Matthias Göcke

Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation?

Abstract In a baseline micro model a band of inaction due to hiring and firing costs is widened by option value effects of exchange rate uncertainty. Based on this micro foundation, an aggregation approach is presented. Under uncertainty, intervals of weak response to exchange rate reversals (called ‘play’ areas) are introduced on the macro level. ‘Spurts’ in new employment or firing may occur after an initially weak response. Since these mechanisms may apply to other ‘investment’ cases where the aggregation of microeconomic real options effects under uncertainty are relevant, they may even be of a more general interest.

A Macroeconomic Model with Hysteresis in Foreign Trade

The continuous non-linear macro-hysteresis loop is approximated by a rhombus shaped path which therefore shows a closer affinity to the genuine concept of hysteresis than conventional techniques via difference equations. This linearized model is applied to implement foreign trade hysteresis in a standard macroeconomic simultaneous equation model demonstrating the persisting consequences of only temporary exogenous shocks on national income, interest rate and the determination of the exchange rate. Since hysteresis in foreign trade is analysed in a macroeconomic framework, the feedback of hysteresis caused by exchange rate variations on the exchange rate itself can be illustrated.

Exchange rate uncertainty and play nonlinearity in aggregate employment

In a microeconomic model, a band of inaction due to hiring and firing costs is widened by option-value effects of exchange rate uncertainty. Applying an adequate aggregation approach, uncertainty leads to intervals of a weak response to exchange rate reversals—the so-called play areas—on the macro level. If changes go beyond the play area, then suddenly strong reactions (spurts) occur. The width of the play is a positive function of the degree of uncertainty. These nonlinear dynamics are captured in a simplified linearized way in a regression framework. As an empirical application, the exchange rate impacts on German employment are analyzed considering play. Since these mechanisms generally apply to investment cases where an aggregation of microeconomic real option effects under uncertainty is relevant, they may be of a general interest.

Leisure versus learning-by-doing — saturation effects and utility-side limits to endogenous growth

Abstract A simple model with learning as a by-product of working based on an experience curve is presented: Accumulation of human capital is measured by means of output aggregated over time. Compared to the prevailing modelling technique of ‘learning-by-investment’, separating learning from real capital accumulation leads to an independent control of learning-by-doing via working time. Dynamic optimisation of the choice between working (resulting in learning and consumption) and leisure is performed. Depending on the production elasticity of experience and on the intratemporal elasticity of substitution between consumption and leisure at each moment, a situation with or without endogenous growth results.

Play Hysteresis in Supply or in Demand as Part of a Market Model

Consequences of economic hysteresis are illustrated based on a standard market model which is extended by hysteresis dynamics. Hysteresis is implemented in a simple linearized way, similar to ‘mechanical play’. As a novelty, both cases, hysteresis in supply and demand, are analysed separately as an explicit part of a supply and demand model. Explicitly modelling supply versus demand side hysteresis has two advantages. (1) Since (hysteretic) supply or demand is only a subsystem of the entire market, persistent endogenous feedback effects on price and quantity are addressed. (2) Differences in the remanent effects of transient shocks between demand and supply hysteresis become obvious.