Optimal Savings for Retirement: The Role of Individual Accounts

May 19, 2015

By Julia Le Bland and Almuth Scholl


We employ a life-cycle model with income risk to analyze how tax-deferred individual accounts affect households’ savings for retirement. We consider voluntary accounts as opposed to mandatory accounts with minimum contribution rates. We contrast add-on accounts with carve-out accounts that partly replace social security contributions. Quantitative results suggest that making add-on accounts mandatory has adverse welfare effects across income groups. Carve-out accounts generate positive welfare across all income groups but gains are lower for low income earners. Default investment rules in individual accounts have a modest impact on welfare.

As soon as you are mandating something, you are going to reduce welfare unless you overcome some sort of short-sightedness or there is a general equilibrium effect that warrants intervention. I see neither in this model, so it must be that replacing part of social security with a mandatory individual account allows to replace a mandate by a less bad one.

Large Firm Dynamics and the Business Cycle

May 17, 2015

By Vasco Carvalho and Basile Grassi


Do large firm dynamics drive the business cycle? We answer this question by developing a quantitative theory of aggregate fluctuations caused by firm-level disturbances alone. We show that a standard heterogeneous firm dynamics setup already contains in it a theory of the business cycle, without appealing to aggregate shocks. We offer a complete analytical characterization of the law of motion of the aggregate state in this class of models – the firm size distribution – and show that the resulting closed form solutions imply aggregate output and productivity dynamics which are: (i) persistent, (ii) volatile and (iii) exhibit time-varying second moments. We explore the key role of moments of the firm size distribution – and, in particular, the role of large firm dynamics – in shaping aggregate fluctuations, theoretically, quantitatively and in the data.

The message of this paper: the distribution of firms changes over time, it matters and can create fluctuations that are consistent to what we assume for a typical business cycle model. In other words, we could be endogenizing here all the way to the firm-level the aggregate shocks we always rely on.

Wage inequality

May 12, 2015

By Ken Burdett, Carlos Carrillo-Tudela and Melvyn Coles


The objective of this paper is to study why are some workers paid more than others. To do so we construct and quantitatively assess an equilibrium search model with on-the-job search, general human capital accumulation and two sided heterogeneity. In the model workers differ in abilities and firms differ in their productivities. The model generates a simple (log) wage variance decomposition that is used to measure the importance of firm and worker productivity differentials, frictional wage dispersion and workers’ sorting dynamics. We calibrate the model using a sample of young workers for the UK. We show that heterogeneity among firms generates a lot of wage inequality. Among low skilled workers job ladder effects are small, most of the impact of experience on wages is due to learning-by-doing. High skilled workers are much more mobile. Job ladder effects have sizeable impact.

To all enthusiasts of diff-in-diff or diff-in-diff-in-diff empirical studies: adding a little bit of theory goes a log way in identifying and understanding what you are trying to measure, let alone how to set up the empirical strategy. This paper is perfect example of that. In particular it allows to tie back the measurements directly to concepts we know from theory, instead of having a usually vague idea that they are consistent with some theory (“the signs are correct”). Finally, this paper is not only a nice empirical exercise, it also yields some pretty interesting results.

The zero lower bound and parameter bias in an estimated DSGE model

May 5, 2015

By Yasuo Hirose and Atsushi Inoue


This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound (ZLB) constraint on the nominal interest rate. Our Monte Carlo experiments using a standard sticky-price DSGE model show that no significant bias is detected in parameter estimates and that the estimated impulse response functions are quite similar to the true ones. However, as the probability of hitting the ZLB increases, the parameter bias becomes larger and therefore leads to substantial differences between the estimated and true impulse responses. It is also demonstrated that the model missing the ZLB causes biased estimates of structural shocks even with the virtually unbiased parameters.

The zero lower bound will have a lasting and profound effect on business cycle research. First, because it happened and this eventuality was not much considered previously. Second, because the assumption of symmetry around a steady-state is not defensible any more and linearization cannot be justified. And third, because the data is also “tainted” and one needs to be extra-careful in dealing with it now. This paper is a good example of this third point.

Remittances and Macroeconomic Volatility in African Countries

May 1, 2015

By Ahmat Jidoud


This paper investigates the channels through which remittances affect macroeconomic volatility in African countries using a dynamic stochastic general equilibrium (DSGE) model augmented with financial frictions. Empirical results indicate that remittances–as a share of GDP–have a significant smoothing impact on output volatility but their impact on consumption volatility is somewhat small. Furthermore, remittances are found to absorb a substantial amount of GDP shocks in these countries. An investigation of the theoretical channels shows that the stabilization impact of remittances essentially hinges on two channels: (i) the size of the negative wealth effect on labor supply induced by remittances and, (ii) the strength of financial frictions and the ability of remittances to alleviate these frictions.

This is a rare paper that applies DSGE methods to Africa. It also addresses an important question, as African economies are extremely volatile and suffer from large frictions, to the point that the volatility of consumption is higher than that of output. Finally, remittances have become more much larger over the years as a share of GDP, and thus offer potentially interesting ways to insure against domestic fluctuations.

April 2015 calls for papers

April 26, 2015

This is the 300th post on the NEP-DGE blog! Note that you can also follow the paper announcements through email, RSS and Twitter.

Monetary Policy and the Distribution of Income and Wealth, St. Louis, 11-12 September 2015.

Liquidity and Financial Crises, Philadelphia, 9-10 October 2015.

Ifo Conference on Macroeconomics and Survey Data, Munich, 4-5 December 2015.

Fertility Shocks and Equilibrium Marriage-Rate Dynamics: Lessons from World War 1 in France

April 20, 2015

By John Knowles and Guillaume Vandenbroucke


Low sex ratios are often equated with unfavorable marriage prospects for women, but in France after World War 1, the marriage probability of single females rose 50%, despite a massive drop in the male/female ratio. We conjecture that the war-time birth-rate bust induced an abnormal postwar abundance of singles with relatively high marriage propensities. We compute the equilibrium response, in a life-cycle matching model, of marriage hazards to war-time fertility and male-mortality shocks. Our results implicate two powerful forces: an abnormal abundance of marriageable men, and increased gains from marriage due to post-war pro-natalism.

This paper addresses an interesting puzzle that lasted well beyond the immediate post-war years. What makes even more interesting is that one needs more than simple bean-counting, as too often in demographics, to offer a solution. To quantitatively match the increase in marriage rates, one has to factor in the added incentives from having children after war, first because the father is less likely to die, and second because there were explicit pro-natalist propaganda and fiscal nudges.


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