Labour market and fiscal policy

This paper discusses fiscal policy using a DSGE model with search and matching in the labour market. Fiscal policy is effective mainly via its impact through the labour market. Although public intervention tends to crowd out private consumption, public spending also improves the matching between unemployed workers and job vacancies. The mechanism modelled in this paper shares similarity with Baxter & King (1993) and Leeper et al. (2010). The model produces positive fiscal multipliers on impact and in the short term and consistently reproduces the reaction to a spending shock of the main labour market variables such as wages, employment or labour market tightness. These results are similar with that of Monacelli et al. (2010) except that the transmission channel does not depend on the downward adjustment of the reservation wage of workers. The size of the fiscal multiplier increases with the elasticity of matching to spending and is also negatively related with the steady state spending to GDP ratio in the presence of diminishing marginal returns on spending. For large value of the multiplier, there is a crowding in of consumption and investment. Lastly, this model produces output multipliers larger than 1 in the presence of nominal price rigidities

Worker debt, default ans diversity of financial fragility

This paper presents a model addressing the conditions under which financial instability arises in the event of household debt. The model addresses two main cases. First, household debt is affected by functional income distribution. Second, household debt is affected by credit supply and depends on bank performances. The model shows that financial fragility arises through a Fisher effect in the first case and through a debt financed consumption boom in the second case. The model then explores two extensions. First, we raise the question of debt default and its impact on financial instability. Second, we discuss the ability of capital adequacy ratio to limit financial instability

Convergence Heterogeneity at the Local Level in Sub-Saharan Africa

This paper tests for convergence in labor productivity at the local level in 10 Sub-Saharan countries, disaggregated into 1136 administrative entities. This work combines nighttime lights data and a unique set of population censuses to produce local measures of growth, employment and sectoral shares. We find evidence of unconditional convergence across sectors in the range of 2\%. However, convergence is heterogeneous and conditional on both manufacturing and services employment shares. Convergence is also associated with proximity to the main city, moderate population density, low land suitability and relatively moderate temperature. Lastly, the within effect dominates the between effect

The Economic Impact of Covid-19 and Associated Lockdown Measures in China

This paper assesses at the local level the economic impact of Covid-19 and associated lockdown measures in China using high frequency nighttime lights data. Building a model of monthly light intensity, lights dropped by a factor ranging between 13 and 18 percent in early 2020. This corresponds to a decline in economic activity of between 9 and 12 percent and a decline in employment of between 2.6 and 3.6 percent. At the local level, the majority of administrative entities followed a v-shaped recovery, while a smaller number followed a u-shaped recovery or a double dip. At province level, light intensity is explained by the number of cases and a lockdown measure. In particular, the increase in stringency index from 0 in December 2019 to 78 in April 2002 explains a decline in lights by 7.4 percent

Tradable Jobs and Local Labour Market in sub-Saharan Africa

This paper measures the impact of attracting tradable jobs on nontradable jobs at the local level in sub-Saharan countries. Applying the local multiplier approach to 10 medium and low-income countries disaggregated into 1441 administrative entities, we show that the multipliers are 3 to 5 times larger than in high-income countries. The multipliers also increase with the employment status and the skills of the tradable jobs created, highlighting the importance of the consumption of locally produced goods. This points to the importance of manufacturing for economic development and structural transformation. The paper also suggests a modification of the usual shift-share instrumental variable in countries characterized by sectoral diversification/unconditional convergence. Lastly, we show that the multipliers maybe be impacted by the size of administrative entities

Overconsumption, Credit Rationing and Bailout Monetary Policy: A Minskyan Perspective

We consider a Keynes-Goodwin model of effective demand and the distributive cycle where workers purchase goods and houses with marginal propensity significantly larger than one. They therefore need credit, supplied from asset holders, and have to pay interest on their outstanding debt. In this initial situation, the steady state is attracting, while a marginal propensity closer to one makes it repelling. The stable excessive overconsumption case can easily turn from a stable boom to explosiveness and from there through induced processes of credit rationing into a devastating bust. In such a situation the Central Bank may prevent the worst by acting as creditor of last resort, purchasing loans where otherwise debt default (and bankruptcy regarding house ownership) would occur. This bail-out policy can stabilize the economy and also reduces the loss of homes of worker families.mortgage loans, booms, debt default, busts, creditor of last resort.

Bargaining, Aggregate Demand and Employment

This paper depicts the negative impact of a falling labour share caused by reduced bargaining power of workers on aggregate demand and employment. Contrary to standard New Keynesian models, the presence of consumers not participating in financial markets (rule of thumb consumers) causes an immediate negative response of output and employment, which is amplified when the economy faces a lower bound on the nominal interest rate. Additionally, the paper shows that by supporting consumption demand, minimum wages might enhance output and employment

A basic model of real-financial market interactions with heterogeneous opinion dynamics

We consider an alternative modelling approach to the mainstream DSGE paradigm, namely a Dynamic Stochastic General Disequilibrium (DSGD) baseline model of continuous and gradual adjustment processes on interacting real and financial markets. Heterogeneous capital gain expectations (chartists and fundamentalists) are introduced in place of rational expectations and we show that the first type of agents tends to destabilise the economy. An additional feature is that the share of prevailing opinion types is able to switch endogenously. Global stability can be ensured if opinions favour fundamentalist behaviour far off the steady state. This interaction of expectations and population dynamics is bounding the potentially explosive real-financial market interactions, but can enforce irregular behaviour within these bounds when the dynamics is dominated by fundamentalist behavior far off the steady state (at least in the downturn). The size of output and share price fluctuations can be reduced however by imposing suitably chosen policy measures on the dynamics of the private sector

Bargaining, Aggregate Demand and Employment

This paper depicts the negative impact of a falling labour share caused by reduced bargaining power of workers on aggregate demand and employment. Contrary to standard New Keynesian models, the presence of consumers not participating in financial markets (rule of thumb consumers) causes an immediate negative response of output and employment, which is amplified when the economy faces a lower bound on the nominal interest rate. Additionally, the paper shows that by supporting consumption demand, minimum wages might enhance output and employment

Towards Keynesian DSGD (isequilibrium) Modelling: Real-Financial Market Interactions with Heterogeneous Expectations Dynamics

We consider an alternative modelling approach to the mainstream DSGE paradigm, namely basically a Dynamic Stochastic General Disequilibrium model of continuous adjustment processes on interacting real and financial markets. We introduce heterogeneous capital gain expectations (chartists and fundamentalists) and show that the first type of agents tends to destabilise he economy. Global stability can be ensured if opinions favour fundamentalist behaviour far off the steady state. This interaction of expectations and population dynamics is bounding the real-financial market interactions, but allows for irregular behaviour within these bounds. Stability can be further improved by adding suitable policy measures