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Conference Paper
Discretion, rules and volatility - commentary
Working Paper
The cost of labor adjustment : inferences from the gap
We study labor adjustment costs. We specify a dynamic optimization problem at the plant-level, allowing for both convex and non-convex adjustment costs. We estimate the parameters of the adjustment process using an indirect inference procedure in which simulated moments are matched with data moments. For this study we use estimates of reduced form adjustment functions obtained by the "gap methodology" reported in Caballero and Engel (1993). Contrary to evidence at the micro level in support of non-convex adjustment costs, our preliminary findings indicate that piecewise quadratic adjustment ...
Working Paper
The economics of labor adjustment : mind the gap
We study the inferences about labor adjustment costs obtained by the "gap methodology" of Caballero and Engel [1993] and Caballero, Engel and Haltiwanger [1997]. In that approach, the policy function of a manufacturing plant is assumed to depend on the gap between a target and the current level of employment. Using time series observations, these studies reject the quadratic cost of adjustment model and find that aggregate employment dynamics depend on the cross sectional distribution of employment gaps. We argue that these conclusions may not be justified. Instead these findings may ...
Journal Article
Coordination of expectations in the recent crisis: private actions and policy responses
Some of the events of the recent financial crisis have made clear the importance of expectations in an economy. The economic choices individuals make are often based on their expectations of what other people will do?in what economists call a ?coordination game.? In such situations, changes in the beliefs of what others may do can affect the actions of individuals. A key element in such situations is that, as the collective beliefs change and individuals respond to these altered expectations, the outcome in the marketplace can change. In the recent crisis, the coordination of expectations ...
Working Paper
Declining Responsiveness at the Establishment Level: Sources and Productivity Implications
This paper studies competing sources of declining dynamism. Evidence shows that an important component of this decline is accounted for by the reduction in the response of employment to shocks in US establishments. Using a plant-level dynamic optimization problem as a framework for analysis, four potential reasons for this decline are studied: (i) a change in exogenous processes for profits, (ii) an increase in impatience, (iii) increased market power, and (iv) increasing adjustment costs. We identify and quantity the contribution of each of these factors building on a simulated method of ...
Working Paper
Is it is or is it ain't my obligation? Regional debt in a fiscal federation
This paper studies the repayment of regional debt in a multiregion economy with a central authority: Who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bail out the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks ...
Working Paper
Designing stabilization policy in a monetary union
The European Monetary Union (EMU) has become a reality, but economists nonetheless continue to debate the desirability and the optimal design of a monetary union. Since a union's essential element is delegation of monetary power to a single centralized entity, one of the key issues in this debate is whether a monetary union will limit the effectiveness of stabilization policy. If so, it will not necessarily be welfare-improving. Having studied a two-country world economy and considered various designs of monetary union, the authors argue that the success of monetary union depends on 1) the ...
Working Paper
Hours and employment implications of search frictions: matching aggregate and establishment-level observations
This paper studies worker and job flows at the establishment and aggregate levels. The paper is built around a set of facts concerning the variability of unemployment and vacancies in the aggregate, the distribution of net employment growth and the comovement of hours and employment growth at the establishment level. A search model with frictions in hiring and firing is used as a framework to understand these observations. Notable features of this search model include non-convex costs of posting vacancies, establishment level profitability shocks and a contracting framework that determines ...
Working Paper
Exhuming Q: market power capital market imperfections
Evidence of the statistical significance of profits in Q regressions remains one of the principal findings in the empirical investment literature. This result is frequently taken to support the view that capital market imperfections are an important element for understanding investment. This paper challenges that conclusion. We argue that allowing the profit function at the firm level to be strictly concave, reflecting, for example, market power, is sufficient to replicate the Q theory based regression results in which profits are a significant factor determining investment. To be clear, our ...
Journal Article
Dollarization and the conquest of hyperinflation in divided societies
This study argues that the delegation of monetary policy control by one country to another can reduce inflation in the delegating country. Hyperinflation is common in a divided society, one in which special interest groups can pressure a weak central government to issue money to finance their own demands while neglecting the country?s overall welfare. A commitment device like dollarization or a currency board, which gives control of the divided country?s money supply to another country, can eliminate this inflation bias. This is illustrated by Argentina?s experience with inflation and a ...