An Empirical Investigation of Shock Persistence in Economic Time Series*

Whether or not shocks persist has important implications in economics. An empirical study investigates this issue for key Australian and US macroeconomic time series. The existence of persistence is investigated by unit root tests and its magnitude estimated by recently proposed techniques. Results from these different approaches are compared.     

Collective Risk Control and Group Security: The Unexpected Consequences of Differential Risk Aversion

We provide an analysis of odds‐improving self‐protection for when it yields collective benefits to groups, such as alliances of nations, for whom risks of loss are public bads and prevention of loss is a public good. Our analysis of common risk reduction shows how diminishing returns in risk improvement can be folded into income effects. These income effects then imply that whether protection is inferior or normal depends on the risk aversion characteristics of underlying utility functions, and on the interaction between these, the level of risk, and marginal effectiveness of risk abatement. We demonstrate how public good inferiority is highly likely when the good is “group risk reduction.” In fact, we discover a natural or endogenous limit on the size of a group and of the amount of risk controlling outlay it will provide under Nash behavior. We call this limit an “Inferior Goods Barrier” to voluntary risk reduction. For the paradigm case of declining risk aversion, increases in group size(wealth) will cause provision of more safety to change from a normal to an inferior good thereby creating such a barrier.     

LABOUR MARKET FLEXIBILITY AND EMPLOYMENT ADJUSTMENT: MICRO EVIDENCE FROM UK ESTABLISHMENTS

In this paper we study how firms react to demand shocks, examininghow different aspects of flexibility shape their responses.Our main findings are: (i) very few firms choose to adjust pricein response to a demand shock; (ii) firms with more flexibilityare more likely to respond to demand shocks by adjusting employmentand hours. Our results provide a microeconomic explanation forrecent macroeconomic evidence that labour input has become moreclosely aligned to the business cycle.     

Revisiting Real Wage Rigidity

In this paper, we provide empirical evidence that real wage rigidity is not a major cause of unemployment volatility. We argue that there is a disconnect between the theoretical and empirical literatures on this topic. While theoretical studies define real wage rigidity as the response of wages to changes in unemployment following productivity shocks, the empirical literature measures real wage rigidity as the estimated semi-elasticity of wages with respect to unemployment, averaged over all shocks. We show that averaging over shocks gives a biased measure of real wage rigidity, as the impact of other shocks confounds the response to productivity shocks. Our results indicate that the estimated semi-elasticity with respect to productivity shocks is twice as large as the estimated semi-elasticity averaged over all shocks. This implies that one cannot attribute unemployment volatility to real wage rigidity.     

TEST OF THE CONVERGENCE HYPOTHESIS ALLOWING FOR CROSS‐SECTIONAL DEPENDENCE

A large empirical literature has investigated whether per capita output converges around a common trend across national and regional economies. The methods used in this literature assume no cross‐sectional dependence even though it is likely to be present and might be important in practice. Chang has devised a promising method of testing for unit roots in heterogeneous panels with cross‐sectional dependence. We apply her method to test whether convergence takes place across three samples of economies: 15 advanced industrial countries; a broader group of 57 countries; and the 48 contiguous US states. We find evidence of convergence for the 15 advanced industrial economies but no evidence of convergence across either the broad group of countries or the US states.     

Globalization and Uncertainty: Earnings Volatility in Sweden, 1985–2003

Earnings volatility has been linked to economic integration only through contradictory conjectures. We assess globalization’s role by examining volatility trends in manufacturing, private services, and public services. If trade increases uncertainty, volatility trends should differ markedly across industries since manufacturing, in contrast to especially public services, is exposed to international competition. We analyze earnings trajectories in Sweden 1985–2003, a country and period evincing accelerating trade, finding no indications of greater volatility increases in manufacturing.     

STABILIZATION POLICY, LEARNING-BY-DOING, AND ECONOMIC GROWTH

This paper shows that fiscal policy, when used for stabilizationpurposes, can have a positive effect on the economy's growth,on human capital accumulation, and on welfare. We introducestochastic productivity shocks into a model in which productivityis augmented through learning-by-doing If future benefits oflearning-by-doing are not fully internalized by workers, thenrecessions are periods in which opportunities for acquiringexperience are foregone. We identify configurations of disturbancesand other parameters for which a countercyclical policy maximizesgrowth and welfare.