Andreas Hornstein

Can Technology Improvements Cause Productivity Slowdowns

We explore two channels through which increases in the rate of investment-specific technological change can lead to decreases in measured productivity growth. The first channel is learning; with an increase in the rate of adoption more resources are devoted to new technologies where experience is low. As a result, labor productivity and TFP growth fall temporarily. Second, if the unmeasured quality of final outputs depends significantly on capital input, then declines in productivity growth will be recorded as the growth rate of capital goes up. We document the recent productivity slowdown in the United States and elsewhere and discuss evidence suggesting that an increase in the rate of investment-specific technological change may have occurred at about the same time as the slowdown began. We then use a simple, parameterized vintage capital model in order to gauge the potential importance of this phenomenon for productivity measurements.

Monopolistic competition, increasing returns to scale, and the importance of productivity shocks

Abstract The neoclassical growth model is extended to incorporate monopolistic competition and increasing returns to scale. Implications for the measurement of productivity change through the Solow residual are studied. It is found that for this extension productivity fluctuations continue to account for a substantial fraction of output volatility. The model cannot account for volatility of employment.

Intermediate Inputs and Sectoral Comovement in the Business Cycle

The postwar U.S. business cycle is characterized by positive comovement of employment and output across sectors. It has been argued that multi-sector growth models are inconsistent with this observation when changes in relative productivities are the main source of fluctuations. We suggest that the input-output structure of an economy, in particular the pervasive use of intermediate inputs, can induce positive comovement in sectoral employment and output following changes in relative productivities. We calibrate a model of the U.S. economy for the durable and nondurable goods producing sectors, and show that sectoral employment and output move together if intermediate inputs are used in production. The model is also consistent with the observation that the relative price of nondurable goods is procyclical.

Technology-policy interaction in frictional labor markets

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 creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labor demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labor market regulation — we analyze unemployment benefits, payroll and income taxes, and firing costs — exacerbates these effects. Thus, the model is qualitatively consistent with some key features of the European labor market experience, relative to that of the United States: it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labor share. A calibrated version of our model suggests that this technology-policy interaction could explain a sizeable fraction of the observed differences between the United States and Europe.

(S,s) Inventory policies in general equilibrium

We study the aggregate implications of (S,s) inventory policies in a dynamic general equilibrium model with aggregate uncertainty. Firms in the models retail sector face idiosyncratic demand risk, and (S,s) inventory policies are optimal because of fixed order costs. The distribution of inventory holdings affects the aggregate outcome in two ways: variation in the decision to order and variation in the rate of sale through the pricing decisions of retailers. We find that both mechanisms must operate to reconcile observations that orders are more volatile than, and inventory investment is positively correlated with, sales, while remaining consistent with other salient business cycle characteristics. The model exhibits strong amplification for some shocks, and persistence to a limited extent.

Should a monetary policymaker look at money

Abstract This paper examines whether monetary indicators are useful in implementing optimal discretionary monetary policy when the policymaker has incomplete information about the environment. We find that money does not contain useful information for the policymaker, if we calibrate the model to the U.S. economy. If money demand were to be appreciably less variable, observations on money could be useful in response to productivity shocks but would be harmful in response to money-demand shocks. We provide an incomplete information example where equilibrium welfare declines when the money-demand volatility decreases.

Accounting for unemployment: the long and short of it

Shimer (2012) accounts for the volatility of unemployment based on a model of homogeneous unemployment. Using data on short-term unemployment he finds that most of unemployment volatility is accounted for by variations in the exit rate from unemployment. The assumption of homogeneous exit rates is inconsistent with the observed negative duration dependence of unemployment exit rates for the U.S. labor market. We construct a simple model of heterogeneous unemployment with short-term and long-term unemployed, and use data on the duration distribution of unemployment to account for entry to and exit from the unemployment pool. This alternative account continues to attribute most of unemployment volatility to variations in exit rates from unemployment, but it also suggests that most of unemployment volatility is due to the volatility of long-term unemployment rather than short-term unemployment. We also show that once one allows for heterogeneous unemployment, the expected value of income losses from unemployment increases substantially, and unemployment volatility implied by a simple matching model increases.

Money and Insurance in a Turnpike Environment

SummaryWe study the effects of introducing a feasible insurance market into the spatial separation model of money described in Mitsui and Watanabe (1989). We show that the insurance contract may or may not drive out money. We also show that, depending on the degree of risk aversion, the additional market can reduce welfare for all agents, increase welfare for all agents, or increase welfare for some agents and reduce it for others.

Insurance Contracts as Commodities: A Note

This paper extends recent developments in general equilibrium theory and applies them to the problem of measuring the real output of an economys insurance sector. These developments permit a priced commodity to be a complex incentive-compatible contract. These contracts are not bundles of more basic commodities. These contracts are elementary in the same sense that event-contingent goods deliveries are elementary in the Arrow- Debreu framework.

Can a Matching Model Explain the Long-Run Increase in Canada's Unemployment Rate?

We construct a simple general equilibrium model of unemployment and calibrate it to the Canadian economy. Job creation and destruction are endogenous. In this model, we consider several potential factors which could contribute to the long-run increase in the Canadian unemployment rate: a more generous unemployment insurance system, higher layoff costs, higher distortionary taxes, and a slower rate of productivity growth. We find that in the model economy the impact of all of these factors on the unemployment rate is small.