Labor Market Frictions into Staggered Wage Contracts

This paper proposes a generalization of the Calvo wage-setting equation, which embeds labor market frictions in the form of a Nash wage bargain. Adding labor market frictions changes significantly the dynamics of the standard wage-setting equation, such that it may have non-trivial implications for the design of optimal monetary policy, and could improve the ability of a general equilibrium model to replicate important labor market stylized facts.

Prototype, micro-founded DSGE models in Scilab®

Dynamic stochastic general equilibrium (DSGE) models have become increasingly popular as a policy tool in central banks in the past few years. The advantage of this approach is that the macroeconomic model is derived from microeconomic principles by spelling out the preferences, technologies and institutional framework under which economic agents interact. A major benefit is that this approach is immune to the Lucas critique, as the model's structural parameters are policy invariant. This makes DSGE models ideal tool to identify sources of fluctuations, answer questions about structural changes, forecast and predict the effect of policy changes, and perform counterfactual experiments. The aim of this Handbook is to show how to derive and simulate two prototype DSGE models. The first chapter examines the real business cycle model and the second chapter illustrate the New Keynesian model. These two frameworks are regarded as the workhorse models among practitioners, due to their simplicity and capability to address policy questions. The Handbook is written in a didactical way to enable the non-initiated reader to set up and simulate simple DSGE models. Each chapter details how to derive the model from first principles, y solving the optimising problem of each agent subject to some, well-defined, economic constraints. It then shows how to derive the long-run equilibrium of the model, how to approximate the model around its long-run equilibrium, and how to solve the model numerically. The end of each chapter shows how to implement numerical solutions in Scilab, a software freely available on the world wide web, and how to derive impulse-response functions and stochastic simulations of the model.DSGE model; model solution; model simulation

Cyclodextrin-based nanosponges as drug carriers

Cyclodextrin-based nanosponges, which are proposed as a new nanosized delivery system, are innovative cross-linked cyclodextrin polymers nanostructured within a three-dimensional network. This type of cyclodextrin polymer can form porous insoluble nanoparticles with a crystalline or amorphous structure and spherical shape or swelling properties. The polarity and dimension of the polymer mesh can be easily tuned by varying the type of cross-linker and degree of cross-linking. Nanosponge functionalisation for site-specific targeting can be achieved by conjugating various ligands on their surface. They are a safe and biodegradable material with negligible toxicity on cell cultures and are well-tolerated after injection in mice. Cyclodextrin-based nanosponges can form complexes with different types of lipophilic or hydrophilic molecules. The release of the entrapped molecules can be varied by modifying the structure to achieve prolonged release kinetics or a faster release. The nanosponges could be used to improve the aqueous solubility of poorly water-soluble molecules, protect degradable substances, obtain sustained delivery systems or design innovative drug carriers for nanomedicine

The adoption and termination of suppliers over the business cycle

We assemble a novel firm-level dataset to study the adoption and termination of suppliers over business cycles. We document that the aggregate number and rate of adoption of suppliers are procyclical. The rate of termination is acyclical at the aggregate level, and the cyclicality of termination encompasses large differences across producers. To account for these new facts, we develop a model with optimizing producers that incur separate costs for management, adoption, and termination of suppliers. These costs alter the incentives to scale up production and to replace existing with new suppliers. Both forces are critical to replicating the observed cyclicality in the adoption and termination rates at the producer and aggregate levels. Sufficiently high convexity in management relative to adjustment costs is required to replicate the observed decrease in the procyclicality of termination of suppliers with the size of producers. The optimal policy entails subsidies to management and adjustment costs

Estimating general equilibrium models: an application with labour market frictions

This handbook shows how to set up, approximate, and estimate a standard real business cycle model enriched with labour market frictions. The structural equations of the model are derived by maximizing the agents’ objective function subject to the structure of the economy. Given the complexity of the resulting equations, we show how to approximate the model around its long-run equilibrium. We then use the approximated equations to take the model to the data and estimate it using Bayesian techniques. To perform the analysis we use a simple real business cycle model for two reasons. First, due to its simplicity, we can primarily focus on the modelling and estimation techniques; second, this simple framework constitutes the backbone model on which central banks build microfounded models to support the policy analysis. A series of forthcoming Handbooks will document how to enrich this simple framework. To motivate the exercise we start from recent empirical evidence suggesting that a positive technology shock leads to a decline in labour inputs. The standard real business model fails to account for this empirical regularity. The question we analyze in this handbook is whether the presence of labour market frictions addresses this problem, without otherwise altering the functioning of the standard model. To this end, we develop and estimate a real business cycle model using Bayesian techniques that allows, but does not require, labour market frictions to generate a negative response of employment to a technology shock. The results of the estimation support the hypothesis that labour market frictions are the factor responsible for the negative response of employment. Given the pedagogical nature of this handbook, we provide documentation of the MATLAB codes used to implement the modelling and estimation techniques described. To make the programming simple, we used Dynare version 3. We thank Michel Juillard for making his routines publicly available.Estimating;general; equilibrium; models;application;labour; market; frictions

Technological synergies, heterogeneous firms, and idiosyncratic volatility

This paper shows the importance of technological synergies among heterogeneous firms for aggregate fluctuations. First, we document six novel empirical facts using microdata that suggest the existence of important technological synergies between trading firms, the presence of positive assortative matching among firms, and their evolution during the business cycle. Next, we embed technological synergies in a general equilibrium model calibrated on firm-level data. We show that frictions in forming trading relationships and separation costs explain imperfect sorting between firms in equilibrium. In particular, an increase in the volatility of idiosyncratic productivity shocks significantly decreases aggregate output without resorting to non-convex adjustment costs

Unemployment in a commodity-rich economy: how relevant is Dutch Disease?

We examine the relevance of Dutch Disease through the lens of an open-economy multisector model that features unemployment due to labor market frictions. Bayesian estimates for the model quantify the effects of both business cycle shocks and structural changes on the unemployment rate. Applying our model to the Australian economy, we find that the persistent rise in commodity prices in the 2000s led to an appreciation of the exchange rate and fall in net exports, resulting in upward pressure on unemployment due to sectoral shifts. However, this Dutch Disease effect is estimated to be quantitatively small and offset by an ongoing secular decline in the unemployment rate related to decreasing relative disutility of working in the non-tradable sector versus the tradable sector. The changes in labor supply preferences, along with shifts in household preferences towards non-tradable consumption that are akin to a process of structural transformation, makes the tradable sector more sensitive to commodity price shocks but a smaller fraction of the overall economy. We conclude that changes in commodity prices are not as relevant as other shocks or structural changes in accounting for unemployment even in a commodity-rich economy like Australia

Testing the effectiveness of unconventional monetary policy in Japan and the United States

The effective lower bound on a short term interest rate may not constrain a central bank's capacity to achieve its objectives if unconventional monetary policy (UMP) is powerful enough. We formalize this `irrelevance hypothesis' using a dynamic stochastic general equilibrium model with UMP and test it empirically for the United States and Japan using a structural vector autoregressive model that includes variables subject to occasionally binding constraints. The hypothesis is strongly rejected for both countries. However, a comparison of the impulse responses to a monetary policy shock across regimes shows that UMP has had strong delayed effects in each country