Monetary policy misspecification in VAR models

We examine the effects of extracting monetary policy disturbances with semi-structural and structural VARs, using data generated bya limited participation model under partial accommodative and feedback rules. We find that, in general, misspecification is substantial: short run coefficients often have wrong signs; impulse responses and variance decompositions give misleadingrepresentations of the dynamics. Explanations for the results and suggestions for macroeconomic practice are provided.

General preferences for consumption goods in the random matching model of commodity money

This paper generalizes the original random matching model of money byKiyotaki and Wright (1989) (KW) in two aspects: first, the economy ischaracterized by an arbitrary distribution of agents who specialize in producing aparticular consumption good; and second, these agents have preferences suchthat they want to consume any good with some probability. The resultsdepend crucially on the size of the fraction of producers of each goodand the probability with which different agents want to consume eachgood. KW and other related models are shown to be parameterizations ofthis more general one.

Testing calibrated general equilibrium models

This paper illustrates the philosophy which forms the basis of calibrationexercises in general equilibrium macroeconomic models and the details of theprocedure, the advantages and the disadvantages of the approach, with particularreference to the issue of testing ``false'' economic models. We provide anoverview of the most recent simulation--based approaches to the testing problemand compare them to standard econometric methods used to test the fit of non--lineardynamic general equilibrium models. We illustrate how simulation--based techniques can be used to formally evaluate the fit of a calibrated modelto the data and obtain ideas on how to improve the model design using a standardproblem in the international real business cycle literature, i.e. whether amodel with complete financial markets and no restrictions to capital mobility is able to reproduce the second order properties of aggregate savingand aggregate investment in an open economy.

International capital flows and credit market imperfections: A tale of two frictions

The financial crisis of 2007-08 has underscored the importance of adverse selection in financialmarkets. This friction has been mostly neglected by macroeconomic models of financialimperfections, however, which have focused almost exclusively on the effects of limited pledgeability.In this paper, we fill this gap by developing a standard growth model with adverseselection. Our main results are that, by fostering unproductive investment, adverse selection:(i) leads to an increase in the economy s equilibrium interest rate, and; (ii) it generates a negativewedge between the marginal return to investment and the equilibrium interest rate. Underfinancial integration, we show how this translates into excessive capital inflows and endogenouscycles. We also extend our model to the more general case in which adverse selection and limitedpledgeability coexist. We conclude that both frictions complement one another and show thatlimited pledgeability exacerbates the effects of adverse selection.

Financial reforms and capital flows: Insights from general equilibrium

As a result of debt enforcement problems, many high-productivity firms in emergingeconomies are unable to pledge enough future profits to their creditors and this constrains thefinancing they can raise. Many have argued that, by relaxing these credit constraints, reformsthat strengthen enforcement institutions would increase capital flows to emerging economies. Thisargument is based on a partial equilibrium intuition though, which does not take into account theorigin of any additional resources that flow to high-productivity firms after the reforms. We showthat some of these resources do not come from abroad, but instead from domestic low-productivityfirms that are driven out of business as a result of the reforms. Indeed, the resources released bythese low-productivity firms could exceed those absorbed by high-productivity ones so that capitalflows to emerging economies might actually decrease following successful reforms. This resultprovides a new perspective on some recent patterns of capital flows in industrial and emergingeconomies.

Equilibrium asset prices and savings of heterogeneous agents in the presence of incomplete markets and portfolio constraints

We study the quantitative properties of a dynamic general equilibrium model in which agents face both idiosyncratic and aggregate income risk, state-dependent borrowing constraints that bind in some but not all periods and markets are incomplete. Optimal individual consumption-savings plans and equilibrium asset prices are computed under various assumptions about income uncertainty. Then we investigate whether our general equilibrium model with incomplete markets replicates two empirical observations: the high correlation between individual consumption and individual income, and the equity premium puzzle. We find that, when the driving processes are calibrated according to the data from wage income in different sectors of the US economy, the results move in the direction of explaining these observations, but the model falls short of explaining the observed correlations quantitatively. If the incomes of agents are assumed independent of each other, the observations can be explained quantitatively.

Equity considerations in health care: An axiomatic bargaining approach

The general issues of equity and efficiency are placed at the center of the analysis of resource allocation problems in health care. We examine them using axiomatic bargaining theory. We study different solutions that have been proposed and relate them to previous literature on health care allocation. In particular, we focus on the solutions based on axiomatic bargaining with claims and suggest that they may be particularly appealing as distributive criteria in health policy. Finally, we present the results of a survey that tries to elicit moral intuitions of people about resource allocation problems and their different solutions.

Red tape and delayed entry

Does cutting red tape foster entrepreneurship in industries with the potential to expand? We address this question by combining the time needed to comply with government entry procedures in 45 countries with industry-level data on employment growth and growth in the number of establishments during the 1980s. Our main empirical finding is that countries where it takes less time to register new businesses have seen more entry in industries that experienced expansionary global demand and technology shifts. Our estimates take into account that proxying global industry shifts using data from only one country or group of countries with similar entry regulations will in general yield biased results.

International business cycles, financial markets and household production

This paper investigates the properties of an international real business cycle model with household production. We show that a model with disturbances to both market and household technologies reproduces the main regularities of the data and improves existing models in matching international consumption, investment and output correlations without irrealistic assumptions on the structure of international financial markets. Sensitivity analysis shows the robustness of the results to alternative specifications of the stochastic processes for the disturbances and to variations of unmeasured parameters within a reasonable range.

Do institutions and culture matter for business cycles?

We examine the relationship between institutions, culture and cyclical fluctuations for a sampleof 45 European, Middle Eastern and North African countries. Better governance is associated withshorter and less severe contractions and milder expansions. Certain cultural traits, such as lack ofacceptance of power distance and individualism, are also linked business cycle features. Businesscycle synchronization is tightly related to similarities in the institutional environment. Mediterraneancountries conform to these general tendencies.

Notes for a new guide to Keynes (I): Wages, aggregate demand, and employment

I revisit the General Theory's discussion of the role of wages inemployment determination through the lens of the New Keynesianmodel. The analysis points to the key role played by the monetarypolicy rule in shaping the link between wages and employment, andin determining the welfare impact of enhanced wage flexibility. I showthat the latter is not always welfare improving.

Entry regulation and intersectoral reallocation

We study how restrictions on firm entry affect intersectoral factor reallocation when openeconomies experience global economic shocks. In our theoretical framework, countries trade freelyin a range of differentiated sectors that are subject to country-specific and global shocks. Entryrestrictions are modeled as an upper bound on the introduction of new differentiated goods followingshocks. Prices and quantities adjust to clear international goods markets, and wages adjustto clear national labor markets. We show that in general equilibrium, countries with tighter entryrestrictions see less factor reallocation compared to the frictionless benchmark. In our empiricalwork, we compare sectoral employment reallocation across countries in the 1980s and 1990s withproxies for frictionless benchmark reallocation. Our results indicate that the gap between actualand frictionless reallocation is greater in countries where it takes longer to start a firm.

Married to intolerance: Attitudes towards intermarriage in Germany, 1900-2006

Marriage is amongst the biggest decisions in life. In general, there is a tendency towards assortative matching people marry others who are relatively similar to themselves. Intermarriage between different social, religious and ethnic groups in most societies is relatively rare (Blossfeld and Timm 2003). Where it occurs, it is associated with more rapid assimilation (Meng and Gregory 2005). The frequency of intermarriage can therefore serve as a useful indicator of tolerant attitudes towards a minority, and of the desire to integrate (Bisin, Topa, and Verdier 2004).In this paper, we analyze under which conditions intermarriage can be used as an indicator of tolerance, and whether such tolerant attitudes persisted in Germany during the last century. We combine information on individual-level attitudes from the German social survey (GESIS) with historical data on marriage patterns.

International consumption risk sharing

This paper formally examines the implications of international consumptionrisk sharing for a panel of industrialized countries. We theoretically derivethe international consumption insurance proposition in a simple setup and showhow it should be modified in more complicated models. We empirically analyzethe implications of the theory for pairs of countries across frequencies of thespectrum and find that aggregate domestic consumption is almost completelyinsured against idiosyncratic real, demographic, fiscal and monetary shocksover short cycles, but that it covaries with these variables over medium andlong cycles. The cross equation restrictions imposed by the theory are, ingeneral, rejected. The policy implications of the results are discussed.

Competing engines of growth: Innovation and standardization

We study a dynamic general equilibrium model where innovation takes theform of the introduction of new goods whose production requires skilled workers.Innovation is followed by a costly process of standardization, whereby these newgoods are adapted to be produced using unskilled labor. Our framework highlightsa number of novel results. First, standardization is both an engine of growth anda potential barrier to it. As a result, growth is an inverse U-shaped function ofthe standardization rate (and of competition). Second, we characterize the growthand welfare maximizing speed of standardization. We show how optimal protection of intellectual property rights affecting the cost of standardization vary withthe skill-endowment, the elasticity of substitution between goods and other parameters. Third, we show that, depending on how competition between innovatingand standardizing firms is modelled and on parameter values, a new type of multiplicity of equilibria may arise. Finally, we study the implications of our model forthe skill-premium and we illustrate novel reasons for linking North-South trade tointellectual property rights protection.