Quality change in the CPI - commentary

Consumer price indexes ; Prices

Economics and Climate Change: Integrated Assessment in a Multi-Region World

This paper develops a model that integrates the climate and the global economy---an integrated assessment model---with which different policy scenarios can be analyzed and compared. The model is a dynamic stochastic general-equilibrium setup with a continuum of regions. Thus, it is a full stochastic general-equilibrium version of RICE, Nordhaus's pioneering multi-region integrated assessment model. Like RICE, our model features traded fossil fuel but otherwise has no markets across regions---there is no insurance nor any intertemporal trade across them. The extreme form of market incompleteness is not fully realistic but arguably not a decent approximation of reality. Its major advantage is that, along with a set of reasonable assumptions on preferences, technology, and nature, it allows a closed-form model solution. We use the model to assess the welfare consequences of carbon taxes that differ across as well as within oil-consuming and -producing regions. We show that, surprisingly, only taxes on oil producers can improve the climate: taxes on oil consumers have no effect at all. The calibrated model suggests large differences in views on climate policy across regions.

News shocks and business cycles

This article considers the question, raised by Beaudry and Portier in their recent articles, of whether "news shocks" can lead to expansions and contractions that look like business cycle movements. News shocks are to be thought of solely as affecting expectations (regarding future events) and thus do not influence current resource restrictions at all. So the question is, for example, whether news about lower future productivity could lead our key aggregate variables—consumption, investment, and employment—to co-move down now. Beaudry and Portier make the point that standard neoclassical models clearly will not allow this outcome, and they, along with other researchers in follow-up work, suggest elaborations on the standard model that would. In the present research, we review this literature and propose a very simple model that does quite well in predicting co-movements in response to news shocks. The model is based on a departure from competitive labor markets: It uses a standard Diamond-Mortensen-Pissarides view that unemployment is determined as a function of search/matching frictions.Business cycles ; Economic growth

The IT revolution : is it evident in the productivity numbers?

Information technology ; Productivity

Implications of the capital-embodiment revolution for directed R&D and wage inequality

Wages ; Labor market ; Productivity

The World Distribution of Productivity: Country TFP Choice in a Nelson-Phelps Economy

This paper builds a theory of the shape of the distribution of total-factor productivity (TFP) across countries. The data on productivity suggests vast differences across countries, and arguably even has “twin peaks”. The theory proposed here is consistent with vast differences in long-run productivity, and potentially also with a twin-peaks outcome, even under the assumption that all countries are ex-ante identical. It is based on the hypothesis that TFP improvements in a given country follow a Nelson-Phelps specification. Thus, they derive from past investments in the country itself and, through a spillover (or catch-up) term, from past investments in other countries. We then construct a stochastic dynamic general equilibrium model of the world which has externalities: each country invests in TFP and internalizes the dynamic effects of its own investment, while treating other countries' investments as given. Average world growth is endogenous, as is the distribution of TFP across countries. We find that small idiosyncratic TFP shocks can lead to large long-run differences in TFP levels and that, in the long run, the world distribution of TFP across countries may be asymmetric, i.e., twin-peaked, or bimodal. More specifically, twin-peaked world distributions of TFP arise if the catch-up term in the Nelson-Phelps equation has a sufficiently low weight. If, on the other hand, technological catch-up is important, the world distribution of TFP is unimodal, though it may still have large dispersion.Growth; Inequality

Vintage capital as an origin of inequalities

Does capital-embodied technological change play an important role in shaping labor market inequalities? This paper addresses the question in a model with vintage capital and search / matching frictions where costly capital investment leads to large heterogeneity in productivity among vacancies in equilibrium. The paper first demonstrates analytically how both technology growth and institutional variables affect equilibrium wage inequality, income shares and unemployment. Next, it applies the model to a quantitative evaluation of capital as an origin of wage inequality: at the current rate of embodied productivity growth a 10-year vintage differential in capital translates into a 6% wage gap. The model also allows a U.S. – continental Europe comparison: an embodied technological acceleration interacted with different labor market institutions can explain a significant part of the differential rise in unemployment and capital share and some of the differential dynamics in wage inequality.

A Quantitative Study of the Replacement Problem in Frictional Economies

The question of how technological change affects labor markets is a classical one in macroeconomics. A standard framework for addressing this question is the matching model with vintage capital and exogenous technical progress. Within this framework, it has been argued that the impact of technological change on labor market outcomes differs according to the mechanism through which the new technology enters the economy. In particular, it matters whether: (1) new capital replaces old capital by destroying the job and displacing the worker (Schumpeterian creative-destruction) or old capital can be "upgraded" to the frontier technology (Solowian upgrading); (2) firms make the technology adoption decision unilaterally (hold-up), or the investment decision is surplus-maximizing (efficient investment). Our main finding is that for quantitatively reasonable parameter values the specific details of the model for how technology is introduced and who decides on investments do not matter for the equilibrium outcomes of our main variables of interest: unemployment, wage inequality, and labor share. The intuition for this "equivalence result" is that these models will yield significantly different implications only if the matching process is very costly and time-consuming, but our calibration shows that this meeting friction is minorinvestment-specific technical change, directed technical change, skill premium

Measuring integration in the labor market - which to use, the demographic or the ethnic concept?

In most countries, the data and the underlying theoretical approaches tend to emphasize the greater success of the natives or the ethnic majority in the labor market. When measuring integration and success in the labor market, different approaches can be used, for example, the demographic or ethnic concept. The ethnic concept refers to ethnicity, regardless of having an immigrant background or not. The demographic concept instead uses the native/immigrant dimension, usually considering first- and second-generation immigrants. Researchers' use of these concepts varies by country but rarely do they discuss which concept would be more relevant to measure labor market differences and inequalities. Relevance is defined by how labor market differences and inequalities can be identified most clearly. In recent literature, it is suggested that in Baltic countries statistical categories of "international migrant/foreign-born" (demographic concept) are not relevant to use because migration took place inside the borders. In the current article, the focus is on the Estonian context and the research question, therefore, asks which concept is suitable for the Estonian context when taking the Russian speaking population into consideration in labor market analysis. Results lead to the conclusion that using the demographic concept without making an ethnic distinction could lead to a distorted interpretation of the Russian-speaking population’s labor market integration in the Estonian context. This result also supports the recommendations from previous literature to use an ethnic concept. The study used the Labor Force Survey (LFS) 2013-2014 for the empirical analysis