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An Aggregation-Consistent Implementation of the Hamilton Filter, forthcoming at the Applied Economics Letters.
STATA Replication Codes and Data http://dx.doi.org/10.17632/dryk4wndpv.1
I propose a modified implementation of the popular Hamilton filter, to make the cyclical component extracted from an aggregate variable consistent with the aggregation of the cyclical components extracted from its underlying variables. This procedure is helpful in many circumstances, for instance when dealing with a variable that comes from a definition or when the empirical relationship is based on an equilibrium condition of a growth model. The procedure consists of the following steps: 1) build the aggregate variable, 2) run the Hamilton filter regression on the aggregate variable and store the related OLS estimates, 3) use these estimated parameters to predict the trends of all the underlying variables, 4) rescale the constant terms to obtain mean-zero cyclical components that are aggregation-consistent. I consider two applications, exploiting U.S. and Canadian data. The former is based on the GDP expenditure components, while the latter on the GDP of its Provinces and Territories. I find sizable differences between the cyclical components of aggregate GDP computed with and without the adjustment, making it a valuable procedure for both assessing the output gap and validating empirically DSGE models.
JEL Classification Codes: C22, E30, E32.
Keywords: Business cycles, Filtering, Hamilton filter, Output gap, Trend-cycle decomposition.
Do Wealth Shocks Matter for the Life Satisfaction of the Elderly? Evidence from the Health and Retirement Study, joint with Q. Li, University of Calgary, Economics Bulletin, Vol. 44 (1), 2024, p. 88-98.
STATA Replication Codes and Data http://dx.doi.org/10.17632/525wkwdhhy.1
We study the importance of wealth shocks as a determinant of life satisfaction for the elderly and near-elderly. With data from the U.S. Health and Retirement Study, we specify an econometric analysis exploiting the 2008-09 financial crisis as a source of exogenous variation in wealth, caused by a long-lasting decrease in asset prices. Although absolute changes in wealth are not found to systematically affect individual well-being, losing 60% or more of the pre-crisis wealth negatively impacted measures of life satisfaction. The results are shown to hold also in a number of robustness checks. The financial crisis wealth shock is found to have a persistent detrimental effect on the well-being of the American elderly. Finally, we argue that the simultaneity bias arising from neglecting the endogeneity of wealth accumulation can be substantial.
JEL Classification Codes: D14, E21, I31, J14.
Keywords: Wealth, Uninsurable shocks, Life Satisfaction, Subjective Well-Being.
Public Debt and Welfare in a Quantitative Schumpeterian Growth Model with Incomplete Markets, Journal of Macroeconomics, Vol. 77, 2023, Article 103539
Fortran 90 Replication Codes http://dx.doi.org/10.17632/v4g8n4kb9b.1
This paper quantifies the welfare effects of counterfactual public debt policies using an endogenous growth model with incomplete markets. The economy features public debt, Schumpeterian growth, infinitely-lived agents, uninsurable income risk, and discount factor heterogeneity. Two versions of the model are specified, one with households holding equity in the group of innovating firms. The model is calibrated to the U.S. economy to match the degree of wealth inequality, the share of R&D expenditure in GDP, the firms' exit rate, the average growth rate, and other standard long-run targets. When comparing balanced growth paths, I find large welfare gains in equilibria characterized by governments accumulating public wealth. The result is robust to the mechanism used to generate a highly concentrated wealth (i.e., preference heterogeneity or ``superstar'' income shocks). Welfare effects decompositions show that level effects and growth effects reinforce each other. The responses of both the intermediate goods and their market conditions are key in explaining the large level effects. The version of the model without equity is computationally easier to solve, allowing to consider transitional dynamics. Taking into account the dynamic adjustment to the new long-run equilibrium, I show that the transitional welfare costs are not large enough to change the sign of the welfare effects stemming from a change in public debt. I find that eliminating public debt would lead to a 0.8% increase in welfare, while moving to a debt/GDP ratio of 100% would entail a welfare loss of 0.5%. A decomposition analysis shows that growth accounts for approximately 50% of the overall welfare effects.
JEL Classification Codes: D52, E21, E62, H63, O41.
Keywords: Public debt, Heterogeneous Agents, Incomplete Markets, Endogenous Growth, Welfare.
Job Displacement Risk and Severance Pay, joint with G. Fella, Queen Mary, Journal of Monetary Economics, Vol. 84, 2016, p. 166-181
This paper is a quantitative, equilibrium study of the insurance role of severance pay when workers face displacement risk and markets are incomplete. A key feature of our model is that, in line with an established empirical literature, job displacement entails a persistent fall in earnings upon re-employment due to the loss of tenure. The model is solved numerically and calibrated to the US economy. In contrast to previous studies that have analyzed severance payments in the absence of persistent earning losses, we find that the welfare gains from the insurance against job displacement afforded by severance pay are sizable.
JEL Classification Codes: D52, D58, E24, J65.
Keywords: Severance Payments, Incomplete Markets, Welfare.
This paper previously circulated with the title "The Non-neutrality of Severance Payments with Incomplete Markets."
The Krusell-Smith Algorithm: Are Self-fulfilling Equilibria Likely?, Computational Economics, Vol. 46 (4), 2015, p. 653-670
Funded by SSHRC IDG Grant # 430-2013-000511.
I investigate whether the popular Krusell and Smith algorithm used to solve heterogeneous-agent economies with aggregate uncertainty and incomplete markets is likely to be subject to multiple self-fulfilling equilibria. In a benchmark economy, the parameters representing the equilibrium aggregate law of motion are randomly perturbed 500 times, and are used as the new initial guess to compute the equilibrium with this algorithm. In a sequence of cases, differing only in the magnitude of the perturbations, I do not find evidence of multiple self-fulfilling equilibria. The economic reason behind the result lies in a self-correcting mechanism present in the algorithm: compared to the equilibrium law of motion, a candidate one implying a higher (lower) expected future capital reduces (increases) the equilibrium interest rates, increasing (reducing) the savings of the wealth-rich agents only. These, on the other hand, account for a small fraction of the population and cannot compensate for the opposite change triggered by the wealth-poor agents, who enjoy higher (lower) future wages and increase (reduce) their current consumption. Quantitatively, the change in behavior of the wealth-rich agents has a negligible impact on the determination of the change in the aggregate savings, inducing stability in the algorithm as a by-product.
JEL Classification Codes: C63, C68, E21, E32.
Keywords: Unemployment Risk, Business Cycles, Incomplete Markets, Heterogeneous Agents, Numerical Methods, Self-fulfilling Equilibria.
Equilibrium Heterogeneous-Agent Models as Measurement Tools: some Monte Carlo Evidence, Journal of Economic Dynamics and Control, Vol. 39, 2014, p. 208-226
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 predict 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 p.p.). 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.
JEL Classification Codes: C15, C54, C68, D52.
Keywords: Monte Carlo, Heterogeneous Agents, Incomplete Markets, Ex-ante Policy Evaluation, Welfare.
Precautionary Savings and Wealth Inequality: a Global Sensitivity Analysis, a revised version appears as Ch. 9 in Calibration Technology, Theories and Applications, I. Fujimoto and K. Nishimura (eds.), Nova Science Publishers, 2013, p. 195-222.
This paper applies Canova JAE 1994 methodology to perform a thorough sensitivity analysis for the Aiyagari QJE 1994 economy. This is a calibrated GE model with incomplete markets and uninsurable income risk, designed to quantify the size of precautionary savings and the degree of wealth inequality. The results of this global robustness analysis are broadly consistent with Aiyagari’s findings. Even when considering priors for the parameters uncertainty which are highly dispersed, the size of the precautionary savings is modest: at most, they account for an 11% increase in the saving rate. However, the results show that the parameter representing the exogenous borrowing limit seems to lead to relatively large changes in measures of wealth inequality. The Gini index increases by 15 points when considering values of the borrowing limits that lead to empirically plausible shares of households with a negative net worth. The parameters that quantitatively have the largest effects on determining the wealth Gini index are the capital share, the borrowing limit, and the depreciation rate. The parameters affecting most significantly precautionary savings are the risk aversion and the standard deviation of the income shocks.
JEL Classification Codes: E21, D52, D58.
Keywords: Precautionary Savings, Calibration, Heterogeneous Agents, Incomplete Markets, Computable General Equilibrium, Monte Carlo.
Optimal Unemployment Insurance in GE: a Robust Calibration Approach, Economics Letters, Vol. 117 (1), 2012, p. 28-31
This paper implements a simple Monte Carlo calibration approach to quantitatively study the Hansen and Imrohoroglu (1992) economy, a GE model with uninsurable employment risk, designed to assess the optimal replacement rate for a public Unemployment Insurance scheme. The results of this sensitivity analysis are consistent with the original findings, but with several caveats. One novel result in particular is that the sampling distribution of the optimal UI is bimodal. Depending on the calibrated parameters, the optimal UI is in one of two regions: a very generous scheme with high replacement rates, where insurance is mainly provided by the UI scheme, or one with low replacement rates, where insurance is mainly achieved through self-insurance. Even in the absence of moral hazard, it is never optimal to provide full insurance. Moreover, for many plausible parameters' configurations, the welfare maximizing replacement rate does not decrease with the level of MH. The qualitative patterns and quantitative findings are not altered substantially when considering an enlarged labor force, which includes the marginally attached workers. Finally, the parameters representing the hours worked, the leisure share in the households' consumption bundle, and the risk aversion have a first order impact on the average welfare. The determination of the optimal UI scheme depends heavily on them. This finding suggests that extra caution should be paid when calibrating these parameters in similar environments.
JEL Classification Codes: E21, D52, D58.
Keywords: Calibration methods, Unemployment Risk, Optimal Unemployment Insurance, Heterogeneous Agents, Incomplete Markets, Computable General Equilibrium, Monte Carlo.
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