Eurosclerosis and International Business Cycles
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w/ Juanyi Jenny Xu
paper incorporates search frictions with endogenous job creation and destruction
into a two country dynamic stochastic general equilibrium model to explain two
macroeconomic facts. First, since the 1980’s, European unemployment rates have
risen substantially above
Labor Mobility and Exchange Rate Regime in Open Economies (Download PDF) w/ Haichao Fan and Juanyi Jenny Xu and In this model, we study the impact of labor mobility on the choice of exchange rate regime in an open economy New Keynesian model with competitive labor markets . When we focus on demand shocks, we find results which are very similar to the standard Mundell optimal currency area result (fixed exchange rates are more costly the less mobile is labor) but with a quite different logic. Unlike the traditional case where labor mobility acts as a safety valve for unemployed workers, we explicitly consider the welfare effects of labor transfers in the face of worker preferences toward locational stability. We find that fixed exchange rates tend to transfer labor to high demand regions without taking full account of the costs of moving workers that prefer to stay at home. When we focus on supply shocks, however, we note there are cases where the optimal currency area logic is reversed. Fixed exchange rates can prevent highly mobile economies from fully realizing the efficiencies of moving workers to low cost production areas. Thus, areas with high inter-regional labor mobility benefit most from exchange rate flexibility.
New Keynesian Exchange Rate Pass-Through
Do Markups Have Betas? The First Order Effects of Sticky Prices (Download PDF) Measures of financial market risk associated with high expected returns on risky assets are strong predictors of the labor share of income. I explain this as the logical outcome of risk-averse monopolistic firms pre-setting prices and taking into account the risk to their profits when they choose markups. A simple version of such a theory generates a statistical model which can demonstrate the impact of aggregate/systemic risk on average markups. When the conditional CAPM model is used as a measure of risk, we find that risk aversion leads to an increase in average markups of between 1 and 2%. This finding is confirmed with a panel of one-digit industry level data and a variety of conditional CAPM models of risk. The findings here demonstrate that the first order impact of aggregate fluctuations on economic efficiency can be associated with quantitatively significant welfare impacts.
Robust Control and the Small Open Economy
pdf file )
This paper examines the properties of business cycles in a small open
economy in which consumers choose plans that are robust to potential model
mis-specification. Faced with a range of potential correct specifications
of the distribution of future shocks, households choose plans that are
optimal under the worst case specification. Linear approximations to these
robust plans are solved for using robust control methods. The robust plans
has a number of important effects on the equilibrium response of the small
open economy to business cycle shocks. First, the equilibrium is stationary.
In a standard linear quadratic model of an open economy facing an exogenous
interest rates, consumption will follow a random walk. Second, consumption
plans robust to model mis-specification allow for greater response of consumption
to temporary income shocks. In a model calibrated to match the features
of the economy of Great Britain, the greater volatility of consumption
leads to a counter-cyclical trade balance matching the data.