November 27, 2019
By Mark Bils, Yongsung Chang and Sun-Bin Kim
We consider a matching model of employment with flexible wages for new hires, but sticky wages within matches. Unlike most models of sticky wages, we allow effort to respond if wages are too high or too low. In the Mortensen-Pissarides model, employment is not affected by wage stickiness in existing matches. But it is in our model. If wages of matched workers are stuck too high, firms require more effort, lowering the value of additional labor and reducing hiring. We find that effort’s response can greatly increase wage inertia.
Wages are sticky once one is hired, but flexible for new hires. In principle, this should make aggregate wage rather flexible, as the margin is the new hires. The paper shows this is not true if effort on existing job matches can respond: this undoes the hiring margin and aggregate wages are sticky.
November 22, 2019
By Adam Brzezinski, Yao Chen, Nuno Palma and Felix Ward
We exploit a recurring natural experiment to identify the effects of money supply shocks: maritime disasters in the Spanish Empire (1531-1810) that resulted in the loss of substantial amounts of monetary silver. A one percentage point reduction in the money growth rate caused a 1.3% drop in real output that persisted for several years. The empirical evidence highlights nominal rigidities and credit frictions as the primary monetary transmission channels. Our model of the Spanish economy confirms that each of these two channels explain about half of the initial output response, with the credit channel accounting for much of its persistence.
This is a very cool paper and as far as I know the first application of DSGE methods to pre-modern economic history. It also nicely highlights how relying on an exogenous and variable money supply is generally a bad idea.
November 15, 2019
By Daniel Carroll and Sewon Hur
How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods and services constitute a larger fraction of expenditures for low-wealth and low-income households. Second, we build a trade model with nonhomothetic preferences—to generate the documented relationship between tradable expenditure shares, income, and wealth—and uninsurable earnings risk—to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we permanently reduce trade costs so as to generate a rise in import share of GDP commensurate with that seen in the data from 2001 to 2014. We find that households in the lowest wealth decile experience welfare gains over the transition, measured by permanent consumption equivalents, that are 57 percent larger than those in the highest wealth decile.
I sometimes hear the argument that the poor benefit the least (if not lose) from international trade: they face potentially lower wages and their job are more likely to be outsourced. Today, I learned that in fact they have a large benefit from their purchases, which are more likely to be tradables than for the general population. The paper argues that this makes them benefit overall more than anybody else from trade, including during a transition while trade is opened more.
November 5, 2019
By Miroslav Gabrovski and Victor Ortego-Marti
This paper develops a business cycle model of the housing market with search frictions and entry of both buyers and sellers. The housing market exhibits a well-established cyclical component, which features three stylized facts: prices move in the same direction as sales and the number of houses for sale, but opposite to the time it takes to sell a house. These stylized facts imply that in the data housing vacancies and the number of buyers are positively correlated, i.e. that the Beveridge Curve is upward sloping. A baseline search and matching model of the housing market is unable to match these stylized facts because it inherently generates a downward sloping Beveridge Curve. With free entry of both buyers and sellers, our model reproduces the positive correlation between prices, sales and vacancies, and matches the stylized facts qualitatively and quantitatively.
You often hear that the real estate market is different from other markets, even other asset markets, in fundamental ways. This paper shows that the sometimes peculiar dynamics of that market can be rationalized without heroic assumptions.