Research Database

We study the general equilibrium effects of social insurance on the transition in a model in which the process of moving workers from matches in the state sector to new matches in the private sector takes time and involves uncertainty. As to be expected, adding social insurance to an economy without any improves welfare. Contrary to standard intuition, however, adding social insurance may slow transition. We show that this result depends crucially on general equilibrium interactions of interest rates and savings under alternative market structures.

This paper catalogues formulas that are useful for estimating dynamic linear economic models. We describe algorithms for computing equilibria of an economic model and for recursively computing a Gaussian likelihood function and its gradient with respect to parameters. We apply these methods to several example economies.

We investigate, by Monte Carlo methods, the finite sample properties of GMM procedures for conducting inference about statistics that are of interest in the business cycle literature. These statistics include the second moments of data filtered using the first difference and Hodrick-Prescott filters, and they include statistics for evaluating model fit. Our results indicate that, for the procedures considered, the existing asymptotic theory is not a good guide in a sample the size of quarterly postwar U.S. data.

It is often argued that with a positively skewed income distribution (median less than mean) majority voting would result in higher tax rates than maximizing average welfare and, hence, lower aggregate savings. We reexamine this view in a capital accumulation model, in which distorting redistributive taxes provide insurance against idiosyncratic shocks and income distributions evolve endogenously. We find small differences of either sign between the tax rates set by a majority voting and a utilitarian government, for reasonable parametric specifications, despite the fact that model simulations produce positively skewed distributions of total income across agents.

The marginal cost of plant capacity, measured by the price of equity, is significantly procyclical. Yet, the price of a major intermediate input into expanding plant capacity, investment goods, is countercyclical. The ratio of these prices is Tobin's q. Following convention, we interpret the fact that Tobin's q differs from unity at all, as reflecting that there are diminishing returns to expanding plant capacity by installing investment goods ("adjustment costs"). However, the phenomenon that interests us is not just that Tobin's q differs from unity, but also that its numerator and denominator have such different cyclical properties. We interpret the sign switch in their covariation with output as reflecting the interaction of our adjustment cost specification with the operation of two shocks: one which affects the demand for equity and another which shifts the technology for producing investment goods. The adjustment costs cause the two prices to respond differently to these two shocks, and this is why it is possible to choose the shock variances to reproduce the sign switch. These model features are incorporated into a modified version of a model analyzed in Boldrin, Christiano and Fisher (1995). That model incorporates assumptions designed to help account for the observed mean return on risk free and risky assets. We find that the various modifications not only account for the sign switch, but they also continue to account for the salient features of mean asset returns. We turn to the business cycle implications of our model. The model does as well as standard models with respect to conventional business cycle measures of volatility and comovement with output, and on one dimension the model significantly dominates standard models. The factors that help it account for prices and rates of return on assets also help it account for the fact that employment across a broad range of sectors moves together over the cycle.

We argue that the rationalization gains often predicted by static applied general equilibrium models with imperfect competition and scale economies are artificially boosted by an unrealistic treatment of fixed costs. We introduce sunk costs into one such model calibrated with real-world data. We show how this changes the oligopoly game in a way significant enough to affect, both qualitatively and quantitatively, the outcome of a trade liberalization exercise.

I argue that Farmer and Guo's one-sector real business cycle model with indeterminacy and sunspots fails empirically and that its failure is inherent in the logic of the model taken together with some simple labor market facts.

This paper considers Marshall's argument that geographic concentration of industry facilitates specialization. I use Census data on manufacturing plants to examine the relationship between localization of industry and vertical disintegration. I find that establishments located near other establishments within the same industry tend to make more intensive use of purchased inputs than establishments without own-industry neighbors. This relationship only holds among industries that are geographically concentrated; having neighbors makes no difference in geographically dispersed industries. I argue that this pattern is consistent with a model in which increased opportunity for specialization is the reason some industries localize.

Our study examines whether there is a systematic relationship between the monetary standard under which a country operates and the rate of inflation it experiences. It also explores whether there are other properties of inflation, money, and output that differ between economies operating under a commodity standard and economies operating under a fiat standard. The basis for our study is price, money, and output data for 15 countries that have operated under both types of monetary standards. For each of these countries the data cover 80 years, and for most the data cover more than 100 years. With these data we are able to establish several facts about the differences in inflation, money growth, and output growth between economies operating under commodity standards and those operating under fiat standards. Specifically, we find that the following facts emerge when comparing commodity standards to fiat standards: inflation, money growth, and output growth are all lower; growth rates of monetary aggregates are less highly correlated with each other; growth rates of monetary aggregates are less highly correlated with inflation; and growth rates of monetary aggregates are more highly correlated with output growth.