Exogenous Productivity Research Articles

The effect of the social security on aggregate effective labor supply: the role of endogenous human capital and of selection effects

Abstract We quantify the importance of endogenous human capital and of selection effects for counterfactual analysis of social security (SS) reforms. The literature typically performs these analyses by using structural models featuring exogenous productivity profiles. However, this approach faces two issues: (i) the estimation of productivity is subject to selection bias, and (ii) productivity is endogenous to the SS reforms. In this paper, we estimate a quantitative overlapping generations model featuring endogenous human capital accumulation using US data. First, we eliminate the SS and find a large positive effect on aggregate effective labor supply ( ${+}10.31\%$ ). Next, we build variants of this model to quantify the two issues (i) and (ii). We find that the endogeneity issue (ii) is quantitatively more important than the selection bias issue (i).

Adjusted net savings needs further adjusting: Reassessing human and resource factors in sustainability measurement

We build a theoretical model of optimal, closed-economy growth of production and consumption, including inputs of human and knowledge capital and growing natural resources, and give two calibrations of it to the global economy's approximately exponential growth during 1995–2014. We thereby show that the World Bank's Adjusted Net Savings (ANS) measure of an economy's sustainability, which has some practical and theoretical advantages over change in wealth, the Bank's preferred measure, ideally needs further adjusting. Our model includes omitted or undervalued estimates of the benefits of human and knowledge capital investment, net resource growth, and productivity growth, and the cost of capitals dilution by population growth. Together these raise estimated, global ANS about 10 percentage points above the Bank's estimate, to equal their growth rate times total wealth, but our adjustments could be negative overall for some countries. By reclassifying about 18% of output from consumption to human and knowledge capital investments, our second calibration needs only 0.3 %/yr of exogenous productivity growth to explain global consumption growth observed during 1995–2014. Though our model omits environmental costs and thus ignores long-run sustainability issues, our adjustments suggest desirable though difficult changes that could improve World Bank ANS as a comparative sustainability indicator.

UNCERTAINTY, LONG‐RUN, AND MONETARY POLICY RISKS IN A TWO‐COUNTRY MACRO MODEL

AbstractWe study the currency risk premium and the forward premium bias in a two‐country New Keynesian model with production, no physical capital, and recursive utility. Monetary policy follows an interest rate feedback rule and exogenous total factor productivity (TFP) growth follows a long‐run risk process with stochastic volatility, which we estimate from data. With cross‐country heterogeneity in TFP and monetary policy, reasonable currency risk premia emerge under complete and incomplete markets but the forward premium bias is trivial. We diagnose the challenge faced by this fairly standard production model to explain the forward premium bias.

Exogenous regional productivity asymmetries in a core-periphery model

Exogenous regional productivity asymmetries in a core-periphery model

The role amenities play in spatial sorting of migrants and their impact on welfare: Evidence from China.

From 2005 to 2015, China's high-skilled labor was increasingly concentrated in cities with high wages and high rents, while a narrowing of the wage gap between high- and low-skilled labor showed an opposite trend to an increase in geographic sorting. In this research, I estimated a spatial equilibrium structural model to identify the causes of this phenomenon and its impact on welfare. Changes in local labor demand essentially led to an increase in skill sorting, and changes in urban amenities further contributed to this trend. An agglomeration of high-skilled labor raised local productivity, increased wages for all workers, reduced the real wage gap, and widened the welfare gap between workers with different skills. In contrast to the welfare effects of changes in the wage gap driven by exogenous productivity changes, changes in urban wages, rents, and amenities increased welfare inequality between high- and low-skilled workers, but this is mainly because the utility of low-skilled workers from urban amenities is constrained by migration costs; if migration costs caused by China's household registration policy were eliminated, changes in urban wages, rents, and amenities would reduce welfare inequality between high- and low-skilled workers to a greater extent than a reduction in the real wage gap between these two groups.

Inter‐sectoral relative price, inflation and structural transformation

AbstractWhile the pattern of composition of sectoral output and consumption are well stylised during growth and structural transformation of an economy, the evidence on the movement of inter‐sectoral relative price is mixed across countries. This paper investigates how demand and supply side forces simultaneously shape structural transformation and the path of relative price in a two‐sector economy comprising an agricultural and a non‐agricultural sector. The model incorporates non‐homothetic preference, heterogeneous sectoral production functions with heterogeneous and exogenous total factor productivity growth. We further investigate how the equilibrium path of relative price contributes to inflation measured by proportionate changes in the aggregate price level which is an index of sectoral prices. We find that the equilibrium rate of inflation is always positive during structural transformation. The rate of inflation increases with increase in growth rate of the non‐agricultural sector and with a higher preference for agricultural goods, and reduces with an increase in the growth of the agricultural sector.

Monetary Policy in a Model of Growth

<ns3:p>Empirical evidence suggests that recessions have long-run effects on the economy's productive capacity. Recent literature embeds endogenous growth mechanisms within business cycle models to account for these "scarring" effects. The optimal conduct of monetary policy in these settings, however, remains largely unexplored. This paper augments the standard sticky-price New Keynesian (NK) to allow for endogenous dynamics in aggregate productivity. The model has a representation similar to the two-equation NK model, with an additional condition linking productivity growth to current and expected future output gaps. Absent state contingency in the subsidies that correct the externalities associated with productivity growth, optimal monetary policy sets inflation above target whenever the subsidies fall short of the externalities. In the recovery from a spell at the ZLB, the optimal discretionary policy sets inflation temporarily above target, helping mitigate the long-run damage. Following a cost-push shock that creates inflationary pressure, the central bank tolerates a larger rise in inflation than in a model with exogenous productivity. The gains from commitment include the central bank's ability to make credible promises about future output gaps in a way that allows it to manipulate current productivity growth.</ns3:p>

Sungbae An Comments on The Global Macroeconomic Impacts of COVID-19: Seven Scenarios

May 15 2021 Sungbae An Comments on The Global Macroeconomic Impacts of COVID-19: Seven Scenarios Author and Article Information Online ISSN: 1536-0083 Print ISSN: 1535-3516 © 2021 by the Asian Economic Panel and the Massachusetts Institute of Technology2021American Society of Health Economists and Massachusetts Institute of Technology Asian Economic Papers (2021) 20 (2): 31–33. https://doi.org/10.1162/asep_a_00817 Cite Icon Cite Permissions Share Icon Share Facebook Twitter LinkedIn MailTo Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Sungbae An Comments on The Global Macroeconomic Impacts of COVID-19: Seven Scenarios. Asian Economic Papers 2021; 20 (2): 31–33. doi: https://doi.org/10.1162/asep_a_00817 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll JournalsAsian Economic Papers Search Advanced Search Sungbae An, Korea Institute for International Economic Policy: The COVID-19 pandemic sheds unprecedented light on how to incorporate health shocks into macroeconomic models. Previous literature on diseases, as summarized in the paper, focuses largely on the economic welfare effects of long-term public health conditions and chronic illnesses linked to mortality and disability. There are a number of reasons for the dominance of these approaches. First, the evaluation of consequences is readily available through traditional labor supply channels. When a part of the labor force is affected by a disease, additional labor costs arise from the temporary loss of working hours by patients and care-givers, medical costs until recovery, and possible long-term deficiency in productivity due to mortality and disability. In this case, the epidemiological literature can estimate the impact of disease on the population and labor force, and it is introduced as an exogenous labor productivity shock to macroeconomic models.... You do not currently have access to this content.

The Interaction of Bankers’ Asset and Liability Management with Liquidity Concerns

This paper develops a dynamic general equilibrium model on the interaction of bankers’ asset and liability management with liquidity concerns. Bankers screen real production projects and issue deposit contracts. Liquidity concerns stem from endogenized early withdrawals of deposits. To fulfill early withdrawals, bankers sell assets in a secondary market. The paper argues that ex post asymmetric information in the secondary market distorts bankers’ incentive to screen ex ante, as bad assets are easier to sell and generate liquidity benefits. Moreover, the general equilibrium feature of the model implies that exogenous aggregate productivity shocks are amplified and that booms may lead to busts.

The role of ICT productivity in Korea-Japan multifactor CES productions and trades

ABSTRACT In this paper, we examine the economic impact of information and communication technology (ICT) innovation, within a general equilibrium framework of empirically estimated constant-elasticity-of-substitution (CES) production frontiers. Such innovation generates not only productivity growth and price changes, but it also triggers changes in the economic structure of production and trade patterns. This process ostensibly increases the social welfare. To study the impact of ICT innovation, we construct a bilateral general-equilibrium model that spans 350 commodities and sectors of trade between Japan and the Republic of Korea. We estimate all CES parameters from published statistics, including linked input–output tables and Comtrade databases. A small exogenous productivity shock in the ICT is examined in terms of potential price reductions of all commodities in both countries.

What Factors Can Explain the Rising Spatial Disparity in Economic Activities in China?

AbstractThis paper explores the impact of spatial externalities in shaping China's economic geography by establishing a theoretical framework that contains regional productivity, trade barriers and local amenities to capture spatial externalities between different regions over time. Combining provincial data on bilateral trade flows with observed information about economic geography during the period 1998–2013, we estimate the distribution and marginal contribution of each explanatory factor. Empirical results suggest that regional labor density and wage are positively related to exogenous productivity and amenities, and negatively related to trade barriers. Meanwhile, variation in the marginal contribution of exogenous productivity and amenities and trade barriers reflects the regional temporal–spatial features in China's recent marketization process. Therefore, the Chinese government should place more emphasis on absorbing advanced technologies and reducing inter‐regional market barriers to promote balanced regional development and improve the efficiency of China's spatial resource allocation.

The Interaction of Bankers' Asset and Liability Management with Liquidity Concerns

This paper develops a dynamic general equilibrium model on the interaction of bankers' asset and liability management with liquidity concerns. Bankers screen real production projects and issue deposits. Liquidity concerns stem from endogenized early withdrawals of deposits. To fulfill early withdrawals, bankers sell assets in a secondary market. The paper argues that ex post asymmetric information in the secondary market distorts bankers' incentive in screening ex ante, as bad assets are easier to sell and generate liquidity benefits. Moreover, the general equilibrium feature of the model implies that exogenous aggregate productivity shocks are amplified and booms may lead to busts.

Investment in Skills, Managerial Quality, and Economic Development

I document that for a group of 38 countries ranging from low to high income: (1) the share of skilled managers is higher in richer countries, (2) the relative income of managers to non-managers is lower in richer countries, and (3) the relative income of skilled to unskilled individuals is lower in richer countries. In addition, the share of managers is lower in richer countries while the mean plant size is larger in richer countries. I explore these facts through the lens of a general equilibrium model of investment in skills and occupational choice. Countries differ in productivity level in production and the level of size-dependent distortions. I find that exogenous productivity differences alone can produce the above facts qualitatively, but size-dependent distortions are needed to account for these facts quantitatively and the output elasticity of productivity is 2.6.

Are Supply Shocks Contractionary at the ZLB? Evidence from Utilization-Adjusted TFP Data

Abstract The basic New Keynesian model predicts that positive supply shocks are less expansionary at the zero lower bound (ZLB) compared to periods of active monetary policy. We test this prediction empirically using Fernald's (2014) utilization-adjusted total factor productivity series, which we take as a measure of exogenous productivity. In contrast to the predictions of the model, positive productivity shocks are estimated to be more expansionary at the ZLB compared to normal times. We find that there is no significant difference in the response of expected inflation to a productivity shock at the ZLB compared to normal times.

Structural propagation in a production network with restoring substitution elasticities

We model an economy-wide production network by cascading binary compounding functions, based on the sequential processing nature of the production activities. As we observe a hierarchy among the intermediate processes spanning the empirical input–output transactions, we utilize a stylized sequence of processes for modeling the intra-sectoral production activities. Under the productivity growth that we measure jointly with the state-restoring elasticity parameters for each sectoral activity, the network of production completely replicates the records of multi-sectoral general equilibrium prices and shares for all factor inputs observed in two temporally distant states. Thereupon, we study propagation of a small exogenous productivity shock onto the structure of production networks by way of hierarchical clustering.

Useful Exergy Is Key in Obtaining Plausible Aggregate Production Functions and Recognizing the Role of Energy in Economic Growth: Portugal 1960–2009

The role of energy in economic growth is controversial. Models based on aggregate production functions (APF) range from the neoclassical, which downplay energy due to a cost-share theorem, but typically rely on exogenous total factor productivity (TFP), to the ecological economic, which acknowledge energy's importance. The validity of the APF concept itself is questioned. Here, we apply cointegration analysis to identify APFs between output, capital, labor, and possibly energy, measured as primary energy or useful exergy. We test for TFP growth by including a time trend. We require that plausible APFs verify cointegration, non-negative output elasticities, and Granger-causality linking inputs to output. Our method recognizes cases where: a) plausible APFs do not exist (thereby addressing the APF critique); b) energy impacts growth directly; c) energy impacts growth indirectly, through capital and labor. We apply the method to Portugal (1960–2009), considering standard and quality-adjusted capital/labor measures. With a time trend or disregarding energy, plausible APFs are never found. Without a trend, plausible APFs are found only when considering capital-energy-labor combinations. Within these, with quality-adjusted capital and labor and useful exergy, results are consistent with the cost-share theorem but energy plays a central role, through a constraint on all factors of production.

Managers and productivity differences

We document that for a group of high-income countries the life-cycle earnings growth of managers relative to non-managers is positively correlated with output per worker. We interpret this evidence through the lens of an equilibrium life-cycle, span-of-control model where managers invest in their skills. We use the model to quantify the importance of exogenous productivity differences and the size-dependent distortions emphasized in the misallocation literature. Our findings indicate that such distortions are critical to generate the observed differences in the growth of relative managerial earnings across countries. Distortions that halve the growth of relative managerial earnings, a move from the U.S. to Italy in our data, lead to a reduction in managerial quality of 27% and to a reduction in output of about nearly 7% – more than half of the observed gap between the U.S. and Italy. Cross-country variation in distortions accounts for about 42% of the cross-country variation in output per worker gap with the U.S.

A Future for Growth?

Macroeconomics has been constrained by assumptions that the economy tends toward full employment, and longterm growth depends on exogenous factors, productivity, and labor force growth. This discounts effects of demand on the labor force participation and immigration, and on investment and productivity growth. Expansionary fiscal policy and greater effective demand could induce reverse (or benevolent) hysteresis where capacity grows faster with higher employment, investment, and productivity.

Multifactor CES general equilibrium: Models and applications

Sector-specific multifactor CES elasticities of substitution and the corresponding productivity growth are jointly measured by regressing the growth of per-factor cost shares against the growth of factor prices. We use linked input-output tables for Japan and the Republic of Korea as the data source for factor price and cost shares in two temporally distant states. We then construct a multisectoral general equilibrium model using the system of estimated CES unit cost functions and evaluate the economy-wide propagation of an exogenous productivity stimulus in terms of welfare. Further, we examine the differences between models based on a priori elasticities such as Leontief and Cobb-Douglas.

Dynamic entry in vertically differentiated markets

We develop a model of vertical innovation in which firms incur a market entry cost and choose a unique level of quality. Once established, firms compete for market shares, selling to consumers with heterogeneous tastes for quality. The equilibrium of the pricing game exists and is unique within our setup. Exogenous productivity growth induces firms to enter the market sequentially at the top end of the quality spectrum. A central feature of the model is that optimization problems of consecutive entrants are self-similar so that new firms enter in constant time-intervals and choose qualities that are a constant fraction higher than incumbent qualities. The asymmetries of quality choice, which inevitably arise because the quality spectrum has top and a bottom, are thus overcome by sequential entry. Our main contribution lies in handling these asymmetries.