Creator: Guler, Bulent, Guvenen, Fatih, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 426 Abstract:
Search theory routinely assumes that decisions about the acceptance/rejection of job offers (and, hence, about labor market movements between jobs or across employment states) are made by individuals acting in isolation. In reality, the vast majority of workers are somewhat tied to their partners—in couples and families—and decisions are made jointly. This paper studies, from a theoretical viewpoint, the joint job-search and location problem of a household formed by a couple (e.g., husband and wife) who perfectly pools income. The objective of the exercise, very much in the spirit of standard search theory, is to characterize the reservation wage behavior of the couple and compare it to the single-agent search model in order to understand the ramifications of partnerships for individual labor market outcomes and wage dynamics. We focus on two main cases. First, when couples are risk averse and pool income, joint search yields new opportunities—similar to on-the-job search—relative to the single-agent search. Second, when the two spouses in a couple face job offers from multiple locations and a cost of living apart, joint search features new frictions and can lead to significantly worse outcomes than single-agent search.
Subject (JEL): J64 - Unemployment: Models, Duration, Incidence, and Job Search, J61 - Geographic Labor Mobility; Immigrant Workers, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Kehoe, Patrick J. and Midrigan, Virgiliu Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 413 Abstract:
Recent studies say prices change about every four months. Economists have interpreted this high frequency as evidence against the importance of sticky prices for the real effects of monetary policy. Theory implies that this interpretation is correct if most price changes are regular, but not if most are temporary, as in the data. Temporary changes have a striking feature: after such a change, the nominal price tends to return exactly to its preexisting level. We study versions of Calvo and menu cost models that replicate this feature. Both models predict that the degree of aggregate price stickiness is determined mostly by the frequency of regular price changes, not by the combined frequency of temporary and regular price changes. Since regular prices are sticky in the data, the models predict a substantial degree of aggregate price stickiness even though micro prices change frequently. In particular, the aggregate price level in our models is as sticky as in standard models in which micro prices change about once a year. In this sense, prices are sticky after all.
Keyword: Sticky prices, Menu costs, and Sales Subject (JEL): E32 - Business Fluctuations; Cycles, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Fogli, Alessandra and Veldkamp, Laura Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 572 Abstract:
Does the pattern of social connections between individuals matter for macroeconomic outcomes? If so, where do these differences come from and how large are their effects? Using network analysis tools, we explore how different social network structures affect technology diffusion and thereby a country's rate of growth. The correlation between high-diffusion networks and income is strongly positive. But when we use a model to isolate the effect of a change in social networks, the effect can be positive, negative, or zero. The reason is that networks diffuse ideas and disease. Low-diffusion networks have evolved in countries where disease is prevalent because limited connectivity protects residents from epidemics. But a low-diffusion network in a low-disease environment needlessly compromises the diffusion of good ideas. In general, social networks have evolved to fit their economic and epidemiological environment. Trying to change networks in one country to mimic those in a higher-income country may well be counterproductive.
Keyword: Pathogens, Disease , Development, Technology diffusion, Growth, Social networks, and Economic networks Subject (JEL): O33 - Technological Change: Choices and Consequences; Diffusion Processes, E02 - Institutions and the Macroeconomy, I10 - Health: General, and O10 - Economic Development: General
Creator: Bhandari, Anmol and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 560 Abstract:
We develop a theory of sweat equity—which is the value of business owners’ time and expenses to build customer bases, client lists, and other intangible assets. We discipline the theory using data from U.S. national accounts, business censuses, and brokered sales to estimate a value for sweat equity for the private business sector equal to 1.2 times U.S. GDP, which is roughly the value of fixed assets in use in these businesses. Although latent, the equity values are positively correlated with business incomes, ages, and standard measures of markups based on accounting data, but not with financial assets of owners or standard measures of business total factor productivity (TFP). We use our theory to show that abstracting from sweat activity leads to a significant understatement of the impacts of lowering tax rates on business incomes—on both the extensive and intensive margins. We also document large differences in the effective tax rates and the effects of tax changes for owner and employee labor inputs. Lower tax rates on owners results in increased self-employment and smaller firm sizes, whereas lower rates on employees has the opposite effects. Allowing for financial constraints and superstar firms does not overturn our main findings.
Keyword: Intangibles and Business valuation Subject (JEL): E13 - General Aggregative Models: Neoclassical, H25 - Business Taxes and Subsidies including sales and value-added (VAT), and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Prati, Alessandro, 1961- Series: Monetary theory and financial intermediation Abstract:
The data and press commentaries studied in this paper call for a reinterpretation of the French inflationary crisis and its stabilization in 1926. In contrast with T. J. Sargent's (1984) interpretation, there is evidence that the budgetary situation was well in hand and that only fear of a capital levy made the public unwilling to buy government bonds. As a result, the government had to repay the bonds coming to maturity with monetary financing. Only when Poincare introduced a bill to shift the tax burden off bondholders did the demand for government bonds recover and inflation stop.
Subject (JEL): E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation, E65 - Macroeconomic policy, macroeconomic aspects of public finance, and general outlook - Studies of particular policy episodes, E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, and N24 - Economic History: Financial Markets and Institutions: Europe: 1913-
Creator: Conesa, Juan Carlos and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 465 Abstract:
We develop a model for analyzing the sovereign debt crises of 2010–2013 in the Eurozone. The government sets its expenditure-debt policy optimally. The need to sell large quantities of bonds every period leaves the government vulnerable to self-fulfilling crises in which investors, anticipating a crisis, are unwilling to buy the bonds, thereby provoking the crisis. In this situation, the optimal policy of the government is to reduce its debt to a level where crises are not possible. If, however, the economy is in a recession where there is a positive probability of recovery in fiscal revenues, the government also has an incentive to smooth consumption and increase debt. Our exercise identifies conditions on fundamentals for which the incentive to smooth consumption dominates, giving rise to a situation where governments optimally “gamble for redemption,” running fiscal deficits and increasing their debt, thereby increasing their vulnerability to crises.
Keyword: Recession, Eurozone, Rollover crisis, and Debt crisis Subject (JEL): F34 - International Lending and Debt Problems, H13 - Economics of Eminent Domain; Expropriation; Nationalization, F44 - International Business Cycles, and E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Creator: Greenwood, Jeremy, 1953- and Huffman, Gregory W. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 151 Abstract:
The question of the existence and uniqueness of a stationary equilibrium for distorted versions of the standard neoclassical growth model is addressed in this paper. The conditions presented guaranteeing the existence and uniqueness of nontrivial equilibrium for the class of economies under study are simple and intuitively appealing, while the existence and uniqueness proof developed is elementary. Examples are presented illustrating that economies with distortional taxation, endogenous growth with externalities, and monopolistic competition can all fit into the framework developed.
Subject (JEL): C62 - Existence and Stability Conditions of Equilibrium, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), and E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Creator: McGrattan, Ellen R. and Schmitz, James Andrew Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 250 Abstract:
This chapter reviews the literature that tries to explain the disparity and variation of GDP per worker and GDP per capita across countries and across time. There are many potential explanations for the different patterns of development across countries, including differences in luck, raw materials, geography, preferences, and economic policies. We focus on differences in economic policies and ask to what extent can differences in policies across countries account for the observed variability in income levels and their growth rates. We review estimates for a wide range of policy variables. In many cases, the magnitude of the estimates is under debate. Estimates found by running cross-sectional growth regressions are sensitive to which variables are included as explanatory variables. Estimates found using quantitative theory depend in critical ways on values of parameters and measures of factor inputs for which there is little consensus. In this chapter, we review the ongoing debates of the literature and the progress that has been made thus far.
Keyword: Cross-country income differences, Growth accounting, Growth regressions, and Endogenous growth theory Subject (JEL): E65 - Studies of Particular Policy Episodes, O41 - One, Two, and Multisector Growth Models, E62 - Fiscal Policy, O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, and O11 - Macroeconomic Analyses of Economic Development
Creator: Bental, Benjamin and Eden, Benjamin Series: Lucas expectations anniversary conference Abstract:
We propose a model in which an unanticipated reduction in the money supply leads to a contemporaneous increase in inventories followed by periods with lower output. This persistent real effect does not require price-rigidity or real shocks and confusion. It is obtained in a model in which markets are cleared and agents are price-takers.
Keyword: Productivity, Money, Supply, and Money supply Subject (JEL): E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers and E22 - Macroeconomics : Consumption, saving, production, employment, and investment - Capital ; Investment ; Capacity
Creator: Alvarez, Fernando, 1964-, Atkeson, Andrew, and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 278 Abstract:
This paper analyzes the effects of money injections on interest rates and exchange rates in a model in which agents must pay a Baumol-Tobin style fixed cost to exchange bonds and money. Asset markets are endogenously segmented because this fixed cost leads agents to trade bonds and money only infrequently. When the government injects money through an open market operation, only those agents that are currently trading absorb these injections. Through their impact on these agents’ consumption, these money injections affect real interest rates and real exchange rates. We show that the model generates the observed negative relation between expected inflation and real interest rates. With moderate amounts of segmentation, the model also generates other observed features of the data: persistent liquidity effects in interest rates and volatile and persistent exchange rates. A standard model with no fixed costs can produce none of these features.
Keyword: Volatile real exchange rates, Liquidity effects, Baumol-Tobin model, Fixed costs, and Term structure of interest rates Subject (JEL): F31 - Foreign Exchange, E52 - Monetary Policy, F41 - Open Economy Macroeconomics, E43 - Interest Rates: Determination, Term Structure, and Effects, and E40 - Money and Interest Rates: General