some consequences of opening a neo keynesian model this paper presents a model of a small open economy in which unemployment or excess demand for labour can occur due to the exogeneity of the nominal wage it incorporates into the analysis a wholly imported intermediate good which can be thought of and is sometimes referred to as oil an internationally traded consumption good and a non traded domestic good whose price is flexible the paper s main antecedents are dixit i976 buiter and lorie i977 and neary i980 the rest of this introduction relates this paper to the relevant literature and the remainder of the paper is structured as follows section i which presents the model is divided into subsections describing the actions of the various agents involved the choice theory of the model the labour market where quantity constraints can arise and finally equilibrium for the system as a whole this section also contains a non technical summary of the subsequent analysis section ii considers in some detail the comparative statics of the price of the non traded good this is necessary because of the central part this price plays in mediating the effects of exogeneous changes on the system section iii investigates the short run consequences of one major disturbance which originates outside the economy a rise in the price of oil section iv considers the effects on the balance of trade of exchange rate policy and derives some simple conditions under which a devaluation will improve the balance of trade the appendix contains a numerical example which shows inter alia that for plausible parameter values it is possible to obtain the expected negative response of employment to an increase in money wages together with a government multiplier greater than one in the last decade several models have been developed of economies in which prices do not necessarily adjust to clear markets within the period in which trade takes place thus trades can occur at false prices see for example clower i965 hicks i965 barro and grossman i976 malinvaud i977 muellbauer and portes i978 the ultimate aim of this programme has been to provide some micro economic basis for certain macroeconomic phenomena especially involuntary unemployment these models make a number of simplifying assumptions they usually assume the existence of representative worker consumers and firms an

toward a reconstruction of keynesian economics expectations and constrained equilibria a two period model of temporary equilibrium with rationing is presented paying particular attention to agents expectations of future constraints it is shown that with arbitrary constraint expectations many different types of current equilibrium may be consistent with the same set of current and expected future wages and prices and that constraint expectations exhibit bootstraps properties e g a higher expectation of keynesian unemployment tomorrow increases the probability that it will prevail today in addition the concept of rational constraint expectations i e perfect foresight of future constraints is introduced and shown to enhance rather than reduce the effectiveness of government policy

rising u s earnings inequality and family labor supply the covariance structure of intrafamily earnings this paper studies the labor supply contributions to individual and family earnings inequality during the period of rising wage inequality in the early 1980 s working couples have positively correlated labor market outcomes which are almost entirely attributable to permanent factors an intertemporal family labor supply model with this feature is used to estimate labor supply elasticities for husbands of 0 05 and wives of 0 40 this implies that labor supply explains little of the rising annual earnings inequality for married men but over 20 percent of the rise in family inequality and 50 percent of the modest rise in female inequality

on the local uniqueness of the fixed price equilibria a number of recent works have addressed the problem of describing the allocation of resources in an economy where prices are fixed at a value that may not achieve equilibrium of supply and demand in the classical sense it seems that by and large through the works of benassy 1975 dreze 1975 malinvaud younes 1977 and younes 1975 agreement has been reached as to the properties that an allocation should possess when transactions take place at given arbitrary fixed prices the purpose of this paper is to present a result in comparative statics which applies in this approach in the framework of an exchange economy a necessary and sufficient condition for the local uniqueness of the fixed price allocation in a neighbourhood of a competitive equilibrium is established under this condition in a neighbourhood of the competitive allocation the fixed price equilibrium is locally a continuous function of the price system a prerequisite for most studies in comparative statics this condition can be related to the stability of the quantity adjustment process associated with fixed price equilibria in a neighbourhood of the competitive equilibrium as is suggested by samuelson s principle of correspondence stability implies local uniqueness while the converse is not true finally it is shown that the fixed price equilibria are both locally unique and stable when the commodities are substitutes for the rationed consumers the paper is organized as follows section 2 presents the model and results the main proofs are gathered in section 3 while an appendix gives the properties of the derivatives of the consumer s demands the mathematical tools involved are first a generalization of the inverse function theorem for lipschitzian functions due to clarke 1976 and second the identity of sylvester for determinants gantmacher 1966 pp 32 33

keynesian and classical unemployment in an open economy this paper examines various unemployment equilibria in a fix price model of an open economy with nontraded goods the economy exports an internationally traded good and imports an intermediate input good the comparative static effects of various exogenous variables on total employment and the balance of trade are derived and compared across regimes considerable emphasis is placed on the employment effects of external disturbances both price shocks such as a rise in the price of the imported intermediate good and quantity shocks e g a slump in the demand for exportables are examined and the appropriate policy for restoring full employment is discussed in each case

demographic structure and capital accumulation a quantitative assessment abstract in a recent paper d albis 2007 demographic structure and capital accumulation journal of economic theory 132 411 434 shows that the effect of population growth on capital accumulation is ambiguous in overlapping generations models with age specific mortality rates contrasting to the predicted negative effect in diamond 1965 national debt in a neoclassical growth model american economic review 55 1126 1150 and blanchard 1985 debt deficits and finite horizons journal of political economy 93 223 247 the quantitative exercises of this paper indicate that while in principle a positive relation between population growth and capital accumulation is possible this relation is practically always negative for industrial countries intuition based on capital dilution and aggregate saving effects is provided this paper also complements d albis 2007 demographic structure and capital accumulation journal of economic theory 132 411 434 in characterizing the steady state equilibrium in more familiar economic concepts

micro and macro labor supply elasticities a reassessment of conventional wisdom the response of aggregate labor supply to various changes in the economic environ ment is central to many economic issues especially the optimal design of tax policies conventional wisdom based on studies in the 1980s and 1990s has long held that the analysis of micro data leads one to conclude that aggregate labor supply elasticities are quite small in this paper we argue that this conventional wisdom does not hold up to empirically reasonable and relevant extensions of simple life cycle models that served as the basis for these conclusions in particular we show that several pieces of conventional wisdom fail in the presence of human capital accumulation or labor supply decisions that allow for adjustment along both the extensive and intensive margin we conclude that previous estimates of small labor supply elasticities based on micro data are fully consistent with large aggregate labor supply elasticities jel d91 e24 j22

blame the parents how parental unemployment affects labor supply and job quality for young adults we study the role of shocks to parental income in determining the labor market outcomes of children entering the labor market we find that a child whose parent loses a job prior to the child s lab

moving back home insurance against labor market risk this paper demonstrates that the option to move in and out of the parental home is a valuable insurance channel against labor market risk which facilitates the pursuit of jobs with the potential for high earnings growth using monthly panel data i document an empirical relationship among coresidence individual labor market events and subsequent earnings growth i estimate the parameters of a dynamic game between youths and parents to show that the option to live at home can account for features of aggregate data for low skilled young workers small consumption responses to shocks high labor elasticities and low savings rates

does reducing unemployment insurance generosity reduce job match quality abstract this paper analyzes how a change in slovenia s unemployment insurance law affected the quality of jobs workers found after periods of unemployment taking advantage the natural experiment we show through difference in differences estimation results that reducing the potential duration of unemployment benefits had no detectable effect on wages on the probability of securing a permanent rather than a temporary job or on the duration of the post unemployment job

fixed price equilibria in a two country model of trade existence and comparative statics abstract the barro grossman malinvaud model of fixed price equilibrium is extended to a two country model of trade with a fixed exchange rate there are various possible types of fixed price equilibria for the international economy depending on the structure of rationing the existence and uniqueness of one type of fixed price equilibrium are proved indeed the extension of the simple macroeconomic model to a two country economy allows a new treatment of the problem of uniqueness of the type of fixed price equilibrium at last some comparative statics results are derived among others the model allows to meet on new grounds i e with some microfoundations some well known results of the conventional keynesian approach but much more general results can be derived applying to a class of market states not already dealt with in international trade theory

is it really good to annuitize although rational consumers without bequest motives are better off investing exclusively with annuitized instruments in partial equilibrium we demonstrate the welfare effect of annuitization is ambiguous in general equilibrium on account of pecuniary externalities absent institutional constraints like prices and budgets the optimal consumption rule would have marginal utility increase at the preferential discount rate in a rational competitive equilibrium where households fully annuitize the growth rate of marginal utility will be the discount rate minus the interest rate resulting in a consumption profile that is too flat accidental bequests transfer wealth from the old to the young steepening the consumption profile and yielding a better equilibrium if households are restricted to keynesian consumption functions the optimal irrational equilibrium with standard preferences can replicate observed consumption and macroeconomic behavior and the equilibrium without annuities delivers higher utility than the equilibrium with annuities whereas preceding papers have merely hypothesized that households might engage in socially optimal yet irrational behavior the failure of households to annuitize is a real world example of this policymakers should not take steps to encourage more annuitization by the public

retirement spending and biological age abstract we solve a lifecycle model in which the consumer s chronological age does not move in lockstep with calendar time instead biological age increases at a stochastic non linear rate in time like a broken clock that might occasionally move backwards in other words biological age could actually decline our paper is inspired by the growing body of medical literature that has identified biomarkers which indicate how people age at different rates this offers better estimates of expected remaining lifetime and future mortality rates it isn t farfetched to argue that in the not too distant future personal age will be more closely associated with biological vs calendar age thus after introducing our stochastic mortality model we derive optimal consumption rates in a classic yaari 1965 framework adjusted to our proper clock time in addition to the normative implications of having access to biological age our positive objective is to partially explain the cross sectional heterogeneity in retirement spending rates at any given chronological age in sum we argue that neither biological nor chronological age alone is a sufficient statistic for making economic decisions rather both ages are required to behave rationally

moral hazard vs liquidity and optimal unemployment insurance this paper presents new evidence on why unemployment insurance ui benefits affect search behavior and develops a simple method of calculating the welfare gains from ui using this evidence i show that 60 percent of the increase in unemployment durations caused by ui benefits is due to a liquidity effect rather than distortions on marginal incentives to search moral hazard by combining two empirical strategies first i find that increases in benefits have much larger effects on durations for liquidity constrained households second lump sum severance payments increase durations substantially among constrained households i derive a formula for the optimal benefit level that depends only on the reduced form liquidity and moral hazard elasticities the formula implies that the optimal ui benefit level exceeds 50 percent of the wage the exact identification approach to welfare analysis proposed here yields robust optimal policy results because it does not require structural estimation of primitives

behavioral obstacles in the annuity market as baby boomers enter retirement they will look to the investment industry for ways to generate income from accumulated savings why most retirees do not purchase longevity insurance in the form of lifetime annuities is a long standing puzzle mental accounting and loss aversion can explain the unpopularity of annuities by framing them as risky gambles where potential losses loom larger than potential gains moreover behavioral anomalies can explain the prevalence of period certain annuities which guarantee a minimum number of payouts finally investors may prefer longevity annuities purchased today to begin payouts in the future to immediate annuities because investors overweight the small probability of living long enough to receive large future payouts

what should i be when i grow up occupations and unemployment over the life cycle abstract why is unemployment higher for younger individuals we address this question in a frictional model of the labor market that features learning about occupational fit in order to learn the occupation in which they are most productive workers sample occupations over their careers because young workers are more likely to be in matches that represent a poor occupational fit they spend more time in transition between occupations through this mechanism our model can replicate the observed age differences in unemployment which as in the data are due to differences in job separation rates

optimal irrational behavior abstract contrary to the usual presumption that welfare in markets is maximized if consumers behave rationally we show in a two period overlapping generations model that there always exists an irrational consumption rule that can weakly improve upon the lifecycle permanent income rule in general equilibrium the market clearing mechanism introduces a pecuniary externality that individual rational households do not consider when making decisions but a publically shared rule of thumb can exploit for typical calibrations the improvement of the welfare of irrational households is robust to the introduction of rational agents although transitions to the optimal irrational steady state are not pareto improving transitions do exist that will improve a pareto social welfare function with a sufficiently small generational discount rate generalizing to a more realistic lifecycle model we find that the save more tomorrow smart plan if properly parameterized can confer higher lifetime utility than the permanent income rule

annuities and individual welfare advancing annuity demand theory we present suffcient conditions for the optimality of full annuitization under market completeness that are substantially less restrictive than those used by yaari 1965 we examine demand with market incompleteness finding that positive annuitization remains optimal widely but complete annuitization does not how uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk a new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases

worker displacement and the added worker effect this article examines the added worker effect which is the labor supply response of wives to their husbands job losses unlike past studies which focused on the husbands current unemployment status this article analyzes wives responses before and after job losses to examine the life cycle labor supply adjustments using panel study of income dynamics data reveals small predisplacement effects and large persistent postdisplacement effects the timing of the responses differs with type of displacement possibly because of differences in the information acquired before job loss long run labor supply increases compensate for over 25 of the husbands lost income

demographic structure and capital accumulation this paper develops an overlapping generations olg model to analyze the consequences of demographic structure changes induced by an exogenous shift in the birth rate we first show that a finite growth rate of the population that maximizes long run capital per capita exists then we examine the theoretical properties of this growth rate by showing that i it corresponds to the demographic structure such that the average ages of capital holders and workers are equal ii it is associated to an efficient steady state iii it increases with compulsory transfers from younger to older generations finally we explain why standard olg models do not exhibit such a growth rate

bounded rationality lifecycle consumption and social security abstract this paper explores an overlapping generations model of bounded rationality in which consumers only foresee the future over a subset of their life span we focus in particular on whether the model can in general equilibrium produce a hump shaped lifecycle consumption profile with a peak that matches data for the average u s consumer for a simple four period model we show that an increasing income profile along with exogenously imposed retirement are sufficient to induce a hump with no other mechanism that can account for a hump besides bounded rationality the model best fits the salient features of consumption data with a planning horizon of 20 years which is well supported by the behavioral evidence found in surveys on retirement planning finally we show that the age of the consumption peak is robust to the introduction of social security mortality risk and another species of bounded rationality quasihyperbolic discounting moreover social security can be welfare improving with a short planning horizon we can calibrate the model to jointly explain the timing of the consumption hump and the optimality of the current social security system with quasihyperbolic discounting instead we can calibrate the model so the current social security system is optimal but we cannot also account for the timing of the consumption hump if we add quasihyperbolic discounting in addition to a short planning horizon the present bias has a negligible effect in equilibrium

the foreign exchange constraint suppression of the trade deficit and the shadow price of foreign exchange in a fix price economy abstract the foreign exchange gap is analysed as a possible feature of a fix price economy the implications of closing the gap by means of import rationing are then discussed finally a set of shadow rates of exchange is derived these shadow prices are conditional on the prevailing regimes and include the paradoxical possibility of a negative shadow rate of exchange

what accounts for the variation in retirement wealth among u s households even among households with similar socioeconomic characteristics saving and wealth vary considerably life cycle models attribute this variation to differences in time preference rates risk tolerance exposure to uncertainty relative tastes for work and leisure at advanced ages and income replacement rates these factors have testable implications concerning the relation between accumulated wealth and the shape of the consumption profile using the panel study of income dynamics and the consumer expenditure survey we find little support for these implications the data are instead consistent with rule of thumb mental accounting or hyperbolic discounting theories of wealth accumulation jel di d91 e21

second third and higher order consumption functions a precautionary tale abstract no analytic solution exists to the consumption problem of an agent who faces uninsurable income shocks though perturbation methods can be used to derive approximate solutions this paper shows it is straightforward to extend the well known second order consumption function to third order however for every n there is a threshold interest rate below which the nth order correction diverges this puts a bound on the accuracy that can be achieved with perturbation methods even a second order consumption function can perform spectacularly worse than a zeroth order function that disregards precautionary saving and this cannot be rectified by going to higher orders

armod a small numerical macroeconomic world model with non clearing markets the purpose of this paper is to demonstrate the usefulness of a non walrasian numerical modeling approach to current macroeconomic problems of excessive unemployment and trade imbalances in the oecd area the model which consists of five world regions generates a sequence of short run equilibria the model captures international transmission mechanisms of business cycle impulses and of the effects of monetary and fiscal policy assuming flexible interest and exchange rates full capital mobility and adaptive expectations a scenario with successful international policy coordin ation illustrates how the model works copyright 1987 by the editors of the scandinavian journal of economics

optimal irrational behavior in continuous time abstract feigenbaum et al 2009 showed in a two period overlapping generations model that households can improve upon the rational competitive equilibrium while maintaining competitive factor markets if agents coordinate upon an irrational consumption saving rule we generalize their findings to continuous time the optimal consumption rule with coordination implies a u shaped lifecycle consumption profile rational agents living in a standard competitive equilibrium would need a 4 increase of consumption in every period across the lifecycle to reach the level of utility that can be achieved under coordination most of this gain can be achieved with a linear saving rule

uncertain lifetime consumption and dissaving in retirement this paper asks whether the continued accumulation or mild dissaving observed among the retired can be explained by uncertain lifetime in the absence of annuities after an initial period influenced by borrowing constraints under constant relative risk aversion uncertain lifetime depresses consumption by a proportion increasing with age if the elasticity of intertemporal substitution in consumption is small illustrative computations based on actual income and survival data show that plausible elasticities are sufficiently small to give this effect the reduction in consumption is large enough to explain much of the lack of decumulation by the elderly

a two country disequilibrium model the implications of wage and price rigidities for several open economy macroeconomic questions are studied in a two country framework using comparative statics and numeric analytic solutions in contrast to a small country disequilibrium approach the proposed model highlights the critical dependence of trade balance stability and other comparative static results on the specification for the export rationing scheme although coordination of export rationing policies carries potential mutual benefits it is shown that these may not be realized due to game theoretic problems the analysis also offers new illustrations and more general results which emphasize 1 the dependence of the efficacy of macroeconomic policies on the specific set of wage and price rigidities as well as quantity constraints in both countries and 2 the likelihood that a devaluation will have perverse trade balance effects in supply constrained regimes

the intertemporal elasticity of substitution an exploration using a us panel of state data this paper uses state level consumption data to estimate the intertemporal elasticity of substitution of consumption ies in contrast to the results of hall 1988 and campbell and mankiw 1989 we provide evidence indicating that the ies is significantly different from zero and probably close to one since inference about the ies in the context of the standard euler equation is problematic as a result of mis specification bias we cast most of our discussion in the context of the framework developed by campbell and mankiw this modifies the euler equation in that a fraction of agents simply consume their income the use of panel data to examine the relationship between interest rates and consumption growth has two advantages first we achieve a significant increase in precision which in particular allows us to rule out a zero ies second we can use the panel aspect of the data to bypass asset return measurement problems in particular we identify a common time component in expected consumption growth that is associated with movements in interest rates when the ies is positive

annuitization and asset allocation this paper examines the optimal annuitization investment and consumption strategies of a utility maximizing retiree facing a stochastic time of death under a variety of institutional restrictions we focus on the impact of aging on the optimal purchase of life annuities which form the basis of most defined benefit pension plans due to adverse selection acquiring a lifetime payout annuity is an irreversible transaction that creates an incentive to delay under the institutional all or nothing arrangement where annuitization must take place at one distinct point in time i e retirement we derive the optimal age at which to annuitize and develop a metric to capture the loss from annuitizing prematurely in contrast under an open market structure where individuals can annuitize any fraction of their wealth at anytime we locate a general optimal annuity purchasing policy in this case we find that an individual will initially annuitize a lump sum and then buy annuities to keep wealth to one side of a separating ray in wealth annuity space we believe our paper is the first to integrate life annuity products into the portfolio choice literature while taking into account realistic institutional restrictions which are unique to the market for mortality contingent claims

employment effects of an increased oil price in an economy with short run labor immobility the effects of an increased oil price are analyzed in a two sector economy with immobile labor combined with a wage leadership assumption starting with a full employment equilibrium an increased oil price will generally lead to unemployment in one of the sectors this unemployment may be eliminated by an appropriate change in fiscal policy if unemployment occurs in the sector which produces nontradeables taxes should be reduced whereas taxes should be increased if unemployment occurs in the sector which produces tradeables if an increased oil price leads to an international excess supply of tradeable goods the direction of the tax change necessary to eliminate unemployment is unambiguous even when the sector in which there is unemployment is known

the composition and drawdown of wealth in retirement as the baby boomers approach and enter their retirement years the accumulation phase of their life cycle is nearly over thus the focus of many researchers financial services firms and public policymakers concerned with retirement saving is shifting from the accumulation of resources while working to the drawdown of resources during retirement retired households are dependent on the annuitized income streams that they have built up during their working careers and on the wealth that they have accumulated in other forms the two most common annuitized income streams are social security benefits and the payments from defined benefit pension plans these payout streams provide income for life and thus provide some protection against falling into poverty if one lives an especially long life the three most common sources of accumulated wealth are equity in an owner occupied home financial assets such as bonds and stocks and financial assets held in a personal retirement account such as an individual retirement arrangement or a 401 k plan throughout our analysis we will define retirement age households as those headed by someone between the ages of 65 and 69 in 2008 just over 80 percent of these households had some equity in their home or another property while 52 percent had assets in personal retirement accounts a much higher fraction 87 percent had some financial assets outside their retirement accounts but for many households the amount of such assets was relatively modest only 45 percent had more than 20 000 in non retirement account financial assets the median financial asset holding for this group including holdings in personal retirement accounts is 52 000 in short many households have small enough amounts of accumulated wealth that they will depend heavily on the life contingent payout streams offered by social security and if they have one a defined benefit pension this paper presents evidence on the resources available to households as they enter retirement it draws heavily on data collected by the health and retirement study which we sometimes refer to as the hrs we calculate the potential additional annuity income that households could purchase given their holdings of non annuitized financial assets at the start of retirement even if households used all of their financial assets inside and outside personal retirement accounts to purchase a life annuity only 47 percent of households between the ages of 65 and 69 in 2008 could increase their life contingent income by more than 5 000 per year at the upper end of the wealth distribution however a substantial number of households could make large annuity purchases we also consider the role of housing equity in the portfolios of retirement age households and explore the extent to which households draw down housing equity and financial assets as they age we find that many households appear to treat housing equity and non annuitized financial assets as precautionary savings tending to draw them down only when they experience a shock such as the death of a spouse or a period of substantial medical outlays because home equity is often conserved until very late in life for many households it may provide some insurance against the risk of living longer than expected a brief conclusion summarizes our findings and indicates how they bear on a number of policy issues such as the role for annuity defaults in retirement saving plans

the impact of family income on child achievement evidence from the earned income tax credit using an instrumental variables strategy we estimate the causal effect of income on children s math and reading achievement our identification derives from the large nonlinear changes in the earned income tax credit the largest of these changes increased family income by as much as 20 percent or approximately 2 100 between 1993 and 1997 our baseline estimates imply that a 1 000 increase in income raises combined math and reading test scores by 6 percent of a standard deviation in the short run test gains are larger for children from disadvantaged families and robust to a variety of alternative specifications jel h24 h31 i21 i38 j13