Aggregate consequences of limited contract enforceability

We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market.

Sectoral Price Rigidity and Aggregate Dynamics

In this paper, we study the macroeconomic implications of sectoral heterogeneity and, in particular, heterogeneity in price setting, through the lens of a highly disaggregated multi-sector model. The model incorporates several realistic features and is estimated using a mix of aggregate and sectoral U.S. data. The frequencies of price changes implied by our estimates are remarkably consistent with those reported in micro-based studies, especially for non-sale prices. The model is used to study (i) the contribution of sectoral characteristics to the observed cross sectional heterogeneity in sectoral output and inflation responses to a monetary policy shock, (ii) the implications of sectoral price rigidity for aggregate output and inflation dynamics and for cost pass-through, and (iii) the role of sectoral shocks in explaining sectoral prices and quantities.

Dos clássicos aos hereges : Keynes e a economia de seu tempo

O artigo trata da posição teórica de Keynes relativamente à economia clássica e à abordagem denominada herética. A primeira seção resgata os traços distintivos das escolas clássica e neoclássica segundo a demarcação proposta por Keynes, bem como as críticas por ele dirigidas às principais teses defendidas por essas linhagens teóricas. A seguir, retoma-se a sua avaliação dos argumentos subconsumistas, indicando-se os seus pontos de convergência e distanciamento dessa visão econômica. Na continuação, apresentam-se as interpretações neoclássicas ao problema da demanda, comentando-se a relação da obra de Keynes com a tradição marshalliana. A última seção avalia a teoria neoclássica do produto real sob condições cíclicas e introduz a versão de Keynes para o equilíbrio agregado definido pelas propensões a gastar e a investir, além de indicar o componente de fragilidade da leitura marshalliana de sua estrutura teórica. Por fim, comenta-se a contribuição de Keynes ao conhecimento econômico da época perante a escola clássica e os hereges.

Hysteresis in the fundamentals of macroeconomics

Two fundamental problems in economic analysis concern the deter mination of aggregate output, and the determination of market prices and quantities. The way economic adjustments are made at the micro level suggests that the history of shocks to the economic environment matters. This paper presents tractable approach for introducing hysteresis into models of how aggregate output and market prices and quantities are determined.

Subsidies as Optimal Fiscal Stimuli

In the theoretical macroeconomics literature, fiscal policy is almost uniformly taken to mean taxing and spending by a ‘benevolent government’ that exploits the potential aggregate demand externalities inherent in the imperfectly competitive nature of goods markets. Whilst shown to raise aggregate output and employment, these policies crowd-out private consumption and hence typically reduce welfare. In this paper we consider the use of ‘tax-and-subsidise’ instead of ‘taxand- spend’ policies on account of their widespread use by governments, even in the recent recession, to stimulate economic activity. Within a static general equilibrium macro-model with imperfectly competitive good markets we examine the effect of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximise welfare, rendering no intervention as a suboptimal state. We also show that, within a two-country setting, a Nash non-cooperative symmetric equilibrium with positive tax and subsidy rates exists, and that cooperation between trading partners in setting these rates is more expansionary and leads to an improvement upon the non-cooperative solution.

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.

Money Cycles

Operating overheads are widespread and lead to concentrated bursts of activity. To transfer resources between active and idle spells, agents demand financial assets. Futures contracts and lotteries are unsuitable, as they have substantial overheads of their own.We show that money – under efficient monetary policy – is a liquid asset that leads to efficient allocations. Under all other policies, agents follow inefficient “money cycle” patterns of saving, activity, and inactivity. Agents spend their money too quickly – a “hot potato effect of inflation”. We show that inflation can stimulate inefficiently high aggregate output.

Leontief versus Ghosh: two faces of the same coin

In this paper we explore the sectoral and aggregate implications of some endogeneization rules (i.e. on value-added and final demand) which have been common in the Leontief model and have been recently proposed in the Ghosh model. We detect that these rules may give rise in both models to some allegedly pathological behavior in the sense that sectoral or aggregate output, very often, may not follow the logical and economically expected direct relationship with some underlying endogenous variables—namely, output and value-added in the Ghosh model and output and consumption in the Leontief model. Because of the common mathematical structure, whatever is or seems to be pathological in the Ghosh model also has a symmetric counterpart in the Leontief model. These would not be good news for the inner consistency of these linear models. To avoid such possible inconsistencies, we propose new and simple endogeneization rules that have a sound economic interpretation.

Economies of Feedlot Scale, Biosecurity, Investment, and Endemic Livestock Disease, September 2006

Infectious livestock disease creates externalities for proximate animal production enterprises. The distribution of production scale within a region should influence and be influenced by these disease externalities. Taking the distribution of the unit costs of stocking an animal as primitive, we show that an increase in the variance of these unit costs reduces consumer surplus. The effect on producer surplus, total surplus, and animal concentration across feedlots depends on the demand elasticity. A subsidy to smaller herds can reduce social welfare and immiserize the farm sector by increasing the extent of disease. While Nash behavior involves excessive stocking, disease effects can be such that aggregate output declines relative to first-best. Disease externalities can induce more adoption of a cost-reducing technology by larger herds so that animals become more concentrated across herds. For strategic reasons, excess overall adoption of the innovation may occur. Larger herds are also more likely to adopt biosecurity innovations, explaining why larger herds may be less diseased in equilibrium.

Essays in theoretical and applied macroeconomics

Cette thèse s’articule autour de trois chapitres indépendants qui s’inscrivent dans les champs de la macroéconomie, de l’économie monétaire et de la finance internationale. Dans le premier chapitre, je construis un modèle néo-keynesien d’équilibre général sous incertitude pour examiner les implications de la production domestique des ménages pour la politique monétaire. Le modèle proposé permet de reconcilier deux faits empiriques majeurs: la forte sensibilité du produit intérieur brut aux chocs monétaires (obtenue à partir des modèles VAR), et le faible degré de rigidité nominale observé dans les micro-données. Le deuxième chapitre étudie le role de la transformation structurelle (réallocation de la main d’oeuvre entre secteurs) sur la volatilité de la production aggregée dans un panel de pays. Le troisième chapitre quant à lui met en exergue l’importance de la cartographie des échanges commerciaux pour le choix entre un régime de change fixe et l’arrimage à un panier de devises. "Household Production, Services and Monetary Policy" (Chapitre 1) part de l’observation selon laquelle les ménages peuvent produire à domicile des substituts aux services marchands, contrairement aux biens non durables qu’ils acquièrent presque exclusivement sur le marché. Dans ce contexte, ils procèdent à d’importants arbitrages entre produire les services à domicile ou les acquerir sur le marché, dépendamment des changements dans leur revenu. Pour examiner les implications de tels arbitrages (qui s’avèrent être importants dans les micro-données) le secteur domestique est introduit dans un modèle néo-keyenesien d’équilibre général sous incertitude à deux secteurs (le secteur des biens non durables et le secteur des services) autrement standard. Je montre que les firmes du secteur des services sont moins enclin à changer leurs prix du fait que les ménages ont l’option de produire soit même des services substituts. Ceci se traduit par la présence d’un terme endogène supplémentaire qui déplace la courbe de Phillips dans ce secteur. Ce terme croit avec le degré de substituabilité qui existe entre les services produits à domicile et ceux acquis sur le marché. Cet accroissement de la rigidité nominale amplifie la sensibilité de la production réelle aux chocs monétaires, notamment dans le secteur des services, ce qui est compatible avec l’évidence VAR selon laquelle les services de consommation sont plus sensibles aux variations de taux d’intérêt que les biens non durables. "Structural Transformation and the Volatility of Aggregate Output: A Cross-country Analysis" (Chapitre 2) est basée sur l’évidence empirique d’une relation négative entre la part de la main d’oeuvre allouée au secteur des services et la volatilité de la production aggrégée, même lorsque je contrôle pour les facteurs tels que le développement du secteur financier. Ce resultat aggregé est la conséquence des développements sectoriels: la productivité de la main d’oeuvre est beaucoup plus volatile dans l’agriculture et les industries manufacturières que dans les services. La production aggregée deviendrait donc mécaniquement moins volatile au fur et à mesure que la main d’oeuvre se déplace de l’agriculture et de la manufacture vers les services. Pour évaluer cette hypothèse, je calibre un modèle de transformation structurelle à l’économie américaine, que j’utilise ensuite pour générer l’allocation sectorielle de la main d’oeuvre dans l’agriculture, l’industrie et les services pour les autres pays de l’OCDE. Dans une analyse contre-factuelle, le modèle est utlisé pour restreindre la mobilité de la main d’oeuvre entre secteurs de façon endogène. Les calculs montrent alors que le déplacement de la main d’oeuvre vers le secteur des services réduit en effet la volatilité de la production aggregée. "Exchange Rate Volatility under Alternative Peg Regimes: Do Trade Patterns Matter?" (Chapitre 3) est une contribution à la litterature économique qui s’interesse au choix entre divers regimes de change. J’utilise les données mensuelles de taux de change bilatéraux et de commerce extérieur entre 1980 et 2010 pour les pays membre de l’Union Economique et Monétaire Ouest Africaine (UEMOA). La monnaie de ces pays (le franc CFA) est arrimée au franc Francais depuis le milieu des années 40 et à l’euro depuis son introduction en 1999. Au moment de l’arrimage initial, la France était le principal partenaire commercial des pays de l’UEMOA. Depuis lors, et plus encore au cours des dix dernières années, la cartographie des échanges de l’union a significativement changé en faveur des pays du groupe des BICs, notamment la Chine. Je montre dans ce chapitre que l’arrimage à un panier de devises aurait induit une volatilité moins pronnoncée du taux de change effectif nominal du franc CFA au cours de la décennie écoulée, comparé à la parité fixe actuelle. Ce chapitre, cependant, n’aborde pas la question de taux de change optimal pour les pays de l’UEMOA, un aspect qui serait intéressant pour une recherche future.

Revenue-neutral tax policies under price uncertainty: reply

In their comment on my 1990 article, Yeh, Suwanakul, and Mai extend my analysis-which focused attention exclusively on firm output-to allow for simultaneous endogeneity of price, aggregate output, and numbers of firms. They show that, with downward- sloping demand, industry output adjusts positively to revenue-neutral changes in the marginal rate of taxation. This result is significant for two reasons. First, we are more often interested in predictions about aggregate phenomena than we are in predictions about individual firms. Indeed, firm-level predictions are frequently irrefutable since firm data are often unavailable. Second, the authors derive their result under a set of conditions that appear to be more general than those invoked in my 1990 article. In particular, they circumvent the need to invoke specific assumptions about the nature of firms' aversions toward risk. I consider this a useful extension and I appreciate the careful scrutiny of my paper.

Admissible conjectures and consistent conjectures

Firms' conjectures are consistent if their ex post behavior rationalizes their ex ante beliefs. Admissible conjectures are those that satisfy the necessary conditions for consistency. Competition is inadmissible unless aggregate output is stationary. Relaxing this restriction, admissibility eliminates Cournot behavior and constrains conduct to be collusive

Profit sharing with heterogeneous entrepreneurial prowess

This paper analyzes the impact of profit sharing on the incentives that individuals face to set up their own business. It presents a model of capital accumulation in which individuals are equally skilled to be workers but differ in their abilities to manage a firm Given an exogenous profit sharing parameter, an individual chooses whether to be an employer or an employee in order to maximize his net income. It is shown that profit sharing can inhibit entrepreneurial initiatives, reducing the number of firms in operation, the aggregate output and the economy's long run capital stock.

Mandatory profit sharing, entrepreneurial incentives and capital accumulation

The impact of a mandatory tax on profits which is transferred to workers is analyzed in a general equilibrium entrepreneurial model. In the short run, this distortion reduces the number of firms and the aggregate output. In the long run, if capital and labor are bad substitutes, it fosters capital accumulation and increases the aggregate output. In a small open economy with free movement of capital, it improves the welfare of the economy's average individual. One concludes that the benefits of sharing schemes may go beyond the short run employment-stabilization goal focused by the profit sharing literature.

Oligopolistic competition under knightian uncertainty

This artic/e applies a theorem of Nash equilibrium under uncertainty (Dow & Werlang, 1994) to the classic Coumot model of oligopolistic competition. It shows, in particular, how one can map all Coumot equilibrium (which includes the monopoly and the null solutions) with only a function of uncertainty aversion coefficients of producers. The effect of variations in these parameters over the equilibrium quantities are studied, also assuming exogenous increases in the number of matching firms in the game. The Cournot solutions under uncertainty are compared with the monopolistic one. It shows principally that there is an uncertainty aversion level in the industry such that every aversion coefficient beyond it induces firms to produce an aggregate output smaller than the monopoly output. At the end of the artic/e equilibrium solutions are specialized for Linear Demand and for Coumot duopoly. Equilibrium analysis in the symmetric case allows to identify the uncertainty aversion coefficient for the whole industry as a proportional lack of information cost which would be conveyed by market price in the perfect competition case (Lerner Index).