Trade, Relative Prices, and the Canadian Great Depression
Canadian GNP per capita fell by roughly a third between 1928 and 1933. Although the decline and the slow recovery of GNP resemble the American Great Depression, trade was more important in Canada, as exports and imports each accounted for roughly a quarter of Canadian GNP in 1928. The fall in the trade share of GNP of roughly 30 percent between 1928 and 1933 was accompanied by a decline of over 20 percent in the relative prices of exports and imports relative to nontraded goods. We develop a three-sector small open economy model, where wages in the nontraded and import competing sectors ...
Is U.S. federal debt too large?
U.S. federal debt has grown to levels that have not been seen since the aftermath of the Second World War. Many economists argue there is plenty to be worried about when it comes to what this implies for the U.S. economy. This Economic Commentary explains that recent increases in debt are typical of the growth seen historically in times of crisis, but entitlement growth is a different story. Unchecked, it will impair our ability to respond to crises and economic downturns in the future.
Technology shocks and unemployment in the last recession
In the latest recession, unemployment rates in the United States increased at a faster pace than in the average OECD country. Since the unemployment rate has been more sensitive to technological shocks in the United States in the past than in other OECD countries, I investigated whether increased sensitivity to such shocks was the reason for the recent relative increase in the U.S. unemployment rate. I find this was not the case.
Reassessing the Effects of Extending Unemployment Insurance Benefits
To deal with the high level of unemployment during the Great Recession, lawmakers extended the availability of unemployment benefits?all the way to 99 weeks in the states where unemployment was highest. A recent study has found that the extensions served to increase unemployment significantly by putting upward pressure on wages, leading to less jobs creation by firms. We replicate the methodology of this study with an updated and longer sample and find a much smaller impact. We estimate that the impact of extending benefits on unemployment through wages and job creation can, at its highest, ...
Credit flows to businesses during the Great Recession
During the last recession, credit flows suffered their worst slowdown since World War II. A look at selected credit market measures gives some insight into why the slowdown was so severe. The measures also show that in spite of the size of the shock, credit flows actually recovered extremely quickly?a testament to the depth of the credit markets, and possibly the interventions that were taken to support them.
Job separations, heterogeneity, and earnings inequality
Changes in the fraction of workers experiencing job separations can account for> most of the increase in earnings dispersion that occurred both between, as well as> within educational groups in the United States from the mid-1970s to the mid-> 1980s. This is not true of changes in average earnings losses following job separations.> A search model with exogenous human capital accumulation calibrated> to match some selected moments of the U.S. labor market is used to measure the> effects of changes in the fraction of workers experiencing job separations (extensive> margin) versus changes in ...
We present a model in which the importance of financial intermediation for development can be measured. We generate financial differences by varying the degree to which contracts can be enforced. Economies where enforcement is poor employ less capital and less efficient technologies. Yet, accounting for all the observed dispersion output requires a higher capital share or a lower elasticity of substitution between capital and labor than usually assumed. We find that the effects of changes in those technological parameters on output are markedly larger when financial frictions are present. ...
Financial Engineering and Economic Development
The vast literature on financial development focuses mostly on the causal impact of the quantity of financial intermediation on economic development and productivity. This paper, instead, focuses on the role of the financial sector in creating securities that cater to the needs of heterogeneous investors. We describe a dynamic extension of Allen and Gale (1989)?s optimal security design model in which producers can tranche the stochastic cash flows they generate at a cost. Lowering security creation costs in that environment leads to more financial investment, but it has ambiguous effects on ...
Monetary Policy and Inequality
This Commentary examines the link between monetary policy and income and wealth inequality by reviewing the theoretical channels that have been proposed and examining the empirical evidence on their importance. The analysis suggests that the magnitude of any redistributive consequences of conventional monetary policy seems to be small. Evidence that unconventional monetary policies have led to increases in inequality is still inconclusive.
The implications of capital-skill complementarity in economies with large informal sectors
In most developing nations, formal workers tend to be more experienced, more educated, and earn more than informal workers. These facts are often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there exists little direct evidence that such barriers are important. This paper describes a model where significant differences arise between formal and informal workers even though labor markets are perfectly competitive. In equilibrium, the informal sector emphasizes low-skill work because informal managers have access to less outside financing, and ...