Economics Department Seminar Series

Department of Economics

Seminar Series
Copies may be downloaded by clicking on the title of the paper.
For more information you may contact Jon Vilasuso, the Seminar Series Coordinator.

2002

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February 15, 2002 BANDYOPADHYAY, Subhayu; West Virginia University. "Trade and Child Labor: A General Equilibrium Analysis."
Abstract: The issue of child labor in developing nations and how it impacts international trade have received substantial attention in recent times. Indeed, it has been a central issue in North-South trade negotiations. In spite of its importance, rigorous economic analysis of the issue is still in a state of relative infancy. This paper provides a systematic analysis of some of the central issues. The effect of trade sanctions on child labor depends critically on the pattern of substitutability (or complementarity) in excess demand functions between the export good and the non-traded good. Sanctions necessarily hurt the nation on aggregate, but have disparate income distribution effects. We show that a subsidy (tax) for education for the unskilled (skilled) households reduces child labor. This indicates that rather than using sanctions, a more fruitful policy will be to persuade developing nations to tax the education of skilled households and use the revenues to subsidize the education of unskilled households. If fertility is endogenous, the effect of sanctions on child labor is qualitatively unaltered. However, the effects on child labor of education related tax or subsidies may be significantly different.

February 22, 2002 OTROK, Chris; University of Virginia. "International Business Cycles: World, Region, and Country-Specific Factors."
Absract: The paper investigates the common dynamic properties of business cycle fluctuations across countries, regions, and the world. We employ a Bayesian dynamic latent factor model to stimate common components in the main macroeconomic aggregates (output, consumption and investment) in a sixty-country sample covering seven regions of the world. In particular, we simultaneously estimate (i) a dynamic factor common to all aggregates, regions, and countries (the world factor); (ii) a set of 7 regional dynamic factors common across aggregates within a region; (iii) 60 country factors to capture dynamic comovement across aggregates within each country; and (iv) a component for each aggregate that captures idiosyncratic dynamics. We decompose the volatility in each aggregate into the fraction due to the world, region, country, and idiosyncratic components. The results indicate that the world factor is an important source of volatility for aggregates in most countries, providing evidence for a world business cycle. We find that the region-specific factor plays only a minor role in explaining fluctuations in economic activity. While the world and regional factors together account for a larger share of fluctuations in output than in consumption, the country-specific and idiosyncratic components play much larger roles in explaining investment dynamics. We also explore how the three aggregates in each country relate to the world, region and country factors, and document similarities and differences across regions, countries and aggregates. We link the empirical results to the economics structures of the countries in the sample.

March 1, 2002 MINKLER, Lanse; University of Connecticut. "Shirking and Motivation in Firms: Evidence from a New Survey."
Abstract: In a U.S. survey 82.7% of the respondents report that they are very likely to keep an agreement to work hard if they agreed to, even if it was almost impossible for their employer to monitor them. Different motivations are analyzed in the decision to keep an agreement to work hard. Based on mean responses, the rank order in descending importance is: moral motivations, intrinsic motivations, peer-pressure, and positive incentives. Respondents also report that fairness considerations are important and that they are especially likely to keep agreements to do a good job with honest employers. In contrast, negative incentives and firm-pressure are judged to be unimportant. Logit analysis indicates that increases in moral and intrinsic motivations increase the likelihood of keeping agreements to provide effort. The evidence suggests that we need to re-examine a foundational assumption underlying the theory of the firm.

March 8, 2002 TOSUN, Mehmet; WVU Bureau of Business and Economics Research. "Global Aging and Migration: A Political Economy Perspective."
Abstract: Population aging has become a global phenomenon. Recent population projections show that world median age will rise from 25.4 in 1995 to 36.5 in 2050, and to 42.9 in 2150. While there is a growing literature analyzing the links between population aging and international capital mobility, aging has hardly ever been addressed in an open economy framework with labor mobility. Besides, there is no comparison of capital and labor mobility within the context of population aging. Labor mobility has a dual effect in the sense that it exhibits the characteristics of capital mobility as well. In addition, when allowed to vote, migrant workers change the political structure composed of young and elderly voters in both labor-receiving and labor-sending countries. In a majority voting mechanism for fiscal policy decisions, political shifts resulting from labor migration may have sizeable impacts on government programs, and in turn may have strong growth and welfare effects. I use a two-country overlapping generations model with international labor mobility and a politically responsive fiscal policy to examine the asymmetry between labor and capital mobility in explaining the effects of global aging. Economic growth and welfare results for the labor mobility model with endogenous policy are found to be superior to the ones for a capital mobility model with endogenous. Furthermore, unlike the results from a model with international capital mobility only, these results point to a global recession in response to the aging of developing nations. Thus, the choice between labor and capital mobility indeed matters for the analysis of the effects of population aging.

March 15, 2002 TALLARINI, Thomas; Carnegie Mellon University. "Whose Habit Is It Anyway?"
Abstract:Several papers have been written recently that use different models of habit persistence to account for business cycle and asset pricing anomalies. Some of these papers treat the habit as internal, i.e. the agent understands the affect his current consumption will have on his future utility. Some treat habit as external, i.e. the habit is a function of average consumption, therefore current consumption will have no effect on future utility. This paper considers both types of habit, individually and jointly, to determine which has a larger effect on economic decision making.

March 22, 2002 LUBIK, Thomas; Johns Hopkins University. "Testing for Indeterminacy in Linear Rational Expectations Models."
Abstract:It is well known that linear rational expectations (RE) models can have multiple equilibria. If the equilibrium is not unique it is possible to construct sunspot equilibria in which stochastic disturbances that are unrelated to fundamental shocks influence model dynamics. The possibility of sunspot equilibria therefore creates special challenges for policy design. However, there are only a few empirical studies on the importance of indeterminacy in macroeconomic models. A particularly important question is whether U.S. monetary policy is consistent with a unique equilibrium. In this paper we estimate a prototypical monetary business cycle model for the U.S. economy with special attention to the monetary policy rule. The theoretical model exhibits sunspot equilibria under certain parameterizations. In previous studies it has been common practice to restrict the parameter space to the region where indeterminacy does not occur which is effectively a misspecification of the empirical model. Consequently, we show in this paper how the likelihood-based estimation of dynamic stochastic general equilibrium models can be extended to the case of multiple equilibria. This allows us to quantify the contribution of sunspot shocks in determining U.S. business cycles. Moreover, we develop an econometric test for the hypothesis that the observed data are consistent with a parameterization of the model economy for which the equilibrium is unique.

April 5, 2002 RIPOLL, Marla; University of Pittsburgh. "Trade Liberalization, Paths of Development, and Income Distribution."
Abstract:The Stolper-Samuelson theorem predicts that since developing countries are relatively abundant in unskilled labor, trade liberalization would decrease the relative wage of skilled to unskilled workers. Empirical evidence shows that while this prediction holds for some developing countries, it does not for many others. To account for these different outcomes, this paper develops a dynamic, general equilibrium model where small developing economies differ in their factor endowments at the time of trade liberalization. These different "initial conditions," along with the impact of increased openness on the endogenous accumulation of factors of production, generate a rich set of outcomes that account for the diverse income-distribution patterns observed across developing countries. In the model, the existence of different initial conditions is explained by differences in trade policy and development strategies across countries. In particular, we consider both import substitution and subsidies to exports and education. Following trade liberalization, the behavior of the skill premium varies across countries because of the different paths of adjustment of both prices and factor endowments. In contrast to the existing literature on trade and wages in developing countries, this paper emphasizes the dynamic and general equilibrium aspects of trade. This paper also stresses the importance of a general equilibrium approach in the empirical work on trade and wages.

April 12, 2002 MARK, Nelson; Ohio State University. "Continuous-Time Market Dynamics, ARCH Effects, and the Forward Premium Anomaly."
Abstract: We study a simple continuous-time model based on uncovered interest parity (UIP) that endogenously generates conditional heteroskedasticity in exchange rate returns. The volatility clustering arises from dependence of the ex post deviation from UIP on the lagged interest differential which is induced into discretized observations that conform to sampling intervals of the data. This dependence has a "big news" interpretation. The model also provides an explanation of the forward premium anomaly as a result of sporadic central bank intervention that creates unanticipated switches in the process governing the interest differential.

April 19, 2002 ROGERS, John, Federal Reserve Borad. "Monetary Union, Price Level Convergence and Inflation: How Close is Europe to the United States?"
Abstract:If price levels are initially different across the euro area, convergence to a common level of prices would imply that inflation will be higher in countries where prices are initially low. Price level convergence thus provides a potential explanation for recent cross-country differences in European inflation, a worrisome development under the ECBs "one-size-fits-all" monetary policy. I present direct evidence on price level convergence in Europe, using a unique data set, and then investigate how much of the recent divergence of national inflation rates can be explained by price level convergence. I show that between 1990 and 1999 prices did become less dispersed in the euro area. Convergence is especially evident for traded goods, and more in the first half of the 1990s than in the second half. By some measures, traded goods price dispersion across the euro area is now close to that across U.S. cities. Despite an on-going process of convergence, deviations from the law of one price are large. Finally, I find a statistically-significant and robust negative relationship between the 1999 price level and 2000 inflation rate in Europe, and that the contribution of price level convergence to explaining inflation differentials is often quite important economically. Still, factors other than price convergence explain most of the cross-country inflation differences.

April 26, 2002 Today's seminar has been canceled..

May 3, 2002 JONES, Barry; SUNY - Binghamton. "Welfare Cost of Inflation in a General Equilibrium Model with Currency and Interest Bearing Deposits"
Abstract:The user cost of non-interest bearing currency is the nominal interest rate. Increases in inflation lead to decreased real currency held in steady state, which imposes a welfare cost. Lucas (2000) estimates this welfare cost in a model with a single non-interest bearing monetary asset. Lucas suggests applying monetary aggregation/index number theory to generalize the model to contain interest-bearing deposits. We solve a general equilibrium model with three agents: a household, a goods producing firm, and a financial firm. We assume that currency and deposits provide utility to the household and form a weakly separable group in the utility function. We use monetary aggregation and index number methods to calibrate the model and estimate the welfare cost of inflation. We compare these estimates to welfare cost estimates from a model in which all money is non-interest bearing currency. We find that the welfare cost of inflation is substantially lower in the models with interest-bearing deposits than in models with only non-interest bearing currency. We also find that the welfare cost of inflation is positively related to the own price elasticity of aggregate money demand.

	Seminar Series Copies may be downloaded by clicking on the title of the paper. For more information you may contact Jon Vilasuso, the Seminar Series Coordinator. 2002 If you do not have Acrobat Reader for your browser, you can download it freely from Adobe's Web site. Download Adobe Acrobat Reader
February 15, 2002	BANDYOPADHYAY, Subhayu; West Virginia University. "Trade and Child Labor: A General Equilibrium Analysis." Abstract: The issue of child labor in developing nations and how it impacts international trade have received substantial attention in recent times. Indeed, it has been a central issue in North-South trade negotiations. In spite of its importance, rigorous economic analysis of the issue is still in a state of relative infancy. This paper provides a systematic analysis of some of the central issues. The effect of trade sanctions on child labor depends critically on the pattern of substitutability (or complementarity) in excess demand functions between the export good and the non-traded good. Sanctions necessarily hurt the nation on aggregate, but have disparate income distribution effects. We show that a subsidy (tax) for education for the unskilled (skilled) households reduces child labor. This indicates that rather than using sanctions, a more fruitful policy will be to persuade developing nations to tax the education of skilled households and use the revenues to subsidize the education of unskilled households. If fertility is endogenous, the effect of sanctions on child labor is qualitatively unaltered. However, the effects on child labor of education related tax or subsidies may be significantly different.
February 22, 2002	OTROK, Chris; University of Virginia. "International Business Cycles: World, Region, and Country-Specific Factors." Absract: The paper investigates the common dynamic properties of business cycle fluctuations across countries, regions, and the world. We employ a Bayesian dynamic latent factor model to stimate common components in the main macroeconomic aggregates (output, consumption and investment) in a sixty-country sample covering seven regions of the world. In particular, we simultaneously estimate (i) a dynamic factor common to all aggregates, regions, and countries (the world factor); (ii) a set of 7 regional dynamic factors common across aggregates within a region; (iii) 60 country factors to capture dynamic comovement across aggregates within each country; and (iv) a component for each aggregate that captures idiosyncratic dynamics. We decompose the volatility in each aggregate into the fraction due to the world, region, country, and idiosyncratic components. The results indicate that the world factor is an important source of volatility for aggregates in most countries, providing evidence for a world business cycle. We find that the region-specific factor plays only a minor role in explaining fluctuations in economic activity. While the world and regional factors together account for a larger share of fluctuations in output than in consumption, the country-specific and idiosyncratic components play much larger roles in explaining investment dynamics. We also explore how the three aggregates in each country relate to the world, region and country factors, and document similarities and differences across regions, countries and aggregates. We link the empirical results to the economics structures of the countries in the sample.
March 1, 2002	MINKLER, Lanse; University of Connecticut. "Shirking and Motivation in Firms: Evidence from a New Survey." Abstract: In a U.S. survey 82.7% of the respondents report that they are very likely to keep an agreement to work hard if they agreed to, even if it was almost impossible for their employer to monitor them. Different motivations are analyzed in the decision to keep an agreement to work hard. Based on mean responses, the rank order in descending importance is: moral motivations, intrinsic motivations, peer-pressure, and positive incentives. Respondents also report that fairness considerations are important and that they are especially likely to keep agreements to do a good job with honest employers. In contrast, negative incentives and firm-pressure are judged to be unimportant. Logit analysis indicates that increases in moral and intrinsic motivations increase the likelihood of keeping agreements to provide effort. The evidence suggests that we need to re-examine a foundational assumption underlying the theory of the firm.
March 8, 2002	TOSUN, Mehmet; WVU Bureau of Business and Economics Research. "Global Aging and Migration: A Political Economy Perspective." Abstract: Population aging has become a global phenomenon. Recent population projections show that world median age will rise from 25.4 in 1995 to 36.5 in 2050, and to 42.9 in 2150. While there is a growing literature analyzing the links between population aging and international capital mobility, aging has hardly ever been addressed in an open economy framework with labor mobility. Besides, there is no comparison of capital and labor mobility within the context of population aging. Labor mobility has a dual effect in the sense that it exhibits the characteristics of capital mobility as well. In addition, when allowed to vote, migrant workers change the political structure composed of young and elderly voters in both labor-receiving and labor-sending countries. In a majority voting mechanism for fiscal policy decisions, political shifts resulting from labor migration may have sizeable impacts on government programs, and in turn may have strong growth and welfare effects. I use a two-country overlapping generations model with international labor mobility and a politically responsive fiscal policy to examine the asymmetry between labor and capital mobility in explaining the effects of global aging. Economic growth and welfare results for the labor mobility model with endogenous policy are found to be superior to the ones for a capital mobility model with endogenous. Furthermore, unlike the results from a model with international capital mobility only, these results point to a global recession in response to the aging of developing nations. Thus, the choice between labor and capital mobility indeed matters for the analysis of the effects of population aging.
March 15, 2002	TALLARINI, Thomas; Carnegie Mellon University. "Whose Habit Is It Anyway?" Abstract:Several papers have been written recently that use different models of habit persistence to account for business cycle and asset pricing anomalies. Some of these papers treat the habit as internal, i.e. the agent understands the affect his current consumption will have on his future utility. Some treat habit as external, i.e. the habit is a function of average consumption, therefore current consumption will have no effect on future utility. This paper considers both types of habit, individually and jointly, to determine which has a larger effect on economic decision making.
March 22, 2002	LUBIK, Thomas; Johns Hopkins University. "Testing for Indeterminacy in Linear Rational Expectations Models." Abstract:It is well known that linear rational expectations (RE) models can have multiple equilibria. If the equilibrium is not unique it is possible to construct sunspot equilibria in which stochastic disturbances that are unrelated to fundamental shocks influence model dynamics. The possibility of sunspot equilibria therefore creates special challenges for policy design. However, there are only a few empirical studies on the importance of indeterminacy in macroeconomic models. A particularly important question is whether U.S. monetary policy is consistent with a unique equilibrium. In this paper we estimate a prototypical monetary business cycle model for the U.S. economy with special attention to the monetary policy rule. The theoretical model exhibits sunspot equilibria under certain parameterizations. In previous studies it has been common practice to restrict the parameter space to the region where indeterminacy does not occur which is effectively a misspecification of the empirical model. Consequently, we show in this paper how the likelihood-based estimation of dynamic stochastic general equilibrium models can be extended to the case of multiple equilibria. This allows us to quantify the contribution of sunspot shocks in determining U.S. business cycles. Moreover, we develop an econometric test for the hypothesis that the observed data are consistent with a parameterization of the model economy for which the equilibrium is unique.
April 5, 2002	RIPOLL, Marla; University of Pittsburgh. "Trade Liberalization, Paths of Development, and Income Distribution." Abstract:The Stolper-Samuelson theorem predicts that since developing countries are relatively abundant in unskilled labor, trade liberalization would decrease the relative wage of skilled to unskilled workers. Empirical evidence shows that while this prediction holds for some developing countries, it does not for many others. To account for these different outcomes, this paper develops a dynamic, general equilibrium model where small developing economies differ in their factor endowments at the time of trade liberalization. These different "initial conditions," along with the impact of increased openness on the endogenous accumulation of factors of production, generate a rich set of outcomes that account for the diverse income-distribution patterns observed across developing countries. In the model, the existence of different initial conditions is explained by differences in trade policy and development strategies across countries. In particular, we consider both import substitution and subsidies to exports and education. Following trade liberalization, the behavior of the skill premium varies across countries because of the different paths of adjustment of both prices and factor endowments. In contrast to the existing literature on trade and wages in developing countries, this paper emphasizes the dynamic and general equilibrium aspects of trade. This paper also stresses the importance of a general equilibrium approach in the empirical work on trade and wages.
April 12, 2002	MARK, Nelson; Ohio State University. "Continuous-Time Market Dynamics, ARCH Effects, and the Forward Premium Anomaly." Abstract: We study a simple continuous-time model based on uncovered interest parity (UIP) that endogenously generates conditional heteroskedasticity in exchange rate returns. The volatility clustering arises from dependence of the ex post deviation from UIP on the lagged interest differential which is induced into discretized observations that conform to sampling intervals of the data. This dependence has a "big news" interpretation. The model also provides an explanation of the forward premium anomaly as a result of sporadic central bank intervention that creates unanticipated switches in the process governing the interest differential.
April 19, 2002	ROGERS, John, Federal Reserve Borad. "Monetary Union, Price Level Convergence and Inflation: How Close is Europe to the United States?" Abstract:If price levels are initially different across the euro area, convergence to a common level of prices would imply that inflation will be higher in countries where prices are initially low. Price level convergence thus provides a potential explanation for recent cross-country differences in European inflation, a worrisome development under the ECBs "one-size-fits-all" monetary policy. I present direct evidence on price level convergence in Europe, using a unique data set, and then investigate how much of the recent divergence of national inflation rates can be explained by price level convergence. I show that between 1990 and 1999 prices did become less dispersed in the euro area. Convergence is especially evident for traded goods, and more in the first half of the 1990s than in the second half. By some measures, traded goods price dispersion across the euro area is now close to that across U.S. cities. Despite an on-going process of convergence, deviations from the law of one price are large. Finally, I find a statistically-significant and robust negative relationship between the 1999 price level and 2000 inflation rate in Europe, and that the contribution of price level convergence to explaining inflation differentials is often quite important economically. Still, factors other than price convergence explain most of the cross-country inflation differences.
April 26, 2002	Today's seminar has been canceled..
May 3, 2002	JONES, Barry; SUNY - Binghamton. "Welfare Cost of Inflation in a General Equilibrium Model with Currency and Interest Bearing Deposits" Abstract:The user cost of non-interest bearing currency is the nominal interest rate. Increases in inflation lead to decreased real currency held in steady state, which imposes a welfare cost. Lucas (2000) estimates this welfare cost in a model with a single non-interest bearing monetary asset. Lucas suggests applying monetary aggregation/index number theory to generalize the model to contain interest-bearing deposits. We solve a general equilibrium model with three agents: a household, a goods producing firm, and a financial firm. We assume that currency and deposits provide utility to the household and form a weakly separable group in the utility function. We use monetary aggregation and index number methods to calibrate the model and estimate the welfare cost of inflation. We compare these estimates to welfare cost estimates from a model in which all money is non-interest bearing currency. We find that the welfare cost of inflation is substantially lower in the models with interest-bearing deposits than in models with only non-interest bearing currency. We also find that the welfare cost of inflation is positively related to the own price elasticity of aggregate money demand.