comparative advantage agglomeration economies and trade costs abstract this paper contributes to the theoretical research exploring the interface between comparative advantage locational fundamentals and agglomeration economies a simple model is developed which highlights costly trade of final outputs and of intermediates we derive the novel insight that the interaction between comparative advantage and agglomeration economies involves a fundamental tension which is intricately affected by trade costs a reduction of trade costs fosters the dispersive impact of comparative advantage in sectors governed by this force whilst the impact of agglomeration economies is enhanced by a fall in trade costs in industries where increasing returns prevail the key implication for international trade is that the relative wage between large and small economies is not only shaped by the primitive determinants of agglomeration economies and comparative advantage but also in a different way by trade costs the key implication for an economic geography setting where labor is mobile is that partial agglomeration emerges when agglomeration economies are strong relative to comparative advantage and this is more likely when trade costs are lower higher in industries governed by increasing returns comparative advantage the model provides a foundation for an urban system in which the larger city exhibits more diversity in production

external economies and international trade redux comment recently in this journal grossman and rossi hansberg 2010 proposed a novel way to think about the implications of international trade in the presence of national external economies at the industry level instead of perfect competition and two industries grh assume bertrand competition and a continuum of industries grh conclude that the equilibrium is unique if transport costs are low that there is no trade for high transport costs and that there is no equilibrium in pure strategies when transport costs are intermediate in this note we reexamine the equilibrium analysis

producer services comparative advantage and international trade patterns we unite the theories of factor abundance and monopolistic competition to explore the general equilibrium relations between trade in producer services economies of scale and factor markets in our model two final goods are produced using capital labor and a variety of differentiated producer services that are produced under increasing returns to scale we analyze the implications for comparative advantage and trade in goods between two countries that differ in factor endowments and in technology of service provision moreover we use the concept of the integrated world equilibrium to investigate trade in goods and services also when services require foreign direct investments

optimal simple monetary and fiscal rules under limited asset market participation the combination of limited asset market participation and consumption habits generates indeterminacy for empirically plausible calibrations of a business cycle model characterized by price and nominal wage rigidities equilibrium determinacy is restored by demand management policies based on simple fiscal rules in this regard fiscal control of nominal income growth is particularly effective in addition the complementarity between the taylor rule and the fiscal feedback on nominal income growth produces relatively large welfare gains limiting both aggregate and intragroup volatilities

limited asset market participation and the euro area crisis an empirical dsge model we estimate a medium scale dynamic stochastic general equilibrium model for the euro area with limited asset market participation lamp our results suggest that in the recent european monetary union years lamp is particularly sizable 39 during 1993 2012 and important to understand business cycle features the bayes factor and the forecasting performance show that the lamp model is preferred to its representative household counterpart in the representative agent model the risk premium shock is the main driver of output volatility in order to match consumption correlation with output in the lamp model this role is played by the investment specific shock because non ricardian households introduce a keynesian multiplier effect and raise the correlation between consumption and investments we also detect the contractionary role of monetary policy shocks during the post 2007 years in this period consumption of non ricardian households fell dramatically but this outcome might have been avoided by a more aggressive policy stance jel c11 c13 c32 e21 e32 e37

taking financial frictions to the data we estimate a dynamic stochastic general equilibrium dsge model with various financial frictions and analyze how well the model explains the great recession predictive analysis shows that the model can only slightly better explain the large deviation from trend during the crisis relative to a model without financial frictions specifically the risk premium shock which is a shock to the external finance premium of the entrepreneurs leverage explains the largest part of the investment downfall during the crisis however the balance sheet channel of financial frictions in the model which structurally links balance sheet conditions of financial intermediaries and nonfinancial borrowers to their borrowing rates is estimated to be weak we examine alternative prior specifications for how the financial frictions enter the model and continue to find a limited role for these frictions rolling window estimation provides evidence for substantial time variation in parameters governing financial frictions we conclude that the well known financial frictions studied in this paper are not able to explain the financial crisis in a linearized and estimated model

the financial crisis in thailand causes conduct and consequences abstract the financial crisis in thailand was a private sector failure expressing itself partly in increasing current account problems but mainly in careless lending borrowing and the accumulation of nonperforming loans in the financial sector during a period when the real economy showed signs of weakening with sluggish exports and an increase in the current account deficit hot money flowed in and covered the deficit but also led to careless investments financial liberalization in an uncontrolled financial sector resulted in misallocation and mismatching political instability indecisiveness and mismanagement at the political and administrative level also contributed to the financial meltdown in thailand

rule of thumb consumers productivity and hours in this paper we study the transmission mechanism of productivity shocks in a model with rule of thumb consumers in the literature this nancial friction has been studied only with reference to scal shocks we show that the presence of rule of thumb consumers is also very helpful in accounting for recent empirical evidence on productivity shocks rule of thumb agents together with nominal and real rigidities play an important role in reproducing the negative response of hours and the delayed responses of output and

changes in the output euler equation and asset markets participation recent estimates of the output euler equation for the united states indicate that the elasticity of aggregate demand to interest rates is not significantly different from zero we first argue that this result may hide a structural break the estimated elasticity is a convolution of two coefficients with opposite signs across the samples 1965 1979 and 1982 2003 the sign of the coefficient in the earlier sample is inconsistent with standard economic theory and intuition we outline a model with limited asset markets participation that can generate this change in sign when asset market participation changes from low to high and provide institutional evidence for such a change in the united states in the late 70s and early 80s

the welfare costs of union wage compression abstract this paper calculates the quantitative significance of the welfare costs of union wage compression this is done in a dynamic general equilibrium model with overlapping generations where agents choose both schooling human capital and assets physical capital the labor market in this model is characterized as a right to manage contract which allows unions to compress wage differentials between high and low skilled workers by implementing a binding minimum wage this paper shows that when labor markets are competitive even low levels of wage compression lead to large welfare losses since wage compression creates costly unemployment among low skilled workers the effect of wage compression on the supply of skilled labor however is rather small since the disincentive effect of a lower high skilled wage is to a large extent offset by a lower opportunity cost of schooling due to higher unemployment

household expenditure and the income tax rebates of 2001 using questions expressly added to the consumer expenditure survey we estimate the change in consumption expenditures caused by the 2001 federal income tax rebates and test the permanent income hypothesis we exploit the unique randomized timing of rebate receipt across households households spent 20 to 40 percent of their rebates on nondurable goods during the three month period in which their rebates arrived and roughly two thirds of their rebates cumulatively during this period and the subsequent three month period the implied effects on aggregate consumption demand are substantial consistent with liquidity constraints responses are larger for households with low liquid wealth or low income

did the 2008 tax rebates stimulate spending in an effort to bolster economic performance in light of a looming downturn in economic activity on february 13 2008 president george w bush signed the economic stimulus act of 2008 more than two thirds of the 152 billion bill consisted of economic stimulus payments to be sent beginning in may to approximately 130 million households to qualify recipients had to have a valid social security number an income tax liability or at least 3 000 of qualifying income that included earned income and some benefits from social security veterans affairs or railroad retirement and have filed a 2007 federal tax return for the most part those who filed as single individuals received between 300 and 600 while those who filed jointly received between 600 and 1 200 additionally parents with children under 17 who were eligible for a child tax credit and had a social security number received an extra 300 per child the tax rebate phased out at higher levels of income as the payment was reduced by 5 percent of the amount of adjusted gross income over 75 000 for singles or over 150 000 for married couples the treasury remitted payments either by direct deposit mainly in the first half of may or by mail mainly from mid may through mid july the effect of these stimulus payments depends on how much was spent this paper reports new survey evidence on the propensity of consumers to spend the 2008 rebate it also relates the survey evidence to aggregate data and to evidence about spending from the 2001 tax rebate

bayesian evaluation of dsge models with financial frictions we evaluate two most popular approaches to implementing financial frictions into dsge models the bernanke gertler and gilchrist 1999 setup where frictions affect the price of loans and the kiyotaki and moore 1997 model where they concern the quantity of loans we take both models to the data and check how well they fit it on several margins overall comparing the models favors the bernanke gertler and gilchrist framework however even this model does not make a clear improvement over the new keynesian benchmark in terms of marginal likelihood and similarity of impulse responses to those obtained from a var

the general equilibrium effects of fiscal policy estimates for the euro area abstract this paper describes a dynamic stochastic general equilibrium model featuring a fraction of non ricardian agents in order to estimate the effects of fiscal policy in the euro area the model takes into account distortionary taxation on labor and capital income and on consumption while expenditures are broken down into purchases of goods and services compensation of public employees and transfers to households a newly computed quarterly data set of fiscal variables is used our results point to the prevalence of mild keynesian effects of public expenditures in particular although innovations in fiscal policy variables tend to be rather persistent government purchases of goods and services and compensations for public employees have small and short lived expansionary effects on private consumption while innovations in transfers to households show a slightly more sizeable and lasting effect the effects are more significant on the revenue side decreases in labor income and consumption tax rates have sizeable effects on consumption and output while a reduction in capital income tax favors investment and output in the medium run finally our estimates suggest that fiscal policy variables contribute little to the cyclical variability of the main macro variables

rule of thumb consumers meet sticky wages it has been argued that rule of thumb consumers substantially alter the determinacy properties of simple interest rate rules and the dynamics of an otherwise standard new keynesian model in this paper we show that nominal wage stickiness helps re establishing standard results key findings are that wage stickiness i affects the shape of determinacy regions in the parameters space restoring the relevance of the taylor principle for the conduct of monetary policy ii implies that a rise in consumption in response to an innovation in government spending is not a robust feature of the model

endogenous ranking and equilibrium lorenz curve across ex ante identical countries this paper proposes a symmetry breaking model of trade with a large but finite number of ex ante identical countries and a continuum of tradeable goods which differ in their dependence on local differentiated producer services productivity differences across countries arise endogenously through free entry to the local service sector in each country in any stable equilibrium the countries sort themselves into specializing in different sets of tradeable goods and a strict ranking of countries in per capita income tfp and the capital labor ratio emerges endogenously furthermore the distribution of country shares the lorenz curve is unique and analytically solvable in the limit as the number of countries grows unbounded using this limit as an approximation allows us to study what determines the shape of distribution to perform various comparative statics and to evaluate the welfare effects of trade publication abstract

solving consumption models with multiplicative habits this paper provides derivations necessary for solving an optimal consumption problem with multiplicative habits and a crra outer utility function either for a microeconomic problem with both labor income risk and rate of return risk or for a macroeconomic representative agent model

asset market participation monetary policy rules and the great inflation this paper argues that limited asset market participation is crucial in explaining u s macroeconomic performance and monetary policy before the 1980s and their changes thereafter in an otherwise conventional sticky price model standard aggregate demand logic is inverted at low enough asset market participation interest rate increases become expansionary passive monetary policy ensures equilibrium determinacy and maximizes welfare this suggests that federal reserve policy in the pre volcker era was better than conventional wisdom implies we provide empirical evidence consistent with this hypothesis and study the relative merits of changes in structure and shocks for reproducing the conquest of the great inflation and the great moderation

consumption habits in a new keynesian business cycle model consumption habits have become an integral component in new keynesian models however consumption habits can be modeled in a host of different ways and this diversity is reflected in the literature i examine whether different approaches to modeling consumption habits have important implications for business cycle behavior using a standard new keynesian business cycle model i show that to a first order log approximation the consumption euler equation associated with the additive functional form for habit formation encompasses the multiplicative function form empirically i show that whether consumption habits are internal or external has little effect on the model s business cycle characteristics

limited asset markets participation monetary policy and inverted aggregate demand logic abstract this paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation while moderate participation rates strengthen the role of monetary policy low enough participation causes an inversion of results dictated by conventional wisdom the slope of the is curve changes sign the taylor principle is inverted optimal welfare maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed however a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation our results may justify fed s behavior during the great inflation period

innocent bystanders monetary policy and inequality abstract we study the effects of monetary policy shocks on and their historical contribution to consumption and income inequality in the united states since 1980 as measured by the consumer expenditure survey contractionary monetary policy systematically increases inequality in labor earnings total income consumption and total expenditures furthermore monetary policy shocks account for a non trivial component of the historical cyclical variation in income and consumption inequality using detailed micro level data on income and consumption we document some of the different channels via which monetary policy shocks affect inequality as well as how these channels depend on the nature of the change in monetary policy

comparing shocks and frictions in us and euro area business cycles a bayesian dsge approach this paper estimates a dsge model with many types of shocks and frictions for both the us and the euro area economy over a common sample period 1974 2002 the structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments our main conclusion is that each of these characteristics is remarkably similar across both currency areas copyright 2005 john wiley sons ltd

macroprudential policy and imbalances in the euro area abstract since its creation the euro area suffered from imbalances between its core and peripheral members this paper checks whether macroprudential policy applied to the peripheral countries could contribute to providing more macroeconomic stability in this region to this end we build a two economy macrofinancial model and simulate the effects of macroprudential policy regulating the loan to value ratio when the core and the periphery are exposed to asymmetric shocks we find that macroprudential policy is able to substantially lower the amplitude of credit and output fluctuations in the periphery however for the policy to be effective it should be decentralized very similar conclusions hold when welfare is considered as the optimality criterion

accounting for growth with new inputs this paper examines the aggregate production function in an economy characterized by the creation of new intermediate inputs the authors show how growth can be decomposed into changes in higher quantities of existing inputs and a greater range of inputs indexes of total factor productivity would reflect the latter the authors construct a dynamic monopolistic competition model in which products are endogenously introduced and simulate that model to produce artificial data when used in standard growth accounting regressions the data can appear to be generated by an economy with exogenous technical change and approximately constant returns to primary factors copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

priors from general equilibrium models for vars abstract this paper uses a simple new keynesian dynamic stochastic general equilibrium model as a prior for a vector autoregression shows that the resulting model is competitive with standard benchmarks in terms of forecasting and can be used for policy analysis jel classification c11 c32 c53 key words bayesian analysis dsge models forecasting vector autoregressions 1 introduction dynamic stochastic general equilibrium dsge models are popular nowadays in macroeconomics they are taught in virtually every economics ph d program and represent a predominant share of publications in the field yet when it comes to policy making these models are scarcely used at least from a quantitative point of view the main quantitative workhorse for policy making at the federal reserve system is frb us a macro econometric model built in the cowles foundation tradition a style of macroeconomics that is no longer taught in many ph d programs 1 in their decision process fed policy makers rely heavily on forecasting they want to know the expected path of inflation in the next few quarters and by how much a 50 basis point increase in the federal funds rate would affect that path frb us offers answers to these questions answers that many macroeconomists would regard with suspicion given both the lucas 1976 critique and the fact that in general the restrictions imposed by cowles foundation models are at odds with dynamic general equilibrium macroeconomics sims 1980 general equilibrium models on the other hand have a hard time providing alternative answers the fact that these models are perceived to do badly in terms of forecasting as they are scarcely parameterized is perhaps one of the reasons why they are not at the forefront of policy making while progress is being made in the development of dsge models that deliver acceptable forecasts e g smets and wouters 2003 this paper proposes an approach that combines a stylized general equilibrium model with a vector autoregression var to obtain a specification that both forecasts well and is usable for policy analysis specifically the approach involves using prior information coming from a dsge model in the estimation of a vector autoregression loosely speaking this prior can be thought of as the result of the following exercise i simulate time series data from the dsge model ii fit a var to these data in practice we replace the sample moments of the simulated data by population moments computed from the dsge model solution since the dsge model depends on unknown structural parameters we use a hierarchical prior in our analysis by placing a distribution on the dsge model parameters a tightness parameter controls the weight of the dsge model prior relative to the weight of the actual sample markov chain monte carlo methods are used to generate draws from the joint posterior distribution of the var and dsge model parameters the paper shows that the approach makes even a fairly stylized new keynesian dsge model competitive with standard benchmarks in terms of forecasting real output growth inflation and the nominal interest rate the three variables that are of most interest to policy makers 2 up to this point our procedure borrows from the work of dejong ingram and whiteman 1993 and ingram and whiteman 1994 who are the first to use priors from dsge models for vars ingram and whiteman showed that prior information from the bare bones stochastic growth model of king plosser and rebelo 1988 is helpful in forecasting real economic activity such as output consumption investment and hours worked in addition to documenting the forecasting performance of a trivariate var with a prior derived from a monetary dsge model this paper makes two contributions that significantly extend the earlier work first we show formally how posterior inference for the var parameters can be translated into posterior inference for dsge model parameters

fiscal policy and the great recession in the euro area how much did fiscal policy contribute to euro area real gdp growth during the great recession we estimate that discretionary fiscal measures have increased annualized quarterly real gdp growth during the crisis by up to 1 6 percentage points we obtain our result by using an extended version of the european central bank s new area wide model with a rich specification of the fiscal sector a detailed modeling of the fiscal sector and the incorporation of as many as eight fiscal time series appear pivotal for our result

new keynesian versus old keynesian government spending multipliers renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy because of modelling uncertainty it is essential that policy evaluations be robust to alternative assumptions we find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust government spending multipliers in an alternative empirically estimated and widely cited new keynesian model are much smaller than in these old keynesian models the estimated stimulus is extremely small with gdp and employment effects only one sixth as large and with private sector employment impacts likely to be even smaller we investigate the sensitivity of our findings with regard to the response of monetary policy the zero bound on nominal interest rates and the inclusion of an empirically relevant degree of rule of thumb behaviour in the new keynesian model in addition we relate our findings using estimated structural macroeconomic models to the recent literature using reduced form regression techniques