income dispersion and counter cyclical markups recent advances in measuring cyclical changes in the income distribution raise new questions how might these distributional changes affect the business cycle itself we show how counter cyclical income dispersion can generate counter cyclical markups in the goods market without any preference shocks or price setting frictions in recessions idiosyncratic labor productivity shocks raise income dispersion lower the price elasticity of demand and increase imperfectly competitive firms optimal markups the calibrated model explains not only many cyclical features of markups but also cyclical and long run patterns of standard business cycle aggregates

the future of macroeconomics macro theory and models at the bank of england abstract the adoption as policy models by central banks of representative agent new keynesian dynamic stochastic general equilibrium models has been widely criticised including for their simplistic micro foundations at the bank of england the previous generation of policy models is seen in its 1999 medium term macro model mtmm instead of improving that model to correct its considerable flaws many shared by other non dsge policy models such as the federal reserve s frb us it was replaced in 2004 by the dsge based beqm though this clearly failed during and after the global financial crisis it was replaced in 2011 by the dsge compass complemented by a suite of models we provide a general critique of dsge models for explaining forecasting and policy analyses at central banks and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory rather than seeking to impose simplistic and unrealistic theory

wealth accumulation over the life cycle and precautionary savings this article constructs and simulates a life cycle model of wealth accumulation and estimates the parameters of the utility function the rate of time preference and the coefficient of risk aversion by matching the simulated median wealth profiles with those observed in the panel study of income dynamics and in the survey of consumer finances the estimates imply a low degree of patience and a high degree of risk aversion the results are used to study the importance of precautionary savings in explaining wealth accumulation they imply that wealth accumulation is driven mostly by precautionary motives at the beginning of the life cycle whereas savings for retirement purposes become significant only closer to retirement

trends in unemployment duration data a method of estimating the distribution of uninterrupted unemploymentspells from aggregate unemployment data is outlined the methodology does not i mpose constant individual hazard rates and allows for heterogeneity characteris tics of the distribution of unemployment spells are then considered including ha zard rates measures of inequality such as gini coefficients and the fraction o f total unemployment associated with s weeks of unemploy ment the relationship between these char acteristics and labor demand variables gnp and supply side variables transfer payments unemployment insurance is considered in or der to better understand the relative role of short and long run unemployment copyright 1986 by mit press

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

digit preference in cps unemployment data abstract in analyses of cps unemployment duration data it is necessary to smooth the observed responses prior to inference to accommodate the effects of digit preference in this note i show that popular methods of smoothing have significant effects on estimates of expected duration the time series properties of this statistic are less severely affected

equilibrium heterogeneous agent models as measurement tools some monte carlo evidence abstract this paper discusses a series of monte carlo experiments designed to evaluate the empirical properties of heterogeneous agent macroeconomic models in the presence of sampling variability the calibration procedure leads to the welfare analysis being conducted with the wrong parameters the ability of the calibrated model to correctly predict the long run welfare changes induced by a set of policy experiments is assessed the results show that for the policy reforms with sizable welfare effects i e more than 0 2 the model always predicts the right sign of the welfare effects however the welfare effects can be evaluated with the wrong sign when they are small and when the sample size is fairly limited quantitatively the maximum errors made in evaluating a policy change are very small for some reforms in the order of 0 02 percentage points but bigger for others in the order of 0 6 percentage points finally having access to better data in terms of larger samples does lead to substantial increases in the precision of the welfare effects estimates though the rate of convergence can be slow

the behavior of unemployment durations over the cycle this paper examines the relationship between unemployment durations and cyclical movements in unemployment using an employment calendar constructed from recent questions in the panel study of income dynamics we find that unemployment durations increase with the unemployment rate with the strongest effects for individuals with the longest elapsed durations copyright 1990 by mit press

unemployment dynamics and duration dependence in france the netherlands and the united kingdom this paper analyzes unemployment dynamics in the french dutch and u k labor market it presents a method to distinguish between the effects of duration dependence and unobserved heterogeneity on the exit rate out of unemployment it turns out that for british male unemployed there is strong genuine negative duration dependence for french unemployed there is no strong duration dependence during the first year of unemployment while for dutch unemployed there is nonmonotonic duration dependence for all groups of french and dutch individuals significant unobserved heterogeneity is found for u k male unemployed heterogeneity seems to be empirically unimportant copyright 1994 by royal economic society

do demographics prevent consumption aggregates from reflecting micro level preferences abstract most simulated micro founded macro models use solely consumer demand aggregates in order to estimate preference parameters of a representative consumer for use in policy evaluation focusing on dynamic models with time separable preferences we show that aggregation holds if and only if momentary utility functions fall in the identical shape harmonic absolute risk aversion ishara utility class identifying which parameters of ishara utility functions are allowed to vary over time given this theoretical result it should be easy to empirically reject the aggregation properties that the macroeconomic representative consumer identification approach requires it suffices to show that permanent incomes guaranteeing the same living standard across households of different size violate an affine relationship in order to test the validity of this affine equation we develop a vignette survey that produces appropriate data without demand estimation restrictions imposed by models surprisingly in six countries this equation is not rejected lending support to using consumer demand aggregates

requiem for the representative consumer aggregate implications of microeconomic consumption behavior macroeconomists pursuing microfoundations for aggregate consumption have generally adopted one of two approaches either to model microeconomic consumption behavior carefully and then to aggregate or to thoroughly understand the behavior of a representative consumer in general equilibrium then to introduce microeconomic risk and heterogeneity the broad conclusion from the bottom up approach has been that precautionary saving and microeconomic heterogeneity can profoundly change behavior stephen p zeldes 1989 angus s deaton 1991 christopher d carroll 1992 the broad conclusion from the top down approach has been that precautionary saving is of little importance in determining the aggregate capital stock s rao aiyagari 1994 per krusell and anthony a smith 1998 leading some economists to conclude that heterogeneity is unimportant for macroeconomic purposes this paper shows that while general equilibrium effects do imply that the aggregate magnitude of precautionary saving is modest nevertheless when a model with uninsurable idiosyncratic risk is modified so that it can match the key micro facts it produces behavior very different in important respects from that produced by the representative agent economy this leads to the conclusion that for many purposes the representative consumer model should be abandoned in favor of a model which matches key microeconomic facts this abstract was borrowed from another version of this item

is fairness blind the effect of framing on preferences for effort sharing rules this paper uses a choice experiment to study citizens preferences for effort sharing rules for reducing carbon dioxide emissions for a given global cost and level of emission reduction we study the willingness to pay for various rules that imply different distributions of the cost between eu the us china and africa the focus of this paper is on the use of two different treatments one where the respondents were informed about the country or country group names and one where the names were replaced with anonymous labels a d this allows us to test whether people s preferences for effort sharing rules depend on the framing of the problem we find that the ranking of the rules and the strength of the preferences are not significantly different between the two treatments and hence we find no evidence of ingroup bias in preferences for effort sharing rules c 2011 elsevier b v all rights reserved less

the reaction of household consumption to predictable changes in social security taxes the key implication of rational expectations and the basic life cycle permanent income hypothesis that predictable changes in income have no effect on the growth rate of consumption expenditures is examined this implication is important for understanding the effectiveness and optimal timing of fiscal policy the causes and propagation of business cycles and the effects of income fluctuations on the growth rate of the economy using household level consumption data from the consumer expenditure survey whether expenditures on nondurable goods increase contemporaneously with predictable changes in social security tax withholding is tested it is found that households do change their consumption expenditures in response to the predictable fluctuations in income induced by the social security tax system

job search stigma effect and escape rate from unemployment this article formulates job search models incorporating certain types of the stigma effect of unemployment it is assumed that the probability of getting a job offer given the unemployment individual contacts the firm is influenced by the duration of unemployment and is justified in a signaling context the optimal search is analyzed for one sector as well as across several independent labor market segments it is shown that there are reasonably general conditions on the search environments for which both the individual reservation wage and escape rate are negative duration dependent a fact observed in empirical studies

relative wage movements and the distribution of consumption we analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare our empirical work draws on the best available cross sectional data sets to construct synthetic panel data on u s consumption labor supply and wages during the 1980s we find that low frequency movements in the cohort education structure of pretax hourly wages among men drove large changes in the distribution of household consumption the results constitute a spectacular failure of between group consumption insurance a failure not explained by existing theories of informationally constrained optimal consumption behavior a welfare analysis indicates that the cost of between group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude

a theory of the consumption function with and without liquidity constraints fifteen years ago milton friedman s 1957 treatise a theory of the consumption function seemed badly dated dynamic optimization theory had not been employed much in economics when friedman wrote and utility theory was still comparatively primitive so his statement of the permanent income hypothesis never actually specified a formal mathematical model of behavior derived explicitly from utility maximization instead friedman relied at crucial points on intuition and verbal descriptions of behavior although these descriptions sounded plausible when other economists subsequently found multiperiod maximizing models that could be solved explicitly the implications of those models differed sharply from friedman s intuitive description of his model furthermore empirical tests in the 1970s and 1980s often rejected these rigorous versions of the permanent income hypothesis in favor of an alternative hypothesis that many households simply spent all of their current income today with the benefit of a further round of mathematical and computational advances friedman s 1957 original analysis looks more prescient than primitive it turns out that when there is meaningful uncertainty in future labor income the optimal behavior of moderately impatient consumers is much better described by friedman s original statement of the permanent income hypothesis than by the later explicit maximizing versions furthermore in a remarkable irony much of the empirical evidence that rejected the permanent income hypothesis as specified in tests of the 1970s and 1980s is actually consistent both with friedman s original description of the model and with the new version with serious uncertainty there are four key differences between the explicit maximizing models

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

imperfect insurance and differing propensities to consume across households abstract this paper extends previous tests of consumption insurance by splitting the sample to examine whether the marginal propensity to consume mpc out of idiosyncratic income shocks is larger for low wealth households than it is for high wealth households using data from the psid i find 1 the mpc of low wealth households is higher than that of high wealth households there are indications that both precautionary savings behavior and liquidity constraints contribute to this difference 2 splitting the data using two different measures of wealth indicates that households perceive housing equity as illiquid 3 when low wealth households are split into two subgroups the mpc of the very low wealth group is smaller reflecting the insurance aspects of means tested safety net programs

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

a new approach to business fluctuations heterogeneous interacting agents scaling laws and financial fragility abstract in this paper we discuss a scaling approach to business fluctuations our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to re discover a set of stylized facts which have to be satisfactorily accounted for in their models standard macroeconomics based on a reductionist approach centered on the representative agent is definitely badly equipped for this task on the contrary we show that a simple financial fragility agent based model based on complex interactions of heterogeneous agents is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

risky higher education and subsidies abstract tertiary education in the u s requires large investments that are risky lumpy and well timed tertiary education is also heavily subsidized our model suggests that despite adverse selection arising from encouraging poorly prepared students to enroll observed collegiate subsidies improve outcomes substantially relative to the fully decentralized case this result occurs because increases in subsidy rates for college education generate reductions in college failure risk without altering mean returns we find that this mechanism is robust and that tertiary subsidy rates well in excess of those observed in the u s can be justified by failure risk alone

the neoclassical growth model with heterogeneous quasi geometric consumers this paper investigates how the assumption of quasi geometric hyperbolic discounting affects the distributional implications of the standard one sector neoclassical growth model with infinitely lived heterogeneous agents the agents are subject to idiosyncratic shocks and face borrowing constraints we confine attention to an interior markov recursive equilibrium the consequence of quasi geometric discounting is that the effective discount factor of an agent is not a constant but an endogenous variable which depends on the agent s current state we show both analytically and by simulation that this new feature can significantly affect the distributional implications of the neoclassical growth model

true and spurious duration dependence the identifiability of the proportional hazard model lancaster and nickell 1980 have argued that in the proportional hazard model the effects of time dependence true duration dependence and unobserved sample heterogeneity spurious duration dependence cannot be distinguished we show that both effects can be distinguished if the model allows for observed explanatory variables in the hazard we also discuss the application of our result to practical situations

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

the response of household consumption to income tax refunds a central implication of the life cycle or permanent income theory is that consumption should not respond to predictable fluctuations in income tests of this implication have yielded mixed results especially on micro data angus deaton 1992 martin browning and annamaria lusardi 1996 in large part this might be due to the difficulties of isolating the predictable component of income at the micro level most tests proceed by instrumenting for income but since the available instruments are typically poor such tests might be prejudiced against finding significant excess sensitivity of consumption to income john shea 1995 also it is not clear how closely the resulting econometric predictions of income coincide with agents actual expectations of income to avoid these difficulties this paper examines the response of household consumption to a particular type of income that is both predictable and transitory income tax refunds since a refund depends on events in the previous calendar year it is predictable income as regards consumption in the year of its receipt consequently under the life cycle theory consumption should not increase on receipt of a refund 2 in addition to testing the canonical model of consumption this paper provides estimates interpretable as the marginal propensity to consume mpc out of refunds since federal tax refunds now amount to over 80 billion per year averaging well over 1 000 per refund these estimates are of interest in themselves more generally they bear on the impact of even preannounced and temporary changes in fiscal policy the paper begins by surveying related studies in section i section ii describes the data the consumer expenditure survey cex which of the leading u s micro data sets has the most comprehensive coverage of expenditure the empirical specification is set out in section hi section iv reports the results and section v concludes

the anatomy of unemployment dynamics abstract this paper examines the relation between individual unemployment durations and incidence inflow size on the one hand and the time varying macroeconomic conditions in the economy on the other we develop a model for the analysis of aggregate unemployment incidence and duration data and estimate this model on quarterly french data over the period 1982 1994 stratified by sex we find upward trends in both incidence and durations the former is relatively important for females the latter for males male incidence and durations are countercyclical with only a minor role for cohort effects on durations in contrast female cohorts entering at the top of the cycle have relatively short unemployment spells and the female incidence is if anything procyclical there is strong seasonal variation in particular in the incidence finally we find relatively small non monotonic individual duration dependence in the first six quarters of unemployment unobserved heterogeneity explains the observed negative duration dependence at these durations we provide some evidence that negative individual duration dependence and not heterogeneity is important at higher durations

does long term unemployment reduce a person s chance of a job a time series test long term unemployed are less likely to leave unemployment than short term unemployed to what extent is this due to an effect of duration and to what extent to heterogeneity on reasonable assumptions heterogeneity on its own with no duration dependence would imply that if over time the exit rate of new entrants fell by a given multiple the overall exit rate from unemployment should fall by the same multiple however over the last twenty years in the uk the overall exit rate has fallen by 60 per cent more than the fall in the exit rate of new entrants another test of pure heterogeneity based on more general assumptions also fails hence we explain the overall fall in exit rates from unemployment by the combined effect of 1 a fall in the ratio of vacancies to unemployed and 2 a higher proportion of the unemployed being long term unemployed and hence demoralized and stigmatized in the eyes of employers

heterogeneous agents and uninsurable idiosyncratic employment shocks in a linearized dynamic general equilibrium model this paper proposes an analytical solution method for a dynamic general equilibrium model with heterogeneous agents and uninsurable idiosyncratic employment shocks the solution method yields an approximate balanced growth path which depends on the unemployment rate and the unemployment risk but which is independent of the ever changing wealth distribution

the time varying volatility of earnings and aggregate consumption growth time varying specifications for the conditional variance of earnings of u s households are estimated with micro data over the period 1968 92 the cross sectional mean of the estimated time varying uncertainty of individual households has a significant impact on aggregate consumption growth as such aggregate precautionary savings may be more important than what is suggested by the results of estimating standard regression equations for aggregate consumption growth that incorporate only lagged income growth and the real interest rate the estimation of a buffer stock consumption model with time varying earnings uncertainty suggests that the precautionary savings motive is cyclical and has become less important in the 1980s

attrition in longitudinal panel data and the empirical analysis of dynamic labour market behaviour in the empirical analysis of unemployment durations and job durations it is generally assumed that the stochastic processes underlying labour market behaviour and the behaviour concerning participation in a panel survey are independent however there are reasons to believe that the probability of dropping out of the panel is related to the rate at which a different job is found if there is such a relation and if it is ignored then the estimator of the rate at which individuals become employed or change jobs will generally be inconsistent in this paper we analyse the relation between the duration spent in a particular labour market state and the duration of panel survey participation by explicitly modelling and estimating the joint distribution of both durations the emphasis will be on models allowing for stochastically related unobserved determinants of both types of duration we estimate models both for unemployment durations and for job durations copyright 1994 john wiley sons ltd

unemployment dynamics and duration dependence a major issue in the analysis of unemployment durations concerns distinguishing genuine duration dependence of the exit rate out of unemployment from unobserved heterogeneity we present a method for the nonparametric estimation of both phenomena designed to be applicable to time series data on aggregate outflows from different duration classes the model explicitly takes into account that individual exit rates are affected by the business cycle and by seasonal effects the method is applied to u s data we find diverging duration effects among black and white individuals however except for white males duration dependence is dominated by unobserved heterogeneity

on the concavity of the consumption function at least since keynes 1935 many economists have had the intuition that the marginal propensity to consume out of wealth declines as wealth increases nonetheless standard perfect certainty and certainty equivalent versions of intertemporal optimizing models of consumption imply a marginal propensity to consume that is unrelated to the level of household wealth we show that adding income uncertainty to the standard optimization problem induces a concave consumption function in which as keynes suggested the marginal propensity to consume out of wealth or transitory income declines with the level of wealth