Can financial market disruptions have non-linear dynamic effects on economic activity? Using a novel econometric technique, we assess whether credit shocks have non-linear effects, notably asymmetry and state-dependence, that have been predicted theoretically but never considered empirically. We obtain two main results. First, negative shocks to credit supply have large and persistent effects on output, but positive shocks have no significant effect. Second, credit supply shocks have larger and more persistent effects in periods of weak economic growth. These findings are consistent with the presence of occasionally binding financial constraints and the recent theoretical predictions of He and Krishnamurthy (2013) and Brunnermeier and Sannikov (2014).
Despite intense scrutiny, estimates of the government spending multiplier remain highly
uncertain, with values ranging from 0.5 to 2. While an increase in government spending
is generally assumed to have the same (mirror-image) effect as a decrease in government
spending, we show that relaxing this assumption is important to understand the effects
of fiscal policy. Regardless of whether we identify government spending shocks from (i) a
narrative approach, or (ii) a timing restriction, we find that the contractionary multiplier
the multiplier associated with a negative shock to government spending is above 1, while
the expansionary multiplier the multiplier associated with a positive shock is substantially below 1. The multiplier is largest in recessions, as found in previous studies, but only
because the contractionary multiplier is largest in recessions. The expansionary multiplier
is always below 1 and not larger in recessions. We argue that our results help understand
the wide range of multiplier estimates found in the literature.
This paper proposes a new method to estimate the (possibly non-linear) dynamic effects of structural shocks by using Gaussian basis functions to parametrize impulse response functions. We apply our approach to the study of monetary policy and obtain two main results. First, regardless of whether we identify monetary shocks from (i) a timing restriction, (ii) sign restrictions, or (iii) a narrative approach, the effects of monetary policy are highly asymmetric: A contractionary shock has a strong adverse effect on unemployment, but an expansionary shock has little effect. Second, an expansionary shock may have some
expansionary effect, but only when the labor market has some slack. In a tight labor market, an expansionary shock generates a burst of in
inflation and no significant change in
Shimer (2005) argues that the Mortensen-Pissarides (MP) model of unemployment lacks
an amplification mechanism because it generates too little fluctuations in labor market variables given productivity shocks of plausible magnitude. While the literature has focused on
ways to enhance the amplification mechanism of the MP model, this paper argues that part
of the problem lies with the endogeneity of productivity. With variable capacity utilization
in labor or capital, measured productivity can respond endogenously to non-technology
shocks. Because such endogenous productivity movements are small relative to unemployment fluctuations, the cyclical component of measured labor productivity can fluctuate a
lot less than unemployment. To illustrate quantitatively the possible importance of this
mechanism, I use a New-Keynesian model with search unemployment and endogenous productivity movements caused by variable labor export. Using a conservative calibration, the
model generates an apparent elasticity between labor market variables and measured productivity that is three times larger than in the MP model. Using a calibration in the spirit
of Hagedorn and Manovskii (2008) but with less extreme values, the model can match the
Published Articles (Refereed Journals and Volumes)
This paper argues that a key aspect of the US labor market is the presence of time-varying heterogeneity across nonparticipants. We document a decline in the share of non-participants who report wanting to work, and we argue that that decline, which was particularly strong in the second half of the 90s, is a major aspect of the downward trends in unemployment and participation over the past 20 years. A decline in the share of “want to work” nonparticipants lowers both the participation rate and the unemployment rate, because a nonparticipant who wants to work has (i) a higher probability of entering the
labor force (compared to other nonparticipants), and (ii) a higher probability of joining unemployment conditional on entering the labor force. We use cross-sectional variation to estimate a model of nonparticipantspropensity to want to work, and we nd that changes in the provision of welfare and social insurance, possibly linked to the mid-90s welfare reforms, explain about 50 percent of the decline in desire to work among nonparticipants.
Local Projections (LP) is a popular methodology for the estimation of Impulse Responses (IR). Compared to the traditional VAR approach, LP allow for more flexible IR estimation by imposing weaker assumptions on the dynamics of the data. The nonparametric nature of LP comes at an efficiency cost and in practice the LP estimator may suffer from excessive variability. In this work we propose an IR estimation methodology based on B-spline smoothing called Smooth Local Projections (SLP). The SLP approach preserves the flexibility of standard LP, can substantially increase precision and is straightforward to implement. A simulation study shows that SLP can deliver substantial gains in IR estimation over LP. We illustrate our technique by studying the effects of monetary shocks where we highlight how SLP can easily incorporate commonly employed structural identification strategies.
A substantial fraction of workers are under-employed, i.e., employed in jobs for which they are over-qualified, and that fraction –the under-employment rate– is higher in recessions. To explain these facts, we build a search model with an endogenous “ranking” mechanism, in which high-skill applicants are systematically hired over less-skilled competing applicants. Some high-skill workers become under-employed in order to escape the competition for high-skill jobs and find a job more rapidly at the expense of less-skilled workers. Quantitatively, the model can capture the key characteristics of underemployment, notably the facts that both the under-employment rate and the wage loss associated with becoming under-employed increase in recessions.
A method to estimate the dynamic effects of structural shocks is proposed: “Functional Approximation of Impulse Responses” (FAIR) consists in directly estimating the moving average representation of the data by approximating impulse responses with a set of basis functions. FAIR can offer a number of benefits over alternative impulse response estimators, including VARs and Local Projections: (i) parsimony and efficiency, (ii) ability to summarize the dynamic effects of shocks with a few moments, (iii) ease of prior elicitation and structural identification, and (iv)
flexibility in allowing for non-linearities. As an illustration, we study the dynamic effects of monetary shocks, notably their asymmetric effects.
The unemployment rate is one of the most important business cycle indicators, but its interpretation can be difficult because slow changes in the demographic composition of the labor force affect the level of unemployment and make comparisons across business cycles difficult. To purge the unemployment rate from demographic factors, labor force shares are routinely used to control for compositional changes. This paper shows that this approach is ill-defined, because the labor force share of a demographic group is mechanically linked to that group’s unemployment rate, as both variables are driven by the same underlying worker flows. We propose a new demographic-adjustment procedure that uses a dynamic factor model for the worker flows to separate aggregate labor market forces and demographic-specific trends. Using the US labor market as an illustration, our demographic-adjusted unemployment rate indicates that the 2008-2009 recession was much more severe and generated substantially more slack than the early 80s recession.
This paper evaluates the flow approach to unemployment forecasting proposed by Barnichon and Nekarda (2012) for a set of OECD countries characterized by very different labor markets. We find that the flow approach yields substantial improvements in forecast accuracy over professional forecasts for all countries, with especially large improvements at longer horizons(one-year ahead forecasts) for European countries. Moreover, the flow approach has the highest predictive ability during recessions and turning points, when unemployment forecasts are most valuable.
We estimate an aggregate matching function and find that the regression residual, which captures movements in matching efficiency, displays procyclical fluctuations and a dramatic decline after 2007. Using a matching function framework that explicitly takes into account worker heterogeneity as well as market segmentation, we show that matching efficiency movements can be the result of variations in the degree of heterogeneity in the labor market. Matching efficiency declines substantially when, as in the Great Recession, the average characteristics of the unemployed deteriorate substantially, or when dispersion in labor market conditions—the extent to which some labor markets fare worse than others—increases markedly.
This paper presents a forecasting model of unemployment based
on labor force flows data that, in real time, dramatically outperforms the Survey
of Professional Forecasters, historical forecasts from the Federal Reserve
Board’s Greenbook, and basic time-series models. Our model’s forecast has a
root-mean-squared error about 30 percent below that of the next-best forecast
in the near term and performs especially well surrounding large recessions and
cyclical turning points. Further, because our model uses information on labor
force flows that is likely not incorporated by other forecasts, a combined forecast including our model’s forecast and the SPF forecast yields an improvement over the latter alone of about 35 percent for current-quarter forecasts, and 15 percent for next-quarter forecasts, as well as improvements at longer horizons.
The negative relationship between the unemployment rate and the job openings rate, known as the Beveridge curve, has been relatively stable in the U.S. over the last decade. Since the summer of 2009, however, the U.S. unemployment rate has hovered between 9.4 and 10.1 percent in spite of firms reporting more job openings. We decompose the recent deviation from the Beveridge curve into different parts using data from the Job Openings and Labor Turnover Survey (JOLTS). We find that most of the current deviation from the Beveridge curve can be attributed to a shortfall in the vacancy yield, which measures hires per vacancy. This shortfall is broad-based across all industries and is particularly pronounced in construction, transportation, trade, and utilities, and leisure and hospitality. Construction alone accounts for more than a third of the Beveridge curve gap.
What is the relative importance of hiring and separation in driving unemployment ﬂuctuations? This paper presents a framework to decompose the moments of unemployment and study the respective contributions of vacancy posting, a measure of ﬁrms’ hiring efforts, and separation. Separation accounts for about 40% of unemployment’s variance, compared to 60% for vacancy posting, and contributes to about 60% of unemployment steepness asymmetry, the fact that unemployment increases faster than it decreases. Further, while vacancy posting is, on average, the most important contributor of unemployment ﬂuctuations, the opposite is true around business cycle turning points, when separation is responsible for most of unemployment movements.
The low correlation between cyclical unemployment and productivity over the postwar period hides a large sign switch in the mid-1980s: from significantly negative the correlation became significantly positive. Using a search model of unemployment with nominal rigidities and variable labor effort, I show that technology shocks can generate a positive unemployment-productivity correlation whereas non-technology shocks (i.e. aggregate demand shocks) tend to do the opposite. In this context, I identify two events that can quantitatively explain the increase in the correlation: (i) a sharp drop in
the volatility of non-technology shocks in the mid-1980s, and (ii) a decline in the response of productivity to non-technology shocks, which from procyclical became acyclical in the last 25 years.
This paper builds a measure of vacancy posting over 1951–2009 that captures the behavior of total—print and online—help-wanted advertising, and can be used for time series analysis of the US labor market.
This paper develops an analytical framework that helps to quantify the optimal level of international reserves for a small open economy with limited access to foreign capital and subject to natural disasters or terms-of-trade shocks. International reserves allow the country to relieve balance of payments pressures caused by external shocks and to avoid large fluctuations in imports. The paper calibrates the model to two regions—the Caribbean and the Sahel region in sub-Saharan Africa—and assesses the sensitivity of the results. The conclusion is that popular rules of thumb, such as maintaining
reserves equivalent to three months of imports, only give imprecise benchmarks.
This paper explores the sources of inflation in Sub-Saharan Africa by examining the relationship between inflation, the output gap and the real money gap. Using heterogeneous panel co-integration estimation techniques, we estimate co-integrating vectors for the production function and the real money demand function to recover the structural output and money gaps for 17 African countries. The central finding is that both gaps contain significant information regarding the evolution of inflation, albeit with a larger role played by the money gap. There is no significant evidence of asymmetry in the relationship.