The Disability Option: Labor Market Dynamics with Macroeconomic and Health Risks

January 31, 2019

By Amanda Michaud and David Wiczer

http://d.repec.org/n?u=RePEc:nys:sunysb:18-12&r=dge

We evaluate the contribution of changing macroeconomic conditions and demographics to the increase in Social Security Disability Insurance (SSDI) over recent decades. Within our quantitative framework, multiple sectors differentially expose workers to health and economic risks, both of which affect individuals’ decisions to apply for SSDI. Over the transition, falling wages at the bottom of the distribution increased awards by 27% in the 1980s and 90s and aging demographics rose in importance thereafter. The model also implies two-thirds of the decline in working-age male employment from 1985 to 2013, three-fourths of which eventually goes on SSDI.

This is important news in understanding the decline in the labor force participation. I would be very curious to see this studied in other countries, especially in those where the labor force participation did not decline.

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Innovation and Trade Policy in a Globalized World

January 11, 2019

Ufuk Akcigit, Sina T. Ates and Giammario Impullitti

http://d.repec.org/n?u=RePEc:cep:cepdps:dp1589&r=all

How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, market leadership and trade flows, in a world with two large open economies at different stages of development. Firms R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statistically, globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition.

There.


Organizational Equilibrium with Capital

December 24, 2018

By Marco Bassetto, Zhen Huo and José-Víctor Ríos-Rull

http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2018-20&r=dge

This paper proposes a new equilibrium concept – organizational equilibrium – for models with state variables that have a time inconsistency problem. The key elements of this equilibrium concept are: (1) agents are allowed to ignore the history and restart the equilibrium; (2) agents can wait for future agents to start the equilibrium. We apply this equilibrium concept to a quasi-geometric discounting growth model and to a problem of optimal dynamic fiscal policy. We find that the allocation gradually transits from that implied by its Markov perfect equilibrium towards that implied by the solution under commitment, but stopping short of the Ramsey outcome. The feature that the time inconsistency problem is resolved slowly over time rationalizes the notion that good will is valuable but has to be built gradually.

This is not an easy paper and one that will take time to digest. However, this organizational equilibrium opens interesting avenues for the study of economic (and other) policies where the limited time horizon of policy makers leads to time inconsistencies.


Uneven gains: the macroeconomic and welfare effects of the business tax reform

December 20, 2018

By Oliver Pardo

http://d.repec.org/n?u=RePEc:col:000416:017011&r=dge

This paper assess the macroeconomic and welfare effects of the 2017 tax reform in the US. This assessment is carried out by simulating the enacted business tax cuts in a dynamic general equilibrium model calibrated to replicate the household income distribution in the US. The simulation suggests that the cuts will lead to increases in investment, wages and output, although the welfare gains are quite unevenly distributed across households. Long-run investment increases by one percentage point of the baseline GDP, leading to a 1.3% increase in the steady-state wages and a 1.7% increase in the steady-state output. However, there is a sudden and permanent drop in tax revenue equivalent to 0.5% of the baseline GDP. The necessary cuts in government spending imply that households in the poorest quintile may face a welfare loss equivalent to 1.6% of the GDP. Mean-while, households in the richest quintile can expect a gain of 4.4% of the GDP. Overall, the welfare gains of all households add up 4.7% of the GDP. Hence, the aggregated welfare gains from all but the richest quintile is barely positive.

While the results are hardly surprising, it is nice to see a first evaluation of this tax policy using serious modeling. There should be more of it.


Collateral Booms and Information Depletion

December 13, 2018

By Vladimir Asriyan, Luc Laeven and Alberto Martín

http://d.repec.org/n?u=RePEc:bge:wpaper:1064&r=dge

We develop a new theory of information production during credit booms. In our model, entrepreneurs need credit to undertake investment projects, some of which enable them to divert resources towards private consumption. Lenders can protect themselves from such diversion in two ways: collateralization and costly screening, which generates durable information about projects. In equilibrium, the collateralization-screening mix depends on the value of aggregate collateral. High collateral values raise investment and economic activity, but they also raise collateralization at the expense of screening. This has important dynamic implications. During credit booms driven by high collateral values (e.g. real estate booms), the economy accumulates physical capital but depletes information about investment projects. As a result, collateral-driven booms end in deep crises and slow recoveries: when booms end, investment is constrained both by the lack of collateral and by the lack of information on existing investment projects, which takes time to rebuild. We provide new empirical evidence using US firm-level data in support of the model’s main mechanism.

This is an interesting take at the slow recovery for the Great Recession. I am also wondering how this theory could explain endogenous herding behavior during such a boom.


Quantitative Easing

December 6, 2018

By Wei Cui and Vincent Sterk

http://d.repec.org/n?u=RePEc:cfm:wpaper:1830&r=dge

Is Quantitative Easing (QE) an effective substitute for conventional monetary policy? We study this question using a quantitative heterogeneous-agents model with nominal rigidities, as well as liquid and partially liquid wealth. The direct effect of QE on aggregate demand is determined by the difference in marginal propensities to consume out of the two types of wealth, which is large according to the model and empirical studies. A comparison of optimal QE and interest rate rules reveals that QE is indeed a very powerful instrument to anchor expectations and to stabilize output and inflation. However, QE interventions come with strong side effects on inequality, which can substantially lower social welfare. A very simple QE rule, which we refer to as Real Reserve Targeting, is approximately optimal from a welfare perspective when conventional policy is unavailable. We further estimate the model on U.S. data and find that QE interventions greatly mitigated the decline in output during the Great Recession.

This is a very interesting paper on a policy that is still poorly understood.


Should I stay or should I go? Austerity, unemployment and migration

November 29, 2018

By Guilherme Bandeira, Jordi Caballé, and Eugenia Vella

http://d.repec.org/n?u=RePEc:bde:wpaper:1839&r=dge

High unemployment and fiscal austerity during the Great Recession have led to significant migration outflows in those European countries that suffered a deep deterioration of their economy, Greece being the most obvious case. This paper introduces endogenous migration in a small open economy DSGE model to analyze the business cycle effects from the interaction of fiscal consolidation instruments with migration. A tax-based consolidation induces the strongest increase in emigration, leading to the highest costs in terms of aggregate GDP and unemployment in the medium run. As a result, the unemployment gains from migration are only temporary. However, in terms of per capita GDP, cuts in the components of public spending that are either productive or utility-enhancing can lead to a deeper contraction than tax hikes or wasteful spending cuts. The introduction of potential migration by the employed implies even higher unemployment costs, a deeper demand contraction, and an increase in both the tax hike and the time required to achieve the same size of fiscal consolidation.

The same applies to internal migration and fiscal policy in a federal state. Important lessons here.