Alpo Willman
- 1 May 2002
- WORKING PAPER SERIES - No. 149Details
- Abstract
- This paper presents the Spanish country block (ES-MCM) of the ESCB Multi-Country Model for the euro area, which has been built in a close co-operation with the ECB and the Banco de Espaa. The theoretical structure of the ES-MCM block is in line with most current mainstream macro models, i.e. the supply factors determine the long-run equilibrium, while in the short run output is demand-determined, resulting from a sluggish adjustment of prices and quantities. The paper is structured as follows. First, a simplified theoretical counterpart of the ES-MCM block is presented and its steady-state comparative statistics and stock-flow equilibrium properties are studied. The theoretical analysis is followed by the review of the estimated equations of the ES-MCM block. Finally the simulation properties of the ES-MCM block are presented in the light of five alternative shock simulations.
- JEL Code
- E10 : Macroeconomics and Monetary Economics→General Aggregative Models→General
E13 : Macroeconomics and Monetary Economics→General Aggregative Models→Neoclassical
E17 : Macroeconomics and Monetary Economics→General Aggregative Models→Forecasting and Simulation: Models and Applications
- 1 June 2002
- WORKING PAPER SERIES - No. 153Details
- Abstract
- In this paper, we present a three equation supply-side model based on aggregation across sectors with sector specific mark-ups and the technology parameters of the production function. The model has been applied to euro area data from the 1970s assuming that the underlying production function is either CES or Cobb-Douglas. Estimation results support the Cobb-Douglas case and the estimated supply-side model accounts satisfactorily for the stylised features of the data, i.e. the hump shape in the labour income share coupled with the relatively stable capital-to-labour income ratio and a noticeable change in profit margins and sectoral production shares. We also produce estimates of potential output and the output gap conditional on estimated production functions and examine the sensitivity of output gap estimates with respect to the alternative parameterisation of the production function.
- JEL Code
- E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production
E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution
- 1 August 2003
- WORKING PAPER SERIES - No. 251Details
- Abstract
- Based on the households' utility maximisation, a closed form approximation of the consumption function is derived and the deep parameters of the consumption function are estimated using aggregate euro area data. The novel element in our approach is the parameterisation of the information content regarding future income changes. In addition to the information regarding time series properties of the historical development of labour income, consumers have also period-specific information on future income realisations. Estimation results support the hypothesis that, although front-loaded, consumers have a lot of information on future income changes, but that also lagged consumption, through habit formation, plays an important role.
- JEL Code
- D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
- 1 September 2003
- WORKING PAPER SERIES - No. 265Details
- Abstract
- Using euro-area data, we re-examine the empirical success of New Keynesian Phillips Curves (NKPCs). The nature of our re-evaluation relies on the actual empirical underpinnings of such estimates: we find existing estimates un-robust and - given that key parameters are generally calibrated rather than estimated - potentially at odds with the data. We re-estimate with a wellspecified optimizing supply-side (which attempts to treat non-stationarity in factor income shares and mark-ups) and this allows us to derive estimates of technology parameters and marginal costs. Our resulting estimates of the euro-area NKPCs are robust, provide reasonable estimates for fixed-price durations and discount rates and embody plausible dynamic properties. Our method for identifying and estimating New Keynesian Phillips curves has general applicability to a wide set of countries and might also be used in identifying sectoral NKPCs.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
- 9 June 2004
- WORKING PAPER SERIES - No. 367Details
- Abstract
- Using a normalized CES function with factor-augmenting technical progress, we estimate a supply-side system of the US economy from 1953 to 1998. Avoiding potential estimation biases that have occurred in earlier studies and putting a high emphasis on the consistency of the data set, required by the estimated system, we obtain robust results not only for the aggregate elasticity of substitution but also for the parameters of labor and capital augmenting technical change. We find that the elasticity of substitution is significantly below unity and that the growth rates of technical progress show an asymmetrical pattern where the growth of laboraugmenting technical progress is exponential, while that of capital is hyperbolic or logarithmic.
- JEL Code
- C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production
E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution
O30 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→General
O51 : Economic Development, Technological Change, and Growth→Economywide Country Studies→U.S., Canada
- 22 June 2005
- OCCASIONAL PAPER SERIES - No. 29Details
- Abstract
- Do asset prices affect real activity? This question has taken on a new importance in recent years, as asset values first surged at the end of 1990s and, thereafter, dramatically retreated. This report reviews the available theoretical and empirical evidence regarding asset price and wealth effects in Europe and some other major economies. The main focus of this report is on consumption effects via the wealth channel, reflecting the bulk of literature on the effects of asset prices. However, asset price effects on investment via the Tobin
- JEL Code
- D1 : Microeconomics→Household Behavior and Family Economics
D3 : Microeconomics→Distribution
D9 : Microeconomics→Intertemporal Choice
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
- 13 June 2007
- WORKING PAPER SERIES - No. 765Details
- Abstract
- In an overlapping generations maximization framework with consumers, whose information on uncertain future income realizations is front loaded, a closed form aggregate consumption function with CRRA preferences is derived. To have a closed form solution we assume that consumers solve their inter-temporal optimization problem sequentially. First they assess risk-adjusted life-time wealth and then the optimal consumption path. The derived model captures precautionary saving, which is dependent on the human to non-human wealth ratio. On aggregate level, after accounting for habit formation, the model is able to explain both the short-run (e.g. the excess sensitivity and the excess smoothness puzzle) and long-run stylized facts of the U.S. consumption data.
- JEL Code
- D11 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Theory
D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis
D82 : Microeconomics→Information, Knowledge, and Uncertainty→Asymmetric and Private Information, Mechanism Design
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
- 21 August 2007
- WORKING PAPER SERIES - No. 806Details
- Abstract
- We implement a tractable state-dependent Calvo price-setting signal dependent on inflation and aggregate competitiveness. This allows us to derive a New Keynesian Phillips Curve (NKPC) expressed in terms of the actual levels of variables - rather than in-deviation from "steady state" form - and thus a specification which is not regime-dependent. A consequence of our approach is that ex-ante all firms face the same optimization problem. This state-dependent NKPC nests the conventional hybrid NKPC form as a special case. Finally, we demonstrate the uefulness of our approach by, first, analyzing the persistence and variability of inflation shocks under different inflation regimes and then comparing our state-dependent and timedependent NKPCs on US data.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
- 30 June 2008
- WORKING PAPER SERIES - No. 915Details
- Abstract
- We develop a framework for analyzing "medium-run" departures from balanced growth, and apply it to the economies of continental Europe. A time-varying factor-augmenting production function (mimicking "directed" technical change) with a below-unitary substitution elasticity coupled with supporting short-run factor demands (and price setting) is shown to account for the observed dynamics of factor incomes shares, capital deepening and the capital-output ratio. Based on careful data accounting, we also identify a rising mark-up, which we ascribe to the rise of Services. The balanced growth path emerges as a special (and testable) case of our framework, as do existing strands of medium-run debates.
- JEL Code
- C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production
E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution
O30 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→General
O51 : Economic Development, Technological Change, and Growth→Economywide Country Studies→U.S., Canada
- 28 January 2009
- WORKING PAPER SERIES - No. 1001Details
- Abstract
- Despite being critical parameters in many economic fields, the received wisdom, in theoretical and empirical literatures, states that joint identification of the elasticity of capital-labor substitution and technical bias is infeasible. This paper challenges that pessimistic interpretation. Putting the new approach of "normalized" production functions at the heart of a Monte Carlo analysis we identify the conditions under which identification is feasible and robust. The key result is that the jointly modeling the production function and first-order conditions is superior to single-equation approaches in terms of robustly capturing production and technical parameters, especially when merged with "normalization". Our results will have fundamental implications for production-function estimation under non-neutral technical change, for understanding the empirical relevance of normalization and the variability underlying past empirical studies.
- JEL Code
- C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production
O30 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→General
O51 : Economic Development, Technological Change, and Growth→Economywide Country Studies→U.S., Canada
- 21 April 2010
- WORKING PAPER SERIES - No. 1175Details
- Abstract
- Capital-labor substitution and total factor productivity (TFP) estimates are essential features of growth and income distribution models. In the context of a Monte Carlo exercise embodying balanced and near balanced growth, we demonstrate that the estimation of the substitution elasticity can be substantially biased if the form of technical progress is misspecified. For some parameter values, when factor shares are relatively constant, there could be an inherent bias towards Cobb-Douglas. The implied estimates of TFP growth also yield substantially different results depending on the specification of technical progress. A Constant Elasticity of Substitution production function is then estimated within a “normalized” system approach for the US economy over 1960:1–2004:4. Results show that the estimated substitution elasticity tends to be significantly lower using a factor augmenting specification (well below one). We are able to reject Hicks-, Harrod- and Solow-neutral specifications in favor of general factor augmentation with a non-negligible capital-augmenting component. Finally, we draw some important lessons for production and supply-side estimation.
- JEL Code
- C15 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Statistical Simulation Methods: General
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production
O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes
O51 : Economic Development, Technological Change, and Growth→Economywide Country Studies→U.S., Canada
- 14 December 2010
- WORKING PAPER SERIES - No. 1278Details
- Abstract
- The reaction of hours worked to technology shocks represents a key controversy between RBC and New Keynesian explanations of the business cycle. It sparked a large empirical literature with contrasting results. We demonstrate that, with a more general and data coherent supply and production framework (
- JEL Code
- E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production
E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution
- 16 February 2011
- WORKING PAPER SERIES - No. 1294Details
- Abstract
- The elasticity of substitution between capital and labor and, in turn, the direction of technical change are critical parameters in many fields of economics. Until recently, though, the application of production functions with non-unitary substitution elasticities (i.e., non Cobb Douglas) was hampered by empirical and theoretical uncertainties. As has recently been revealed,
- JEL Code
- C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production
E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution
O30 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→General
O51 : Economic Development, Technological Change, and Growth→Economywide Country Studies→U.S., Canada
- 7 April 2011
- WORKING PAPER SERIES - No. 1316Details
- Abstract
- Rational expectations has been the dominant way to model expectations, but the literature has quickly moved to a more realistic assumption of boundedly rational learning where agents are assumed to use only a limited set of information to form their expectations. A standard assumption is that agents form expectations by using the correctly specified reduced form model of the economy, the minimal state variable solution (MSV), but they do not know the parameters. However, with medium-sized and large models the closed-form MSV solutions are difficult to attain given the large number of variables that could be included. Therefore, agents base expectations on a misspecified MSV solution. In contrast, we assume agents know the deep parameters of their own optimising frameworks. However, they are not assumed to know the structure nor the parameterisation of the rest of the economy, nor do they know the stochastic processes generating shocks hitting the economy. In addition, agents are assumed to know that the changes (or the growth rates) of fundament variables can be modelled as stationary ARMA (p,q) processes, the exact form of which is not, however, known by agents. This approach avoids the complexities of dealing with a potential vast multitude of alternative mis-specified MSVs. Using a new Multi-country Euro area Model with Boundedly Estimated Rationality we show this approach is compatible with the same limited information assumption that was used in deriving and estimating the behavioural equations of different optimizing agents. We find that there are strong differences in the adjustment path to the shocks to the economy when agent form expectations using our learning approach compared to expectations formed under the assumption of strong rationality. Furthermore, we find that some variation in expansionary fiscal policy in periods of downturns compared to boom periods.
- JEL Code
- C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation
D83 : Microeconomics→Information, Knowledge, and Uncertainty→Search, Learning, Information and Knowledge, Communication, Belief
D84 : Microeconomics→Information, Knowledge, and Uncertainty→Expectations, Speculations
E17 : Macroeconomics and Monetary Economics→General Aggregative Models→Forecasting and Simulation: Models and Applications
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
- 7 April 2011
- WORKING PAPER SERIES - No. 1315Details
- Abstract
- The model presented here is a New estimated medium-scale Multi-Country Model (NMCM) which covers the five largest euro area countries and is used for forecasting and scenarios analysis at the European Central Bank. The model has a tight theoretical structure which allows for non-unitary elasticity of substitution, non-constant augmenting technical progress and heterogeneous sectors with differentiated price and income elastiticites of demand across sectors. Furthermore, it has the explicit inclusion of expectations on the basis of three optimising private sector decision making units: i.e. firms, trade unions and households, where output is in the short run demand-determined and monopolistically competing firms set prices and factor demands. Labour is indivisible and monopoly-unions set wages and households make consumption/saving decisions. We assume agents optimise under limited information where each agent knows only the parameters related to his/her optimization problem. Therefore we estimate with GMM, which implicitly assumes limited information boundedly rational expectations. In this paper we provide some simulation results under the assumption of model-consistent rational expectations, we show that there is some heterogeneity across countries and that the reactions of the economies to shocks depends strongly on whether the shocks are pre-announced, announced and credible or unannounced and uncredible.
- JEL Code
- C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation
C6 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
- 22 August 2011
- WORKING PAPER SERIES - No. 1369Details
- Abstract
- We argue that the New-Keynesian Phillips Curve literature has failed to deliver a convincing measure of
- JEL Code
- E20 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→General
E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General
- 28 November 2011
- WORKING PAPER SERIES - No. 1400Details
- Abstract
- We examine the two-level nested Constant Elasticity of Substitution production function where both capital and labor are disaggregated in two classes. We propose a normalized system estimation method to retrieve estimates of the inter- and intra-class elasticities of substitution and factoraugmenting technical progress coefficients. The system is estimated for US data for the 1963-2006 period. Our findings reveal that skilled and unskilled labor classes are gross substitutes, capital structures and equipment are gross complements, and aggregate capital and aggregate labor are gross complements with an elasticity of substitution close to 0.5. We discuss the implications of our findings and methodology for the analysis of the causes of the increase in the skill premium and, by implication, inequality in a growing economy.
- JEL Code
- E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution
J23 : Labor and Demographic Economics→Demand and Supply of Labor→Labor Demand
J24 : Labor and Demographic Economics→Demand and Supply of Labor→Human Capital, Skills, Occupational Choice, Labor Productivity
O40 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→General
- 2 December 2014
- WORKING PAPER SERIES - No. 1745Details
- Abstract
- The model presented here is an estimated medium-scale model for the United States (US) economy developed to forecast and analyse policy issues for the US. The model is specified to track the deviation of the medium- run developments from the balanced-growth-path via an estimated CES production function for the private sector, where factor augmenting technical progress is not constrained to evolve at a constant rate. The short-run deviations from the medium run are estimated based on three optimising private sector decision making units: firms, trade unions and households. We assume agents optimise under limited-information model-consistent learning, where each agent knows the parameters related to his/her optimization problem. Under this learning approach the effect of a monetary policy shock on output and inflation is more muted but persistent than under rational expectations, but both specifications are broadly comparable to other US macro models. Using the learning version, we .find stronger expansionary effects of an increase in government expenditure during periods of downturns compared to booms.
- JEL Code
- C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation
C6 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
- 9 June 2015
- WORKING PAPER SERIES - No. 1800Details
- Abstract
- For the US the supply and wages of skilled labor relative to those of unskilled labor have grown over the postwar period. The literature has tended to explain this through
- JEL Code
- J01 : Labor and Demographic Economics→General→Labor Economics: General
J31 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→Wage Level and Structure, Wage Differentials
O4 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity
- 26 September 2018
- WORKING PAPER SERIES - No. 2180Details
- Abstract
- We offer a macroeconomic assessment of China’s Reform Period, highlighting several neglected channels underlining its great expansion. Estimating the supply side of the post-Reform economy reveals the relatively high (above unity) value of the elasticity of factor substitution and the time-varying pattern of factor-saving technical change. The latter we relate to trade, human capital and reallocation factors. We then demonstrate how, in addition to factor accumulation and technical progress, the above-unity elasticity of substitution can be a source of growth (the ‘de La Grandville hypothesis’). We then draw upon our estimated framework to rationalize China’s high and rising savings ratio as well as the dynamic nature of its convergence path.
- JEL Code
- D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity
E13 : Macroeconomics and Monetary Economics→General Aggregative Models→Neoclassical
O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development