Economic Network

American Economic Journal: Macroeconomics
Vol. 7, Issue 2

April 2015

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Sharing High Growth across Generations: Pensions and Demographic Transition in China (#2)
Zheng Song, Kjetil Storesletten, Yikai Wang and Fabrizio Zilibotti
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Welfare Cost of Business Cycles with Idiosyncratic Consumption Risk and a Preference for Robustness (#3)
Martin Ellison and Thomas J. Sargent
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Demographic Patterns and Household Saving in China (#4)
Chadwick C. Curtis, Steven Lugauer and Nelson C. Mark
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Consumption Volatility, Marketization, and Expenditure in an Emerging Market Economy (#5)
Daniel L. Hicks
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Optimal Labor-Market Policy in Recessions (#6)
Philip Jung and Keith Kuester
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Understanding Markups in the Open Economy (#7)
Beatriz de Blas and Katheryn N. Russ
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Measured Aggregate Gains from International Trade (#8)
Ariel Burstein and Javier Cravino
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Optimal Mirrleesean Taxation in a Ben-Porath Economy (#9)
Marek Kapička
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Unemployment Insurance Fraud and Optimal Monitoring (#10)
David L. Fuller, B. Ravikumar and Yuzhe Zhang
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(1) Front Matter
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(2) Sharing High Growth across Generations: Pensions and Demographic Transition in China
Zheng Song, Kjetil Storesletten, Yikai Wang and Fabrizio Zilibotti
We analyze intergenerational redistribution in emerging economies with the aid of an overlapping generations model with endogenous labor supply. Growth is initially high but declines over time. A version of the model calibrated to China is used to analyze the welfare effects of alternative pension reforms. Although a reform of the current system is necessary to achieve financial sustainability, delaying its implementation implies large welfare gains for the (poorer) current generations, imposing only small costs on (richer) future generations. In contrast, a fully funded reform harms current generations, with small gains to future generations. (JEL E13, H55, J11, O11, O15, P24, P36)
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(3) Welfare Cost of Business Cycles with Idiosyncratic Consumption Risk and a Preference for Robustness
Martin Ellison and Thomas J. Sargent
The welfare cost of random consumption fluctuations is known from De Santis (2007) to be increasing in the level of uninsured idiosyncratic consumption risk. It is known from Barillas, Hansen, and Sargent (2009) to increase if agents care about robustness to model misspecification. We calculate the cost of business cycles in an economy where agents face idiosyncratic consumption risk and fear model misspecification, finding that idiosyncratic risk has a greater impact on the cost of business cycles if agents already fear model misspecification. Correspondingly, endowing agents with fears about misspecification is more costly when there is already idiosyncratic risk. (JEL D81, E13, E21, E32)
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(4) Demographic Patterns and Household Saving in China
Chadwick C. Curtis, Steven Lugauer and Nelson C. Mark
This paper studies how demographic variation affects the aggregate household saving rate. We focus on China because it is experiencing an historic demographic transition and has had a massive increase in household saving. We conduct a quantitative investigation using a structural overlapping generations model that incorporates parental care through support for dependent children and financial transfers to retirees. The saving decisions in the parameterized model mimic many of the features observed in the Chinese household saving rate time series from 1955 to 2009. Demographic change alone accounts for over half of the saving rate increase. (JEL D12, D91, E21, J11, O12, O16, P36)
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(5) Consumption Volatility, Marketization, and Expenditure in an Emerging Market Economy
Daniel L. Hicks
In response to income fluctuations, households smooth consumption by substituting between market expenditure and time inputs. This paper provides evidence of this substitution in the context of food consumption over transitory and permanent income fluctuations in Mexico. Household time investments drive a wedge between consumption and expenditure, amplifying measured expenditure volatility. Volatility decompositions for Mexico and the United States suggest that the extent of bias in expenditure-based measures induced by changes in marketization is relatively larger in the Mexican setting. These findings imply that volatility comparisons between commodities or across countries are misleading when consumption measures ignore home production. (JEL D12, D91, E21, E32, O11, O12)
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(6) Optimal Labor-Market Policy in Recessions
Philip Jung and Keith Kuester
Within a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort, we show how to decentralize the constrained-efficient allocation by a combination of a production tax and three labor-market policy instruments: vacancy subsidies, layoff taxes, and unemployment benefits. We derive analytical expressions for the optimal mix of these over the business cycle. Calibrating the model to the US economy under the assumption that wages are rigid, we find that hiring subsidies and layoff taxes should rise considerably and persistently in recessions. The optimal variation in unemployment benefits, in contrast, is quantitatively small and short-lived. (JEL E24, E32, J24, J63, J64, J65)
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(7) Understanding Markups in the Open Economy
Beatriz de Blas and Katheryn N. Russ
This paper presents a new model of Bertrand competition between heterogeneous firms in the open economy where the macroeconomic distribution of markups responds to the degree of trade openness and the underlying level of technology in each trading partner. The model’s simple closed-form distributions for markups and pricing yield predictions that coincide with a number of stylized facts from the empirical literature on markups, pass-through, and trade openness which previously could be illustrated only through numerical simulations. (JEL D43, F12, F41, L13)
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(8) Measured Aggregate Gains from International Trade
Ariel Burstein and Javier Cravino
We examine the implications of workhorse trade models for how aggregate productivity, real GDP and real consumption, as measured by statistical agencies, respond to changes in trade costs. In a range of models, changes in measured productivity are equal to the inverse of an export-share weighted average of changes in variable trade costs incurred domestically. Under certain conditions, despite the multiple biases in the CPI, measured real consumption captures the first-order effects of changes in variable trade costs on welfare. Through the lens of these results, we interpret some of the empirical work on measured gains from trade. (JEL E21, E23, F11, F43)
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(9) Optimal Mirrleesean Taxation in a Ben-Porath Economy
Marek Kapička
I characterize optimal taxes in a life-cycle economy where ability and human capital are unobservable. I show that unobservable human capital effectively makes preferences over labor nonseparable across age. I generalize the static optimal tax formulas to account for such nonseparabilities and show how they depend both on own-Frisch labor elasticities and cross-Frisch labor elasticities. I calibrate the economy to US data. I find that the optimal marginal income taxes decrease with age, in contrast to both the US tax code and to a model with observable human capital. I demonstrate that the behavior of cross Frisch elasticities is essential in explaining the decline. (JEL D91, H21, H24, J24)
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(10) Unemployment Insurance Fraud and Optimal Monitoring
David L. Fuller, B. Ravikumar and Yuzhe Zhang
An important incentive problem for the design of unemployment insurance is the fraudulent collection of unemployment benefits by workers who are gainfully employed. We show how to efficiently use a combination of tax/subsidy and monitoring to prevent such fraud. The optimal policy monitors the unemployed at fixed intervals. Employment tax is nonmonotonic: it increases between verifications but decreases after a verification. Unemployment benefits are relatively flat between verifications but decrease sharply after a verification. Our quantitative analysis suggests that the optimal monitoring cost is 60 percent of the cost in the current US system. (JEL D82, H24, J64, J65)
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