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Estimation of General Equilibrium Labor Market Search Models

Final Report Summary - ESEMO (Estimation of General Equilibrium Labor Market Search Models)

The research involving the Principal Investigator has focused on the following Key intermediate goals set up in the original version of Annex 1:
• Key intermediate goal#1: Unemployment Insurance over the Life Cycle. A great deal of the literature has analyzed the optimal design of labor market institutions but so far this literature has neglected the question whether these policies should vary over the life cycle. I have studied the gains from taking a life cycle perspective in the design of labor market institutions. This research has led to one paper published in the American Economic Review and to another one published in the Journal of Economic Theory.

• Key intermediate goal#2: The Dynamics of Vacancies and Unemployment in the OECD. A great deal of the business cycle literature has focused the analysis just on the US. This focus is partly misplaced, because the cyclical properties of the labor market vary significantly across countries. I have studied differences in the cyclical behavior of the labor market across the OECD. I have constructed a cross-country comparable data set for several OECD countries and I have investigated differences across countries in labor market dynamics at business cycle frequencies. These efforts have already led to some published research output.

• Key intermediate goal#3: Sources of business cycle fluctuations in the US. I have investigated the sources of business cycle fluctuations in the US and whether technology shocks can account for the volatility in vacancies, unemployment and finding probabilities observed in US. I have also better studied the properties of technology shocks in the US. I have shown that these shocks have Schumpeterian features leading to an increase in unemployment in the short run. These efforts have already led to a publication in the Economic Journal and to one paper presented at several international conferences, which will be published in the coming years.

• “Key intermediate goal#4”. US dynamics and the current recession. I have studied employment dynamics over the current US Great recession and the role of financial frictions. There is evidence that asset prices have played a major role in recent US business cycle episodes. The conventional wisdom is that asset prices matter because assets can be used as a collateral and a higher value of collateral relaxes financial constraints thereby promoting consumption, investment and overall aggregate activity. But the price of assets, which private agents take as given, is affected by the aggregate level of income and employment. This induces pecuniary externalities which sometimes justifies subsidizing economic activity. I have evaluated the effects of “Make it in America” government policies aimed at subsidizing businesses in certain states to promote job creation in the US economy. I have proposed a simple methodology to analyze the importance of pecuniary externalities in real economies and I have studied to what extent monetary policy can be effective in stimulating economies once in a liquidity trap. These efforts have already led to three working papers that have been presented in some of the best academic conferences and have received positive attention by the profession.