Michal Kejak

The Czech Economic Transition: Exploring Options Using a Macrosectoral Model

The processes that will drive the next stage of the Czech transition are likely to be similar to those promoting real convergence in the EU cohesion countries. We draw on previous modelling research on the cohesion economies to construct and calibrate a small macrosectoral model of the Czech Republic that serves to highlight key policy issues facing CEE-country decision-makers. Four scenarios are then explored by simulation: the first projects the current pattern of disequilibrium wage setting into the future, while a second looks at the consequences of labour market reform. The other scenarios highlight some of the differences between policy strategies based on indigenous versus FDI-driven export-led growth.

Inflation, Investment and Growth: A Money and Banking Approach

Output growth, investment and the real interest rate in long-run evidence tend to be negatively affected by inflation. Theoretically, inflation acts as a human capital tax that decreases output growth and the real interest rate, but increases the investment rate, opposing evidence. This paper resolves this puzzle by requiring exchange for investment as well as consumption. Inflation then decreases the investment rate, and still decreases both output growth and real interest up to some moderately high rate of inflation, above which increasingly low investment finally causes capital to fall relative to labour, and the real interest rate to rise.

Changing Composition of Human Capital: The Czech Republic, Hungary, and Poland

We show that the business education/occupations have expanded and that the technical education/occupations have contracted in the Czech Republic and Poland since 1990. We interpret these changes as an adjustment necessary for their transition to a market economy. We do not find the same pattern in Hungary, which we attribute to its earlier timing of transition. We construct an aggregate model in which labor reallocates in response to changing demand structure. When calibrated to the Czech and Polish data, the model generates a large movement of workers with technical education and experience into business occupations in the early 1990s. The discounted sum of output loss due to the gap between the demand structure and the composition of existing human capital amounts to 20 to 40 percent of 1990 GDP.

The Czech Economic Transition

The processes that will drive the next stage of the Czech transition are likely to be similar to those promoting real convergence in the countries of the EU periphery. We draw on previous modeling research on these latter economies to construct and calibrate a small macrosectoral model of the Czech Republic. Model simulations explore some key policy issues facing CEE-country decision-makers: labour market reforms, disinflation and industrial development. Our analysis suggests that much can be learned from the experience of countries like Ireland and Portugal which have converged substantially towards EU average living standards.

Projection Methods for Economies with Heterogeneous Agents

In this paper we develop a general methodology for solving models with heterogeneous agents by projection methods. Our approach is solely based on the functional forms of agents’ optimal policy rules and on a functional condition on the endogenous stationary distribution. Solving simultaneously the optimal policy rules and the distribution, this paper provides a new methodology for computing equilibria in which the distribution of wealth and income is a part of a social planner’s optimization problem. We do not impose any additional restrictions or assumptions on the equilibrium allocations. Compared to other computational methods, it does not suffer from the curse of dimensionality and provides an efficient tool for computing models of economies with a continuum of heterogeneous agents with several endogenous and exogenous state variables. We illustrate the algorithm on a standard model with uninsurable idiosyncratic risk from labor income. The approximate solution is highly accurate, especially for the distribution function. This method can be used to compute equilibria in economies with heterogeneous agents in which the distribution of wealth and income is a part of a government’s optimization problem.

Optimal Government Policies in Models with Heterogeneous Agents

In this paper we develop a new methodology for finding optimal government policies in economies with heterogeneous agents. The methodology is solely based on three classes of equilibrium conditions from the governments and individual agents optimization problems: 1) the first order conditions; 2) the stationarity condition on the distribution function; and, 3) the aggregate market clearing conditions. These conditions form a system of functional equations which we solve numerically. The solution takes into account simultaneously the effect of government policy on individual allocations and (from the governments point of view) optimal distribution of agents in the steady state. This general methodology is applicable to a wide range of optimal government policies in models with heterogeneous agents. We illustrate it on a steady state Ramsey problem with heterogeneous agents, finding the optimal tax schedule.

Tax Evasion, Human Capital, and Productivity-Induced Tax Rate Reduction

Growth in the human capital sector’s productivity explains in part how US postwar growth and welfare could have increased while US tax rates declined. Modeling tax evasion within an endogenous growth model with human capital, an upward trend in goods and human capital sectors gradually decreases tax evasion and allows for tax rate reduction. Using estimated goods and human capital sectoral productivities, the model explains 30 percent of the actual decline in a weighted average of postwar US top marginal personal and corporate tax rates. The productivity increases are asymmetric in a fashion related to that of McGrattan and Prescott.

Minimum Weighted Residual Methods in Endogeneous Growth Models

The paper deals with the application of Minimum Weighted Residual Methods (MWR) in intertemporal optimizing models of endogenous economic growth. In the 1st part of the paper the basics of the MWR method are described. Attention is mainly concentrated on one special class of MWR methods: the orthogonal collocation method with the Chebyshev polynomial basis. The second part of the paper is devoted to the setup of a model of endogenous growth with human capital accumulation and the government sector and to the derivation of 1st order conditions which form a Two-Point-Boundary-Value problem. A transformation of the problem which eliminates the growth in variables is then presented and the MWR method is used to solve the model for some policy experiments.

Optimal government policies in models with heterogeneous agents

In this paper we develop a new methodology for finding optimal government policies in economies with heterogeneous agents. The methodology is solely based on three classes of equilibrium conditions from the government’s and individual agent’s optimization problems: 1) the first order conditions; 2) the stationarity condition on the distribution function; and, 3) the aggregate market clearing conditions. These conditions form a system of functional equations which we solve numerically. The solution takes into account simultaneously the effect of government policy on individual allocations and (from the government’s point of view) optimal distribution of agents in the steady state. This general methodology is applicable to a wide range of optimal government policies in models with heterogeneous agents. We illustrate it on a steady state Ramsey problem with heterogeneous agents, finding the optimal tax schedule. JEL Keywords: Optimal macroeconomic policy, optimal taxation, computational techniques, heterogeneous agents, distribution of wealth and income

Tuning in RBC Growth Spectra

For US postwar data, the paper explains an array of RBC puzzles by adding to the standard RBC model external margins for both physical capital and human capital, and examining model fit with data across business cycle (BC) and low frequency (LF) as well as Medium Cycle (MC) windows. The model results in a goods sector productivity shock with a 7500 times smaller variance than the standard RBC model, implying greatly improved amplification of the shock. In addition, output growth persistence autocorrelation profiles are modeled as in data, thus improving upon the propagation puzzle. The model produces a consumption-output ratio as in the business cycle data, a labor share of output that is countercyclic as in data, and human capital investment time that is countercyclic as in data. Also the capacity utilization rate is procyclic within BC, LF and MC windows as in data; including labor moments, a wide array of moments are explained for correlations, volatilities and growth persistence across these business cycle and lower frequency windows. Using a metric of fit, along with a uniform grid search, measures of fit are presented by window and category. In the BC window, key correlations have only an average 15% deviation from the data moments; the LF growth persistence has only an average 8% deviation from the data moments.