Essays on non-search unemployment and monetary policy

This doctoral dissertation explores the role that institutions and policies can have in shaping aggregate economic outcomes. The thesis is comprised of an introductory chapter and three independent essays. All essays set up a clear structure that specifies how economic agents react to a changing environment. That is, each essay builds on the general equilibrium modeling of Macroeconomics. The first essay examines the equilibrium effects of occupational human capital protection during mass layoffs in a setup where human capital can depreciate during unemployment spells and commitment problems prevent markets from allocating layoffs optimally. As the consequences of the policy are tightly related to occupational mobility, the paper focuses on modeling reallocation incentives of heterogeneous workers. In a calibrated model, a policy that concentrates involuntary unemployment incidences to inexperienced workers, decreases workers’ incentives to reallocate, compared to an equilibrium where everyone faces an identical unemployment risk, leading also to a decrease in aggregate unemployment. Moreover, this policy change increases the market output and on average does not harm the inexperienced workers. The second essay explores the effects of unionization in an island model of Lucas and Prescott (1974) with different union structures. When a model with competitive labor markets is set to match the empirical fact that a large number of unemployment spells ends with recalls, an introduction of a large labor union, that represents all workers and sets a common economy-wide minimum wage, increases unemployment substantially. Moreover, the whole increase is about non-search unemployment as search unemployment actually reduces marginally. If the same degree of unionization is generated by a continuum of small unions, the aggregate unemployment reaction is somewhat smaller. However, the increase in non-search unemployment is still considerable. The workings of a large union are also explored when the union is assumed to bargain over the minimum wage with an employers’ organization. This environment leads to a considerably lower increase in aggregate unemployment. Yet again, the search intensity of unemployed workers drops significantly. In the third essay we show that the cancellation of income and substitution effect implied by King-Plosser-Rebelo (1988) preferences breaks tight coeff- cient restriction between the slope of the Phillips curve and the elasticity of consumption with respect to real interest rate in a sticky price macro model. This facilitates the estimation of intertemporal elasticity of substitution using full information Bayesian Maximum Likelihood techniques within a structural model. The US data from the period 1984–2007 supports low intertemporal elasticity of substitution and strongly rejects a logarithmic and an additively separable utility specification commonly applied in the New Keynesian literature.Tämä väitöskirja tarkastelee instituutioiden ja politiikkatoimenpiteiden vaikutuksia koko talouden tulemien kannalta, keskittyen erityisesti työmarkkinoihin. Työ koostuu johdannosta ja kolmesta itsenäisestä esseestä. Tarkastelu pohjautuu yleisen tasapainon malleihin. Ensimmäinen essee tutkii ammatillisen osaamisen suojelun vaikutuksia irtisanomistilanteissa, kun inhimillinen pääoma voi rapautua työttömyysjaksojen aikana ja epätäydellisistä sopimuksista johtuen markkinat eivät kohdista irtisanomisia tehokkaasti. Koska politiikkamuutoksen seuraukset ovat läheisesti sidoksissa ammatilliseen liikkuvuuteen, essee keskittyy heterogeenisten työntekijöiden uranvaihtojen mallintamiseen. Kalibroituun malliin pohjautuvat tulokset indikoivat, että irtisanomissääntö, joka kohdistaa työttömyysjaksot ensisijassa kokemattomiin työntekijöihin, laskee ammattien välistä liikkuvuutta verrattuna tilanteeseen, jossa kaikki työntekijät kohtaavat saman työttömyysriskin. Toisaalta talouden työttömyys on pienempää ja tuotanto suurempaa, kun irtisanomiset kohdistuvat kokemattomiin työntekijöihin. Väitöskirjan toinen luku tarkastelee erilaisten ammattiliittorakenteiden merkitystä Lucasin ja Prescottin (1974) mallin avulla. Kun kalibroinnissa huomioidaan, että suuri osa työttömyysjaksoista päättyy paluuseen samalle työnantajalle, suuren ja kaikkia työntekijöitä edustavan ammattiliiton vaikutus minipalkkaan ja työttömyyteen on merkittävä. Lisäksi koko työttömyyden lisäys on työnhaun poissulkevaa työttömyyttä. Jos vastaava järjestäytymisaste saavutetaan monien ammattiliittojen toimesta, työttömyyden ja minimipalkan reaktiot ovat pienempiä. Kuitenkin myös tässä tapauksessa työnhaun poissulkevan työttömyyden kasvu on huomattavaa. Tutkimuksessa tarkastellaan myös tilannetta, jossa suuri ammattiliitto neuvottelee minimipalkasta työnantajajärjestön kanssa. Tässä tapauksessa työttömyyden reaktiot ovat selvästi maltillisempia. Kolmannessa esseessä tarkastellaan uuskeynesiläistä mallia, jossa työn tarjonnan tulo- ja substituutiovaikutus kumoavat toisensa, kun taloudenpitäjien preferenssejä kuvataan tasaisen kasvun mukaisilla ns. King–Plosser–Rebelopreferensseillä (1988). Tällöin talouden inflaatiodynamiikkaa kuvaavan Phillips-käyrän kulmakertoimen – inflaation kustannusherkkyyden – ja kulutuksen korkojouston välinen tiivis yhteys rikkoontuu. Tämä ominaisuus helpottaa kulutuksen kasvuvauhdin korkoherkkyyttä mittaavan parametrin eli intertemporaalisen substituutiojouston estimointia rakenteellisissa malleissa, kun estimoinneissa käytetään täyden informaation bayesilaista suurimman uskottavuuden estimointimenetelmää. Yhdysvalloista kerätyssä, ajanjakson 1984–2007 kattavassa aineistossa intertemporaalisen substituutiojouston arvo estimoituu pieneksi

Transmission of macro shocks to loan losses in a deep crisis: the case of Finland

Building on the work of Sorge and Virolainen (2006), we revisit the data on aggregate Finnish bank loan losses from the corporate sector, which covers the ‘Big Five’ crisis in Finland in the early 1990s. Several extensions to the empirical model are considered. These extensions are then used in the simulations of the aggregate loan loss distribution. The simulation results provide some guidance as to what might be the most important dimensions in which to improve the basic model. We found that making the average LGD depend on the business cycle seems to be the most important improvement. We also compare the empirical fit of the annual expected losses over a long period. In scenario-based analyses we find that a prolonged deep recession (as well as simultaneity of various macro shocks) has a convex effect on cumulative loan losses. This emphasizes the importance of an early policy response to a looming crisis. Finally, a comparison of the loan loss distribution on the eve of the 1990s crisis with the most recent distribution demonstrates the greatly elevated risk level prior to the 1990s crisis.credit risk; bank loan losses; banking crisis; macro shocks; default rates; stress testing

Intermediation in a directed search model

We provide an example where establishing competitive coordination service platforms is so lucrative that they end up reducing welfare. We consider a canonical directed search model in which buyers have unit demands and sellers' capacity constraint leads to a coordination problem: in a symmetric equilibrium without intermediation some sellers receive too many and some too few buyers. We compare this equilibrium to one where sellers and buyers can choose to become intermediaries who coordinate the meetings. In this setup, roughly one-fifth of agents become intermediaries. As a result, a large part of the supply and demand in the economy vanishes. Moreover, the large amount of intermediaries actually reduces the meeting efficiency. Jointly, these effects imply that the gains from trade are lower than that in the economy without intermediation.Peer reviewe

Uncertainty, Misallocation and the Life-cycle Growth of Firms

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Intermediation in a directed search model

We provide an example where establishing competitive coordination service platforms is so lucrative that they end up reducing welfare. We consider a canonical directed search model in which buyers have unit demands and sellers' capacity constraint leads to a coordination problem: in a symmetric equilibrium without intermediation some sellers receive too many and some too few buyers. We compare this equilibrium to one where sellers and buyers can choose to become intermediaries who coordinate the meetings. In this setup, roughly one-fifth of agents become intermediaries. As a result, a large part of the supply and demand in the economy vanishes. Moreover, the large amount of intermediaries actually reduces the meeting efficiency. Jointly, these effects imply that the gains from trade are lower than that in the economy without intermediation.Peer reviewe