Research
Work in progress
Macroeconomic Effects of the Gender Revolution (2022)
with Luca Fosso and Francesco Furlanetto
Abstract: Postwar US labor market data display a substantial, secular decline in female-to-male employment and wage gaps. This paper aims to identify the role of alternative structural drivers, and to quantify the macroeconomic effects. For this purpose we propose a novel time series model which maps empirical trends into selected (macro and gender-specific) structural trends. Identification is achieved with restrictions from a neoclassical theory about
gender-specific labor. Our empirical results point to a secular rise in female-specific labor demand as the dominant driver of long-run gender gaps in the US labor market. Moreover, this structural trend has been key for the persistent components in US employment and GDP, thus being an important contributor to overall economic growth in the postwar US economy. Finally, to understand gender-specific labor supply we find it crucial to account for skills: a secular rise in the labor supply of skilled females has largely been counteracted by a decline in the supply of unskilled females, thus, explaining why gender-specific supply trends do not show up in aggregate data.
Did Monetary Policy Kill the Phillips Curve? Some Simple Arithmetics (2022)
with Francesco Furlanetto and Etienne Vaccaro-Grange
Abstract: Price inflation in the U.S. economy has been remarkably stable over the past 25 years, in spite of large fluctuations in real economic activity. This observation has led some to believe that the Phillips curve has flattened. We argue that this viewpoint may be premature unless one accounts explicitly for all supply-side variation in data. In fact, we show that it is crucial to control for an entire array of supply shocks (and not only cost-push shocks) when evaluating alternative explanations for the puzzling behavior of inflation. Equipped with a combination of New Keynesian theory and SVAR models, we decompose the unconditional variation in data into the components driven by demand and supply shocks, respectively. This allows us to conduct a simple yet novel accounting exercise, which reveals that the Phillips curve remains relatively stable once supply shocks are properly controlled for. The demand curve, in contrast, has flattened substantially. Our results are fully consistent with an explanation based on a more aggressive monetary policy response to inflation.
Monetary Policy when Export Revenues Drop (2022)
with Øistein Røisland, Tommy Sveen and Ragnar Torvik
Abstract: We study how monetary policy should respond to shocks which permanently alter the steady state structure of the economy. In such a case monetary policy affects not only the short run misallocations due to nominal rigidities, but also relative prices which stimulate reallocation of capital. We consider a permanent and negative shock to export revenues that requires a larger traded sector and a smaller non-traded sector in the new steady state. This reallocation calls for a change in relative prices during the transition, but may also lead to a period of high unemployment. We show how an appropriate monetary policy could mitigate the welfare costs of the transition by allowing the exchange rate to depreciate, and thereby allowing inflation to increase in the short run. Traditional monetary policy regimes, such as inflation targeting or a fixed exchange rate, would imply high unemployment and inefficiently slow transition. Stabilizing nominal wage growth, in contrast, would be close to the
welfare-optimal monetary policy.
Foreign Shocks (2015)
Previously circulated as: Foreign Shocks in an Estimated Multi-Sector Model
Abstract: How and to what extent are small open economies affected by international shocks? I develop and estimate a medium scale DSGE model that addresses both questions. The model incorporates i) international markets for firm-to-firm trade in production inputs, and ii) producer heterogeneity where technology and price setting constraints vary across industries. Using Bayesian techniques on Canadian and US data, I document several macroeconomic regularities in the small open economy, all attributed to international disturbances. First, foreign shocks are crucial for domestic fluctuations at all forecasting horizons. Second, productivity is the most important driver of business cycles. Investment efficiency shocks on the other hand have counterfactual implications for international spillover. Third, the relevance of foreign shocks accumulates over time. Fourth, business cycles display strong co-movement across countries, even though shocks are uncorrelated and the trade balance is countercyclical. Fifth, exchange rate pass-through to aggregate CPI inflation is moderate, while pass-through at the sector level is positively linked to the frequency of price changes. Few of these features have been accounted for by existing open economy DSGE literature, but all are consistent with reduced form evidence. The model presented here offers a structural interpretation of the results.
Can Sticky Price Models Account for International Disturbances in Small Open Economies? (2014)
with Tommy Sveen
Previously circulated as: Sectoral Interdependence and Business Cycle Synchronization in Small Open Economies
Abstract: Existing New Keynesian models are not able to reproduce the observed influence of international business cycles on small open economies. We address this puzzle by constructing a two-sector New Keynesian model for a small open economy. The setup takes into account intermediate trade and producer heterogeneity, where goods and service industries differ in terms of i) price flexibility, ii) trade intensity, iii) their I-O structure, and iv) the volatility of productivity innovations. The combination of intermediate markets and heterogeneous production makes international business cycles highly important for the small economy, even if it has a large service sector. Exploiting I-O matrices of Canadian and US industries, the model is able to reproduce the role of international disturbances typically found in empirical studies. Model simulations deliver cross-country correlations in macroeconomic variables of about 0.7, with half of the variation in domestic variables attributed to foreign shocks.
Monetary Policy in Oil Exporting Economies (2014)
Abstract: How should monetary policy be constructed when national income depends on oil exports? I set up a general equilibrium model for an oil exporting small open economy to analyze this question. Fundamentals include an oil sector and domestic non-oil firms - some of which are linked to oil markets via supply chains. In the model, the intermediate production network implies transmission of international oil shocks to all domestic industries. The presence of wage and price rigidities at the sector level leads to non-trivial trade-offs between different stabilization targets. I characterize Ramsey-optimal monetary policy in this environment, and use the framework to shed light on i) welfare implications of the supply chain channel, and ii) costs of alternative policy rules. Three results emerge: First, optimal policy puts high weight on nominal wage stability. In contrast, attempts to target impulses from the oil sector can be disastrous for welfare. Second, while oil sector activity contributes to macroeconomic fluctuations, it does not change the nature of optimal policy. Third, operational Taylor rules with high interest rate inertia can approximate Ramsey equilibrium reasonably well.
Inflation Targeting in a Small Open Economy with Sticky Wages and Prices (2012)
From monetary policy course with Antti Ripatti
with Luca Fosso and Francesco Furlanetto
Abstract: Postwar US labor market data display a substantial, secular decline in female-to-male employment and wage gaps. This paper aims to identify the role of alternative structural drivers, and to quantify the macroeconomic effects. For this purpose we propose a novel time series model which maps empirical trends into selected (macro and gender-specific) structural trends. Identification is achieved with restrictions from a neoclassical theory about
gender-specific labor. Our empirical results point to a secular rise in female-specific labor demand as the dominant driver of long-run gender gaps in the US labor market. Moreover, this structural trend has been key for the persistent components in US employment and GDP, thus being an important contributor to overall economic growth in the postwar US economy. Finally, to understand gender-specific labor supply we find it crucial to account for skills: a secular rise in the labor supply of skilled females has largely been counteracted by a decline in the supply of unskilled females, thus, explaining why gender-specific supply trends do not show up in aggregate data.
Did Monetary Policy Kill the Phillips Curve? Some Simple Arithmetics (2022)
with Francesco Furlanetto and Etienne Vaccaro-Grange
Abstract: Price inflation in the U.S. economy has been remarkably stable over the past 25 years, in spite of large fluctuations in real economic activity. This observation has led some to believe that the Phillips curve has flattened. We argue that this viewpoint may be premature unless one accounts explicitly for all supply-side variation in data. In fact, we show that it is crucial to control for an entire array of supply shocks (and not only cost-push shocks) when evaluating alternative explanations for the puzzling behavior of inflation. Equipped with a combination of New Keynesian theory and SVAR models, we decompose the unconditional variation in data into the components driven by demand and supply shocks, respectively. This allows us to conduct a simple yet novel accounting exercise, which reveals that the Phillips curve remains relatively stable once supply shocks are properly controlled for. The demand curve, in contrast, has flattened substantially. Our results are fully consistent with an explanation based on a more aggressive monetary policy response to inflation.
Monetary Policy when Export Revenues Drop (2022)
with Øistein Røisland, Tommy Sveen and Ragnar Torvik
Abstract: We study how monetary policy should respond to shocks which permanently alter the steady state structure of the economy. In such a case monetary policy affects not only the short run misallocations due to nominal rigidities, but also relative prices which stimulate reallocation of capital. We consider a permanent and negative shock to export revenues that requires a larger traded sector and a smaller non-traded sector in the new steady state. This reallocation calls for a change in relative prices during the transition, but may also lead to a period of high unemployment. We show how an appropriate monetary policy could mitigate the welfare costs of the transition by allowing the exchange rate to depreciate, and thereby allowing inflation to increase in the short run. Traditional monetary policy regimes, such as inflation targeting or a fixed exchange rate, would imply high unemployment and inefficiently slow transition. Stabilizing nominal wage growth, in contrast, would be close to the
welfare-optimal monetary policy.
Foreign Shocks (2015)
Previously circulated as: Foreign Shocks in an Estimated Multi-Sector Model
Abstract: How and to what extent are small open economies affected by international shocks? I develop and estimate a medium scale DSGE model that addresses both questions. The model incorporates i) international markets for firm-to-firm trade in production inputs, and ii) producer heterogeneity where technology and price setting constraints vary across industries. Using Bayesian techniques on Canadian and US data, I document several macroeconomic regularities in the small open economy, all attributed to international disturbances. First, foreign shocks are crucial for domestic fluctuations at all forecasting horizons. Second, productivity is the most important driver of business cycles. Investment efficiency shocks on the other hand have counterfactual implications for international spillover. Third, the relevance of foreign shocks accumulates over time. Fourth, business cycles display strong co-movement across countries, even though shocks are uncorrelated and the trade balance is countercyclical. Fifth, exchange rate pass-through to aggregate CPI inflation is moderate, while pass-through at the sector level is positively linked to the frequency of price changes. Few of these features have been accounted for by existing open economy DSGE literature, but all are consistent with reduced form evidence. The model presented here offers a structural interpretation of the results.
Can Sticky Price Models Account for International Disturbances in Small Open Economies? (2014)
with Tommy Sveen
Previously circulated as: Sectoral Interdependence and Business Cycle Synchronization in Small Open Economies
Abstract: Existing New Keynesian models are not able to reproduce the observed influence of international business cycles on small open economies. We address this puzzle by constructing a two-sector New Keynesian model for a small open economy. The setup takes into account intermediate trade and producer heterogeneity, where goods and service industries differ in terms of i) price flexibility, ii) trade intensity, iii) their I-O structure, and iv) the volatility of productivity innovations. The combination of intermediate markets and heterogeneous production makes international business cycles highly important for the small economy, even if it has a large service sector. Exploiting I-O matrices of Canadian and US industries, the model is able to reproduce the role of international disturbances typically found in empirical studies. Model simulations deliver cross-country correlations in macroeconomic variables of about 0.7, with half of the variation in domestic variables attributed to foreign shocks.
Monetary Policy in Oil Exporting Economies (2014)
Abstract: How should monetary policy be constructed when national income depends on oil exports? I set up a general equilibrium model for an oil exporting small open economy to analyze this question. Fundamentals include an oil sector and domestic non-oil firms - some of which are linked to oil markets via supply chains. In the model, the intermediate production network implies transmission of international oil shocks to all domestic industries. The presence of wage and price rigidities at the sector level leads to non-trivial trade-offs between different stabilization targets. I characterize Ramsey-optimal monetary policy in this environment, and use the framework to shed light on i) welfare implications of the supply chain channel, and ii) costs of alternative policy rules. Three results emerge: First, optimal policy puts high weight on nominal wage stability. In contrast, attempts to target impulses from the oil sector can be disastrous for welfare. Second, while oil sector activity contributes to macroeconomic fluctuations, it does not change the nature of optimal policy. Third, operational Taylor rules with high interest rate inertia can approximate Ramsey equilibrium reasonably well.
Inflation Targeting in a Small Open Economy with Sticky Wages and Prices (2012)
From monetary policy course with Antti Ripatti
Publications
The Decline of the Labor Share: New Empirical Evidence (American Economic Journal: Macroeconomics, 2020), conditionally accepted
with Francesco Furlanetto and Nicolo F. Maffei
Abstract: We use time series techniques to estimate the importance of four main explanations for the decline of the US labor income share: (i) rising firm markups, (ii) falling bargaining power of workers, (iii) higher investment-specific technology growth, and (iv) more automated production processes. Identification is achieved with restrictions derived from a stylized model of structural change. Our results point to automation as the main driver of the labor share, although rising markups have played an important role in the last 20 years. We also find evidence of capital-labor complementarity, suggesting that capital deepening may have raised the labor share.
Business Cycles in an Oil Economy (Journal of International Money and Finance, 2019 Vol. 96 pp. 283-303)
with Vegard H. Larsen and Martin Seneca
Abstract: The recent oil price fall has created concern among policy makers regarding the consequences of terms of trade shocks for resource-rich countries. This concern is not a minor one – the world’s commodity exporters combined are responsible for 15–20% of global value added. We develop and estimate a two-country New Keynesian model in order to quantify the importance of oil price shocks for Norway – a large, prototype petroleum exporter. Domestic supply chains link mainland (non-oil) Norway to the off-shore oil industry, while fiscal authorities accumulate income in a sovereign wealth fund. Oil prices and the international business cycle are jointly determined abroad. These features allow us to disentangle the structural sources of oil price fluctuations, and how they affect mainland Norway. The estimated model provides three key results. First, oil price movements represent an important source of macroeconomic volatility in mainland Norway. Second, while no two shocks cause the same dynamics, conventional trade channels make an economically less significant difference for the transmission of global shocks to the oil exporter than to oil importers. Third, the domestic oil industry’s supply chain is an important transmission mechanism for oil price movements, while the prevailing fiscal regime provides substantial protection against external shocks.
The Power of Forward Guidance in NEMO (Norges Bank Staff Memo, 7/2019)
with Sara S. Meyer, Yasin Mimir and Øistein Røisland
Abstract: This staff memo revisits the power of forward guidance with particular emphasis on the effectiveness of anticipated policy in Norges Bank's main policy model NEMO. First we explain, within the context of a simple toy model, why and how forward guidance has implausible effects in standard monetary policy frameworks. Second, we discuss some of the main solutions to the so-called forward guidance puzzle. We argue that existing proposals, including effective discounting as in Gabaix (2018), come with serious limitations once guidance about nominal policy rates is considered. With these lessons in mind, we proceed with a quantitative assessment of forward guidance in NEMO. It is shown that the presence of several real and nominal frictions reduces the net effects of forward guidance compared with the simple model. A powerful expectations channel is still at play: agents in NEMO believe that expansionary interest rate paths will be counteracted at some point in the future, resulting in limited net effects of forward guidance policies. We briefly discuss the realism of this feature.
Climatic Disasters, Economic Growth, and Armed Civil Conflict (Journal of Peace Research, 2012 Vol. 49 (1) pp. 147-162)
with Paivi Lujala
Abstract: Global warming is expected to make the climate warmer, wetter, and wilder. It is predicted that such climate change will increase the severity and frequency of climate-related disasters like flash floods, surges, cyclones, and severe storms. This article uses econometric methods to study the consequences of climate-induced natural disasters on economic growth, and how these disasters are linked to the onset of armed civil conflict either directly or via their impact on economic growth. The results show that climate-related natural disasters have a negative effect on growth and that the impact is considerable. The analysis of conflict onset shows that climate-related natural disasters do not increase the risk of armed conflict. This is also true when we instrument the change in GDP growth by climatic disasters. The result is robust to inclusion of country and time fixed effects, different estimation techniques, and various operationalization of the disasters measure, as well as for conflict incidence and war onset. These findings have two major implications: if climate change increases the frequency or makes weather-related natural disasters more severe, it is an economic concern for countries susceptible to these types of hazards. However, our results suggest – based on historical data – that more frequent and severe climate-related disasters will not lead to more armed conflicts through their effects on GDP growth.
with Francesco Furlanetto and Nicolo F. Maffei
Abstract: We use time series techniques to estimate the importance of four main explanations for the decline of the US labor income share: (i) rising firm markups, (ii) falling bargaining power of workers, (iii) higher investment-specific technology growth, and (iv) more automated production processes. Identification is achieved with restrictions derived from a stylized model of structural change. Our results point to automation as the main driver of the labor share, although rising markups have played an important role in the last 20 years. We also find evidence of capital-labor complementarity, suggesting that capital deepening may have raised the labor share.
Business Cycles in an Oil Economy (Journal of International Money and Finance, 2019 Vol. 96 pp. 283-303)
with Vegard H. Larsen and Martin Seneca
Abstract: The recent oil price fall has created concern among policy makers regarding the consequences of terms of trade shocks for resource-rich countries. This concern is not a minor one – the world’s commodity exporters combined are responsible for 15–20% of global value added. We develop and estimate a two-country New Keynesian model in order to quantify the importance of oil price shocks for Norway – a large, prototype petroleum exporter. Domestic supply chains link mainland (non-oil) Norway to the off-shore oil industry, while fiscal authorities accumulate income in a sovereign wealth fund. Oil prices and the international business cycle are jointly determined abroad. These features allow us to disentangle the structural sources of oil price fluctuations, and how they affect mainland Norway. The estimated model provides three key results. First, oil price movements represent an important source of macroeconomic volatility in mainland Norway. Second, while no two shocks cause the same dynamics, conventional trade channels make an economically less significant difference for the transmission of global shocks to the oil exporter than to oil importers. Third, the domestic oil industry’s supply chain is an important transmission mechanism for oil price movements, while the prevailing fiscal regime provides substantial protection against external shocks.
The Power of Forward Guidance in NEMO (Norges Bank Staff Memo, 7/2019)
with Sara S. Meyer, Yasin Mimir and Øistein Røisland
Abstract: This staff memo revisits the power of forward guidance with particular emphasis on the effectiveness of anticipated policy in Norges Bank's main policy model NEMO. First we explain, within the context of a simple toy model, why and how forward guidance has implausible effects in standard monetary policy frameworks. Second, we discuss some of the main solutions to the so-called forward guidance puzzle. We argue that existing proposals, including effective discounting as in Gabaix (2018), come with serious limitations once guidance about nominal policy rates is considered. With these lessons in mind, we proceed with a quantitative assessment of forward guidance in NEMO. It is shown that the presence of several real and nominal frictions reduces the net effects of forward guidance compared with the simple model. A powerful expectations channel is still at play: agents in NEMO believe that expansionary interest rate paths will be counteracted at some point in the future, resulting in limited net effects of forward guidance policies. We briefly discuss the realism of this feature.
Climatic Disasters, Economic Growth, and Armed Civil Conflict (Journal of Peace Research, 2012 Vol. 49 (1) pp. 147-162)
with Paivi Lujala
Abstract: Global warming is expected to make the climate warmer, wetter, and wilder. It is predicted that such climate change will increase the severity and frequency of climate-related disasters like flash floods, surges, cyclones, and severe storms. This article uses econometric methods to study the consequences of climate-induced natural disasters on economic growth, and how these disasters are linked to the onset of armed civil conflict either directly or via their impact on economic growth. The results show that climate-related natural disasters have a negative effect on growth and that the impact is considerable. The analysis of conflict onset shows that climate-related natural disasters do not increase the risk of armed conflict. This is also true when we instrument the change in GDP growth by climatic disasters. The result is robust to inclusion of country and time fixed effects, different estimation techniques, and various operationalization of the disasters measure, as well as for conflict incidence and war onset. These findings have two major implications: if climate change increases the frequency or makes weather-related natural disasters more severe, it is an economic concern for countries susceptible to these types of hazards. However, our results suggest – based on historical data – that more frequent and severe climate-related disasters will not lead to more armed conflicts through their effects on GDP growth.
