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2006 Working Papers

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Risky Human Capital and Deferred Capital Income Taxation
By Borys Grochulski & Tomasz Piskorski
Working Paper 06-13
Released: January 2007

We study the structure of optimal wedges and capital taxes in a Mirrlees economy with endogenous skills. Human capital is a private state variable that drives the skill process of each individual. Building on the findings of the labor literature, we...

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Market-Based Regulation and the Informational Content of Prices
By Philip Bond, Itay Goldstein & Edward Simpson Prescott
Working Paper 06-12
Released: November 2006

Various laws and policy proposals call for regulators to make use of the information reflected in market prices. We focus on a leading example of such a proposal, namely that bank supervision should make use of the market prices of traded bank s...

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Computing Business Cycles in Emerging Economy Models
By Juan Carlos Hatchondo, Leonardo Martinez & Horacio Sapriza
Working Paper 06-11
Released: November 2006

We show that computing business cycles in emerging economy models using the discrete state space technique may be misleading. We solve the models of sovereign default presented by Aguiar and Gopinath (2006) using interpolation. We find that the simulated...

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Technology-Policy Interaction in Frictional Labor Markets
By Andreas Hornstein, Per Krusell & Giovanni L. Violante
Working Paper 06-10
Released: November 2006

Does capital-embodied technological change play an important role in shaping labor market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital...

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The Political Economy of Labor Subsidies
By Marina Azzimonti, Eva de Francisco & Per Krusell
Working Paper 06-9
Released: October 2006

We explore a political economy model of labor subsidies, extending Meltzer and Richard's median voter model to a dynamic setting. We explore only one source of heterogeneity: initial wealth. As a consequence, given an operative wealth effect, poorer...

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Technical Appendix for "Frictional Wage Dispersion in Search Models: A Quantitative Assessment"
By Giovanni L. Violante, Per Krusell & Andreas Hornstein
Working Paper 06-8
Released: September 2006

In this Technical Appendix to Hornstein, Krusell, and Violante (2006) (HKV, 2006, hereafter) we provide a detailed characterization of the search model with (1) wage shocks during employment and (2) on-the-job search outlined in Sections 6 and 7 of...

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Frictional Wage Dispersion in Search Models: A Quantitative Assessment
By Giovanni L. Violante, Per Krusell & Andreas Hornstein
Working Paper 06-7
Released: September 2006

Standard search and matching models of equilibrium unemployment, once properly calibrated, can generate only a small amount of frictional wage dispersion, i.e., wage di erentials among ex-ante similar workers induced purely by search frictions. We derive...

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Understanding How Employment Responds to Productivity Shocks in a Model with Inventories
By Pierre-Daniel G. Sarte, Andreas Hornstein & Yongsung Chang
Working Paper 06-6
Released: August 2006

Whether technological progress raises or lowers aggregate employment in the short run has been the subject of much debate in recent years. Using a simple model of industry employment, we show that cross-industry differences of inventory holding costs,...

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The Lucas Critique and the Stability of Empirical Models
By Paolo Surico & Thomas A. Lubik
Working Paper 06-5
Released: July 2006

This paper re-considers the empirical relevance of the Lucas critique using a DSGE sticky price model in which a weak central bank response to inflation generates equilibrium indeterminacy. The model is calibrated on the magnitude of the...

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Home Production
By Andreas Hornstein & Yongsung Chang
Working Paper 06-4
Released: June 2006

Studying the incentives and constraints in the non-market sector — that is, home production — enhances our understanding of economic behavior in the market. In particular, it helps us to understand (1) small variations of labor supply over ...

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Nontraded Goods, Market Segmentation, and Exchange Rates
By Margarida Duarte & Michael Dotsey
Working Paper 06-3
Released: May 2006

Empirical evidence suggests that movements in international relative prices (such as the real exchange rate) are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable...

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On the Aggregate and Distributional Implications of Productivity Differences across Countries
By Diego Restuccia, Tatyana Koreshkova & Andrés Erosa
Working Paper 06-2
Released: March 2006

We develop a quantitative theory of human capital with heterogeneous agents in order to assess the sources of cross-country income differences. The cross-sectional implications of the theory and U.S. data are used to restrict the parameters of human...

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Reputation and Career Concerns
By Leonardo Martinez
Working Paper 06-1
Released: January 2006

This paper studies Holmstrom's [1999] seminal model of career concerns, but considers that a small change in the beliefs about the agent's future productivity may imply a large change in his compensation — because, for example, the agent may be...

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