The Taylor Principle and (In-) Determinacy in a New Keynesian Model with hiring Frictions and Skill Loss

We introduce duration dependent skill decay among the unemployed into a New-Keynesian model with hiring frictions developed by Blanchard/Gali (2008). If the central bank responds only to (current, lagged or expected future) inflation and quarterly skill decay is above a threshold level, determinacy requires a coefficient on inflation smaller than one. The threshold level is plausible with little steady-state hiring and firing ("Continental European Calibration") but implausibly high in the opposite case ("American calibration"). Neither interest rate smoothing nor responding to the output gap helps to restore determinacy if skill decay exceeds the threshold level. However, a modest response to unemployment guarantees determinacy. Moreover, under indeterminacy, both an adverse sunspot shock and an adverse technology shock increase unemployment extremely persistently.

Exchange rate forecasters’ performance: evidence of skill?

This paper sheds new light on a long-standing puzzle in the international finance literature, namely, that exchange rate expectations appear inaccurate and even irrational. We find for a comprehensive dataset that individual forecasters’ performance is skill-based. ‘Superior’ forecasters show consistent ability as their forecasting success holds across currencies. They seem to possess knowledge on the role of fundamentals in explaining exchange rate behavior, as indicated by better interest rate forecasts. Superior forecasters are more experienced than the median forecaster and have fewer personnel responsibilities. Accordingly, foreign exchange markets may function in less puzzling and irrational ways than is often thought.

Both Sides of the Story: Skill-biased Technological Change, Labour Market Frictions, and Endogenous Two-Sided Heterogeneity

This paper presents a stylised framework to examine how skill-biased technological change and labour market frictions affect the relationship between economic expansion and unskilled unemployment. The first part of the analysis focuses on the investment decisions in skill-acquisition and technology adoption activities faced by workers and firms in response to the introduction of an innovative technology. The second part examines how endogenous two-sided heterogeneity in the labour market affects the macroeconomic outcomes in terms of unemployment, technological diffusion, and economic expansion. To conclude, the framework is used to discuss the effects of alternative forms of policy intervention on agents' investment decisions and on the macroeconomic outcomes.

The Impact of Higher Education Institution-Firm Knowledge Links on Firm-level Productivity in Britain

This paper estimates whether both sourcing knowledge from and/or cooperating on innovation with HEIs (Higher Education Institutions)1 impacts on establishment-level total factor productivity (TFP) using a dataset created by merging the UK government’s Community Innovation Survey (CIS) with the Annual Respondents Database (ARD). It also considers whether higher graduate employment (as a measure of human capital) also impacts positively on TFP at the establishment-level. Many studies have investigated the relationship between university-firm knowledge links and innovation (see, for example, Mansfield, 1991; Becker, 2003; Thorn et al, 2007). Most of these studies find a positive impact. Fewer studies have investigated the impact of university-firm knowledge links on productivity. Belderbos et al. (2004), using the Dutch CIS, find that cooperation with universities has no statistically significant impact on the growth of labour productivity. Medda et al. (2005) find no statistically significant effect of collaborative research undertaken by Italian manufacturing firms and universities on the growth of TFP. Arvanitis et al. (2008), using Swiss data, show that university-firm knowledge and technology transfer has both a direct impact on labour productivity and an indirect impact through its positive impact on innovation. In sum, there is as yet no clear consensus as to the impact of university-firm knowledge links on productivity.

The effects of agglomeration on wages: evidence from the micro-level

This paper estimates individual wage equations in order to test two rival non-nested theories of economic agglomeration, namely New Economic Geography (NEG), as represented by the NEG wage equation and urban economic (UE) theory , in which wages relate to employment density. The paper makes an original contribution by evidently being the first empirical paper to examine the issue of agglomeration processes associated with contemporary theory working with micro-level data, highlighting the role of gender and other individual-level characteristics. For male respondents, there is no significant evidence that wage levels are an outcome of the mechanisms suggested by NEG or UE theory, but this is not the case for female respondents. We speculate on the reasons for the gender difference.

Optimal taxation and the skill premium

The stylized facts suggest a negative relationship between tax progressivity and the skill premium from the early 1960s until the early 1990s, and a positive one thereafter. They also generally imply rising tax progressivity, except for the 1980s. In this paper, we ask whether optimal tax policy is consistent with these observations, taking into account the demographic and technological factors that have also affected the skill premium. To this end, we construct a dynamic general equilibrium model in which the skill premium and the progressivity of the tax system are endogenously determined, with the latter being optimally chosen by a benevolent government. We find that optimal policy delivers both a progressive tax system and model predictions which are generally consistent, except for the 1980s, with the stylized facts relating to the skill premium and progressivity. To capture the patterns in the data over the 1980s requires that we adopt a government policy which is biased towards the interests of skilled agents. Thus, in addition to demographic and technological factors, changes in the preferences of policy-makers appear to be a potentially important factor in determining the evolution of the observed skill premium.

Inequalities in Child Mortality in India: A District-Level Analysis

This paper measures the degree of inequality in child mortality rates across districts in India, using data from the 1981, 1991 and 2001 Indian population censuses. The results show that child mortality is more concentrated in less developed districts in all three census years. Further, between 1981 and 2001, the inequality in child mortality seems to have increased to the advantage of the more developed districts (i.e., there was an increasing concentration of child mortality in less developed districts). However, the inequality in female child mortality rates seems to have declined between 1991 and 2001, even as it increased – albeit at a slower rate than before – for male child mortality rates. In the decomposition analysis, it is found that while a more equitable distribution of medical facilities and safe drinking water across districts did contribute towards reducing inequality in child mortality between 1981 and 1991, different levels of structural change among districts were responsible for a very large part of the inequality in child mortality to the advantage of the more developed districts in all three census years. Other variables which played important roles in increasing inequality included a measure of infrastructure development, female literacy, and a social group status variable. The paper concludes with some brief comments on the policy implications of the findings.

Aggregate and welfare effects of long run inflation risk under inflation and price-level targeting

This paper presents a DSGE model in which long run inflation risk matters for social welfare. Aggregate and welfare effects of long run inflation risk are assessed under two monetary regimes: inflation targeting (IT) and price-level targeting (PT). These effects differ because IT implies base-level drift in the price level, while PT makes the price level stationary around a target price path. Under IT, the welfare cost of long run inflation risk is equal to 0.35 percent of aggregate consumption. Under PT, where long run inflation risk is largely eliminated, it is lowered to only 0.01 per cent. There are welfare gains from PT because it raises average consumption for the young and lowers consumption risk substantially for the old. These results are strongly robust to changes in the PT target horizon and fairly robust to imperfect credibility, fiscal policy, and model calibration. While the distributional effects of an unexpected transition to PT are sizeable, they are short-lived and not welfare-reducing.

Human capital, social mobility and the skill premium

This paper develops a dynamic general equilibrium model to highlight the role of human capital accumulation of agents differentiated by skill type in the joint determination of social mobility and the skill premium. We first show that our model captures the empirical co-movement of the skill premium, the relative supply of skilled to unskilled workers and aggregate output in the U.S. data from 1970-2000. We next show that endogenous social mobility and human capital accumulation are key channels through which the effects of capital tax cuts and increases in public spending on both pre- and post-college education are transmitted. In particular, social mobility creates additional incentives for the agents which enhance the beneficial effects of policy reforms. Moreover, the dynamics of human capital accumulation imply that, post reform, the skill premium is higher in the short- to medium-run than in the long-run.

Indexed versus nominal government debt under inflation and price-level targeting

This paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a much better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a better store of value relative to indexed bonds. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. From a policy perspective, a key finding is that accounting for optimal indexation has important welfare implications for comparisons of IT and PT.

Tax smoothing in a business cycle model with capital-skill complementarity

This paper undertakes a normative investigation of the quantitative properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity, endogenous skill formation and stochastic shocks to public consumption as well as total factor and capital equipment productivity. Our main finding is that an empirically relevant restriction which does not allow the relative supply of skilled labour to adjust in response to aggregate shocks, signi cantly changes the cyclical properties of optimal labour taxes. Under a restricted relative skill supply, the government fi nds it optimal to adjust labour income tax rates so that the average net returns to skilled and unskilled labour hours exhibit the same dynamic behaviour as under fl exible skill supply.

Optimal progressive taxation in a model with endogenous skill supply.

This paper examines whether efficiency considerations require that optimal labour income taxation is progressive or regressive in a model with skill heterogeneity, endogenous skill acquisition and a production sector with capital-skill complementarity. We find that wage inequality driven by the resource requirements of skill-creation implies progressive labour income taxation in the steady-state as well as along the transition path from the exogenous to optimal policy steady-state. We find that these results are explained by a lower labour supply elasticity for skilled versus unskilled labour which results from the introduction of the skill acquisition technology.

On the real effects of financial pressure: Evidence from euro area firm-level employment during the recent financial crisis.

Using a large panel of unquoted euro-area firms over the period 2003-11, this paper examines the impact of financial pressure on firms’ employment. The analysis finds evidence that financial pressure negatively affects firms’ employment decisions. This effect is stronger during the 2007-2009 financial crisis, especially for firms in the periphery area compared to their counterparts in the core European economies. We also find that impact of financial pressure on employment is more potent for firms classified as financially constrained and operating in periphery economies during the financial crisis.

Enhancing Interns’ Aspirations towards the Labour Market through Skill-Acquisition: The Second Chance Schools Experience

Second Change School programmes are active in a number of European countries. These schools offer vulnerable young adults an alternative opportunity to enhance their employability skills by alternating education with work experience. People enrolling in these programmes disengaged from schools at an early age. They already experienced or are at-risk to enter into unemployment. This paper examines the impact of the Second Chance Schools on their participants’ aspirations towards the labour market through skill-acquisition. We are able to identify the perception of Second Chance Schools’ interns regarding entry to the professional life. A third of them, for example, consider their attitude or their surroundings as a barrier preventing them from getting a job. However, our results emphasise the role of the interns’ coach in improving their aspirations towards the labour market. We also show that when compared to male interns, female interns have a stronger (positive) perception of the school as a place where they can gain skills.

Education and the local equity bias around the world

Using a panel of 38 economies, over the period 2001 to 2010, we analyse the link between different facets of education and diversification in international portfolios. We find that university education, mathematical numeracy, in addition to financial skill, play an important role in reducing home bias. After separating countries according to their level of financial development, we find that less developed economies with more university graduates, or with higher level of mathematical numeracy, have lower level of local equity bias compared to more developed countries. We also find that the beneficial effect of education is more pronounced during the most recent financial crisis, especially for economies with less developed financial markets.