Money, e-money and consumer welfare

January 30, 2023

By Francesco Carli and Burak Uras

We develop a micro-founded monetary model to inquire the role of a privately provided e-money instrument for household consumption smoothing and welfare. Different from fiat money, e-money users pay electronic transaction fees, but in turn e-money reduces spatial separation frictions and enables risk-sharing. We characterize the conditions that promotes e-money to be Pareto improving and the conditions when e-money reduces its users’ welfare – despite for the consumption-smoothing it induces. We calibrate our model for the context of M-Pesa in Kenya and conduct a quantitative analysis. Since our quantitative analysis reveals a limited role for privately provided e-money, we recommend the optimality of e-money regulation.

This paper is a fascinating application of money search theory to the emergencies of privately issued mobile money. There are clear advantages from providing a widely adopted transaction system, but monopoly power comes with it, hence the need to regulate. The motivation for regulation here is thus different from regular banking regulation, which is more concerned about systemic financial health.


Job Ladder, Human Capital, and the Cost of Job Loss

January 24, 2023

By Richard Audoly, Federica De Pace and Giulio Fella

High-tenure workers losing their job experience a large and prolonged fall in wages and earnings. The aim of this paper is to understand and quantify the forces behind this empirical regularity. We propose a structural model of the labor market with (i) on-the-job search, (ii) general human capital, and (iii) firm specific human capital. Jobs are destroyed at an endogenous rate due to idiosyncratic productivity shocks and the skills of workers depreciate during periods of non-employment. The model is estimated on German Social Security data. By jointly matching moments related to workers’ mobility and wages, the model can replicate the size and persistence of the losses in earnings and wages observed in the data. We find that the loss of a job with a more productive employer is the primary driver of the cumulative wage losses following displacement (about 50 percent), followed by the loss of firm-specific human capital (about 30 percent).

This is a very interesting question and a cool way to address it. Someone should apply this to other economies, as I suspect the results would not be the same where there is a lot more churn on the labor market, for example.

The Dynamics of the Racial Wealth Gap

January 17, 2023

By Dionissi Aliprantis, Daniel Carroll and Eric Young

What drives the dynamics of the racial wealth gap? We answer this question using a dynamic stochastic general equilibrium heterogeneous-agents model. Our calibrated model endogenously produces a racial wealth gap matching that observed in recent decades along with key features of the current cross-sectional distribution of wealth, earnings, intergenerational transfers, and race. Our model predicts that equalizing earnings is by far the most important mechanism for permanently closing the racial wealth gap. One-time wealth transfers have only transitory effects unless they address the racial earnings gap, and return gaps only matter when earnings inequality is reduced.

This is another paper that steps out of usual DSGE modelling topics to address important questions for which that type of approach is particularly well suited for. Even if you disagree with some of the assumptions or the calibration, it lays down a framework from where the discussion should start. Very promising.


January 17, 2023

By Ayşe İmrohoroğlu and Kai Zhao

This paper examines the effectiveness of several policies in reducing the aggregate share of homeless in a dynamic general equilibrium model. The model economy is calibrated to capture the most at-risk groups and generates a diverse population of homeless with a significant fraction becoming homeless for short spells due to labor market shocks and a smaller fraction experiencing chronic homelessness due to health shocks. Our policy experiments show housing subsidies to be more effective in reducing the aggregate homeless share, mostly by helping those with short spells, than non-housing policies. For the chronically homeless population, a means-tested expansion of disability income proves to be effective. We also find that some policies that result in higher exit rates from homelessness, such as relaxation of borrowing constraints, help the currently homeless population but lead to a larger homeless share at the steady state by increasing the entry rate.

This is an excellent topic and approach. People are going to debate the assumptions, but this is at least a starting point to better understand what can work to curb homelessness. I am looking forward to what will happen to this paper and what will follow.