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Creator: Kleiner, Morris and Soltas, Evan J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 590 Abstract:
We assess the welfare consequences of occupational licensing for workers and consumers. We estimate a model of labor market equilibrium in which licensing restricts labor supply but also affects labor demand via worker quality and selection. On the margin of occupations licensed differently between U.S. states, we find that licensing raises wages and hours but reduces employment. We estimate an average welfare loss of 12 percent of occupational surplus. Workers and consumers respectively bear 70 and 30 percent of the incidence. Higher willingness to pay offsets 80 percent of higher prices for consumers, and higher wages compensate workers for 60 percent of the cost of mandated investment in occupation-specific human capital.
Palabra clave: Labor supply, Welfare analysis, Human capital, and Occupational licensing Tema: J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, D61 - Allocative Efficiency; Cost-Benefit Analysis, K31 - Labor Law, J44 - Professional Labor Markets; Occupational Licensing, and J38 - Wages, Compensation, and Labor Costs: Public Policy
Creator: Arellano, Cristina, Mateos-Planas, Xavier, and Ríos-Rull, José-Víctor Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 589 Abstract:
In the data sovereign default is always partial and varies in its duration. Debt levels during default episodes initially increase and do not experience reductions upon resolution. This paper presents a theory of sovereign default that replicates these properties, which are absent in standard sovereign default theory. Partial default is a flexible way to raise funds as the sovereign chooses its intensity and duration. Partial default is also costly because it amplifies debt crises as the defaulted debt accumulates and interest rate spreads increase. This theory is capable of rationalizing the large heterogeneity in partial default, its comovements with spreads, debt levels, and output, and the dynamics of debt during default episodes. In our theory, as in the data, debt grows during default episodes, and large defaults are longer, and associated with higher interest rate spreads, higher debt levels, and deeper recessions.
Palabra clave: Sovereign risk, Emerging markets, Debt crises, and Debt restructuring Tema: F34 - International Lending and Debt Problems, H63 - National Debt; Debt Management; Sovereign Debt, and G01 - Financial Crises
Creator: Benati, Luca, Lucas, Jr., Robert E., Nicolini, Juan Pablo, and Weber, Warren E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 587 Abstract:
We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily large, which is rejected by the data. A simple extension imposing limits on the amount that households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6, which encompasses the well-known squared-root specification of Baumol and Tobin.
Palabra clave: Cointegration and Long-run money demand Tema: E41 - Demand for Money and C32 - Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Creator: McGrattan, Ellen R., Miyachi, Kazuaki, and Peralta-Alva, Adrian Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 586 Abstract:
Japan is facing the problem of how to finance retirement, health care, and long-term care expenditures as the population ages. This paper analyzes the impact of policy options intended to address this problem by employing a dynamic general equilibrium overlapping generations model, specifically parameterized to match both the macro- and microeconomic level data of Japan. We find that financing the costs of aging through gradual increases in the consumption tax rate delivers better macroeconomic performance and higher welfare for most individuals relative to other financing options, including raising social security contributions, debt financing, and a uniform increase in health care and long-term care copayments.
Palabra clave: Japan, Health care, Aging, Retirement, and Taxation Tema: I13 - Health Insurance, Public and Private, H55 - Social Security and Public Pensions, E62 - Fiscal Policy, and H51 - National Government Expenditures and Health
Creator: Luttmer, Erzo G. J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 585 Abstract:
Most firms begin very small, and large firms are the result of typically decades of persistent growth. This growth can be understood as the result of some form of organization capital accumulation. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This is shown to imply that incumbent firms account for most aggregate organization capital accumulation. And it implies potentially extremely slow aggregate convergence rates. A benchmark model is proposed in which managers can use incumbent organization capital to create new organization capital. Workers are a specific factor for producing consumption, and they require managerial supervision. Through the lens of the model, the aftermath of the Great Recession of 2008 is unsurprising if the events of late 2008 and early 2009 are interpreted as a destruction of organization capital, or as a belief shock that made consumers want to reduce consumption and accumulate more wealth instead.
Palabra clave: Zipf's law, Business cycles, Firm size distribution, and Slow recoveries Tema: L11 - Production, Pricing, and Market Structure; Size Distribution of Firms and E32 - Business Fluctuations; Cycles
Creator: Ayres, João, Hevia, Constantino, and Nicolini, Juan Pablo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 584 Abstract:
In this paper, we show that there is substantial comovement between prices of primary commodities such as oil, aluminum, maize, or copper and real exchange rates between developed economies such as Germany, Japan, and the United Kingdom against the US dollar. We therefore explicitly consider the production of commodities in a two-country model of trade with productivity shocks and shocks to the supplies of commodities. We calibrate the model so as to reproduce the volatility and persistence of primary commodity prices and show that it delivers equilibrium real exchange rates that are as volatile and persistent as in the data. The model rationalizes an empirical strategy to identify the fraction of the variance of real exchange rates that can be accounted for by the underlying shocks, even if those are not observable. We use this strategy to argue that shocks that move primary commodity prices account for a large fraction of the volatility of real exchange rates in the data. Our analysis implies that existing models used to analyze real exchange rates between large economies that mostly focus on trade between differentiated final goods could benefit, in terms of matching the behavior of real exchange rates, by also considering trade in primary commodities.
Palabra clave: Real exchange rate disconnect puzzle and Primary commodity prices Tema: F41 - Open Economy Macroeconomics and F31 - Foreign Exchange
Creator: Conesa, Juan Carlos, Kehoe, Timothy Jerome, 1953-, Nygaard, Vegard M., and Raveendranathan, Gajendran Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 583 Abstract:
We develop and calibrate an overlapping generations general equilibrium model of the U.S. economy with heterogeneous consumers who face idiosyncratic earnings and health risk to study the implications of exogenous trends in increasing college attainment, decreasing fertility, and increasing longevity between 2005 and 2100. While all three trends contribute to a higher old age dependency ratio, increasing college attainment has different macroeconomic implications because it increases labor productivity. Decreasing fertility and increasing longevity require the government to increase the average labor tax rate from 32.0 to 44.4 percent. Increasing college attainment lowers the required tax increase by 10.1 percentage points. The required tax increase is higher under general equilibrium than in a small open economy with a constant interest rate because the reduction in the interest rate lowers capital income tax revenues.
Palabra clave: College attainment, Health care, Aging, Taxation, and Overlapping generations Tema: H55 - Social Security and Public Pensions, I13 - Health Insurance, Public and Private, H20 - Taxation, Subsidies, and Revenue: General, H51 - National Government Expenditures and Health, and J11 - Demographic Trends, Macroeconomic Effects, and Forecasts
Creator: Nicolini, Juan Pablo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 582 Abstract:
In this paper, I revisit some recent work on the theory of the money supply, using a theoretical framework that closely follows Karl Brunner's work. I argue that had his research proposals been followed by the profession, some of the misunderstandings related to the instability of the money demand relationship could have been avoided.
Palabra clave: Means of payment, Money multiplier, and Transaction services Tema: E58 - Central Banks and Their Policies and E51 - Money Supply; Credit; Money Multipliers
Creator: Chari, V. V., Nicolini, Juan Pablo, and Teles, Pedro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 581 Abstract:
We use the Ramsey and Mirrlees approaches to study how fiscal and trade policy should be set cooperatively when governments must raise revenues with distorting taxes. Free trade and unrestricted capital mobility are optimal. Efficient outcomes can be implemented with taxes only on final consumption goods and labor income. We study alternative tax systems, showing that uniform taxation of household asset returns, and not taxing corporate income yields efficient outcomes. Border adjustments exempting exports from and including imports in the tax base are desirable. Destination- and residence-based tax systems are desirable compared to origin- and source-based systems.
Palabra clave: Origin- and destination-based taxation, Value-added taxes, Free trade, Production efficiency, Border adjustment, and Capital income tax Tema: E62 - Fiscal Policy, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination