Research

Unemployment differentials are much greater between members of the euro area than between U.S. states. In both economies, net migration responds to unemployment differentials, though the response is smaller in the euro area compared to the United States. This paper explores to what extent the relative lack of labor mobility hinders macroeconomic stabilization in the euro area. We use a multi-country DSGE model with cross-border migration to evaluate Mundell’s hypothesis that labor mobility could stabilize unemployment rates and offset the cost of adopting a shared currency. Compared to a baseline calibrated to match bilateral migration flows in the euro area, a counter- factual that raises migration flows to U.S. levels suggests a reduction in unemployment differentials by about a third and a reduction in the costs of about 25-30 percent. Labor mobility is particularly effective in reducing these costs when prices and wages are sticky or economies are integrated through trade. We show that gains are unevenly distributed within countries, as gains entirely accrue to workers, whereas capital owners lose from higher labor mobility.

We examine the responsiveness of labor participation, unemployment and labor migration to exogenous variations in labor demand. Our empirical approach considers four instruments for regional labor demand commonly used in the literature. Empirically, we find that labor migration is a significant margin of adjustment for all our instruments. Following an increase in regional labor demand, the initial increase in employment is accounted for mainly through a reduction in unemployment. Over time however, net labor in-migration becomes the dominant factor contributing to increased regional employment. After 5 years, roughly 60 percent of the increase in employment is explained by the change in population. Responses of labor migration are strongest for individuals aged 20-35. Based on historical data back to the 1950s, we find no evidence of a decline in the elasticity of migration to changes in employment.

Unemployment rates are substantially higher and more volatile in the euro area relative to the United States. We ask to what extent the lack of cross-country labor mobility can account for unemployment dynamics in Europe. Our analytical model incorporates frictions in the labor market as well as an endogenous migration decision. Firms are unable to freely adjust wages during economic contractions, generating an asymmetric distribution of unemployment over the business cycle. The model is calibrated to the dynamics of unemployment and net migration in a typical euro area country. An increase in labor mobility to that observed in the United States and holding all other parameters fixed would reduce the volatility of euro area unemployment by 40% and return 1 million unemployed to the workforce. The welfare cost to a typical euro area country of the currency union is 4.7 percent of permanent consumption; increasing labor mobility reduces this cost to about 4.1 percent.

Which firms and households will be most impacted by a carbon tax? To answer that question I set up a heterogenous agent, multi-sector model with putty-clay technology. A tax of $100 per ton of carbon emissions cuts emissions by 25% after 5 years, but it also reduces output by 2% in the short run and 5% in the long run. In the short term, the tax is progressive despite poorer households spending more on carbon-intensive goods, the prices of which are rising. The putty-clay model’s inherent complementarity of capital and energy causes a sharp decline in capital income, a major source of income for top earners, and the resulting decline in investment causes job cuts in the capital goods-producing industries that employ high-income earners. In the longer run, as factor prices and capital stocks adjust, the tax incidence flattens with middle class households loosing 2% of their real income, somewhat less than low-income and high-income households.

How does risk-sharing across member states of a currency union reduce the volatility of consumption? We decompose the benefits from risk sharing into a direct effect that measures the response of consumption to state-specific income fluctuations, and an indirect effect that captures the response of income to the underlying shock. Crucially, the indirect benefits of risk sharing reinforce the direct benefits as higher risk sharing does not only smooth consumption for a given volatility of income, but also reduces the volatility of income. We estimate both the direct and indirect effects by exploiting regional variation in military buildups across U.S. states. About half of state-specific income fluctuations are smoothed out and a $1 increase in external demand raises state- level income by $1.5. Calibrating a DSGE model of a small open economy to match these empirical findings we show that the observed level of risk sharing between U.S. states cuts state-level consumption volatility by a factor of 4, with half of the reduction being due to indirect, general equilibrium effects.

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We estimate the responsiveness of net labor migration to regional differences in unemployment rates across the United States since the mid-1970s. Our baseline estimate suggests an elasticity of roughly -0.3. For typical labor force participation ratios, an increase of 100 unemployed workers in an area is associated with net out-migration of roughly 47 workers. Instrumenting for regional unemployment produces even higher estimates. Our estimates are stable over time, inclusive of the Great Recession. The estimates depend crucially on accurate data and accounting for long-term trends in migration and unemployment. 

The hoped-for silver lining of euro-area austerity programs was to raise external competitiveness and improve current accounts. Using product- and industry-level data for 12 countries over 1999-2018, we show that reductions in government spending indeed reduce prices and wages, but only for products with low import content and industries with low export shares. This leads to asymmetric expenditure switching, with net exports improving through lower imports rather than higher exports. Adding home bias in government spending and limited factor mobility to a small-open DSGE model helps match these patterns, but also increases the output cost of correcting current account imbalances. 

(Table 3 in the published article has several incorrect numbers. Please refer to the pre-print above.)

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I study the implications for government spending multipliers of two observations: Government demand is concentrated on few sectors and workers are sluggish to switch sectors. Together, they reduce crowding out because demand fluctuations in one sector have limited impact on production conditions in other sectors. Compared to a one-sector model, a model that captures input-output linkages and labor movements across 400 sectors in the U.S. raises multipliers by about 0.5 when preferences feature no wealth effects on labor supply and potentially by more in the presence of wealth effects. I provide empirical support by showing that relative prices respond to spending shocks and discuss the model’s implications for how the composition of stimulus packages affect the multiplier.

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Financial crises in emerging market economies induce diverging patterns of ownership stakes and subsequent divestiture rates among domestic and foreign acquirers. We rationalize these empirical findings in a tractable model where domestic acquirers are subject to borrowing constraints. In contrast to standard fire-sale effects operating for acquisitions by foreign acquirers, acquisition patterns of domestic firms are shaped by a novel counteracting selection effect, resulting in larger acquired stakes and more persistent ownership. We present empirical evidence consistent with the model’s predictions using a large dataset of domestic and cross-border emerging market acquisitions over 1990-2007. The estimated contribution of selection effects is quantitatively significant, leading to 12% increases in stakes, 25% increases in full acquisitions, and 30% declines in divestiture rates among crisis-time domestic acquisitions. Our results demonstrate how financial crises can have both short- and long-run effects through the market for corporate control, by changing the set of acquirers and how long acquirers keep ownership.

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We exploit differences across U.S. states' exposure to trade to study the effects of changes in the exchange rate on economic activity. Across states, trade-weighted exchange rate depreciations are associated with increased state exports, reduced state unemployment and higher state hours worked. The effects are particularly strong during periods of economic slack. A multi-region model with inter-state trade and labor flows, calibrated to match state-level trade data and migration flows replicates the empirical relationship between exchange rates and unemployment. The high degree of interstate trade plays an important role in transmitting shocks across states in the first year, whereas interstate migration shapes cross-sectional patterns in later years. We use the model to study the regional effects of tariffs in the United States. The model suggests that a 25 percent Chinese import tariff on U.S. goods would be felt throughout  the United States, even in states with small direct linkages to China, raising unemployment rates by 0.2 to 0.7 percentage points in the short run. 

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Cross-country differences in austerity, defined as government purchases below forecast, account for 75 percent of the observed cross-sectional variation in GDP in advanced economies during 2010-2014. Statistically, austerity is associated with lower GDP, lower inflation and higher net exports. A multi-country DSGE model calibrated to 29 advanced economies generates effects of austerity consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity was so contractionary that debt-to-GDP ratios in some countries increased as a result of endogenous reductions in GDP and tax revenue. 

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Cuts to government spending rather than increases in consumption taxes are statistically associated with internal devaluations in the euro area during the period 2010-2014. Countries that cut spending experienced a decline in nominal wages, rising net exports, a fall in the relative price of non-tradables and a shift of consumption towards non-tradables. We show that these patterns are generally consistent with a neoclassical small open economy model with GHH preferences. The main remaining discrepancy between model and data is a missing terms of trade response in the data: Export prices did not decline in austere countries (nor did import prices), giving rise to asymmetric expenditure switching: Current account improvements are solely driven by falls in imports rather than increasing exports. 

How can an economy keep on running current account surpluses with an ever-appreciating currency? Switzerland's case is more than puzzling from a theoretical point of view. In this project, we combine data from various sources to dissect Switzerland's current account miracle. The analysis reveals a nuanced picture: Switzerland's current account is strongly driven by a handful of sectors, pharmaceuticals and merchanting in particular. Most sectors, including services, suffer from the stronger exchange rate. Part of the boom of pharmaceuticals is driven by an increase in global demand for pharmaceutical products.