Organizational capital and employment fluctuations

In this paper I present a model in which production requires two types of labor inputs: regular productive tasks and organizational capital, which is accumulated by workers performing organizational tasks. By allocating more workers from organizational to productive tasks, firms can temporarily increase production without hiring. The availability of this intensive margin of labor adjustment, in combination with adjustment costs along the extensive margin (search frictions, firing costs, training costs), makes it optimal to delay employment adjustments. Simulations indicate that this mechanism is quantitatively important even if only a small fraction of workers perform organizational tasks, and explains why the hiring rate is persistent and why employment is slow to recover after the end of a recession.

Trade and productivity

We estimate the effect of international trade on average laborproductivity at the country level. Our empirical approach relies onsummary measures of trade that, we argue, are preferable on boththeoretical and empirical grounds to the one conventionally used. Incontrast to the marginally significant and non-robust effects of tradeon productivity found previously, our estimates are highly significantand robust even when we include institutional quality and geographicfactors in the empirical analysis. We also examine the channels throughwhich trade and institutional quality affect average labor productivity.Our finding is that trade works through labor efficiency, whileinstitutional quality works through physical and human capitalaccumulation. We conclude with an exploratory analysis of the role oftrade policies for average labor productivity.

The daily market for funds in Europe: Has something changed with the EMU?

This paper presents evidence that the existence of deposit and lending facilities combined with an averaging provision for the reserve requirement are powerful tools to stabilize the overnight rate. We reach this conclusion by comparing the behavior of this rate in Germany before and after thestart of Stage III of the EMU. The analysis of the German experience is useful because it allows us to isolate the effects on the overnight rate of these particular instruments of monetary policy. To show that this outcome is a general conclusion and not a particular result of the German market, we develop a theoretical model of reserve management which isable to reproduce our empirical findings.

Do institutional changes affect business cycles? Evidence from Europe

We study the effects that the Maastricht treaty, the creation of the ECB, andthe Euro changeover had on the dynamics of European business cycles using a panelVAR and data from ten European countries - seven from the Euro area and threeoutside of it. There are changes in the features of European business cycles and in thetransmission of shocks. They precede the three events of interest and are more linkedto a general process of European convergence and synchronization.

Why are capital flows so much more volatile in emerging than in developed countries?

The standard deviations of capital flows to emerging countries are 80 percent higher than those to developed countries. First, we show that very little of this difference can be explained by more volatile fundamentals or by higher sensitivity to fundamentals. Second, we show that most of the difference in volatility can be accounted for by three characteristics of capital flows: (i) capital flows to emerging countries are more subject to occasional large negative shocks ( crises ) than those to developed countries, (ii) shocks are subject to contagion, and (iii) the most important one shocks to capital flows to emerging countries are more persistent than those to developed countries. Finally, we study a number of country characteristics to determine which are most associated with capital flow volatility. Our results suggest that underdevelopment of domestic financial markets, weak institutions, and low income per capita, are all associated with capital flow volatility.

Multiple filtering devices for the estimation of cyclical DSGE models

We propose a method to estimate time invariant cyclical DSGE models using the informationprovided by a variety of filters. We treat data filtered with alternative procedures as contaminated proxies of the relevant model-based quantities and estimate structural and non-structuralparameters jointly using a signal extraction approach. We employ simulated data to illustratethe properties of the procedure and compare our conclusions with those obtained when just onefilter is used. We revisit the role of money in the transmission of monetary business cycles.

On the sources of the Great Moderation

The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labor productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidencepoints to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behindthe observed changes.

A simple model of multiple equilibria based on risk

This paper shows how risk may aggravate fluctuations in economies with imperfect insurance and multiple assets. A two period job matching model is studied, in which risk averse agents act both as workers and as entrepreneurs. They choose between two types of investment: one type is riskless, while the other is a risky activity that creates jobs.Equilibrium is unique under full insurance. If investment is fully insured but unemployment risk is uninsured, then precautionary saving behavior dampens output fluctuations. However, if both investment and employment are uninsured, then an increase in unemployment gives agents an incentive to shift investment away from the risky asset, further increasing unemployment. This positive feedback may lead to multiple Pareto ranked equilibria. An overlapping generations version of the model may exhibit poverty traps or persistent multiplicity. Greater insurance is doubly beneficial in this context since it can both prevent multiplicity and promote risky investment.

On the timing of balance of payments crises: Disaggregated information and interest rate policy

This paper proposes a dynamic framework to study the timing of balance of paymentscrises. The model incorporates two main ingredients: (i) investors have private information; (ii)investors interact in a dynamic setting, weighing the high returns on domestic assets against the incentives to pull out before the devaluation. The model shows that the presence of disaggregated information delays the onset of BOP crises, giving rise to discrete devaluations. It also shows that high interest rates can be eective in delaying and possibly avoiding the abandonment of the peg. The optimal policy is to raise interest rates sharply as fundamentals become very weak. However, this policy is time inconsistent, suggesting a role for commitment devices such as currency boards or IMF pressure.

Increasing returns, imperfect competition and factor prices

We show how, in general equilibrium models featuring increasing returns, imperfectcompetition and endogenous markups, changes in the scale of economic activity affectincome distribution across factors. Whenever final goods are gross-substitutes (gross-complements), a scale expansion raises (lowers) the relative reward of the scarce factoror the factor used intensively in the sector characterized by a higher degree of product differentiation and higher fixed costs. Under very reasonable hypothesis, our theory suggests that scale is skill-biased. This result provides a microfoundation for the secular increase in the relative demand for skilled labor. Moreover, it constitutes an important link among major explanations for the rise in wage inequality: skill-biased technical change, capital-skill complementarities and international trade. We provide new evidence on the mechanism underlying the skill bias of scale.

The political economy of employment protection

This paper develops a model of job creation and job destruction in agrowing economy with embodied technical progress, that we use toanalyze the political support for employment protection legislationssuch as the ones that are observed in most European countries.We analyze the possibility of Condorcet cycles due to the fact thatworkers about to become unemployed prefer both an increase and areduction in firing costs over the status quo. Despite this problem, we show the existence of local, and sometimes global majority winners.In voting in favour of employment protection, incumbent employeestrade off lower living standards (because employment protectionmaintains workers in less productive activities) against longer job duration. We show that the gains from, and consequently the politicalsupport for employment protection (as defined by maximunjob tenure) are larger, the lower the rate of creative destruction and the largerthe worker's bargaining power. Numerical simulations suggest a hump-shaped response of firing costs to these variables, as well as negative impact of exogeneous turnover on employment protection.

Inflation and output dynamics with firm-owned capital

We model firm-owned capital in a stochastic dynamic New-Keynesian generalequilibrium model à la Calvo. We find that this structure impliesequilibrium dynamics which are quantitatively di¤erent from the onesassociated with a benchmark case where households accumulate capital andrent it to firms. Our findings therefore stress the importance ofmodeling an investment decision at the firm level in addition to ameaningful price setting decision. Along the way we argue that the problemof modeling firm-owned capital with Calvo price-setting has not been solvedin a correct way in the previous literature.

Fiat money, intrinsic properties and government transaction policy

Why do people coordinate on the use of valueless piecesof paper as generally accepted money? A possible answeris that these objects have intrinsic properties that make them better candidates to be used as media of exchange. Another answer stresses the fact that unconvertible fiat money will not easily appear unless there is a centralized institution that favors its use.The main objective of the paper is to analyze these questions. In order to do this, we take a model of commodity money in which fiat money does not play any significant role and modify it to examine under which circumstances fiat money might come to circulate as medium of exchange. Some of the results obtained from the model differ in a rather substantial way from previous related literature.

Neglected risks, financial innovation and financial fragility

We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.

The new Keynesian approach to monetary policy analysis: Lessons and new directions

I discuss several lessons regarding the design and conduct of monetary policy that have emerged out of the New Keynesian research program. Those lessons include the bene.ts of price stability, the gains from commitment about future policies, the importance of nat-ural variables as benchmarks for policy, and the bene.ts of a credible anti-inflationary stance. I also point to one challenge facing NK modelling efforts: the need to come up with relevant sources of policy tradeoffs. A potentially useful approach to meeting that challenge, based on the introduction of real imperfections, is presented.