Current Working Papers
Great Depressions | Search Frictions | Product Market Regulation and Unemployment | Asset Markets
On the Real Origins of the Great Depression , with Albrecht Ritschl, HU Berlin
first version: August 2006 this version: May 2007
This paper examines the ability of real forces to account for the Great Depression and its precursor, the severe recession of 1920-21, as well as for the roaring 20's upswing. We introduce monopolistic competition and labor market search frictions into an otherwise standard neoclassical model. We allow for two bargaining frameworks: individual and collective, each corresponding to a steady-state of the model. A shift from individual to collective bargaining presents as a recession, with sharp declines in output and asset prices, accompanied by an increase in unemployment. Conversely, a shift back to individual bargaining presents as an expansion, with increases in output and asset prices and a decrease in unemployment. We document three important legal shifts in the ability of workers to freely form collective bargaining coalitions occuring in 1914, late 1921 and 1929/early 1930. In the calibrated model, a shift from the individual bargaining to the collective bargaining steady states leads to declines in output and firm values, and increases in unemployment and wages whose magnitudes are in line with those observed in the Great Depression.
Presentations: ESSIM 2007 (Izmir), SED 2007 (Prague), MMF Group 2007, AEA 2008 (New Orleans) & various seminars
The British Great Depression, with Albrecht Ritschl, HU Berlin
coming soon !!
Presentations: EHS 2007 (Exeter)
The Great Depression in International Comparison, with Albrecht Ritschl, HU Berlin
coming soon !!
2. Search Frictions in RBC Models
Resurrecting the Extensive Margin
first version: May 2006 this version: November 2006
This paper considers a real business cycle model with search frictions in the labor market and labor supply which is elastic along the extensive margin. Previous authors have found that such models generate counterfactually procyclical unemployment and a positively-sloped Beveridge curve. This paper presents a sensible calibration which does indeed generate countercyclical unemployment and a negatively correlated unemployment and vacancies despite the presence of a participation margin. In addition, the calibrated model contributes substantially toward resolving the consumption-tightness puzzle described by Ravn (2006).
Presentations: Midwest Macro 2007 (Cleveland), NA Winter Meetings of Econometric Society 2008 (New Orleans),
SED 2006 (Vancouver) & various seminars
3. Product Market Regulation and Unemployment
Product Market Regulation and Endogenous Union Formation, with Christian Haefke, IAE Vienna and Barcelona, IZA
this version: July 2006
We contribute to the growing literature which aims to link product market regulation and competition to labor market outcomes, in order to explain the divergent US and continental European labor market performance over the past two decades. The main contributions of this paper are twofold. First, we show that the choice of bargaining regime (individual or collective) is crucial for the impact of product market competition on unemployment rates. Under collective bargaining, unemployment is strongly increasing in monopoly power, while under individual bargaining unemployment rates are nearly invariant to the degree of competition in the product market. Since the choice of bargaining institution is so important, we endogenize it. We find that the bargaining regime which emerges endogenously depends crucially on the degree of monopoly power in the economy. When product market competition is low, collective bargaining is stable, while individual bargaining emerges as the stable institution when product market competition is high enough. In the calibrated model, moving from the US low regulation/individual bargaining economy to the EU high regulation/collective bargaining economy leads to a substantial increase in equilibrium unemployment rates from 5.5% to 8.9% in the model economy.
Presentations: Penn Search & Matching Workshop 2006, SED 2004 (Florence), ECB Labor Conference 2004
& various seminars
Product Market Deregulation and the US Employment Miracle, with Christian Haefke, IAE Vienna and Barcelona, IZA
this version: December 2006
We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is integrating labor market search frictions and individual wage bargaining into a model with monopolistic competition in the goods market. Product market competition affects unemployment by two channels: the output expansion effect and a countervailing effect due to a hiring externality. Competition is then linked to barriers to entry. We calibrate the model to US data and perform a policy experiment to assess whether the decrease in trend unemployment during the 1980's and 1990's could be attributed to product market deregulation. Our quantitative analysis suggests that under individual bargaining, a decrease of less than four tenths of a percentage point of unemployment rates can be attributed to product market deregulation, a surprisingly small amount.
Presentations: ASSA 2003 (Washington, D.C.), ESSIM 2003 (Vougliameni), SED 2003 (Paris) & various seminars
Product Market Deregulation and European Unemployment, with Christian Haefke, IAE Vienna and Barcelona, IZA
this version: December 2003
This paper considers the dynamic relationship between product market entry regulation and equilibrium unemployment and wages, both theoretically and quantitatively. The main elements of our model are Mortensen-Pissarides style search frictions in the labor market, monopolistic competition in the goods market, multi-worker firms and individual bargaining. We identify two main channels by which product market competition affects unemployment: the output expansion effect, by which a reduction in monopoly power also reduces unemployment, and a countervailing effect due to a hiring externality a la Stole and Zwiebel (1996). Quantitatively, increasing our measure of competition has a surprisingly moderate effect on equilibrium unemployment rates, but a substantial impact on real wages. Competition is then linked to barriers to entry. Data on entry costs are used to compare labor market performance under two regimes: a high-regulation European regime and a low-regulation Anglo-American one. Our analysis suggests that no more than half a percentage point of European unemployment rates can be attributed to the regulation of entry, a surprisingly small amount.
Presentations: ASSA 2003 (Washington, D.C.), ESSIM 2003 (Vougliameni), SED 2003 (Paris) & various seminars
Product Market Regulation in the Presence of Unions: Quantitative Implications, with Christian Haefke, IAE Vienna and Barcelona, IZA and Gernot Doppelhofer, Cambridge University
Why are Asset Returns More Volatile during Recessions?
During a recession, many macroeconomic variables display higher levels of volatility. This paper shows that introducing an AR(1)-ARCH(1) driving process into the canonical Lucas consumption CAPM framework can account for the empirically observed greater volatility of asset returns during recessions. In particular, agents' joint forecasting of levels and time-varying second moments transforms symmetric-volatility driving processess into asymmetric-volatility endogenous variables. Moreover, numerical examples show that the model can indeed account for the degree of cyclical variation in both bond and equity returns in US data. Finally, I argue that the underlying mechanism is not specific to financial markets, and has the potential to explain cyclical variation in the volatilities of a wide variety of macroeconomic variables.