Two-country Model and Foreign Exchange Dynamics

We establish the nature of the dynamics of the exchange rate in a two country model with heterogenous firms a la Abadir and Talmain (2002)

Stock Market Valuation and Monopolistic Competition: a Dynamic Stochastic General Equilibrium Approach

This paper extends a Real Business Cycle model to an economy in which monopolistic competitive firms’ technology is subject to idiosyncratic and common shocks. The value of future technology rents drive stock market valuation. We study how the arrival of new information about future technological developments affect each firm’s stream of future profit, the rate on return on physical capital, and the value of equity. We show that good news about future technology of a specific firm or industry will lift the price of shares of the specific firms, but that good news about future aggregate productivity will raise the discount rate, leaving the price of shares unchanged. On the other hand, good news about future aggregate profit margins will lift the price of shares.Equity, Heterogeneous (non-representative) firms, Monopolistic Competition, Real Business Cycle (RBC), Stock Market

Rent-seeking, Occupational Choice and Oil Boom.

This paper examines choice of occupation between productive activities and rent-seeking in an oil-dominated economy where oil rent is the major source of public revenue. Three regimes can occur: no rent-seeking, coexistence of rent-seeking and of productive activity and full rent-seeking. The economy may get trapped in each regime unless it shocked by a substantial change in exogenous parts of reward structure. In particular in the latter case the extraction and liquidation of oil is the only productive activity. Oil boom in general rewards both productive and unproductive activities unequally and hence affects occupational choice. We identify situations where boom favours misallocation of talent and the extent of diversion that boom induces dominates its income effect. Our model also captures voracity effect where fiscal transfers grow more proportional than the size of windfall itself. Boom may however cause changing of regime from coexistence of both activities to full rent-seeking even when the voracity effect is not operative. In this case boom has a permanent effect and its aftermath persists even when the oil rent returns to its pre-boom level.Oil economies, rent-seeking, occupational choice, oil boom, voracity effect.

Aggregation, Persistence and Volatility in a Macromodel

Starting from microeconomic foundations, we derive a general formula for the aggregation of outputs of heterogeneous firms (or sectors), and we solve explicitly for the fundamental intertemporal equilibrium path of the aggregate economy. The firms are subject to temporary technology shocks, but the aggregate output has radically different dynamical properties, and a special form of long memory and nonlinearity never used hitherto. We study, analytically, the implied time series properties of the new process characterizing aggregate GDP per capita. This process is more persistent than any dynamically-stable linear process (e.g. autoregressions) and yet is mean-reverting (unlike unit-root processes), and its volatility is of a greater order of magnitude than that of any of its components. This amplification of volatility means that even small shocks at the micro level can lead to large fluctuations at the macro level. The process is also characterized by long cycles which have random lengths and which are asymmetric. Increased monopoly power will tend to reduce the amplitude and increase the persistence of business cycles. Strikingly, we find that the nonlinear aggregate process has an S-shaped decay of memory, similar to the data but unlike linear time series models such as the widely-used Auto-Regressive Integrated Moving-Average (ARIMA) processes and their special cases (including fractional Integration).

Endogenous Fertility, Endogenous Growth and Public Pension System: Should We Switch from a PAYG to a Fully-Funded System?

This paper studies the implications of state pension plan reform on fertility and on growth. It extends the Grossman and Yanagawa (1993) endogenous growth framework by incorporating altruism, making fertility endogenous. We investigate the effect on long-run growth of a switch from a Pay-As-You-Go (PAYG) pension system to a fully-funded system. We show that a PAYG pension system is associated with a lower fertility rate than a fully-funded system. This lower fertility in turn increases the rate of growth. Hence, switching from a PAYG system to a fully-funded system may be harmful, especially for developing countries in which limited resources are heavily stressed by high fertility rates. In addition, we propose a hypothetical pension system, the Saving Subsidy Program (SSP), which would yield a higher growth rate than the PAYG system. The SSP consists of a minimum benefit level for each retiree and of a subsidy to private savings.

Industrial structure, trade and regional economics : market segmentation

TWe consider a general equilibrium model a la Bhaskar (Review of Economic Studies 2002): there are complementarities across sectors, each of which com- prise (many) heterogenous monopolistically competitive firms. Bhaskar's model is extended in two directions: production requires capital, and labour markets are segmented. Labour market segmentation models the difficulties of labour migrating across international barriers (in a trade context) or from a poor region to a richer one (in a regional context), whilst the assumption of a single cap- ital market means that capital flows freely between countries or regions. The model is solved analytically and a closed form solution is provided. Adding labour market segmentation to Bhaskar's two-tier industrial structure allows us to study, inter alia, the impact of competition regulations on wages and financial flows both in the regional and international context, and the output, welfare and financial implications of relaxing immigration laws. The analytical approach adopted allows us, not only to sign the effect of policies, but also to quantify their e¤ects. Introducing capital as a factor of production improves the realism of the model and refines its empirically testable implications.market segmentation, monopolistic competition, industry competition, regional competition, capital flows

Two-country Model and Foreign Exchange Dynamics

We establish the nature of the dynamics of the exchange rate in a two country model with heterogenous firms a la Abadir and Talmain (2002)

Macro and Financial Markets: The Memory of an Elephant?

Macroeconomic and aggregate financial series share an unconventional type of nonlinear dynamics. Existing techniques (like co-integration) model these dynamics incompletely, hence generating seemingly paradoxical results. To avoid this, we provide a methodology to disentangle the long-run relation between variables from their own dynamics, and illustrate with two applications. First, in the forward-premium puzzle, adding a component quantifying the persistent nonlinear dynamics of exchange rates yields substantial predictability and makes the forward-premium term insignificant. Second, S&P 500 grows in a pattern of momentum followed by reversal, forming long cycles around a trend given by GDP, a stable non-breaking relation since WWII. Classification-Keywords:

Nelson-Plosser Revisited: the ACF Approach

We detect a new stylized fact about the common dynamics of macroeconomic and financial aggregates. The rate of decay of the memory (or persistence) of these series is depicted by their autocorrelation functions (ACFs), and they all fit very closely a parsimonious four-parameter functional form that we present. Not only does our formula fit the data better than the ones that arise from autoregressive models, but it also yields the correct shape of the ACF. This can help policymakers understand the lags with which an economy evolves, and its turning points.

Nelson-Plosser revisited: the ACF approach

We detect a new stylized fact about the common dynamics of macroeconomic and financial aggregates. The rate of decay of the memory of these series is depicted by their Auto-Correlation Functions (ACFs). They all share a common four-parameter functional form that we derive from the dynamics of an RBC model with heterogeneous firms. We find that, not only does our formula fit the data better than the ACFs that arise from autoregressive models, but it also yields the correct shape of the ACF. This can help policymakers understand better the lags with which an economy evolves, and the onset of its turning points. Classification-JEL: JEL E32, E52, E63