One EMU Fiscal Policy for the EURO

By Alexandre Lucas Cole, Chiara Guerello and Guido Traficante

http://d.repec.org/n?u=RePEc:pra:mprapa:97380&r=dge

We build a two-country New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties and welfare implications of different fiscal policy scenarios. Our main findings are that a government spending rule which targets the net exports gap rather than the domestic output gap produces more stable dynamics and that consolidating government budget constraints across countries with symmetric tax rate movements provides greater stabilization. A key role is played by the trade elasticity which determines the impact of the terms of trade on net exports. In fact, when goods are complements, the stabilization properties of coordinating fiscal policies are no longer supported. These findings point out to possible policy prescriptions for the Euro Area: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of Fiscal Union or both.

This paper addresses an important policy question, yet I am not ready to advocate the policy prescription. The reason is that I find symmetric two-country models too restrictive, especially when you want to talk about the Eurozone, where economies differ a lot in size and bilateral trade balance matters only in few cases. Build at least a three-country model with economies differing in size (and import propensity). You lose the convenience of the two-country symmetry, but you gain relevance.

Waiting for the Prince Charming: Fixed-Term Contracts as Stopgaps

By Normann Rion

http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-02331887&r=dge

In this paper, I build a simple Mortensen-Pissarides model embedding a dual labor market. I derive conditions for the existence of an equilibrium with coexisting strongly protected open-ended contracts and exogeneously short fixed-term contracts. I also study dynamics after a reform on employment protection legislation. Temporary contracts play the role of fillers while permanent contracts are used to lock up high-productivity matches. High firing costs favor the emergence of a dual equilibrium. Employment protection legislation encourages the resort to temporary employment in job creation. This scheme is intertwined with a general-equilibrium effect: permanent contracts represent the bulk of employed workers and a more stringent employment protection reduces aggregate job destruction. This pushes down unemployment and in turn reduces job creation ows through temporary contracts. The model is calibrated to match the French labor market. Policy experiments demonstrate that there is no joint gain in employment and social welfare through reforms on firing costs around the baseline economy. The optimal policy consists in implementing a unique open-ended contract with a strong cut in firing costs. Increases in firing costs within a dual labor market lead to a sluggish adjustment, while large cuts in firing costs lead to a quick one. The adjustment time of the labor market is highly non-monotonous between these two extremes. Policy-related uncertainty significantly strengthens fixed-term employment on behalf of open-ended employment. Considering extensions, I draw conclusions on the inability of a large class of random-matching models to mimic the distribution of temporary contracts’ duration while maintaining possible the expiring temporary contracts’ conversion into permanent contracts.

This is a very cool paper that highlights one of the major ills of the French labor market and what to do about it. However, as the paper nicely demonstrates, the transition dynamics are important. In particular, some reforms involve a temporary increase in unemployment, and we all now how difficult transitions work out in France.

Risk-sensitive preferences and age-dependent risk aversion

By Phitawat Poonpolkul

http://d.repec.org/n?u=RePEc:een:camaaa:2019-86&r=dge

People in different age groups have shown to differ in their degrees of risk aversion. This study investigates the macroeconomic implications of population aging when households are assumed to be increasingly risk-averse in future utility when they age. The model incorporates risk-sensitive preferences used in Hansen & Sargent (1995), which is the only recursive preferences that can separate risk aversion and intertemporal elasticity of substitution while being monotonic, into a 16-generation discrete-time OLG model with undiversifiable income risk. Compared to a time-additive counterpart, risk-sensitive preferences capture precautionary saving motive that exacerbates adverse responses of aggregate macroeconomic variables under a population aging scenario through demographic re-weighting and life-cycle redistribution channels. Varying risk aversion also allows households to internalize future uncertainties when evaluating their welfare impacts of demographic change, resulting in non-monotonic welfare dynamics with higher welfare loss under a high-risk environment and vice versa. Risk-sensitive preferences with age-dependent risk aversion can play an important role in optimal policy settings by introducing uncertainties into the welfare impact analysis, while taking into account more realistic risk-taking behavior of different age cohorts.

Making this kind of differentiation does not matter in most setups, but when we are taking precautionary savings over the life cycle, it definitively does. Add a major financial-market based recession in there, and you could get some major policy conclusions.

Labor Market Frictions and Lowest Low Fertility

By Nezih Guner, Ezgi Kaya and Virginia Sánchez Marcos

http://d.repec.org/n?u=RePEc:iza:izadps:dp12771&r=dge

The total fertility rate is well below its replacement level of 2.1 children in high- income countries. Why do women choose such low fertility levels? We study how labor market frictions affect the fertility of college-educated women. We focus on two frictions: uncertainty created by dual labor markets (the coexistence of jobs with temporary and open-ended contracts) and inflexibility of work schedules. Using rich administrative data from the Spanish Social Security records, we show that women are less likely to be promoted to permanent jobs than men. Temporary contracts are also associated with a lower probability of first birth. With Time Use data, we also show that women with children are less likely to work in jobs with split-shift schedules, which come with a fixed time cost. We then build a life-cycle model in which married women decide whether to work or not, how many children to have, and when to have them. In the model, women face a trade-off between having children early and waiting and building their careers. We show that reforms that reduce the labor market duality and eliminate split-shift schedules increase the completed fertility of college-educated from 1.52 to 1.88. These reforms enable women to have more children and have them early in their life-cycle. They also increase the labor force participation of women and eliminate the employment gap between mothers and non-mothers.

Women face clearly hurdles in making their joint fertility and job choices that men do not face. The labor market has clearly not been accommodative in that respect. This suggests one way to facilitate fertility while improving career prospects: forbidding split-shift schedules, that is, jobs with a very long lunch break that are quite common in Spain. Sometimes, removing some options improves other choices.