On the Stability of the Excess Sensitivity of Aggregate Consumption Growth in the USA

This paper investigates whether there is time variation in the excess sensitivity of aggregate consumption growth to anticipated aggregate disposable income growth using quarterly US data over the period 1953–2014. Our empirical framework contains the possibility of stickiness in aggregate consumption growth and takes into account measurement error and time aggregation. Our empirical specification is cast into a Bayesian state‐space model and estimated using Markov chain Monte Carlo (MCMC) methods. We use a Bayesian model selection approach to deal with the non‐regular test for the null hypothesis of no time variation in the excess sensitivity parameter. Anticipated disposable income growth is calculated by incorporating an instrumental variables estimation approach into our MCMC algorithm. Our results suggest that the excess sensitivity parameter in the USA is stable at around 0.23 over the entire sample period. Copyright © 2016 John Wiley & Sons, Ltd.     

A mathematical approach to study and forecast racial groups interactions: deterministic modeling and scenario method

Globalization and migratory fluxes are increasing the ethnic and racial diversity within many countries. Therefore, describing social dynamics requires models that are apt to capture multi-groups interactions. Building on the assumption of a relationship between multi-racial dynamics and socioeconomic status (SES), we introduce an aggregate, contextual, and continuous index of SES accounting for measures of income, employment, expected life, and group numerosity. After, taking into account that groups’ SES assumes the form of a logit model, we propose a Lotka–Volterra system to study and forecast the interaction among racial groups. Last, we apply our methodology to describe the racial dynamics in the US society. In particular, we study the kind and the intensity of Asians–Blacks–Natives–Whites interactions in the US between 2002 and 2013. Moreover, we forecast the evolution of groups’ SES and how interracial relations will unfold between 2013 and 2018 and in three alternative stylized scenarios.

     

Adaptive learning and distributional dynamics in an incomplete markets model

Recent research shows that several DSGE models provide a closer fit to the data under adaptive learning. This paper extends this research by introducing adaptive learning in the model of Krusell and Smith (1998) with uninsurable idiosyncratic risks and aggregate uncertainty. A first contribution of this paper establishes that the equilibrium of this framework is stable under least-squares learning. The second contribution consists of showing that bounded rationality enhances the ability of this model to match the distribution of income in the US. Learning increases significantly the Gini coefficients because of the opposite effects on consumption of the capital-rich and of the capital-poor agent. The third contribution is an empirical exercise that shows that learning can account for increases in the income Gini coefficient of up to 25% in a period of 28 years. Overall, these findings suggest that adaptive learning has important distributional repercussions in this class of models.     

A time series analysis of real wages,consumption and asset returns

This paper re-examines whether the time series properties of aggregate consumption, real wages, and asset returns can be explained by a neoclassical model. Previous empirical rejections of the model have suggested that the optimal labour contract model might be appropriate for understanding the time series properties of the real wage rate and consumption. We show that an optimal contract model restricts the long-run relation of the real wage rate and consumption. We exploit this long-run restriction (cointegration restriction) for estimating and testing the model, using Ogaki and Park's (1989) cointegration approach. This long-run restriction involves a parameter that we call the long-run intertemporal elasticity of substitution (IES) for non-durable consumption but does not involve the IES for leisure. This allows us to estimate the long-run IES for non-durable consumption from a cointegrating regression. Tests for the null of cointegration do not reject our model. As a further analysis, our estimates of the long-run IES for non-durable consumption are used to estimate the discount factor and a coefficient of time-nonseparability using Hansen's (1982) Generalized Method of Moments. We form a specification test for our model à la Hausman (1978) from these two steps. This specification test does not reject our model. © 1996 John Wiley & Sons, Ltd.     

Consumption and Aggregate Constraints: International Evidence*

This paper documents that region‐level consumption exhibits excess sensitivity to lagged region‐level income in Italy, Japan, Spain, the UK and West Germany. However, region‐specific consumption exhibits substantially less sensitivity to lagged region‐specific income. Moreover, excess sensitivity is inversely related to standard measures of openness and credit market integration and for most countries, it has decreased over time. These findings are consistent with the results reported by Ostergaard et al. [Journal of Political Economy (2002) Vol. 110, pp. 634–645] for US states and Canadian provinces, and provide empirical support for the hypothesis that closed‐economy constraints may partly be responsible for the excess sensitivity phenomenon in aggregate data.     

A two-sector model with target-return pricing in a stock-flow consistent framework

In this paper, we build a generalized two-sector Kaleckian growth model and explore the dynamics towards long-run positions. The model incorporates conflicting claims of labour and firms over income distribution and endogenous labour-saving technical progress. Adopting a stock-flow consistent framework, our simulation experiments yield the following results. First, the ‘paradox of thrift’ and the ‘paradox of costs’ hold, meaning that lower saving rates generate higher growth rates while higher real wages generate higher profit rates, but the magnitude of the impact depends on the initial status of income distribution and monetary policy. Second, changes in autonomous labour-saving innovations might explain the phenomenon of the ‘New Economy’ of the second half of the 1990s within an alternative framework. Our simulations with a two-sector model retrieve the analytical results achieved with a one-sector Kaleckian model, with the addition of path dependence.     

Commodity and asset demands with and without quantity constraints in the labour market

This paper reformulates the consumer's decision-making problem in a temporary framework with and without quantity constraints in the labour market in such a way as to define a complete demand system which includes consumption, labour and saving. Then, based on American and Canadian data (1948–1980), this extended complete demand system is estimated using a priori theoretical properties. Quantity constraints in the labour market cannot be rejected, and marginal propensities to consume out of labour income are very different from the marginal propensities out of non-labour income. Temporal separability is rejected and Slutsky conditions are preserved.     

Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies

We extend the standard textbook search and matching model by introducing deep habits in consumption. This assumption generates amplification in the response of labour market variables to technology shocks by producing endogenous countercyclical mark-ups. The cyclical fluctuations of vacancies and unemployment in our model can replicate those observed in the US data, with labour market tightness being 20 times more volatile than consumption. Vacancies display a hump-shaped response to technology shocks and the numerical simulations generate an artificial Beveridge curve that is in line with the data. Our model preserves the assumption of fully flexible wages for new hires and the calibration is consistent with the estimated elasticity of unemployment to unemployment benefits. Finally, we show that in contrast to models with exogenous mark-up shocks, the deep habits model does not require an implausible variation in the elasticity of demand to match the volatility of labour market variables, and the cyclical properties of the mark-up are in line with empirical evidence.     

Impact of China's currency valuation and labour cost on the US in a trade and exchange rate model

Ricardian dynamic general equilibrium analyses show that under free trade arrangements a low income country with lower wage cost and large endowment of labour has comparative advantage in trade. Efficiency gains from this enhance economic growth and welfare of households simultaneously in both low income and advanced economies. Theoretical predictions are empirically validated here with structural VAR analysis based on quarterly data over the time period 1995:1 to 2009:1 on China's relative wage cost, interest rate differential, real effective exchange rate (REER), relative GDP and the US current account balance. It is shown how the relative prices of labour, capital and the currency affect the economic activity in China and current account balance in the US. With free capital inflows and outflows and restrictions on labour mobility, comparative advantage of China and the trade deficit of the US will both be minimised if China allows real appreciation of the Yuan and complete adjustment in prices. Higher production cost and prices in China could reduce welfare of Chinese households and the trade imbalance of the US, while higher relative GDP of China lowers the current account balance for the US.     

Simple tests for sample selection bias in censored and discrete choice models

This paper presents two simple tests of sample selection bias for models where the primary equation of interest has a censored or discrete dependent variable. The first test is derived as a conditional moment test and can be implemented in a regression-based framework. The second test is an extension of the testing procedures proposed by Heckman (1979) and Vella (1993) and is a t-test on a constructed variable in an auxiliary equation. The utility of the tests is illustrated in a model determining the receipt of work conditioned nonwage labour income over a subsample of working women.     

Testing the Stochastic Implications of the Permanent Income Hypothesis Using Canadian Provincial Data*

This paper utilizes relatively unexplored Canadian provincial‐level data to investigate an old but still relevant question in macroeconomics as to whether consumption responds to income innovations in a manner consistent with the stochastic implications of the permanent income hypothesis (PIH). The empirical results obtained do not appear to be in accord with the PIH. Instead, consumption's response to income innovations is found to be much weaker than that predicted by PIH; in particular, the response displays an asymmetric pattern in the sense that it is much stronger for negative than positive income innovations. We interpret this evidence of asymmetry as indicative of the presence of liquidity constraints in provincial households.     

Testing the Empirical Relevance of the ‘Saving for a Rainy Day’ Hypothesis in US Metro Areas

The joint implication of the consumption Euler equation and cointegration between income and consumption is that savings predict future income declines, the ‘saving for a rainy day’ hypothesis. The empirical relevance of this hypothesis plays a key role in discussions of fiscal policy multipliers, and it holds under the null that the permanent income hypothesis is true. We find little support for this hypothesis using time series data for the 100 largest US Metropolitan Statistical Areas for the period 1980q1–2015q4. Our approach is to test for cointegration and weak exogeneity between income and consumption, and by exploring the direction of Granger causality between the two time series. We find that income more often predicts consumption and saving than the converse. We also give evidence that house price changes played a role in US income and consumption dynamics, before, during and after the Great Recession.     

Separability and Aggregate Shocks in the Life-cycle Model of Consumption: Evidence from Spain

The purpose of this paper is to test the life-cycle permanent income hypothesis using an unbalanced panel from the Spanish family expenditure survey. Our model accounts for aggregate shocks and non-separability in the Euler equation among consumption goods, contrary to most of the literature in this area. Our results do not indicate excess sensitivity of consumption growth to income.     

Estimating Excess Sensitivity and Habit Persistence in Consumption Using Greenbook Forecasts

In this paper, we revisit the issue of excess sensitivity of consumption to income and address the weak instrument problem that is well documented in this literature. Using quarterly data for the US economy, we first highlight the weak instrument problem by showing that the use of conventional instruments tends to overestimate the share of rule-of-thumb consumers. To address this weak instrument problem, we propose a new instrument for endogenous disposable income growth in the consumption function, namely, the Greenbook forecast of real disposable income growth. We show that this instrument encompasses the information contained in the conventional set of instruments, and is a superior predictor of income growth. We find that using our proposed instrument ameliorates the weak instrument problem and provides a much smaller estimate for the rule-of-thumb consumers. We also extend our empirical framework to allow for habit persistence and provide an estimate for this important parameter of the consumption function. Finally, we use a time-varying specification of consumption function that allows for endogenous regressors, and document a decline in the share of rule-of-thumb consumers and a rise in the habit-persistence parameter in the US over our sample period.     

Disaggregate evidence on the persistence of consumer price inflation

This paper uses disaggregate inflation data spanning all of consumption to examine: (i) the persistence of disaggregate inflation relative to aggregate inflation; (ii) the distribution of persistence across consumption sectors; and (iii) whether persistence has changed. Assuming mean inflation to be unchanged, disaggregate persistence inflation is consistently below aggregate persistence. Taking into account an early 1990s shift in mean inflation identified by break tests yields much lower estimates of both aggregate and disaggregate persistence for 1984–2002. But with the mean break, average disaggregate persistence is actually as great as aggregate inflation persistence. A factor model provides a natural framework for interpreting the relationship between aggregate and disaggregate persistence. Copyright © 2006 John Wiley & Sons, Ltd.     

Labor market search and capital accumulation: Some analytical results

This paper integrates labor market search into an intertemporal utility maximization framework and analytically solves for equilibrium dynamics. The integrated model improves upon a neoclassical model by generating the realistic hump-shaped response of output to a productivity shock and the counterclockwise dynamics of job vacancies and unemployment around the Beveridge curve. In contrast to a standard search model, our model endogenizes agents' reservation wage as the marginal rate of substitution between leisure and consumption, through which agents' intertemporal consumption decision directly affects the labor market behavior. As a result, even a permanent productivity shock generates non-monotonic dynamics in employment.     

Renting vs buying a home: A matter of wealth accumulation or of geographic stability?

I study the housing tenure decision in the context of a spatial life cycle model with uninsurable individual income risk, plausibly calibrated to match key features of the US housing market. I find that the relatively low ownership rate of young households is mainly explained by their high geographic mobility. Downpayment constraints have minor quantitative implications on ownership rates, except for old households. I also find that idiosyncratic earnings uncertainty has a significant impact on homeownership rates. Based on these results, I argue that the long term increase in ownership rates observed over the period 1993–2009 was not necessarily due to mortgage market innovations and the relaxation of downpayment requirements, as is often argued. Instead, it was simply an implication of US demographic evolution, most notably the decline in interstate migration and, less importantly, population ageing. The model predicts that an increase in the income risk (i.e. higher income inequality) has a positive impact on geographical mobility of young households, which means that young homeowners are less affected by the labour market inefficiency associated with homeownership.     

Trade Liberalization and Poverty in Ecuador: A CGE Macro-Microsimulation Analysis

Cross-country analysis of the aggregate growth-poverty link is likely to miss important country-specific detail and possible offsetting forces in the underlying labour market adjustment process. This paper combines a CGE model analysis with a microsimulations approach to analyse the effects of trade liberalization on poverty and income distribution in Ecuador. The CGE model enables us to disentangle the general equilibrium effects of various trade policy scenarios on sector output, employment, factor incomes and household consumption. However, as is typical of CGE models, this analysis only provides distribution results for fairly aggregated groups of workers and a reduced number of representative households. The microsimulations approach adds the full distribution to the analysis and allows simulation of the effects of trade reform on the job status and remuneration of individual workers and thereby on household income distribution and poverty. The macro- microsimulation results indicate that the trade opening in Ecuador induced mild aggregate welfare gains, but rising income inequality due to rising wage differentials between skilled and unskilled workers implies virtually no poverty-reducing effect from trade liberalization.     

Is agglomeration really good for growth? Global efficiency,interregional equity and uneven growth

According to NEG literature, spatial concentration of industrial activities increases growth at the regional and aggregate level without generating regional growth differentials. This view is not supported by the data. We extend the canonical model with an additional sector producing non-tradable goods which benefits from localized knowledge spillovers coming from the R&D performing industrial sector. This view, motivated by the evidence, generates both an anti-growth and a pro-growth effect of agglomeration for both the deindustrializing and the industrializing regions and leads to two novel results: (1) when agglomeration takes place, growth is lower in the periphery; (2) agglomeration may have a negative effect on the growth rate of real income, both at the regional and at the aggregate level. Our conclusions have relevant policy implications: contrary to the standard view, current EU and US regional policies favouring industrial dispersion might be welfare-improving both at the regional and the aggregate level and may reduce regional income disparities.     

A structural model of US aggregate job flows

This paper contributes to the analysis of jobs flows dynamics through the explicit modelling of job creations and job destructions. We propose a simple matching model extended for endogenous separation and tractable heterogeneity. The parameters of the model are estimated using a simulation‐based estimation method. We then test the ability of trade externalities, generated by the matching process, to (i) propagate reallocation and aggregate disturbances in the whole labor market and (ii) generate the observed distribution of aggregate job flows. The results clearly indicate that the model is able to match the dynamics of US aggregate job flows. Copyright © 2002 John Wiley & Sons, Ltd.