A Matching Model of Endogenous Growth and Underground Firms

February 29, 2012

By Gaetano Lisi and Maurizio Pugno


A matching model will explain both unemployment and economic growth by considering the underground sector and human capital. Three problems can thus be simultaneously accounted for: (i) the persistence of the underground sector, (ii) the ambiguous relationships between underground employment and unemployment, and (iii) between growth and unemployment. Key assumptions are that entrepreneurial ability is heterogeneous, skill accumulation determines productivity growth, job-seekers choose whether to invest in education. The conclusions are that the least able entrepreneurs, whose number is endogenous, set up underground firms, employ unskilled labour, and do not contribute to growth. If the monitoring rate is sufficiently low, underground employment alleviates unemployment, but the economy grows at lower rates.

Interesting paper that also highlights that there is a possible trade-off between growth and unemployment because of a sizable underground sector. Another aspect that would be interesting is to see whether having a large underground sector is welfare improving. While it leads to the above trade-off, it does reduce the cost of an idle workforce, even if it is a very low productivity.


Fat-tail Distributions and Business-Cycle Models

February 23, 2012

By Guido Ascari, Giorgio Fagiolo and Andrea Roventini


Recent empirical findings suggest that macroeconomic variables are seldom normally distributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) densities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this statistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.

Much of economic (and econometric) analysis is based on the assumption that stochstic processes are normal. This paper claims that at least some aggregate statistics are not normal — in particular they have fat tails–, and that the RBC and NK models cannot replicate that. I am not sure this is a valid criticism of the models. That is, however, a valid criticism of the solution method of those models. It is convenient to use linear-quadratic methods to solve them, and they require normal distributions, but it does noat have to be those.

Economics and Climate Change: Integrated Assessment in a Multi-Region World

February 3, 2012

By John Hassler and Per Krusell


This paper develops a model that integrates the climate and the global economy—an integrated assessment model—with which different policy scenarios can be analyzed and compared. The model is a dynamic stochastic general-equilibrium setup with a continuum of regions. Thus, it is a full stochastic general-equilibrium version of RICE, Nordhaus’s pioneering multi-region integrated assessment model. Like RICE, our model features traded fossil fuel but otherwise has no markets across regions—there is no insurance nor any intertemporal trade across them. The extreme form of market incompleteness is not fully realistic but arguably not a decent approximation of reality. Its major advantage is that, along with a set of reasonable assumptions on preferences, technology, and nature, it allows a closed-form model solution. We use the model to assess the welfare consequences of carbon taxes that differ across as well as within oil-consuming and -producing regions. We show that, surprisingly, only taxes on oil producers can improve the climate: taxes on oil consumers have no effect at all. The calibrated model suggests large differences in views on climate policy across regions.

I believe this is the paper Per Krusell has been talking about in various plenary talks. I find this research agenda very exciting and an interesting way to redefine “macro” in macroeconomics.