and Martin Uribe)
This paper proposes a novel international transmission mechanism based on the
assumption of deep habits (habits formed on a good-by-good basis). Under deep habits,
firms face more elastic demand functions in markets where nonhabitual demand is high
relative to habitual demand, creating an incentive to price discriminate. We refer to
this type of price discrimination as pricing to habits. In the presence of pricing to
habits, innovations to domestic aggregate demand induce a decline in markups in the
domestic country but not abroad, leading to a departure from the law of one price.
In this way, the proposed pricing-to-habit mechanism can explain the observation that
prices of the same good across countries, expressed in the same currency, vary over the
business cycle. Furthermore, it can account for the empirical fact that in response to
a positive domestic demand shock, such as an increase in government spending, the
real exchange rate depreciates, domestic consumption expands, and the trade balance
deteriorates.
"Deep Habits", Review of Economic Studies,
“PPP Strikes Back: Aggregation and the Real Exchange Rate”. Quarterly Journal
of Economics, vol.120(1), pp.1-43, lead article. (With Jean Imbs, Haroon Mumtaz and Helene Rey).
“Markov Switching Causality and the Money-Output Relationship”. Journal of Applied
Econometrics, 2005, vol. 20(5), pp. 665-83. (With Zacharias Psaradakis and Martin Sola).
“International Business Cycles: The Quantitative Role of Transportation Costs”. Journal
of International Money and Finance, 2004, 23(4), 645-71. (with Elisabetta Mazzenga).
“Asymmetric Effects of Monetary Policy in the
US”. Quarterly
Review , 2004, Federal Reserve Bank of St. Louis. (With Martin Sola).
“Non-Linearities and
Real Exchange Rate Dynamics”. Journal of the European Economic Association, 2003, I(2-3), 639-49. (With Jean Imbs, Haroon Mumtaz and Helene Rey).
“On Adjusting the HP-filter for the Frequency of Observations”. Review of Economics and Statistics, 2002, 84(1), 371-80. (With Harald Uhlig).
“The Macroeconomic Effects of German
Unification: Real Adjustments and the Welfare State”. Review of
Economic Dynamics, 2000, 3, 423-60. (With Fabio Canova).
“Schooling, Training, Growth and Minimum
Wages”. Scandinavian Journal of Economics, 1999, vol. 101 no.3, 441-57. (With Jan Rose Sorensen).
“Minimum Wages: Curse or Blessing”, Research
in Labor Economics, 1997, vol.16, 343-367. (With Jan Rose Sorensen)
“International Business Cycles in Theory and in Practice.” Journal
of International Money and Finance, 1997, vol. 16, no.2, 255-83.
“Permanent and Transitory Shocks and the U.K. Business Cycle”. Journal
of Applied Econometrics, 1997, vol. 12, no. 1, 27-48.
“International Consumption Risk Sharing”. International
Economic Review, 1996, vol. 37, no. 3, 573-601. (With Fabio Canova).
“Stylized Facts and Changes in Regime: Are
Prices Procyclical?”. Journal of Monetary Economics, 1995, vol. 36
no. 3, 497-526. (with Martin Sola).
“Growth, Human Capital Spillovers and International Policy Coordination”. Scandinavian Journal of Economics, 1993, 95,
No.4, 494-515. (With Keith Blackburn) “Business Cycles in the U.K.: Facts and
Fictions”. Economica, 1992, 59, 383-401. (With Keith Blackburn)
We generalize the standard habit formation model to an environment in which agents form habits over individual varieties of goods as opposed to over a composite consumption good. We refer to this preference specification as ‘deep habit formation.’ Under deep habits, the demand function faced by individual producers depends on past sales. A central result of the paper is that deep habits give rise to countercyclical markups. We examine several extensions of the model including inernal habits rather than external habits, relative habits rather than difference habits, nominal rigidities.
The working paper version of this paper also included econometric estimates.
You can also access our data: "Data description file", "Excel Data file"
We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that the aggregate real exchange rate is persistent because its components have
heterogeneous dynamics, that established time series and panel methods fail to control for. When heterogeneity is taken into account, the estimated persistence of real exchange rates
falls dramatically. Its half-life, for instance, falls to around one year, significantly below Rogoff’s ‘consensus view’ of three to five years. The results are shown to be robust. The findings of the paper are consistent with later results in the literature that question the extent of price rigidities.
You can also access our data: "Excel Data file"
We propose a new method for analyzing time-series characterized by changes in the causal pattern between the variables of interest. Our method is based on a VAR specification augmented with time-varying parameters. The time-variation in parameters are modelled as reflecting changes in causality which is assumed to governed by a stochastic unobservable finite Markov chain. We apply the method to the US money-output relationship. We are able to reconcile earlier apparentely contradicitng results in the literature regarding money's predictive power for output. We also find interesting results for how causality change over the business cycle - we show that money Granger causes output mainly during recessions.
CEPR DP version.
We introduce a transportation sector into a two-country international business cycle model. We show that such costs of transportation have very substantial welfare costs but limited effects on the business cycle patterns of trade and relative prices. However, if one realistically assumes that trade gives rise not only to costs of moving goods geographially but also takes time, transportation costs are important for understanding relative price movements and contribute substantially towards solving the international comovement puzzle.
This paper tests for the presence of asymmetric effects of monetary policy on aggregate activity using U.S. postwar quarterly data. We are interested in three types of asymmetry: (i) whether negative and positive monetary policy shocks have different effects on output; (ii) whether big or small shocks have different effects; and/or (iii) whether low-variance, negative shocks have asymmetric effects on output. We discuss the three possibilities below and explain under which conditions these asymmetries might take place. We find evidence in favor of small / negative shocks having larger real effects than other types of shocks.
We confirm the presence of substantial non-linearities in real exchange rate dynamics at the sectoral level. We compute the speed of mean reversion of sector specific real exchange rates, conditional on the existence of arbitrage as implied by our non-linear estimations, and relate them to plausible economic determinants such as tradability and exchange rate volatility.
This paper studies how the HP-Filter should be adjusted, when changing the frequency of observations. It complements the results of Baxter and King (1999) with an analytical analysis, demonstrating that the filter parameter should be adjusted by multiplying it with the fourth power of the observation frequency ratios. This yields an HP parameter value of 6.25 for annual data given a value of 1600 for quarterly data. The relevance of the suggestion is illustrated empirically.
The working paper version includes some extra graphics and some extra analysis on the link to temporal aggregation.
We study the effects of German unification in a model with capital accumulation, skill differences and a welfare state. We argue that this event is similar to a mass migration of low-skilled agents holding no capital into a foreign country. Absent a welfare state, we observe an investment boom, depressed output and employment conditions. Capital owners and high-skilled agents are willing to give up to 4% of per-capita consumption to favor unification. When a welfare state exists the investment boom disappears and the recession is prolonged. Now, with unification, capital owners and high-skilled agents lose 4% of per-capita consumption
We examine how the long-run growth performance of an economy is affected by a labor market distortion. In our model, growth occurs through skill formation, and skills are generated through schooling and training of unskilled workers. We analyze how a minimum wage legislation affects long-run growth. In general, the effects are ambiguous. The reason is that while a minimum wage discourages training, it also encourages schooling. The net effect then depends on whether training or schooling dominates the long-run increases in labor productivity.
This paper analyzes the effects of minimum wages in a model with human capital accumulation and heterogeneous agents. We show that minimum wages - because of externalities in human capital accumulation - may increase aggregate output. This model also gives rise to a spike in the wage distribution at the minimum wage. In the absence of heterogneity, minimum wages may even implement the first-best. However, in a heterogenous agents environment, minimum wages cannot achieve the first best and may lead to substantial negative effects on the less human-capital skilled agents.
This paper shows that the comovement puzzle and other key puzzles in international macroeconomics - apart from the productivity puzzle - are robust features of frictionless two-country international business cycle models with specialization. Multi-country models, however, appear better suited to solving some of these puzzles.
In this paper the business cycle properties of UK data are investigated using a VAR technique. A Real Business Cycle (RBC) model is formulated. The model includes both permanent and transitory shocks to technology. The business cycle properties of the data and the model are investigated by deriving the expected changes over various forecast horizons from a VAR model. It is found, contrary to evidence in Rotemberg and Woodford (1996), that the model can account for many features of the data and that temporary shocks are pertinent in order to explain the business cycle moments. The main difference between theory and data is present in hours worked.
This paper formally examines the implications of international consumption risk sharing for a panel of industrialized countries. The authors theoretically derive the international consumption insurance proposition in a simple setup and show how to modify it in more complicated models. They analyze the implications of the theory for pairs of countries and find that aggregate domestic consumption is almost completely insured against idiosyncratic real, demographic, fiscal, and monetary shocks over short cycles but that it covaries with these variables over medium and long cycles. The cross equation restrictions imposed by the theory are rejected. The policy implications are discussed
We investigate empirically the stability of the correlation between output growth and inflation using a technique that allows for changes in regime. We look at recent quarterly data for the G4 and at historical data for the U.S. and U.K. We find evidence of changes both in means and variances in both sources of data. In the quarterly data we find that the covariance between output growth and inflation is typically negative. In the historical data we find, as suggested in previous studies, that inflation was procyclical especially in the inter-war years, but has been countercyclical in the post-war period.
Also in Andersen and Moene (eds.), 1994: Endogenous Growth,
Blackwell, Oxford.
This paper is concerned with public policy and economic development in a world of interdependent economies. Its objective is to show how the international coordination of economic policy is a means of promoting growth across countries. The analysis is based on a two-country endogenous growth model in which the production of human capital depends on country-specific tax-financed public expenditure and worldwide previously accumulated knowledge. The authors consider optimal policy as the outcome of a dynamic game between benevolent governments. They show that both growth (which itself has no normative significance) and welfare are, indeed, higher under cooperation than under noncooperation.
This paper documents the statistical properties of the contemporary business fluctuations in the United Kingdom. The authors study the period 1956-90 using quarterly, detrended data on key aggregate variables. They compute selected moments of the data, compare their results with those for the United States, and rigorously test for dynamic instabilities. The authors' findings confirm the existence of substantive cyclical regularities, both across countries and across time. Some notable cross-country differences are also identified. Conclusions about stability are shown to be potentially sensitive to the method of testing. In general, cross-correlations are appreciably more stable than standard deviations.