Unemployment compensation and aggregate fluctuations

This paper focuses on a theoretical and empirical analysis of the effects of discretionary changes of unemployment compensation payments on aggregate fluctuations. By means of a dynamic stochastic general equilibrium model, it is shown that unemployment compensation can stabilize consumption on the one hand; however, on the other one, it has adverse effects on unemployment and output. These theoretical results are confirmed by the empirical structural vector autoregressive model. Moreover, the results highlight the importance of real wages in transmitting unemployment benefit shocks on to the macroeconomy. In particular, discretionary changes lead to an increase in real wages, unemployment and consumption while inducing a small decline in output.     

Underground economy and aggregate fluctuations

This paper explores the role of underground economic activities as an explanation of differences in registered aggregate fluctuations. In order to do so, we introduce an underground economy sector in an otherwise standard Real Business Cycle model and calibrate it to the USA economy. We find that, at low frequencies, Europe fluctuates more than the USA, while its participation rate is smaller. The existence of underground activities rationalizes the negative relationship between participation rates and fluctuations of registered output. Our model accounts for 44.3% of the differences in aggregate fluctuations between the USA and European economies. Finally, the model generates implied sizes of the underground economy of 3.2% and 7% of the American and European output, respectively, which are in the range of those found in the empirical literature.     

A note on the statistical properties of aggregate q measures

Many different measures of Tobin's q have been proposed which differ in measurement methods and data sources. This paper evaluates the similarities and differences in the statistical properties of the different measures using ARIMA and factor analysis methods. The statistical properties of average and marginal q measures are found to be quite different.     

Learning,capital-embodied technology and aggregate fluctuations

Recent cyclical episodes in the U.S. and G-7 economies are asymmetric: recoveries and expansions tend to be long and gradual and busts tend to be short and sharp. A large body of work views the two recent cyclical U.S. episodes, namely, the “new economy” boom in the late 1990s, and the 2000s housing boom-bust as episodes where over-optimistic beliefs have played a significant role. These episodes have revived interest in expectations driven business cycles models. However, previous work in this area has not addressed the important asymmetry feature of business cycles. This paper takes a step towards addressing this limitation of expectations driven business cycle models. We propose a generalization of the Greenwood et al. (1988) model with vintage capital and learning about capital embodied productivity and show it can deliver fluctuations that are asymmetric as in the U.S. data. Learning, calibrated to match the procyclical forecast precision from the Survey of Professional Forecasters, is crucial for the model?s ability to generate asymmetries. Forecast errors generated by the model are shown to trigger recessions that mimic in magnitude, duration and depth the typical post WW II U.S. recession.     

Asset price fluctuations without aggregate shocks

We analyze the pricing of a productive asset in a class of dynamic exchange economies with heterogeneous, infinitely-lived agents, and self-enforcing intertemporal trades. Individual incomes fluctuate and are correlated; preferences, dividends and aggregate income are fixed. Almost all economies in this class have a unique stationary Markovian equilibrium with fluctuations in asset prices. As the set of unrationed households changes over time and states, excess demand functions shift, asset returns fluctuate, and some households are shut out of asset markets. Examples suggest that the amplitude of these movements is negatively correlated with the productivity of the asset and with the penalty for default.     

The tradeoff between social insurance and aggregate fluctuations

Government programs that insure individuals against idiosyncratic risks, such as unemployment insurance, attempt to offset shocks that are obscured by behavioral variables. The resultant moral hazard reduces the efficiency of the insurance. When this feature is examined in a dynamic setting, the variance and duration of aggregate income fluctuations may be intensified by insurance.     

Uninsured idiosyncratic risk, liquidity constraints and aggregate fluctuations

Summary. I study the role played by uninsured idiosyncratic risk and liquidity constraints in the propagation of aggregate fluctuations. To this purpose, I compare the aggregate fluctuations of two model economies that differ in their insurance technologies only. In one of these model economies liquidity constrained households vary their holdings of a nominally denominated asset in order to buffer an uninsured idiosyncratic shock to their individual production opportunities. In the other economy every idiosyncratic component of risk can be costlessly insured. I find that the limited insurance technology implies fluctuations in output that are 20% larger, fluctuations in hours relative to output that are 9% larger, fluctuations in consumption relative to output that are 18% smaller, and a correlation of hours and productivity that is 15% smaller than those that obtain under the full insurance technology. Received: March 6, 1996; revised version August 15, 1996     

Sovereign risk,interbank freezes,and aggregate fluctuations

This paper shows how spillovers from sovereign risk to banks׳ access to wholesale funding establish a bank-sovereign nexus. In a dynamic stochastic general equilibrium set-up, heterogeneous banks give rise to an interbank market where government bonds are used as collateral. Government borrowing under limited commitment is costly ex ante as bank funding conditions tighten when the quality of collateral drops. These spillovers, by impeding interbank intermediation, lower the penalty from defaulting due to an interbank freeze during a recession and propagate aggregate shocks to the macroeconomy. The model is calibrated using Greek data and is capable of reproducing stylized facts from the European sovereign debt crisis. In an application, we show that the ECB׳s non-standard financing operations mitigate the adverse feedback mechanism.     

A note on aggregation of CES-type production functions

In this note we shall be concerned with the aggregation of the constant elasticity of substitution (CES) type of production function. In particular we will derive the error made by using the arithmetic averages as they are usually published, rather than the theoretically required averages.     

Investment rates and the aggregate production function

In this paper we consider a simple version of the neoclassical growth model, and carry out an empirical analysis of the main determinants of aggregate investment across countries. The neoclassical growth model predicts that aggregate investment may be influenced by income growth, the capital income share, the relative price of capital, taxes, and other market distortions. We check these investment patterns for both OECD and non-OECD countries. We also decompose investment data into equipment and structures, and explore major factors affecting their relative prices. These empirical exercises shed light into the shape of the neoclassical production function.     

An expository note on individual risk without aggregate uncertainty

In economies where agents bear some risk, the analysis would often be facilitated by the assumption that the risks are i.i.d. and disappear in the aggregate. A formal appeal to the law of large numbers requires the consideration of a sequence of finite economies. In an economy with a continuum of agents there are countable families of sets for which it is impossible for a law of large numbers to be valid. With countably many agents and a finitely additive measure, independence is compatible with the law of large numbers.     

Heterogeneous productivity shocks,elasticity of substitution and aggregate fluctuations

We use a Dixit-Stiglitz setting to show that aggregate productivity fluctuations can be generated through changes in the dispersion of firms’ productivity. When the elasticity of substitution among goods is larger than one, an increase in the dispersion raises aggregate productivity because firms at the top of the distribution produce most of output. When the elasticity is smaller than one, an increase in the dispersion reduces aggregate productivity because firms at the bottom of the distribution use most of inputs. We use individual firm level data from Spanish manufacturing firms to test the relationship between the dispersion of firms’ productivity and aggregate productivity. The estimated coefficients are consistent with the predictions of the model: we find that an increase in the coefficient of variation of firms productivity of 1% increases aggregate productivity by 0.16% in sectors with an elasticity of substitution larger than one while the same increase in the standard deviation reduces aggregate productivity by 0.36% in sectors with an elasticity of substitution smaller than one.     

Labor market institutions and aggregate fluctuations in a search and matching model

This paper explores the influence of labor market institutions on aggregate fluctuations. It uses a dynamic, stochastic, general equilibrium model characterized by search and matching frictions in the labor market and nominal rigidities in the goods market. It finds that firing costs and unemployment benefits can have substantial effects on aggregate fluctuations. Increasing firing costs decreases the volatility of output, employment, and job flows due to the reduction in the mass of jobs sensitive to disturbances and lower incentives for firms to hire and fire workers. Hence, firms adjust to shocks mainly through prices, causing inflation to become more volatile. Raising unemployment benefits has the reverse effect on aggregate fluctuations.     

The impact of technical change on the aggregate production function

This study endeavours to look at both disembodied technical progress and embodied technical progress in the capital stock and in the labour force in the United States over the period 1947–80. The results suggest that disembodied technical progress has been about 3% per year, embodied technical progress in the capital stock is approximately 3–4% per year and educational attainment significantly enhances labour productivity. Finally, when the issue of structural stability of the underlying production relationship is addressed, the period 1971–80 gives rise to some inconsistency.     

Multinational production,exports and aggregate productivity

This paper presents and estimates a dynamic model of multinational production (MP) and exports with heterogeneous firms. The model highlights the interaction between firms' location and export decisions and their effect on aggregate productivity. The model is structurally estimated using firm-level Indonesian manufacturing data. The results are broadly consistent with the pattern of productivity, exports and MP across firms. Counterfactual experiments suggest that there are substantial productivity gains due to international trade and MP. The implied changes in steady state real wages, however, are relatively small. The experiments emphasize that the nature of firm-level trade and MP interactions are crucial to determining the aggregate effects of trade and foreign direct investment policy.     

A multivariate time series analysis of the United States aggregate production function

This study examines the effects of hours of work per unit of private sector capital, the relative price of energy, government capital per unit of private sector capital, and inflation on private sector output per unit of capital in the U.S. over the period 1952–90. A small vector autoregressive model that comprises the variables typically employed in single-equation estimates of the aggregate production function is used. Variance decompositions and cumulative impulse response functions indicate that hours of work per unit of private sector capital, the relative price of energy, and the inflation rate have significant effects on private sector output per unit of capital over the 1952–90 period. However, there is no evidence of a significant effect for government capital per unit of private capital. An historical decomposition that begins in 1973 with the emergence of a “productivity slump” and continues through 1990 indicates that shocks to hours of work per unit of capital, the relative price of oil, and inflation appear important in explaining output per unit of capital but shocks to government capital are not important.     

On the aggregate production function and its presence in modern macroeconomics

The aim of this article is to assess some possible consequences on modern macroeconomics following by the acceptance of the neo-classical paradigm in its representation of productive processes through the aggregate production function. In the first part of the paper we will reconsider the analytical meaninf of the aggregate production function, and in particular of its'hidden’ elements in order to remind the reader of their evident, albeit silenced limitation. In the second part we will recal that profound traces of this obsolete paradigm are well present in modern macoreconomics, where the aggregate production function is still an unavoidable tool, and we will argue that damaging consequences arise in some of the major macroeconomic fields, like growth and cyclical fluctuations.     

Increasing returns and aggregate production efficiency by a monopoly

This paper considers an economy where there are many firms with increasing-returns-to-scale technologies and attempts to derive sufficient conditions ensuring that monopoly achieves aggregate production efficiency. In a setting of one output and many inputs, we obtain such sufficient conditions which can be interpreted as a nondecreasing generalized average productivity of inputs for each firm. We also show that a special class of generalized Cobb-Douglas production functions has such a property that monopoly always achieves aggregate production efficiency.     

Employment fluctuations and dynamics of the aggregate average wage in Poland, 1996–20031

The aggregate average wage is often used as an indicator of economic performance and welfare, and as such often serves as a benchmark for changes in the generosity of public transfers and for wage negotiations. Yet if economies experience a high degree of (non‐random) fluctuation in employment, the composition of the employed population will have a considerable effect on the computed average. In this paper we demonstrate the extent of this problem using data for Poland for the period 1996–2003. During these years the employment rate in Poland fell from 51.2 percent to 44.2 percent and most of this fall occurred between the end of 1998 and the end of 2002. We show that about a quarter of the growth in the average wage during this period could be attributed purely to changes in employment.