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Abstract: One of the most important labor market developments of the last century was the sustained trend toward earlier retirement among American men. This trend came to at least a temporary halt in the mid-1980s. Since then, male participation rates at older ages have stabilized or even increased slightly, while older women's participation rates have begun rising dramatically. The dominant factor driving the trend toward earlier male retirement was a long-term increase in economic wealth, which permitted workers to enjoy rising living standards even as they spent a growing percentage of their lives outside the workforce. The expansion of Social Security and of employer-sponsored pension plans, and the introduction of mandatory retirement rules, also encouraged earlier retirement over much of the last century. In recent years, many public policies and private institutions that encourage early retirement have been modified. Mandatory retirement was outlawed in most jobs. Social Security is no longer growing more generous, and coverage under company pension plans is no longer rising. In addition, both Social Security and private pensions have become more "age neutral," meaning that they provide either weaker incentives or no incentives to retire at particular ages, such as age 62 or age 65. Finally, the scheduled rise in Social Security's normal retirement age over the next two decades will encourage later retirements, at least modestly. An open question is whether further changes are needed. Given that labor force growth is slowing and Americans are enjoying longer and healthier lives, efforts to encourage people to work longer could have important benefits both for individuals and for the national economy. On the other hand, rising labor productivity, increased work effort, and more saving during the pre-retirement years could allow Americans to enjoy higher living standards even if they choose to spend more years in retirement. If opinion polls are to be believed, most workers favor preserving options for early retirement, even if it means heavier contributions to the retirement system during their working careers.
Abstract: One commonly held view about the difference between continental European countries and other OECD economies, especially the United States, is that the heavy regulation of the former reduces their growth. Using newly assembled data on regulation in several sectors of many OECD countries, we provide substantial and robust evidence that various measures of regulation in the product markets, concerning in particular entry barriers, are negatively related to investment. The policy implication of our analysis is clear: regulatory reforms that liberalize entry are very likely to spur investment.
Abstract: The paper examines the formation of free trade agreements (FTAs) as a network formation game. We consider a general n-country model in which (possibly asymmetric) countries trade differentiated industrial commodities as well as a numeraire good. We show that if all countries are symmetric, the complete FTA network is pairwise stable and it is the unique stable network if industrial commodities are not highly substitutable. We also compare FTAs and customs unions (CUs) as to which of these two regimes facilitates global trade liberalization, emphasizing the fact that unlike in the case of a CU, each signatory of an FTA can have a new FTA without consent of other member countries.
Abstract: The paper presents a model that analyses the role of cultural differences in international trade. The decision to study foreign cultures and languages is incorporated into a simple trade model, which captures some basic properties of cultural and language barriers. First, cultural costs differ from physical ones in that they can be eliminated by learning. Second, learning a language has economies of scale, thus smaller countries tend to invest more into learning. Third, learning decisions within one country impose an externality on trading partners, since learning by one party makes communication easier also for the other one. This implies that learning decisions are in general inefficient, and the paper derives the connection between the equilibrium and optimal outcomes. Finally, because of the substitutability of learning among countries, a policy where a country discourages learning - "cultural protectionism" - can be rationalized. Under certain conditions, such a policy can improve global welfare, not just that of the protecting country.
Abstract: The paper analyzes the population dynamics of a country that has two ethnic groups, a minority and a majority. Minority members can choose whether or not to assimilate into the majority. If the minority is small, the long-run outcome is full assimilation. When the minority is large, the unique long-run equilibrium is the initial situation. For intermediate minority sizes multiple equilibria are possible, including the full- and no-assimilation ones. The paper also solves the social planner's problem, which indicates that the country can end up in an inefficient steady state. Even if the steady state is the optimal one, the equilibrium path will be suboptimal. Two extensions to the basic model are considered. The first one allows for a comparison between a multicultural and a "melting pot" society. The second one introduces population growth and studies the interplay between exogenous and endogenous changes in the minority's size.
Abstract: We discuss instrumental variables (IV) estimation in the broader context of the generalized method of moments (GMM), and describe an extended IV estimation routine that provides GMM estimates as well as additional diagnostic tests. Stand-alone test procedures for heteroskedasticity, overidentification, and endogeneity in the IV context are also described.
Abstract: Traditionally, the effects of monetary policy actions on output are thought to be transmitted via monetary or credit channels. Real business cycle theory, by contrast, highlights the role of real price changes as a source of revisions in spending and production decisions. Motivated by the desire to focus on the effects of price changes in the monetary transmission mechanism, this paper incorporates a direct measure of the real own-price of money into an estimated vector autoregression and a calibrated real business cycle model. Consistent with this new view of the monetary transmission mechanism, both approaches reveal that movements in the own-price of money are strongly related to movements in output.
Abstract: This paper examines the decisions faced by workers who must decide whether or not to accept job offers that may differ from their current jobs in both initial wages and wage growth. Introducing heterogeneity in slopes as well as intercepts in a search framework has the immediate implication that agents must look ahead to determine the expected reward of higher wage growth. Under the assumption of homogeneous wage growth, it is hard to explain why an agent would accept a job that required a wage cut. Allowing for heterogenity in wage growth opens the possibility that these are transitions to jobs in which the initial cut in pay is more than offset by expected future wage growth. Such transitions that lead to an increase in the value function should be classified as transitions to "better" jobs even if they entail an initial cut in wages. We use the SIPP to estimate a structural model, which allows us to recover parameters of the wage o er distributions and the probability of involuntary terminations. With these primitives we are able to classify job changes according to their impact on the value function. We find that roughly a third of transitions that entail a wage cut are actually transitions to "better" jobs when the classification is based on the change in the value function.
Abstract: I develop a general equilibrium model with sticky prices, credit constraints, nominal loans and asset (house) prices. Changes in house prices modify agents' borrowing capacity through collateral value; changes in nominal prices affect real repayments through debt deflation. Monetary shocks move asset and nominal prices in the same direction, and are amplified and propagated over time. The "financial accelerator" is not constant across shocks: nominal debt stabilises supply shocks, making the economy less volatile when the central bank controls the interest rate. I discuss the role of equity, debt indexation and household and firm leverage in the propagation mechanism. Finally, I find that monetary policy should not respond to asset prices as a means of reducing output and inflation volatility.
Abstract: This paper tests a credit channel of monetary policy (especially a bank-lending channel) in the housing market. We argue that the relevance of the credit channel depends on the structural features of the housing finance system, in particular efficiency and institutional organisation. We employ a structural VAR approach to analyse this issue in four European housing markets (Finland, Germany, Norway and the UK). Our results support the existence of a broad credit channel and, in some contexts, of a bank-lending channel. More importantly, the findings show across countries a clear-cut relationship between presence of a credit (bank-lending) channel, efficiency of housing finance and type of institutions active in mortgage provision.
Abstract: A structural vector autoregressive approach identifies the main macroeconomic factors behind fluctuations in house prices in France, Germany, Italy, Spain, Sweden and the UK. Quarterly GDP, house prices, money, inflation and interest rates are characterised by a multivariate process driven by supply, nominal, monetary, inflationary and demand shocks. Tight money leads to a fall in real house prices; house price responses are hump-shaped; the responses of house prices and, to a lesser extent, GDP to a monetary shock can be partly justified by the different housing and financial market institutions across countries; transitory shocks drive a significant part of short-run house price fluctuations.
Abstract: This paper investigates the benefits of allowing households to compensate the portfolio distortion due to their housing consumption through investments in housing price derivatives. Focusing on the London market, we show that a major loss from over-investment in housing is that households are forced to hold a very risky portfolio. However, the strong performance of the London housing market means that little is lost in terms of expected returns. Even households with limited wealth are better off owning their home rather than renting and investing in financial assets, as long as they are willing to face the financial risk involved. In this context, access to housing price derivatives would benefit most poor homeowners looking to limit their risk exposure. It would also benefit wealthier investors looking for the high returns provided by housing investments without the costs of direct ownership of properties. Comparisons with French, Swedish and US data provide a broader perspective on our findings.
Abstract: We analyse the impact of financial liberalisation on the link between monetary policy and house prices. We present a simple model of a small open economy subject to credit constraints. The model shows that the higher the degree of financial liberalisation, the stronger is the impact of interest rate shocks on house prices. We then use vector autoregressions to study the role of monetary policy shocks in house price fluctuations in Finland, Sweden and UK, characterised by financial liberalisation episodes over the last twenty years. We find that the response of house prices to interest rate surprises is bigger and more persistent in periods characterised by more liberalised financial markets.
Abstract:This paper summarizes and discusses new evidence on the nature, extent, evolution and consequences of financing constraints in Latin America. The countries covered are: Argentina, Colombia, Costa Rica, Ecuador, Mexico, and Uruguay. All the new contributions share the characteristics of being based on microdata. Most of the data sources are firms' balance sheets. For Argentina information on debt contracts and credit history is also available, while for Costa Rica personal information on entrepreneurs was also collected. Some of the papers investigate the determinants of firms' financing choices, and the consequences of access or debt composition on performance. Other papers attempt to assess the severity of financing constraints, by focusing on firms' investment choices. All the papers (but one) were part of the project "Determinants and Consequences of Financial Constraints Facing Firms in Latin America and the Caribbean," financed by the IADB. However, other recent micro-econometric contributions are discussed as well. The results suggest that access to credit (and its cost) depends not only upon favorable balance sheet characteristics, but also upon the closeness of the relationship between firms and banks as well as credit history. Access to long-term loans and to loans denominated in foreign currency is positively related to the size and tangibility of firms' assets and negatively related to measures of country risk. Moreover, firms that have foreign participation appear to be less financially constrained in their investment decisions. The same is true for firms that are associated with business groups. On the whole, it appears that financial liberalization tends to relax financial constraints for firms that were previously constrained, while financial crises tighten them. However, firms that have more access to external sources of finance via, for instance, exports or ownership links, appear to suffer less in the post-crisis period. The paper concludes with a discussion of the policy implications of these results.
Abstract: In a New Keynesian model, technology and cost-push shocks compete as terms that stochastically shift the Phillips curve. A version of this model, estimated via maximum likelihood, points to the cost-push shock as far more important than the technology shock in explaining the behavior of output, inflation, and interest rates in the postwar United States data. These results weaken the links between the current generation of New Keynesian models and the real business cycle models from which they were originally derived; they also suggest that Federal Reserve ocials have often faced dicult trade-offs in conducting monetary policy.
Abstract: This paper shows that many estimators of thresholds in ordered response models exist, because binary choice location estimators can be converted into threshold estimators. A new threshold estimator is proposed that is consistent under more general conditions. An extension to random thresholds is provided.
Abstract: This paper presents a new method to correct for measurement error in wage data and applies this method to address an old question. How much downward wage flexibility is there in the U.S.? We apply standard methods developed by Bai and Perron (1998b) to identify structural breaks in time series data. Applying these methods to wage histories allows us to identify when each person experienced a change in nominal wages. The length of the period of constant nominal wages is left unrestricted and is allowed to differ across individuals, as is the size and direction of the nominal wage change. We apply these methods to data from the Survey of Income and Program Participation. The evidence we provide indicates that the probability of a cut in nominal wages is substantially overstated in data that is not corrected for measurement error.
Abstract: What inflation rate should the central bank target? We address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. We assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile. The contribution of this paper is to demonstrate that a modified Taylor Principle holds in this environment. If the central bank elects to target sector one, and if it responds with a coefficient greater than unity to price movements in this sector, then this policy rule will ensure determinacy across all sectors. The results of this paper have at least two implications. First, the equilibrium-determinacy criterion does not imply a preference to any particular measure of inflation. Second, since the Taylor Principle applies at the sectoral level, there is no need for a Taylor Principle at the aggregate level.
Abstract: Consider an atomistic developer who decides when and at what density to develop his land, under a property value tax system characterized by three time-invariant tax rates: the tax rate on pre-development land value; the tax rate on post- development residual site value; and the tax rate on structure value. Arnott (2002) identified the subset of property value tax systems which are neutral. This paper investigates the relative efficiency of four idealized, non-neutral property value tax systems (i) Canadian property tax system; (ii) simple property tax system; (iii)residual site value tax system;( iv) differentiated property tax system under the assumption of a constant rental growth rate.
Abstract: We describe the Stata software environment, and illustrate how it may be profitably employed for applied economic research. Stata stands between "point and click" statistical packages and matrix languages in terms of extensibility and ease of use, and provides web-accessible features that enhance collaborative research and instruction.
Abstract: Kydland and Prescott first identified the inflationary bias that results when a central bank does not precommit to a monetary policy rule. Subsequent work, published over the past twenty five years, demonstrates that this inflationary bias can be minimized by appointing central bankers whose preferences or incentives differ systematically from those of society as a whole. Subsequent work also shows that central bankers may optimally choose to maintain their reputations as inflation fighters. The literature to date, however, says remarkably little about how central bankers establish their reputations, or build credibility for their policies, in the first place.
Abstract: The article suggests a formal model of a two-tier voting procedure, which unlike traditional voting systems does not presuppose that ev- ery vote counts the same. In deciding a particular issue voters are called in the first round to assign categories of their fellow-citizens with differential voting power (or weights) according to the special position or concern individuals are perceived as having with regard to that issue. In the second stage, voters vote on the issue itself accord- ing to their substantive view and their votes are counted in the light of the differential weights assigned in the first round. We analyze the formal and the philosophical reasons that support the model.
Abstract: The paper presents a model that can explain how regional differences emerge in a country as a consequence of foreign trade. The model is based on the widely used increasing returns/transportation costs framework. In addition to the conventional elements, heterogeneous households and imperfect labor mobility are added. The results indicate that for a small economy international trade leads to human capital reallocation, and thus more regional inequality than without labor heterogeneity. Even small migration ows can lead to large inequalities in per capita incomes, if the most skilled workers move. The model also sheds some light on the relative importance of fundamentals and historical factors.
Abstract: I show that endogenously persistent output dynamics are not a puzzle for the standard sticky-price model once openness of the economy is taken into account. I make this point using a two-country, monetary model of macroeconomic interdependence under internationally incomplete asset markets with stationary net foreign asset dynamics. If asset markets are incomplete, price stickiness generates endogenous persistence in the cross-country GDP differential by introducing persistence in the dynamics of the relative price differential between the two economies. This results in the dependence of the current real GDP differential on its past value, as well as on the stock of net foreign assets accumulated in the previous period. The elasticity of the current GDP differential to its past value is sizable for standard parameter values, implying a quantitatively significant persistence effect through this channel. Endogenous persistence yields hump-shaped responses of GDP to productivity and monetary policy shocks.
Abstract: By exploiting a rich firm level database, this paper presents novel empirical evidence on the impact that the introduction of process and product innovations exerts on productivity, as well as on the role played by R&D and fixed capital investment in enhancing the likelihood of introducing innovations at the firm level. Our results imply that process innovation has a large impact on productivity. Furthermore, R&D spending is strongly positively associated with the probability of introducing a new product, whereas fixed capital spending increases the likelihood of introducing a process innovation. The latter result rejects the fact that new technologies are frequently embodied in new capital goods. However, the effect of fixed investment on the probability of introducing a process innovation is magnified by R&D spending internal to the firm. This implies that, in our sample, R&D affects productivity growth by facilitating the absorption of new technologies.
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