Creator: Cooper, Russell and Willis, Jonathan L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 310 Abstract:
We study inferences about the dynamics of labor adjustment obtained by the “gap methodology” of Caballero and Engel  and Caballero, Engel and Haltiwanger . In that approach, the policy function for employment growth is assumed to depend on an unobservable gap between the target and current levels of employment. Using time series observations, these studies reject the partial adjustment model and find that aggregate employment dynamics depend on the cross-sectional distribution of employment gaps. Thus, nonlinear adjustment at the plant level appears to have aggregate implications. We argue that this conclusion is not justified: these findings of nonlinearities in time series data may reflect mismeasurement of the gaps rather than the aggregation of plant-level nonlinearities.
Keyword: Employment, Aggregate Employment, and Adjustment Costs Subject (JEL): J60 - Mobility, Unemployment, Vacancies, and Immigrant Workers: General, J23 - Labor Demand, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Cooper, Russell and Kempf, Hubert Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 311 Abstract:
Central to ongoing debates over the desirability of monetary unions is a supposed trade-off, outlined by Mundell : a monetary union reduces transactions costs but renders stabilization policy less effective. If shocks across countries are sufficiently correlated, then, according to this argument, delegating monetary policy to a single central bank is not very costly and a monetary union is desirable.
This paper explores this argument in a setting with both monetary and fiscal policies. In an economy with monetary policy alone, we confirm the presence of the trade-off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low. However, fiscal interventions by national governments, combined with a central bank that has the ability to commit to monetary policy, overturn these results. In equilibrium, such a monetary union will be welfare improving for any correlation of shocks.
Keyword: Monetary unions, Public assistance programs, Currency, Stabilization policies, Unemployment, Central banks, and Income taxes
Creator: Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 312 Abstract:
This paper reviews the role of micro non-convexities in the study of business cycles. One important non-convexity arises because an individual can work only one workweek length in a given week. The implication of this non-convexity is that the aggregate intertemporal elasticity of labor supply is large and the principal margin of adjustment is in the number employed—not in the hours per person employed—as observed. The paper also reviews a business cycle model with an occasionally binding capacity constraint. This model better mimics business cycle fluctuations than the standard real business cycle model. Aggregation in the presence of micro non-convexities is key in the model.
Creator: Buera, Francisco and Nicolini, Juan Pablo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 540 Abstract:
We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the ﬁnancial crisis that unraveled in 2007 in the United States. The model can be used to study the effects of the credit-crunch on the main macroeconomic variables and the impact of alternative policies. The policy implications regarding forward guidance are in contrast with the prevalent view in most central banks, based on the New Keynesian explanation of the liquidity trap.
Keyword: Ricardian equivalence, Credit crunch, Monetary policy, Collateral constraints, and Liquidity trap Subject (JEL): E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, E52 - Monetary Policy, E44 - Financial Markets and the Macroeconomy, and E58 - Central Banks and Their Policies
Creator: Bils, Mark, Klenow, Peter J., and Malin, Benjamin A. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 516 Abstract:
Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been called “the labor wedge” — a cyclical intratemporal wedge between the marginal product of labor and the marginal rate of substitution of consumption for leisure. The intratemporal wedge can be broken into a product market wedge (price markup) and a labor market wedge (wage markup). Based on the wages of employees, the literature has attributed the intratemporal wedge almost entirely to labor market distortions. Because employee wages may be smoothed versions of the true cyclical price of labor, we instead examine the self-employed and intermediate inputs, respectively. Looking at the past quarter century in the United States, we find that price markup movements are at least as important as wage markup movements — including during the Great Recession and its aftermath. Thus, sticky prices and other forms of countercyclical markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.
Keyword: Price markups, Business cycles, Wage markups, and Labor wedge Subject (JEL): E32 - Business Fluctuations; Cycles and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Fitzgerald, Doireann, Haller, Stefanie, and Yedid-Levi, Yaniv Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 524 Abstract:
We document how export quantities and prices evolve after entry to a market. Controlling for marginal cost, and taking account of selection on idiosyncratic demand, there are economically and statistically significant dynamics of quantities, but no dynamics of prices. To match these facts, we estimate a model where firms invest in customer base through non-price actions (e.g. marketing and advertising), and learn gradually about their idiosyncratic demand. The model matches quantity, price and exit moments. Parameter estimates imply costs of adjusting investment in customer base, and slow learning about demand, both of which generate sluggish responses of sales to shocks.
Keyword: Firm dynamics, Exporter dynamics, and Customer base Subject (JEL): L10 - Market Structure, Firm Strategy, and Market Performance: General, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), and F10 - Trade: General