Research

Publications

“Revisiting Intertemporal Elasticity of Substitution in a Sticky Price Model”  Journal of Economic Dynamics and Control, 144, 2022

with Juha Kilponen and Jouko Vilmunen 

Macroeconomic models typically assume additively separable preferences where consumption enters the utility function in a logarithmic form. This restriction implies that consumption growth is highly sensitive to movements in real interest rates, which in turn implies an unrealistically steep demand curve and intertemporal trade-off. We re-estimate the stylized New Keynesian Model with US data using King-Plosser-Rebelo (1988) preferences with and without habits and show that the equilibrium real interest rate elasticity of output is in the range of 0.05 – 0.20 in the US. Such low real interest rate elasticity is better in line with the empirical consumption Euler equation literature and implies relatively weak transmission of monetary policy to output and inflation.

"Intermediation in a Directed Search Model" Journal of Economics & Management Strategy, 30, 2, 2021 

with Klaus Kultti and Tuomas Takalo

We provide an example where establishing competitive coordination service platforms is so lucrative that they end up reducing welfare. We consider a canonical directed search model in which buyers have unit demands and sellers’ capacity constraint leads to a coordination problem: in a symmetric equilibrium without intermediation some sellers receive too many and some too few buyers. We compare this equilibrium to one where sellers and buyers can choose to become intermediaries who coordinate the meetings. In this set-up, roughly one fifth of agents become intermediaries. As a result, a large part of the supply and demand in the economy vanishes. Moreover, the large amount of intermediaries actually reduces the meeting efficiency. Jointly, these effects imply that the gains from trade are lower than in the economy without intermediation.

Working Papers

"Uncertainty, Misallocation and the Life-cycle Growth of Firms" 

with Eero Mäkynen

 We propose a decomposition of static misallocation that distinguishes between idiosyncratic uncertainty and ex ante misallocation generated by tax-like distortions. Using profits-to-wage-bill ratios and value-added-to-wage-bill ratios, we can identify the two sources of misallocation. In the comprehensive Finnish firm-level data, uncertainty accounts for 41% of aggregate misallocation and has a strong decreasing age-dependent trend in it. We show that our results are quantitatively consistent with a life-cycle model of firm growth that incorporates learning. According to the dynamic model, uncertainty suppresses output by 8-12%, while ex ante misallocation has a 40% negative effect on output.

"Unionizing Non-Search Unemployment"

This paper explores the effects of unionization in an equilibrium search framework, where firms are heterogeneous and workers can choose whether to search or wait for a job similar to their previous position. When a model with competitive labor markets is set to match the empirical fact that a large number of unemployment spells ends with recalls, introducing a large labor union that bargains over a minimum wage with an employers’ organization increases unemployment notably. Moreover, the whole increase is about non-search unemployment, as search unemployment reduces marginally. This implies that unionization substantially decreases the search activity of unemployed workers. 

“Layoff orders, Human Capital and Occupational Mobility via Unemployment” 

This paper examines the equilibrium effects of occupational human capital protection during mass layoffs in a setup where human capital can depreciate during unemployment spells and commitment problems prevent markets from allocating layoffs optimally. As the consequences of the policy are tightly related to occupational mobility, the paper focuses on modeling reallocation incentives of heterogeneous workers. In a calibrated model, a policy that concentrates involuntary unemployment incidences to inexperienced workers, decreases workers' incentives to reallocate, compared to an equilibrium where everyone faces an identical unemployment risk, leading also to a decrease in aggregate unemployment. Moreover, this policy change increases the market output and on average does not harm the inexperienced workers.