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Discussion Paper
(S,s) inventory policies in general equilibrium
We study the aggregate implications of (S,s) inventory policies in a dynamic general equilibrium model. Firms in the model's retail sector face idiosyncratic demand risk, and (S,s) inventory policies are optimal because of fixed order costs. The model economy replicates salient features of the business cycle and reconciles evidence that orders are more volatile than sales, and that inventory investment is positively correlated with sales. There are two main results. First, we find that general equilibrium effects and the optimal order size are important for the economy's response to exogenous ...
Discussion Paper
The real business cycle: intermediate inputs and sectoral comovement
We describe the postwar U.S. business cycle for the durable and nondurable goods producing sector. The business cycle is characterized by positive comovement of output, employment, and investment across the two sectors. We develop a two sector growth model to explain the observed pattern of comovements, and suggest that intermediate inputs produced by the nondurable goods sector for the durable goods sector play a crucial role.
Working Paper
Vintage capital as an origin of inequalities
Working Paper
Accounting for unemployment: the long and short of it
Shimer (2012) accounts for the volatility of unemployment based on a model of homogeneous unemployment. Using data on short-term unemployment he finds that most of unemployment volatility is accounted for by variations in the exit rate from unemployment. The assumption of homogeneous exit rates is inconsistent with the observed negative duration dependence of unemployment exit rates for the U.S. labor market. We construct a simple model of heterogeneous unemployment with short-term and long-term unemployed, and use data on the duration distribution of unemployment to account for entry to and ...
Working Paper
What is the real story for interest rate volatility?
What is the source of interest rate volatility? Why do low interest rates precede business cycle booms? Most observers tend to assume that monetary policy is largely responsible for it. Indeed, a standard real business cycle model delivers rather small fluctuations in real interest rates. Here, however, we present two models of the real business cycle variety in which real rate fluctuations are of similar magnitude as in the data, while simultaneously matching salient business cycle facts. The second model also replicates the cyclical behavior of real interest rates. The models build on ...
Working Paper
Aggregate Labor Force Participation and Unemployment and Demographic Trends
We estimate trends in the labor force participation (LFP) and unemployment rates for demographic groups differentiated by age, gender, and education, using a parsimonious statistical model of age, cohort, and cycle effects. Based on the group trends, we construct trends for the aggregate LFP and unemployment rate. Important drivers of the aggregate LFP rate trend are demographic factors, with increasing educational attainment being important throughout the sample, ageing of the population becoming more important since 2000, and changes of groups' trend LFP rates, e.g., for women prior to ...
Working Paper
Should optimal discretionary monetary policy look at money?
This paper examines whether monetary indicators are useful in implementing optimal discretionary monetary policy when the policy maker has incomplete information about the environment. We find that money does not contain useful information for the policy maker, if we calibrate the model to the U.S. economy. If money demand were to be appreciably less variable, observations on money could be useful in response to productivity shocks but would be harmful in response to money demand shocks. We provide an incomplete information example where equilibrium welfare declines when the money demand ...
Working Paper
Home production
Studying the incentives and constraints in the non-market sector ? that is, home production ? enhances our understanding of economic behavior in the market. In particular, it helps us to understand (1) small variations of labor supply over the life cycle, (2) large variations of employment relative to wages over the business cycle, and (3) large income differences across countries.
Working Paper
Technology-policy interaction in frictional labor markets
Does capital-embodied technological change play an important role in shaping labor market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labor demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labor market regulation?we analyze unemployment benefits, payroll and income taxes, and firing ...
Working Paper
Can a matching model explain the long-run increase in Canada's unemployment rate?
We construct a simple general equilibrium model of unemployment and calibrate it to the Canadian economy. Job creation and destruction are endogenous. In this model, we consider several potential factors which could contribute to the long-run increase in the Canadian unemployment rate: a more generous unemployment insurance system, higher layoff costs, higher distortionary taxes, and a slower rate of productivity growth. We find that in the model economy the impact of all of these factors on the unemployment rate is small.