The Economic Adjustment Program for Portugal : assessing welfare impact in a heterogeneous-agent framework

The sovereign debt crisis, triggered by the 2007-08 global financial cri- sis, has affected several European Union (EU) countries, leading to unprecedented financial assistance programs. In May 2011, the Portuguese Government set an agreement with the Troika (a supranational institution composed by the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF)), through which, in exchange for external help, the Portuguese author- ities committed to an Economic Adjustment Program (EAP). In order to assess the impacts of the EAP on welfare and, in particular, on inequality, this paper simulates the debt consolidation strategy proposed by the Troika using a general equilibrium model with heterogeneous agents. The model enables to explore the impacts of the fiscal adjustment on the endogenous cross-section distribution of income, wealth and welfare. Our results predict a positive net welfare gain, despite the existence of sig- nificant transition costs in terms of output losses and inequality, especially during the first years of implementation. Overall, the net positive welfare gains are biased towards the poorer, which means that the consolidation plan will be, in the end, equality-enhancing. These results reflect the instruments involved in the consolida- tion strategy: productive and unproductive expenditure cuts combined with a slight increase in social transfers. Furthermore, the simulation predicts a positive impact on the Portuguese net foreign asset (NFA) position. Assuming this prediction is correct, this strongly supports the motivation for the adoption of the Economic Adjustment Program which considers the large external indebtedness of Portugal as a central issue in the economic diagnosis.info:eu-repo/semantics/publishedVersio

The Demographic Transition in Closed and Open Economies: A Tale of Two Regions

This paper constructs a general equilibrium overlapping generation model to evaluate quantitatively how demographic transition (falling mortality and fertility rates) affects aggregate variables (wages, interest rate, output), and inter-generational welfare in closed and open economies. We perform this analysis for two economies calibrated to resemble the North (US and Europe) and Latin America. Our simulations suggest that the demographic transition could have generated income per capita growth up to 0. 5% per year in excess of steady-state growth in the past 50 years in Latin America and 0. 3% in the North

Solving OLG Models with Many Cohorts, Asset Choice and Large Shocks

The paper presents a computationally efficient method to solve overlapping generations models with asset choice. The method is used to study an OLG economy with many cohorts, up to 3 different assets, stochastic volatility, short-sale constraints, and subject to rather large technology shocks. On the methodological side, the main findings are that global projection methods with polynomial approximations of degree 3 are sufficient to provide a very precise solution, even in the case of large shocks. Globally linear approximations, in contrast to local linear approximations, are sufficient to capture the most important financial statistics, including not only the average risk premium, but also the variation of the risk premium over the cycle. However, global linear approximations are not sufficient to reliably pin down asset choices. With a risk aversion parameter of only 4, the model generates a price of risk, measured as the Sharpe ratio, that is almost half of what it is for US stocks. However, the asset price fluctuations and the equity premium are much smaller than in US data

Demand Induced Fluctuations

We build a variation of the neoclassical growth model in which households increased desire to save generate recessions. Our economy features three departures from the standard model: (1) goods markets (for nontradables) require active search from households wherein increases in consumption expenditures increase measured productivity; (2) adjustment costs make it difficult to expand the tradable goods sector by reallocating factors of production from nontradables to tradables; (3) labor markets have Nash bargaining wage setting and Mortensen-Pissarides search and matching frictions labor markets. These departures provide a novel quantitative theory to explain recessions like those in southern Europe without relying on technology shocks

Sticky Wage Models and Labor Supply Constraints

In sticky wages models (either à la Calvo or à la Rotemberg), labor is solely determined by the demand side. However, a change of circumstances may make labor demand higher than agents' willingness to work. We find that workers are required to work against their will between 15 percent and 30 percent of the time (with 5 percent wage markup, less with higher markups and in Rotemberg models). Estimating models with the minimum of the demand and supply of labor instead of the demand-determined quantity yields different and unappealing properties. Hence, special attention should be paid to possible violations of the labor supply constraint

Work Schedules, Wages and Employment in a General Equilibrium Model with Team Production

This paper provides a prototype general equilibrium model of team production. Team production refers to production processes which require that the work schedules of heterogeneous workers be closely coordinated. The key innovation in the framework is that the work schedules, wages, and employment of heterogeneous workers are endogenously determined in the presence of team production. I demonstrate the potential importance of modeling team production through a quantitative example. (Copyright: Elsevier)