Some conceptual difficulties regarding "net" multipliers

Multipliers are routinely used for impact evaluation of private projects and public policies at the national and subnational levels. Oosterhaven and Stelder (2002) correctly pointed out the misuse of standard 'gross' multipliers and proposed the concept of 'net' multiplier as a solution to this bad practice. We prove their proposal is not well founded. We do so by showing that supporting theorems are faulty in enunciation and demonstration. The proofs are flawed due to an analytical error but the theorems themselves cannot be salvaged as generic, non-curiosum counterexamples demonstrate. We also provide a general analytical framework for multipliers and, using it, we show that standard 'gross' multipliers are all that is needed within the interindustry model since they follow the causal logic of the economic model, are well defined and independent of exogenous shocks, and are interpretable as predictors for change.

Priors about observables in vector autoregressions

Standard practice in Bayesian VARs is to formulate priors on the autoregressive parameters, but economists and policy makers actually have priors about the behavior of observable variables. We show how this kind of prior can be used in a VAR under strict probability theory principles. We state the inverse problem to be solved and we propose a numerical algorithm that works well in practical situations with a very large number of parameters. We prove various convergence theorems for the algorithm. As an application, we first show that the results in Christiano et al. (1999) are very sensitive to the introduction of various priors that are widely used. These priors turn out to be associated with undesirable priors on observables. But an empirical prior on observables helps clarify the relevance of these estimates: we find much higher persistence of output responses to monetary policy shocks than the one reported in Christiano et al. (1999) and a significantly larger total effect.

A sequential model for older workers' labor transitions after a health shock

In this work we study older workers'(50-64) labor force transitions after a health/disability shock. We find that the probability of keeping working decreases with both age and severity of the shock. Moreover, we find strong interactions between age and severity in the 50-64 age range and none in the 30-49 age range. Regarding demographics we find that being female and married reduce the probability of keeping work. On the contrary, being main breadwinner, education and skill levels increase it. Interestingly, the effect of some demographics changes its sign when we look at transitions from inactivity to work. This is the case of being married or having a working spouse. Undoubtedly, leisure complementarities should play a role in the latter case. Since the data we use contains a very detailed information on disabilities, we are able to evaluate the marginal effect of each type of disability either in the probability of keeping working or in returning back to work. Some of these results may have strong policy implications.

Endogenous Credit Cycles and Financial Dampening in an Adverse Selection Economy

We propose an adverse selection framework in which the financial sector has a dual role. It amplifies or dampens exogenous shocks and also generates endogenous fluctuations. We fully characterize constrained optimal contracts in a setting in which entrepreneurs need to borrow and are privately informed about the quality of their projects. Our characterization is novel in analyzing pooling and separating allocations in a context of multi-dimensional screening: specifically, the amounts of investment undertaken and of entrepreneurial net worth are used to screen projects. We then embed these results in a dynamic competitive economy. First, we show how endogenous regime switches in financial contracts may generate fluctuations in an economy that exhibits no dynamics under full information. Unlike previous models of endogenous cycles, our result does not rely on entrepreneurial net worth being counter-cyclical or inconsequential for determining investment. Secondly, the model shows the different implications of adverse selection as opposed to pure moral hazard. In particular, and contrary to standard results in the macroeconomic literature, the financial system may dampen exogenous shocks in the presence of adverse selection.

Book vs. Fair Value Accounting in Banking, and Intertemporal Smoothing

The aim of this paper is to examine the pros and cons of book and fair value accounting from the perspective of the theory of banking. We consider the implications of the two accounting methods in an overlapping generations environment. As observed by Allen and Gale(1997), in an overlapping generation model, banks have a role as intergenerational connectors as they allow for intertemporal smoothing. Our main result is that when dividends depend on profits, book value ex ante dominates fair value, as it provides better intertemporal smoothing. This is in contrast with the standard view that states that, fair value yields a better allocation as it reflects the real opportunity cost of assets. Banking regulation play an important role by providing the right incentives for banks to smooth intertemporal consumption whereas market discipline improves intratemporal efficiency.

Measurement with Some Theory: a New Approach to Evaluate Business Cycle Models

We propose a method to evaluate cyclical models which does not require knowledge of the DGP and the exact empirical specification of the aggregate decision rules. We derive robust restrictions in a class of models; use some to identify structural shocks and others to evaluate the model or contrast sub-models. The approach has good size and excellent power properties, even in small samples. We show how to examine the validity of a class of models, sort out the relevance of certain frictions, evaluate the importance of an added feature, and indirectly estimate structural parameters.

The Ins and Outs of Unemployment: A Conditional Analysis

We analyze how unemployment, job finding and job separation rates react to neutral and investment-specific technology shocks. Neutral shocks increase unemployment and explain a substantial portion of unemployment volatility; investment-specific shocks expand employment and hours worked and mostly contribute to hours worked volatility. Movements in the job separation rates are responsible for the impact response of unemployment while job finding rates for movements along its adjustment path. Our evidence qualifies the conclusions by Hall (2005) and Shimer (2007) and warns against using search models with exogenous separation rates to analyze the effects of technology shocks.

Structural changes in the US economy: Bad Luck or Bad Policy?

This paper investigates the relationship between time variations in output and inflation dynamics and monetary policy in the US. There are changes in the structural coefficients and in the variance of the structural shocks. The policy rules in the 1970s and 1990s are similar as is the transmission of policy disturbances. Inflation persistence is only partly a monetary phenomena. Variations in the systematic component of policy have limited effects on the dynamics of output and inflation. Results are robust to alterations in the auxiliary assumptions.

Financing Constraints, Irreversibility, and Investment Dynamics

We develop a model of an industry with many heterogeneous firms that face both financing constraints and irreversibility constraints. The financing constraint implies that firms cannot borrow unless the debt is secured by collateral; the irreversibility constraint that they can only sell their fixed capital by selling their business. We use this model to examine the cyclical behavior of aggregate fixed investment, variable capital investment, and output in the presence of persistent idiosyncratic and aggregate shocks. Our model yields three main results. First, the effect of the irreversibility constraint on fixed capital investment is reinforced by the financing constraint. Second, the effect of the financing constraint on variable capital investment is reinforced by the irreversibility constraint. Finally, the interaction between the two constraints is key for explaining why input inventories and material deliveries of US manufacturing firms are so volatile and procyclical, and also why they are highly asymmetrical over the business cycle.

Strategic Delegations in Monetary Unions

In monetary unions, monetary policy is typically made by delegates of the member countries. This procedure raises the possibility of strategic delegation - that countries may choose the types of delegates to influence outcomes in their favor. We show that without commitment in monetary policy, strategic delegation arises if and only if three conditions are met: shocks affecting individual countries are not perfectly correlated, risk-sharing across countries is imperfect, and the Phillips Curve is nonlinear. Moreover, inflation rates are inefficiently high. We argue that ways of solving the commitment problem, including the emphasis on price stability in the agreements constituting the European Union are especially valuable when strategic delegation is a problem.

Cyclical Skill-Biased Technological Change

Over the past two decades, technological progress has been biased towards making skilled labor more productive. The evidence for this finding is based on the persistent parallel increase in the skill premium and the supply of skilled workers. What are the implications of skill-biased technological change for the business cycle? To answer this question, we use the CPS outgoing rotation groups to construct quarterly series for the price and quantity of skill. The unconditional correlation of the skill premium with the cycle is zero. However, using a structural VAR with long run restrictions, we find that technology shocks substantially increase the premium. Investment-specific technology shocks are not skill-biased and our findings suggest that capital and skill are (mildly) substitutable in aggregate production.

Business Cycles, Unemployment Insurance, and the Calibration of Matching Models

This paper points out an empirical puzzle that arises when an RBC economy with a job matching function is used to model unemployment. The standard model can generate sufficiently large cyclical fluctuations in unemployment, or a sufficiently small response of unemployment to labor market policies, but it cannot do both. Variable search and separation, finite UI benefit duration, efficiency wages, and capital all fail to resolve this puzzle. However, both sticky wages and match-specific productivity shocks help the model reproduce the stylized facts: both make the firm's flow of surplus more procyclical, thus making hiring more procyclical too.

Policy and the Evolution of the US Economy: 1948-2002

This paper investigates the relationship between monetary policy and the changes experienced by the US economy using a small scale New-Keynesian model. The model is estimated with Bayesian techniques and the stability of policy parameter estimates and of the transmission of policy shocks examined. The model fits well the data and produces forecasts comparable or superior to those of alternative specifications. The parameters of the policy rule, the variance and the transmission of policy shocks have been remarkably stable. The parameters of the Phillips curve and of the Euler equations are varying.

Credit Constraints, Firms' Precautionary Investment, and the Business Cycle

This paper studies the macroeconomic implications of firms' precautionary investment behavior in response to the anticipation of future financing constraints. Firms increase their demand for liquid and safe investments in order to alleviate future borrowing constraints and decrease the probability of having to forego future profitable investment opportunities. This results in an increase in the share of short-term projects that produces a temporary increase in output, at the expense of lower long-run investment and future output. I show in a calibrated model that this behavior is at the source of a novel and powerful channel of shock transmission of productivity shocks that produces short-run dampening and long-run propagation. Furthermore, it can account for the observed business cycle patterns of the aggregate and firm-level composition of investment.

Downsizing, Job Insecurity, and Firm Reputation

This paper studies how firms make layoff decisions in the presence of adverse shocks. In this uncertain environment, workers' expectations about their job security affect their on-the-job performance. This productivity effect on job insecurity forces firms to strike a balance between laying off redundant workers and maintaining survivors' commitment when deciding on the amount and timing of downsizing. This framework offers an explanation of conservative employment practices (such as zero or reduced layoffs) based on firms having private information about their future profits. High retention rates and wages can signal that the firm has a bright future, boosting workers' confidence. Moreover, the model provides clear predictions about when waves of downsizing will occur as opposed to one-time massive cuts.