Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico

This paper shows that introducing weak property rights in the standard real business cycle (RBC) model can help to explain economic fluctuations. This is motivated by the empirical observation that changes in institutions in emerging markets are related to the evolution of the main macroeconomic variables. In particular, in Mexico, the movements in productivity in the data are associated with changes in institutions, so that we can explain productivity shocks to a large extent as shocks to the quality of institutions. We find that the model with shocks to the degree of protection of property rights only - without technology shocks - can match the second moments in the data for Mexico well. In particular, the fit is better than that of the standard neoclassical model with full protection of property rights regarding the auto-correlations and cross-correlations in the data, especially those related to labor. Viewing productivity shocks as shocks to institutions is also consistent with the stylized fact of falling productivity and non-decreasing labor hours in Mexico over 1980-1994, which is a feature that the neoclassical model cannot match.

Financial shocks and the US business cycle

Employing the financial accelerator (FA) model of Bernanke, Gertler and Gilchrist (1999) enhanced to include a shock to the FA mechanism, we construct and study shocks to the efficiency of the financial sector in post-war US business cycles. We find that financial shocks are very tightly linked with the onset of recessions, more so than TFP or monetary shocks. The financial shock invariably remains contractionary for sometime after recessions have ended. The shock accounts for a large part of the variance of GDP and is strongly negatively correlated with the external finance premium. Second-moments comparisons across variants of the model with and without a (stochastic) FA mechanism suggests the stochastic FA model helps us understand the data.

Life-Cycle, Effort and Academic Inactivity

It has been observed that university professors sometimes become less research active in their later years. This paper models the decision to become inactive as a utility maximising problem under conditions of uncertainty and derives an age-dependent activity condition for the level of research productivity. The model implies that professors who are close to retirement age are more likely to become inactive when faced with setbacks in their research while those who continue research do not lower their activity levels. Using data from the University of Iceland, we find support for the model’s predictions. The model suggests that universities should induce their older faculty to remain research active by striving to make their research more productive and enjoyable, maintaining peer pressure, reducing job security and offering higher performance related pay.

Cohort effects within firms, and their implications for labour market outcomes and the business cycle

The project aims to achieve two objectives. First, we are analysing the labour market implications of the assumption that firms cannot pay similarly qualified employees differently according to when they joined the firm. For example, if the general situation for workers improves, a firm that seeks to hire new workers may feel it has to pay more to new hires. However, if the firm must pay the same wage to new hires and incumbents due to equal treatment, it would either have to raise the wage of the incumbents, or offer new workers a lower wage than the firm would do otherwise. This is very different from the standard assumption in economic analysis that firms are free to treat newly hired workers independently of existing hires. Second, we will use detailed data on individual wages to try to gauge whether (and to what extent) equity is a feature of actual labour markets. To investigate this, we are using two matched employer-employee panel datasets, one from Portugal and the other from Brazil. These unique datasets provide objective records on millions of workers and their firms over a long period of time, so that we can identify which firms employ which workers at each time. The datasets also include a large number of firm and worker variables.

The S. pombe cdc16 gene is required both for maintenance of p34cdc2 kinase activity and regulation of septum formation: a link between mitosis and cytokinesis?

In the fission yeast Schizosaccharomyces pombe, septum formation and cytokinesis are dependent upon the initiation, though not the completion of mitosis. A number of cell cycle mutants which show phenotypes consistent with a defect in the regulation of septum formation have been isolated. A mutation in the S. pombe cdc16 gene leads to the formation of multiple septa without cytokinesis, suggesting that the normal mechanisms that limit the cell to the formation of a single septum in each cycle do not operate. Mutations in the S. pombe early septation mutants cdc7, cdc11, cdc14 and cdc15 lead to the formation of elongated, multinucleate cells, as a result of S phase and mitosis continuing in the absence of cytokinesis. This suggests that in these cells, the normal mechanisms which initiate cytokinesis are defective and that they are unable to respond to this by preventing further nuclear cycles. Genetic analysis has implied that the products of some of these genes may interact with that of the cdc16 gene. To understand how the processes of septation and cytokinesis are regulated and coordinated with mitosis we are studying the early septation mutants and cdc16. In this paper, we present the cloning and analysis of the cdc16 gene. Deletion of the gene shows that it is essential for cell proliferation: spores lacking a functional cdc16 gene germinate, complete mitosis and form multiple septa without undergoing cell cleavage.(ABSTRACT TRUNCATED AT 250 WORDS)

The Optimal Distribution of the Tax Burden over the Business Cycle

This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income households. A model incorporating capital-skill complementarity in production and differential access to capital and labour markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We .nd that the tax rate for high income agents is optimally the least volatile and the tax rate for low income agents the least countercyclical. In contrast, the path of optimal taxes for the middle income group is found to be very volatile and counter-cyclical. We further find that the optimal response to output-enhancing capital equipment technology and spending cuts is to increase the progressivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.

Cyclical and Welfare Effects of Public Sector Unions in a Real-Business-Cycle Model

Motivated by the highly-unionized public sectors, the high public shares in total employment, and the public sector wage premia observed in Europe, this paper examines the importance of public sector unions for macroeconomic theory. The model generates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly-unionized public sector, namely Germany during the period 1970-2007. The union model is a signifi cant improvement over a model with exogenous public employment. In addition, endogenously-determined public wage and hours add to the distortionary e ffect of contractionary tax reforms by generating greater tax rate changes, thus producing signi ficantly higher welfare losses.

On the cost of rent-seeking by government bureaucrats in a Real-Business-Cycle framework

This paper studies the wasteful e ffect of bureaucracy on the economy by addressing the link between rent-seeking behavior of government bureaucrats and the public sector wage bill, which is taken to represent the rent component. In particular, public o fficials are modeled as individuals competing for a larger share of those public funds. The rent-seeking extraction technology in the government administration is modeled as in Murphy et al. (1991) and incorporated in an otherwise standard Real-Business-Cycle (RBC) framework with public sector. The model is calibrated to German data for the period 1970-2007. The main fi ndings are: (i) Due to the existence of a signi ficant public sector wage premium and the high public sector employment, a substantial amount of working time is spent rent-seeking, which in turn leads to signifi cant losses in terms of output; (ii) The measures for the rent-seeking cost obtained from the model for the major EU countries are highly-correlated to indices of bureaucratic ineffi ciency; (iii) Under the optimal scal policy regime,steady-state rent-seeking is smaller relative to the exogenous policy case, as the government chooses a higher public wage premium, but sets a much lower public employment, thus achieving a decrease in rent-seeking.

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.

Noncooperative Oligopoly in Markets with a Continuum of Traders: A Limit Theorem µa la Cournot

In this paper, we consider an exchange economy µa la Shitovitz (1973), with atoms and an atomless set. We associate with it a strategic market game of the kind first proposed by Lloyd S. Shapley and known as the Shapley window model. We analyze the relationship between the set of the Cournot-Nash equilibrium allocations of the strategic market game and the Walras equilibrium allocations of the exchange economy with which it is associated. We show, with an example, that even when atoms are countably in¯nite, any Cournot-Nash equilibrium allocation of the game is not a Walras equilibrium of the underlying exchange economy. Accordingly, in the original spirit of Cournot (1838), we par- tially replicate the mixed exchange economy by increasing the number of atoms, without a®ecting the atomless part, and ensuring that the measure space of agents remains finite. We show that any sequence of Cournot-Nash equilibrium allocations of the strategic market games associated with the partially replicated exchange economies approximates a Walras equilibrium allocation of the original exchange economy.

Unemployment and Endogenous Reallocation over the Business Cycle

This paper studies unemployed workers’ decisions to change occupations, and their impact on fluctuations in aggregate unemployment and its underlying duration distribution. We develop an analytically and computationally tractable stochastic equilibrium model with heterogenous labor markets. In this model three different types of unemployment arise: search, rest and reallocation unemployment. We document new evidence on unemployed workers’ gross occupational mobility and use it to calibrate the model. We show that rest unemployment is the main driver of unemployment fluctuations over the business cycle and causes cyclical unemployment to be highly volatile. The resulting unemployment duration distribution generated by the model responds realistically to the business cycle, creating substantial longer-term unemployment in downturns. Finally, rest unemployment also makes our model simultaneously consistent with procyclical occupational mobility of the unemployed, countercyclical job separations into unemployment and a negatively-sloped Beveridge curve.

Directed Search over the Life Cycle

We develop a life-cycle model of the labor market in which different worker-firm matches have different quality and the assignment of the right workers to the right firms is time consuming because of search and learning frictions. The rate at which workers move between unemployment, employment and across different firms is endogenous because search is directed and, hence, workers can choose whether to seek low-wage jobs that are easy to find or high-wage jobs that are hard to find. We calibrate our theory using data on labor market transitions aggregated across workers of different ages. We validate our theory by showing that it predicts quite well the pattern of labor market transitions for workers of different ages. Finally, we use our theory to decompose the age profiles of transition rates, wages and productivity into the effects of age variation in work-life expectancy, human capital and match quality.

Computing Markov-Perfect Optimal Policies in Business-Cycle Models

Time-inconsistency is an essential feature of many policy problems (Kydland and Prescott, 1977). This paper presents and compares three methods for computing Markov-perfect optimal policies in stochastic nonlinear business cycle models. The methods considered include value function iteration, generalized Euler-equations, and parameterized shadow prices. In the context of a business cycle model in which a scal authority chooses government spending and income taxation optimally, while lacking the ability to commit, we show that the solutions obtained using value function iteration and generalized Euler equations are somewhat more accurate than that obtained using parameterized shadow prices. Among these three methods, we show that value function iteration can be applied easily, even to environments that include a risk-sensitive scal authority and/or inequality constraints on government spending. We show that the risk-sensitive scal authority lowers government spending and income-taxation, reducing the disincentive households face to accumulate wealth.

Perinatal care at the limit of viability between 22 and 26 completed weeks of gestation in Switzerland.

Perinatal care of pregnant women at high risk for preterm delivery and of preterm infants born at the limit of viability (22-26 completed weeks of gestation) requires a multidisciplinary approach by an experienced perinatal team. Limited precision in the determination of both gestational age and foetal weight, as well as biological variability may significantly affect the course of action chosen in individual cases. The decisions that must be taken with the pregnant women and on behalf of the preterm infant in this context are complex and have far-reaching consequences. When counselling pregnant women and their partners, neonatologists and obstetricians should provide them with comprehensive information in a sensitive and supportive way to build a basis of trust. The decisions are developed in a continuing dialogue between all parties involved (physicians, midwives, nursing staff and parents) with the principal aim to find solutions that are in the infant's and pregnant woman's best interest. Knowledge of current gestational age-specific mortality and morbidity rates and how they are modified by prenatally known prognostic factors (estimated foetal weight, sex, exposure or nonexposure to antenatal corticosteroids, single or multiple births) as well as the application of accepted ethical principles form the basis for responsible decision-making. Communication between all parties involved plays a central role. The members of the interdisciplinary working group suggest that the care of preterm infants with a gestational age between 22 0/7 and 23 6/7 weeks should generally be limited to palliative care. Obstetric interventions for foetal indications such as Caesarean section delivery are usually not indicated. In selected cases, for example, after 23 weeks of pregnancy have been completed and several of the above mentioned prenatally known prognostic factors are favourable or well informed parents insist on the initiation of life-sustaining therapies, active obstetric interventions for foetal indications and provisional intensive care of the neonate may be reasonable. In preterm infants with a gestational age between 24 0/7 and 24 6/7 weeks, it can be difficult to determine whether the burden of obstetric interventions and neonatal intensive care is justified given the limited chances of success of such a therapy. In such cases, the individual constellation of prenatally known factors which impact on prognosis can be helpful in the decision making process with the parents. In preterm infants with a gestational age between 25 0/7 and 25 6/7 weeks, foetal surveillance, obstetric interventions for foetal indications and neonatal intensive care measures are generally indicated. However, if several prenatally known prognostic factors are unfavourable and the parents agree, primary non-intervention and neonatal palliative care can be considered. All pregnant women with threatening preterm delivery or premature rupture of membranes at the limit of viability must be transferred to a perinatal centre with a level III neonatal intensive care unit no later than 23 0/7 weeks of gestation, unless emergency delivery is indicated. An experienced neonatology team should be involved in all deliveries that take place after 23 0/7 weeks of gestation to help to decide together with the parents if the initiation of intensive care measures appears to be appropriate or if preference should be given to palliative care (i.e., primary non-intervention). In doubtful situations, it can be reasonable to initiate intensive care and to admit the preterm infant to a neonatal intensive care unit (i.e., provisional intensive care). The infant's clinical evolution and additional discussions with the parents will help to clarify whether the life-sustaining therapies should be continued or withdrawn. Life support is continued as long as there is reasonable hope for survival and the infant's burden of intensive care is acceptable. If, on the other hand, the health care team and the parents have to recognise that in the light of a very poor prognosis the burden of the currently used therapies has become disproportionate, intensive care measures are no longer justified and other aspects of care (e.g., relief of pain and suffering) are the new priorities (i.e., redirection of care). If a decision is made to withhold or withdraw life-sustaining therapies, the health care team should focus on comfort care for the dying infant and support for the parents.