Aggregate Elasticity Research Articles

Housing Wealth Effects: The Long View

AbstractWe provide new time-varying estimates of the housing wealth effect back to the 1980s. We use three identification strategies: ordinary least squares with a rich set of controls, the Saiz housing supply elasticity instrument, and a new instrument that exploits systematic differences in city-level exposure to regional house price cycles. All three identification strategies indicate that housing wealth elasticities were if anything slightly smaller in the 2000s than in earlier time periods. This implies that the important role housing played in the boom and bust of the 2000s was due to larger price movements rather than an increase in the sensitivity of consumption to house prices. Full-sample estimates based on our new instrument are smaller than recent estimates, though they remain economically important. We find no significant evidence of a boom–bust asymmetry in the housing wealth elasticity. We show that these empirical results are consistent with the behaviour of the housing wealth elasticity in a standard life-cycle model with borrowing constraints, uninsurable income risk, illiquid housing, and long-term mortgages. In our model, the housing wealth elasticity is relatively insensitive to changes in the distribution of loan-to-value (LTV) for two reasons: first, low-leverage homeowners account for a substantial and stable part of the aggregate housing wealth elasticity; second, a rightward shift in the LTV distribution increases not only the number of highly sensitive constrained agents but also the number of underwater agents whose consumption is insensitive to house prices.

Does Labor Supply Respond to a Flat Tax? Evidence from the Russian Tax Reform

We exploit the exogenous change in marginal tax rates created by the Russian flat tax reform of 2001 to identify the effect of taxes on labor supply of males and females. We apply the weighted difference-in-difference regression approach and instrumental variables to the labor supply function estimated on individual panel data. The mean regression results indicate that the tax reform led to a statistically significant increase in male hours of work but had no effect on that of females. However, we find a positive response to tax changes at both tails of the female hour distribution. We also find that the reform increased the probability of finding a job among both males and females. Despite significant variation in individual responses, the aggregate labor supply elasticities are trivial and suggest that reform-induced changes in labor supply were an unlikely explanation for the amplified personal income tax revenues that followed the reform.

Consumption, reservation wages, and aggregate labor supply

This paper exploits micro data on the joint distribution of consumption and wages to measure the Frisch labor supply elasticity at the extensive margin. The approach is based on a derived reservation property of the working decision that holds in a class of models where the labor choice is intratemporal: given consumption, there exists a unique wage level above which individuals work and below which they do not. It is shown that this property is robust to heterogeneity in borrowing constraints, discount factors, and wage processes within the class of models. Applying it directly to the observed joint distribution of consumption and wages, I find that the aggregate Frisch elasticity at the extensive margin is 0.4 and that across various demographic groups, the elasticity ranges from 0.2 to 0.6. However, the elasticity variation is more pronounced across consumption groups and the elasticity is decreasing in consumption within demographic groups. The latter findings imply that the measured elasticity critically depends on the composition of consumption groups in the sample.

Heterogeneous Consumers, Segmented Asset Markets and the Real Effects of Monetary Policy

Abstract This article proposes a novel mechanism by which changes in the distribution of money holdings have real aggregate effects. I develop a flexible-price model of segmented asset markets in which monetary policy influences the aggregate demand elasticity via heterogenous money holdings. Because varieties of consumption bundles are purchased sequentially, newly injected money disseminates slowly throughout the economy via second-round effects. The model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and pro-cyclical wages after monetary shocks. Among other correlations of financial variables, it also reproduces the empirical, negative relationship between changes in the money supply and markups.

The Nonlinear Effects of Fiscal Policy

We argue that the fiscal multiplier of government purchases is increasing in the shock, in contrast to what is assumed in most of the literature: the fiscal multiplier is largest for large positive government spending shocks and smallest for large contractions in government spending. We empirically document this fact by analyzing two independent datasets and using two different empirical approaches. We find that a neoclassical, life-cycle, incomplete markets model calibrated to match key features of the US economy, including the distribution of wealth, can well explain this empirical finding. The mechanism works through the relationship between fiscal shocks, the distribution of wealth and the aggregate labor supply elasticity: liquidity constrained agents have less elastic labor supply responses to changes in future income. An increase (decrease) in government spending today acts as a negative (positive) shock to future income, as future wages will be lower (higher). A large increase (decrease) in government spending today will induce saving (borrowing) and move a larger fraction of the agents in the economy away from (towards) the borrowing limit. Analysis of micro-data confirms the mechanism.

Impact of Demand Shocks on the Stock Market: Evidence from Chinese IPOs

The inelastic markets hypothesis states that the aggregate stock market price elasticity of demand is small, implying that flows have large impacts on prices. We exploit demand shocks created as investor funds are frozen and unfrozen during Chinese IPOs to estimate the impact of demand shocks on the Chinese stock market. Using brokerage account records, we observe the selling and buying as investors raise cash to subscribe for IPOs and then reinvest the funds that supported unsuccessful subscriptions. Using an instrumental variables estimator we find that a 10 bps demand shock increases stock prices by between 26.1 and 64.7 bps.

Aggregate Elasticity of Substitution between Skills: Estimates from a Macroeconomic Approach

We estimate the elasticity of substitution between high-skill and low-skill workers using panel data from 32 countries during 1970-2015. Most existing estimates, which are based only on U.S. micro data, find a value close to 1.6. We bring international data together with a theory-informed macro approach to provide new evidence on this important macroeconomic parameter. Using the macro approach we find that the elasticity of substitution between tertiary-educated workers and those with lower education levels falls between 1.8 and 2.6, which is higher than previous estimates but within a plausible range. In some specifications, estimated elasticity is above the value required for strong skill-bias of technology, suggesting strong skill-bias is not implausible.

The Cost of Heterogeneity: Can Density Peaks Clustering Improve CES Aggregation?

This paper applies recent advances in machine learning to a long-standing macroeconomics question by using density peaks clustering to improve estimation of aggregate price indexes. To measure a price index that properly accounts for consumer welfare, it is important to consider the effect of changes in product variety. Standard methods for estimating this effect using CES demand systems implicitly rely on the assumption that consumer tastes can be accurately represented by a single taste parameter. However, if consumers have heterogeneous unobserved tastes across goods, the estimated aggregate elasticity will tend to be lower than that of the groups. By clustering consumers into groups that share similar tastes, we can accurately estimate elasticity and get more representative measurements for each consumer’s cost of living. Applying the method to a panel of consumer retail purchases, I show that methods that ignore consumer heterogeneity imply elasticities on average 20% below my method and inflation rates about half a percentage point per year lower than a weighted average of the heterogeneous groups.

Do we need multivariate modeling approaches to model crash frequency by crash types? A panel mixed approach to modeling crash frequency by crash types

In safety literature, simulation-based multivariate framework is the most commonly employed approach for analyzing multiple crash frequency dependent variables. The current research effort contributes to literature on crash frequency analysis by suggesting an alternative and mathematically simpler approach for analyzing multiple crash frequency variables for the same study unit. The proposed recasts a multivariate distributional problem as a repeated measure univariate problem. Specifically, we employed a simpler panel random parameter based univariate model framework to analyze zonal level crash counts for different crash types. The empirical analysis is based on the traffic analysis zone (TAZ) level crash count data for both motorized and non-motorized crashes from Central Florida for the year 2016. The performance of the proposed framework is compared with the performance of the random parameter multivariate negative binomial model (RPMNB) using a host of metrics for estimation sample and hold-out sample. The resulting goodness of fit and predictive measures clearly highlight the comparable performance offered by the proposed framework relative to the commonly used RPMNB model with substantially fewer parameters. The comparison exercise is augmented by computing aggregate level elasticity effects for both PMNB and RPMNB models. The results clearly highlight the comparable performance offered by the proposed PMNB model relative to the traditional RPMNB model. In summary, the proposed framework allows for a parsimonious specification without compromising the model explanatory power and provides similar performance as the most traditional multivariate NB model for analyzing different crash dimensions.

Health care investments and economic performance in Portugal: an industry level analysis

PurposeThe purpose of this paper, on Portugal, is to determine the economic effects of public and private capital spending on health.Design/methodology/approachThe authors use a vector autoregressive model to estimate the elasticities and marginal products of health care investments in Portugal on investment, employment and output.FindingsEvery €1m invested in health care yields significant positive spillover effects, boosting investment and GDP by €24.74 and €20.45m, respectively, creating 188 net jobs. Adversely, net exports deteriorate, as new capital goods are imported. While only 28.2 percent of the total accumulated increase in GDP occurs within a year, investment is front loaded with a corresponding 73.8 percent. Over this period, 68 workers are displaced for every €1m invested. At a disaggregated level, real estate, construction, and transportation and storage are industries where output shares increase the most. Employment shares increase the most in professional services, construction and basic metals.Research limitations/implicationsThis paper adds to the empirical literature, corroborating, for example, Rivera and Currais (1999a) and McDonald and Roberts (2002) in that health care spending can have a very significant effect on macroeconomic aggregates. In addition to the analysis of the tradable/non-tradable divide, it adds two further novelties by discussing industry-specific effects on economic performance and the distinction between effects on impact and those over the longer term.Practical implicationsAs policy implications, health investments have very significant long-term economic performance effects, but are unhelpful counter cyclically. Also, they will change the industry mix: construction and professional services are the non-traded industries that will benefit the most, while the traded industries of non-metallic minerals, basic metals, and machinery and equipment benefit much less.Social implicationsGiven that capital spending on health boosts economic performance, especially in the long run, it ought to be a part of Portugal’s medium-to-long-term growth strategy. Also, if these projects depress economic activity in the short run, and are thus unhelpful counter cyclically, the timing of when they are launched matters. Furthermore, following a health investment, policies that boost net exports will be required to ensure trade balance.Originality/valueThe originality of this paper is to estimate, in a dynamic framework, the aggregate and industry-specific elasticities and marginal products on investment, employment and output, allowing the identification of effects both on impact and over the long term. Although health care investments are expected to have important macroeconomic effects, they need not be evenly distributed across industries.

Can capital deepening explain the global decline in labor's share?

We estimate an aggregate elasticity of substitution between capital and labor near or below one, which implies that capital deepening cannot explain the global decline in labor's share. Our methodology derives from transition paths in the neo-classical growth model. The elasticity of substitution is identified from the cross-country correlation between trends in the labor share and a theoretically derived proxy for the rental rate of capital. Trends in labor's share and the rental rate are weakly correlated across countries, and inversely related in most samples. Previous cross-country estimates of this elasticity were substantially greater than one, which we show was largely due to omitted variable bias: earlier studies used investment prices alone to proxy for the rental rate, whereas the growth model relates rental rates to investment prices and consumption growth.

How Well Do Consumer-Brand Relationships Drive Customer Brand Loyalty? Generalizations from a Meta-Analysis of Brand Relationship Elasticities

AbstractTo advance understanding of how well different types of brand relationships drive customer brand loyalty and to help companies improve the effectiveness of their relationship-building investments, this article conducts a meta-analysis of the link between five consumer-brand relationship constructs and customer brand loyalty. The analysis of 588 elasticities from 290 studies reported in 255 publications over 24 years (n = 348,541 across 46 countries) reveals that the aggregate brand relationship elasticity is .439. More importantly, results demonstrate under what conditions various types of brand relationships increase loyalty. For example, while elasticities are generally highest for love-based and attachment-based brand relationships, the positive influence of brand relationships on customer brand loyalty is stronger in more recent (vs. earlier) years, for nonstatus (vs. status) and publicly (vs. privately) consumed brands, and for estimates using attitudinal (vs. behavioral) customer brand loyalty. Overall, the results suggest that brand relationship elasticities vary considerably across brand, loyalty, time, and consumer characteristics. Drawing on these findings, the current research advances implications for managers and scholars and provide avenues for future research.

Lessons for Tax Reform from an Equilibrium Model of Innovation

We formulate and estimate a general equilibrium model of innovation-led growth and use it to evaluate the quantitative implications of individual income tax reforms for innovation and aggregate productivity growth. In the model, innovation comes from entrants creating new products and incumbents improving own existing products. We estimate the model parameters by matching key moments of U.S. data. The model generates an aggregate labor supply elasticity and a per capita GDP growth response to marginal tax rate changes that are consistent with available empirical estimates. We find that the model accounts reasonably well for the observed movements in TFP, labor productivity, hours worked and number of firms per capita during the “Reagan tax cuts” of the eighties. The model predicts that a temporary, deficit-financed, 3 percentage points cut in the average marginal individual income tax rate, set to expire in 2025, produces a temporary TFP growth acceleration leading to a 6 percent increase in real per capita GDP by year 2040.

The Balance of Payments and Russian Economic Growth

Based on a demand-side approach, Thirlwall’s law claims that, in the long-run, economic growth is constrained by the balance of payments. Income elasticity of demand for exports should be greater than income elasticity of demand for imports in order to grow faster than the limit imposed by export demand. According­ly, accurate estimations of income elasticities are necessary to identify these bounds. This research estimates export and import functions using bilateral trade data between Russia and 53 of its major partners. Then, we empirically test the validity of Thirlwall’s law over the years 1996-2016, generalizing Thirlwall’s model in a bilateral panel framework. In addition, export and import functions are estimated taking into account export and import composition, controlling for key sectoral effects on aggregate elasticities. Using dynamic panel data models, the findings suggest that, on average, the Russian economy has been growing faster than what Thirlwall’s law predicts. The sectoral composition of the Russian external sector has eased the external constraint to growth. Russian exports still significantly consist of oil and gas, price inelastic goods, with positive effects on trade balance over the period of study. However, in a transition toward green energies, the allocation and investment of exports revenues is a key factor to address future scenarios where carbon-based resources lose relevance.

The Role of Financial Constraints on Labour Share Developments: Macro- and Micro-Level Evidence

Technological advancements have been affecting labour shares through a steep decline in the relative price of investment goods. This has lowered the cost of capital allowing firms to replace labour with capital. Nonetheless, financing obstacles could obstruct investment in both labour and capital. This paper assesses the role of financial constraints in hampering the effect of relative investment prices change on labour shares, using data for up to 26 OECD countries over the period 1995-2014. We find statistically significant, economically large and robust effects of financial constraints acting as a channel to hinder the effect of relative investment prices changes on labour shares. In particular, our results reveal that: (i) there has been a global decline in the labour share that coincides with declines in the relative price of investment goods and this decline has been heterogeneous across countries with different levels of financial constraints; (ii) industries highly dependent on external finance face a lower decline in the labour share following a drop in the relative investment price than industries that are less dependent on external finance, possibly because they are more constrained in accessing funds to finance investment; (iii) industry-level investment prices affect the labour share partly through changes within-firms rather than through composition effects, with smaller effects for firms that are more dependent on external finance and larger effects in less financially constrained and highly productive firms. These results are corroborated by an estimated aggregate elasticity of substitution between capital and labour greater than one, and higher for countries that are less financially constrained.

Monetary Policy and Inequality: How Does One Affect the Other?

This study investigates the relation between monetary policy and income inequality by asking how one affects the other: the effect of monetary policy on income inequality and the impact of the long-run level of income inequality on the effectiveness of monetary policy. To this end, I build a heterogeneous-agent New Keynesian economy with indivisible labor in which both macro and micro labor supply elasticities are endogenously generated. I find that monetary policy shocks have distributional consequences due to a substantial heterogeneity in labor supply elasticity across households. I also show that a more equal economy is associated with more effective monetary policy in terms of output since it generates a larger aggregate elasticity of labor supply, thereby having a flatter New Keynesian Philips curve. Empirical evidence based on state-level panel data supports this model result.

What Determines the Elasticity of Substitution between Capital and Labor? A Literature Review

This paper provides the first comprehensive review of the empirical and theoretical literature on the determinants of the elasticity of substitution between capital and labor. Our focus is on the two‐input constant elasticity of substitution (CES) production function. We start by presenting four concise observations that summarize the empirical literature on the estimation of . Motivated by these observations, the main part of this survey then focuses on potential determinants of capital–labor substitution. We first review several approaches to the microfoundation of production functions where the elasticity of substitution (EOS) is treated as a purely technological parameter. Second, we outline the construction of an aggregate elasticity of substitution (AES) in a multi‐sectoral framework and investigate its dependence on underlying intra‐ and inter‐sectoral substitution. Third, we discuss the influence of the institutional framework on the extent of factor substitution. Overall, this survey highlights that the effective elasticity of substitution (EES), which is typically estimated in empirical studies, is generally not an immutable deep parameter but depends on a multitude of technological, non‐technological, and institutional determinants. Based on these insights, the final section identifies a number of potential empirical and theoretical avenues for future research.

Aggregate Elasticity and Tabletability of Molecular Solids: a Validation and Application of Powder Brillouin Light Scattering.

Describing the elastic deformation of single-crystal molecular solids under stress requires a comprehensive determination of the fourth-rank stiffness tensor (Cijkl). Single crystals are, however, rarely utilized in industrial applications, and thus averaging techniques (e.g., the Voigt or Reuss approach) are employed to reduce the Cijkl (or its inverse Sijkl) to polycrystalline aggregate mechanical moduli. With increasing elastic anisotropy, the Voigt and Reuss-averaged aggregate moduli can diverge dramatically and, provided that drug molecules almost exclusively crystallize into low-symmetry space groups, warrants a significant need for accurate aggregate mechanical moduli. This elasticity data, which currently is largely absent for pharmaceutical materials, is expected to aid understanding how materials respond to direct compression and tablet formation. Powder Brillouin light scattering (p-BLS) has recently demonstrated facile access to porosity-independent, aggregate mechanical moduli. In this study, we extend our previous p-BLS model for obtaining mechanical properties and validate our approach against a broad library of molecular solids with diverse intermolecular interaction topologies and with previously determined Cijkl which permits benchmarking our results. Our Young's and shear moduli determined with p-BLS strongly correlate, with limited bias (i.e., a near 1:1 relation), with the Voigt-averaged Young's and shear moduli determined using the Cijkl. Through follow-on tabletability studies, we introduce initial classifications of tabletability behavior based on the results of our p-BLS studies and the apparent elastic anisotropy. With further development, this approach represents a robust and novel method to potentially identify materials for optimum tabletability at early developmental stages.

THE EMPLOYMENT INTENSITY OF GROWTH: EVIDENCE FROM TUNISIA

The employment intensity of output growth or elasticity of employment with respect to output plays an important role in assessing the job creation ability of economic sectors. This research aims to focus on the Tunisian case in order to estimate the employment intensity of growth among Tunisian productive sectors and identify key sectors that are employment intensive. The data cover the period 1980-2012. Results suggest a significant decrease in aggregate employment elasticity over the period of study. At the sector level, we identify two categories of sectors. The first category involves low-productive sectors with high and increasing employment-output elasticities. The second category includes high-productive sectors with low and decreasing employment-output elasticities. The second stage of the analysis identifies the major determinants influencing total employment elasticity. The trade openness as well as selected macroeconomic policy variables contribute significantly to explain the elasticity evolution.

Households' response to changes in electricity pricing schemes: Bridging microeconomic and engineering principles

This paper presents a computational take on households' response to price changes. Many studies use assumptions (i.e., price elasticities) that were estimated using historical information; however, if a price change has not been experienced in the past, the response may not be statistically predicted. While other papers have explored price response behavior internally through microeconomic principles, many factors affect a household's electricity use, including the construction of the dwelling, outdoor air temperature, and efficiency of the air conditioner. We have superimposed a physical model, which determines hourly power loads, with a utility maximization component.The dwelling itself is calibrated to one in Saudi Arabia, but we test households that have various preferences in their utility function, levels of thermal insulation, and income. We further analyze a wide range of electricity pricing schemes; some are progressive tariffs, while one is defined hourly. The extent to which the prices are raised in the alternative schemes has never been experienced in Saudi Arabia. Our analysis shows that households with low electricity preferences exhibit a larger short-run response than would be derived from the aggregate price elasticities estimated statistically. Moreover, improved building insulation affects the household's decision-making process.