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.

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.

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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. 

A large literature empirically evaluates the strength of various risk-sharing mechanisms across regions in a currency union using the variance decomposition framework by Asdrubali et al. (1996). A common finding is that only about 20% of fluctuations in aggregate GDP translate into fluctuations of per-capita consumption across U.S. states, whereas this number is about 60% for euro area countries We calibrate a DSGE model of a small open economy to match these findings and show that the benefits of risk sharing are likely to be larger than suggested by these numbers: If countries in the euro area had risk-sharing mechanisms in place like those across U.S. states, the volatility of consumption would be cut by a factor of more than 3.

Compared to the United States, unemployment rates in Europe are substantially higher and display stronger variation across time and space. In this paper, we ask to what extent the lack of cross-country labor mobility can account for the higher level of unemployment observed in Europe. Starting point is a recent literature that argues that the level of unemployment increases in business cycle volatility when nominal wages cannot be adjusted downward. In this context, migration of unemployed workers from depressed regions into booming regions with better job prospects lowers union-wide unemployment. This suggests that currency unions with a more mobile labor force enjoy both less volatile unemployment and lower average levels of unemployment. We quantify the relevance of this link between labor mobility and the level of unemployment in a small open economy model with downward nominal wage rigidity and migration. In our counterfactual exercise, we ask by how much unemployment levels would go down if labor in Europe was as mobile as in the United States.

We examine the responsiveness of labor participation, unemployment and labor migration to variations in labor demand. Our empirical approach considers a number of 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. Initial employment responses are attributed roughly evenly to decreased unemployment and increased in-migration. Over time, the contribution of migration increases while the contribution of unemployment decreases. Variations in labor migration are strongest for individuals aged 20-40. Finally, migration is less responsive for smaller regions (e.g., counties) compared to larger regions (e.g., states).

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.