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I carry out a business cycle accounting exercise (Chari, Kehoe and McGrattan, 2007) on the U.S. data measured in wage units (Farmer (2010)) for the entire postwar period. In contrast to a conventional approach, this approach preserves common medium-term business cycle fluctuations in GDP, its components and the unemployment rate. Additionally, it facilitates decomposition of the labor wedge into the labor supply and the labor demand wedges. Using this business cycle accounting methodology, I find that in the transformed data, most movements in GDP are accounted for by the labor supply wedge. Therefore, I reverse a key finding of the real business cycle literature which asserts that 70% or more of economic fluctuations can be explained by TFP shocks. In other words, the real business cycle model fits the data badly because the assumption that households are on their labor supply equation is flawed. This failure is masked by data that has been filtered with a conventional approach that removes fluctuations at medium frequencies. My findings are consistent with the literature on incomplete labor markets.
Labor --- Macroeconomics --- Price Level --- Inflation --- Deflation --- Business Fluctuations --- Cycles --- Prices, Business Fluctuations, and Cycles: Forecasting and Simulation --- Energy: Demand and Supply --- Prices --- Energy and the Macroeconomy --- Wages, Compensation, and Labor Costs: General --- Unemployment: Models, Duration, Incidence, and Job Search --- Demand and Supply of Labor: General --- Labor Economics: General --- Labor Demand --- Labour --- income economics --- Wages --- Unemployment rate --- Labor supply --- Labor share --- Labor demand --- Unemployment --- Labor market --- Labor economics --- United States --- Income economics
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This paper presents a structural model of crime and output. Individuals make an occupational choice between criminal and legal activities. The return to becoming a criminal is endogenously determined in a general equilibrium together with the level of crime and economic activity. I calibrate the model to the Northern Triangle countries and conduct several policy experiments. I find that for a country like Honduras crime reduces GDP by about 3 percent through its negative effect on employment indirectly, in addition to direct costs of crime associated with material losses, which are in line with literature estimates. Also, the model generates a non-linear effect of crime on output and vice versa. On average I find that a one percent increase in output per capita implies about ½ percent decline in crime, while a decrease of about 5 percent in crime leads to about one percent increase in output per capita. These positive effects are larger if the initial level of crime is larger.
Labor --- Public Finance --- Criminology --- Human Capital --- Skills --- Occupational Choice --- Labor Productivity --- Wages, Compensation, and Labor Costs: General --- Informal Economy --- Underground Econom --- Illegal Behavior and the Enforcement of Law --- Demand and Supply of Labor: General --- National Government Expenditures and Related Policies: General --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Crime & criminology --- Labour --- income economics --- Public finance & taxation --- Crime --- Labor markets --- Public expenditure review --- Expenditure --- Crime--Economic aspects --- Labor market --- Expenditures, Public --- Economic theory --- El Salvador
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This paper presents a structural model of crime and output. Individuals make an occupational choice between criminal and legal activities. The return to becoming a criminal is endogenously determined in a general equilibrium together with the level of crime and economic activity. I calibrate the model to the Northern Triangle countries and conduct several policy experiments. I find that for a country like Honduras crime reduces GDP by about 3 percent through its negative effect on employment indirectly, in addition to direct costs of crime associated with material losses, which are in line with literature estimates. Also, the model generates a non-linear effect of crime on output and vice versa. On average I find that a one percent increase in output per capita implies about ½ percent decline in crime, while a decrease of about 5 percent in crime leads to about one percent increase in output per capita. These positive effects are larger if the initial level of crime is larger.
El Salvador --- Labor --- Public Finance --- Criminology --- Human Capital --- Skills --- Occupational Choice --- Labor Productivity --- Wages, Compensation, and Labor Costs: General --- Informal Economy --- Underground Econom --- Illegal Behavior and the Enforcement of Law --- Demand and Supply of Labor: General --- National Government Expenditures and Related Policies: General --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Crime & criminology --- Labour --- income economics --- Public finance & taxation --- Crime --- Labor markets --- Public expenditure review --- Expenditure --- Crime--Economic aspects --- Labor market --- Expenditures, Public --- Economic theory --- Income economics
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This paper develops and estimates a general equilibrium rational expectations model with search and multiple equilibria where aggregate shocks have a permanent effect on the unemployment rate. If agents' wealth decreases, the unemployment rate increases for a potentially indefinite period. This makes unemployment rate dynamics path dependent as in Blanchard and Summers (1987). I argue that this feature explains the persistence of the unemployment rate in the U.S. after the Great Recession and over the entire postwar period.
Unemployment. --- Business cycles. --- Hysteresis (Economics) --- Economics --- Economic cycles --- Economic fluctuations --- Cycles --- Joblessness --- Employment (Economic theory) --- Full employment policies --- Labor supply --- Manpower policy --- Underemployment --- Labor --- Macroeconomics --- Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data) --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Business Fluctuations --- Unemployment: Models, Duration, Incidence, and Job Search --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Macroeconomics: Consumption --- Saving --- Wealth --- Wages, Compensation, and Labor Costs: General --- Labor Economics: General --- Labour --- income economics --- Unemployment rate --- Consumption --- Real wages --- National accounts --- Economic theory --- Labor economics --- United States --- Income economics
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The effect that the recent decline in the price of oil has had on growth is far from clear, with many observers at odds to explain why it does not seem to have provided a significant boost to the world economy. This paper aims to address this puzzle by providing a systematic analysis of the effect of oil price shocks on growth for 72 countries comprising 92.8% of world GDP. We find that, on net, shocks driving the oil price in 2015 shaved off 0.2 percentage points of growth for the median country in our sample, and 0.17 percentage points in GDP-weighted terms. While increases in oil supply and shocks to oil-specific demand actually boosted growth in 2015 (by about 0.2 and 0.4 percentage points, respectively), weak global demand more than offset these gains, reducing growth by 0.8 percentage points. Counterfactual simulations for the 72 countries in our sample underscore the importance of diversification, rather than low levels of openness, in shielding against negative shocks to the world economy.
Petroleum industry and trade. --- Petroleum products --- Petroleum --- Petroleum industry and trade --- Energy industries --- Oil industries --- Prices. --- Prices --- Investments: Energy --- Exports and Imports --- Macroeconomics --- Economic Theory --- Industries: Energy --- Price Level --- Inflation --- Deflation --- Business Fluctuations --- Cycles --- Prices, Business Fluctuations, and Cycles: Forecasting and Simulation --- Energy: Demand and Supply --- Energy and the Macroeconomy --- Energy: General --- Agriculture: Aggregate Supply and Demand Analysis --- Macroeconomics: Production --- Trade: General --- Investment & securities --- Economic theory & philosophy --- Petroleum, oil & gas industries --- International economics --- Oil prices --- Oil --- Supply shocks --- Oil production --- Export diversification --- Commodities --- Economic theory --- Production --- International trade --- Supply and demand --- Exports --- United States
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This paper uses the old-Keynesian representative agent model developed in Farmer (2010b) to answer two questions: 1) do increased government purchases crowd out private consumption? 2) do increased government purchases reduce unemployment? Farmer compared permanent tax financed expenditure paths and showed that the answer to 1) was yes and the answer to 2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in Farmer (2010b). However, in contrast to Farmer's experiment we find that a temporary increase in government purchases can also reduce unemployment.
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This article documents recent developments in emerging markets in the context of the COVID-19 pandemic, assesses their prospects and challenges, and discusses appropriate policy settings for the medium term. It argues that EM policymakers’ ability to grapple with an incomplete and uneven recovery will be constrained by high public debt and uncertain inflation prospects as well as external risks surrounding capital flows and exchange rate developments. The paper also discusses potential impact of a tightening in global financial conditions and appreciation of the US dollar that could be triggered by a general increase in risk aversion or a reassessment of the likely path of US monetary policy.
Macroeconomics --- Economics: General --- Finance: General --- Inflation --- Diseases: Contagious --- Foreign Exchange --- Public Finance --- Global Outlook --- Monetary Policy --- Central Banks and Their Policies --- General Financial Markets: General (includes Measurement and Data) --- Price Level --- Deflation --- Health Behavior --- Debt --- Debt Management --- Sovereign Debt --- Economic & financial crises & disasters --- Economics of specific sectors --- Finance --- Infectious & contagious diseases --- Currency --- Foreign exchange --- Public finance & taxation --- Emerging and frontier financial markets --- Financial markets --- Prices --- COVID-19 --- Health --- Exchange rates --- Public debt --- Currency crises --- Informal sector --- Economics --- Financial services industry --- Communicable diseases --- Debts, Public --- China, People's Republic of
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This paper uses the old-Keynesian representative agent model developed in Farmer (2010b) to answer two questions: 1) do increased government purchases crowd out private consumption? 2) do increased government purchases reduce unemployment? Farmer compared permanent tax financed expenditure paths and showed that the answer to 1) was yes and the answer to 2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in Farmer (2010b). However, in contrast to Farmer's experiment we find that a temporary increase in government purchases can also reduce unemployment.
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This article documents recent developments in emerging markets in the context of the COVID-19 pandemic, assesses their prospects and challenges, and discusses appropriate policy settings for the medium term. It argues that EM policymakers’ ability to grapple with an incomplete and uneven recovery will be constrained by high public debt and uncertain inflation prospects as well as external risks surrounding capital flows and exchange rate developments. The paper also discusses potential impact of a tightening in global financial conditions and appreciation of the US dollar that could be triggered by a general increase in risk aversion or a reassessment of the likely path of US monetary policy.
China, People's Republic of --- Macroeconomics --- Economics: General --- Finance: General --- Inflation --- Diseases: Contagious --- Foreign Exchange --- Public Finance --- Global Outlook --- Monetary Policy --- Central Banks and Their Policies --- General Financial Markets: General (includes Measurement and Data) --- Price Level --- Deflation --- Health Behavior --- Debt --- Debt Management --- Sovereign Debt --- Economic & financial crises & disasters --- Economics of specific sectors --- Finance --- Infectious & contagious diseases --- Currency --- Foreign exchange --- Public finance & taxation --- Emerging and frontier financial markets --- Financial markets --- Prices --- COVID-19 --- Health --- Exchange rates --- Public debt --- Currency crises --- Informal sector --- Economics --- Financial services industry --- Communicable diseases --- Debts, Public --- Covid-19
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