Directed Search and Job Rotation

By Fei Li and Can Tian

http://d.repec.org/n?u=RePEc:pen:papers:12-024&r=dge

We consider the impact of job rotation in a directed search model in which firm sizes are endogenously determined and match quality is initially unknown. A large firm benefits from the opportunity of rotating workers so as to partially overcome loss of mismatch. As a result, in the unique symmetric equilibrium, large firms have higher labor productivity and lower separation rates. In contrast to the standard directed search model with multi-vacancy firms, this model can generate a positive correlation between firm size and wage without introducing any ex ante productivity differences or imposing any non-concave production function assumption.

Interesting contribution in the literature that tries to explain the positive correlation between firm size and wages. Internal reassignments do indeed provide opportunities for correcting mismatches, something small firms cannot enjoy. The latter must go though costly firing and hiring. I wonder whether the correlation is stronger in countries where the latter costs are higher, which would corroborate this theory.

Hedging against the government: a solution to the home asset bias puzzle

By Tiago C. Berriel and Saroj Bhattarai

http://d.repec.org/n?u=RePEc:fip:feddgw:113&r=dge

This paper explains two puzzling facts: international nominal bonds and equity portfolios are biased domestically. In our two-country model, holding domestic government nominal debt provides a hedge against shocks to bond returns and the impact on taxes they induce. For this result, only two features are essential: some nominal risk and taxes falling only on domestic agents. A third feature explains why agents choose to hold primarily domestic equity: government spending falls on domestic goods. Then, an increase in government spending raises the returns on domestic equity, providing a hedge against the subsequent increase in taxes. These conclusions are robust to a wide range of preference parameter values and the incompleteness of financial markets. A calibrated version of the model predicts asset holdings that quantitatively match the data.

An interesting take of the portfolio home bias: it is the result of hedging against fiscal policy. But given that government expenses are procyclical in some countries and countercyclical in others, I wonder whether this can really be generalized beyond the United States, which the model economy is calibrated for.

Ambiguous Business Cycles

By Cosmin Ilut and Martin Schneider

http://d.repec.org/n?u=RePEc:duk:dukeec:12-06&r=dge

This paper considers business cycle models with agents who dislike both risk and ambiguity (Knightian uncertainty). Ambiguity aversion is described by recursive multiple priors preferences that capture agents’ lack of confidence in probability assessments. While modeling changes in risk typically requires higher-order approximations, changes in ambiguity in our models work like changes in conditional means. Our models thus allow for uncertainty shocks but can still be solved and estimated using first-order approximations. In our estimated medium-scale DSGE model, a loss of confidence about productivity works like `unrealized’ bad news. Time-varying confidence emerges as a major source of business cycle fluctuations.

Interesting paper that makes the important distinction between risk and uncertainty and thus say something in a structured way about how confidence has an impact on business cycles. As a bonus, this discussion does not require rational expectations,

Active calls for papers

The recent poll has indicated an overwhelming support for having not just papers but also calls for papers listed on this blog. Only 10% were opposed to it, which I think is a smashing approval rate. Similar numbers where obtained for the poll on the mailing list, hence that will also feature these calls from now on. If you know of any calls relevant to dynamic general equilibrium theory, do not hesitate to tell me about them.

Here are a few calls for which deadlines have not passed yet.

Carnegie-NYU-Rochester Conference

Fiscal and Monetary Policy in the Presence of Debt Crises, New York, 19-20 April 2013.

REDg

VII REDg – Dynamic General Equilibrium Macroeconomics Workshop, Madrid, 21-22 September 2012.

Boston Fed

Third Boston University/Boston Fed Conference on Macro-Finance Linkages, Boston, 30 November-1 December 2012.

Saving on a Rainy Day, Borrowing for a Rainy Day

By Sule Alan, Thomas Crossley and Hamish Low

http://d.repec.org/n?u=RePEc:koc:wpaper:1212&r=dge

The aim of this paper is to understand what a recession means for individual consumers, and to model in a life-cycle framework how individuals respond to recessions. Our focus is on the sharp increase in savings rates that have been observed in the current and recent recessions. We show empirically that these saving spikes were short-lived and common to all working age groups. We then study life-cycle models in which recessions involve one or more of: (i) an aggregate permanent negative shock to individual income; (ii) an increase in the variance of idiosyncratic permanent shocks; (iii) a tightening of credit constraints; (iv) asset market crashes. In simulations and in the data we aggregate explicitly from individual behavior. We model credit tightening as a constraint on new borrowing and this generates an option value of borrowing in good times. We show that the rise in the aggregate savings ratio is driven by increases in uncertainty, rather than tighening of credit; temporary shocks to the supply of credit generate increases in saving only among younger agents.

I would add that this paper shows that the quick run-up in the aggregate savings rate at the start od the recession was a perfectly rational response, and not due to a sudden waking up from a spending frenzy.