Mikael Carlsson

Wage Adjustment and Productivity Shocks

We study how workers’ wages respond to TFP-driven innovations in firms’ labor productivity. Using unique data with highly reliable firm-level output prices and quantities in the manufacturing sector in Sweden, we are able to derive measures of physical (as opposed to revenue) TFP to instrument labor productivity in the wage equations. We find that the reaction of wages to sectoral labor productivity is almost three times larger than the response to pure idiosyncratic (firm-level) shocks, a result which crucially hinges on the use of physical TFP as an instrument. These results are all robust to a number of empirical specifications, including models accounting for selection on both the demand and supply side through worker-firm (match) fixed effects. Further results suggest that technological progress at the firm level has negligible effects on the firm-level composition of employees.

MEASURES OF TECHNOLOGY AND THE BUSINESS CYCLE

We analyze the technology shocks identified by two different structural VAR models and compare them with classical and refined Solow residuals. The measures of technology are reasonably highly correlated. Alternative identifying restrictions in the VARs, however, have different theoretical as well as empirical consequences for the technology shocks. King et al.s (1991) model and the classical Solow residual capture a mixture of technology and labor supply shocks, whereas the technology shocks from Gals model and the refined Solow residuals are robust to the latter phenomenon. Moreover, we find that the two robust measures of technology are negatively correlated with hours worked.

Selection Effects in Producer-Price Setting

We use micro data on product prices linked to information on the firms that set them to test for selection effects (state dependence) in micro-level producer pricing. In contrast to using synthetic data from a canonical Menu-Cost model, we find very weak, if any, micro-level selection effects when running price change probability regressions on actual data. Also, fitting a model that nests both time- and state-dependent elements (the CalvoPlus model of Nakamura and Steinsson, 2010), the parameters mimic the standard Calvo (1983) model. Thus, upstream in the supply chain, price setting is best characterized by a very low degree of self-selection.

Monetary Policy and Staggered Wage Bargaining When Prices are Sticky

In this paper, we outline a baseline DSGE model which enables a straightforward analysis of wage bargaining between firms and households/unions in a model with both staggered prices and wages. Relying on empirical evidence, we assume that prices can be changed whenever wages are changed. This feature of the model greatly reduces the complexity of the price and wage setting decisions; specifically it removes complicated interdependencies between current and future price and wage decisions. In an application of the model we study the interaction between labor-market institutions and monetary policy choices, and the consequences for welfare outcomes. Specifically, we focus on the relative bargaining power of unions. We find that, for a standard specification of the monetary policy rule, welfare is substantially affected by the degree of relative bargaining power, but that this effect can be neutralized by optimal discretionary policy.

Capital Adjustment Patterns in Swedish Manufacturing Firms: What Model do they Suggest?

In this paper we study the capital adjustment process in Swedish manufacturing firms and relate the empirical findings to standard models of firm behavior in the presence of impediments to capital adjustments. We find that (i) a model with irreversible capital goes a very long way in capturing the salient features of firm-level capital adjustment behavior. To see this, an integrated approach is necessary since different alternative models do well in certain comparative dimensions but not in others. (ii) The partial adjustment model generally fails to explain capital adjustment patterns. (iii) The capital accumulation process is a highly volatile and non-persistent process on the firm-level. (iv) Firms adjustment behavior is asymmetric in that they are more likely to tolerate excess capital than shortages of capital, and finally, (v) the estimated adjustment function implies that aggregate investment is relatively unresponsive to aggregate shocks in deep recessions as compared to the responsiveness in normal times.

Monetary Policy under Downward Nominal Wage Rigidity

We develop a New Keynesian model with staggered price and wage setting where downward nominal wage rigidity (DNWR) arises endogenously through the wage bargaining institutions. It is shown that the optimal (discretionary) monetary policy response to changing economic conditions then becomes asymmetric. Interestingly, in our baseline model we find that the welfare loss is actually slightly smaller in an economy with DNWR. This is due to that DNWR is not an additional constraint on the monetary policy problem. Instead, it is a constraint that changes the choice set and opens up for potential welfare gains due to lower wage variability. Another finding is that the Taylor rule provides a fairly good approximation of optimal policy under DNWR. In contrast, this result does not hold in the unconstrained case. In fact, under the Taylor rule, agents would clearly prefer an economy with DNWR before an unconstrained economy ex ante.

Testing for Purchasing Power Parity in Cointegrated Panels

This paper applies the maximum likelihood panel cointegration method of Larsson and Lyhagen (2007) to test the strong PPP hypothesis using data for the G7 countries. This method is robust in several important dimensions relative to previous methods, including the well-known issue of cross-sectional dependence of error terms. The findings using this new method are contrasted to those from the Pedroni (1995) cointegration tests and fully modified OLS and dynamic OLS esimators of the cointegrating vectors. Our overall results are the same across all approaches: The strong PPP hypothesis is rejected in favour of weak PPP with heterogenenous cointegrating vectors.

Investment and Uncertainty: A Theory-Based Empirical Approach

This paper provides empirical evidence on the dynamic effects of uncertainty on firm-level capital accumulation. A novelty in this paper is that the firm-level uncertainty indicator is motivated and derived from a theoretical model, the neoclassical investment model with time to build. This model also serves as the base for the empirical work, where an error-correction approach is employed. I find a negative effect of uncertainty on capital accumulation, both in the short and the long run. This outcome cannot be explained by the model alone. Instead, the results suggest that the predominant mechanism at work stems from irreversibility constraints.

Optimal Monetary Policy Under Downward Nominal Wage Rigidity

We develop a New Keynesian model with staggered price and wage setting where downward nominal wage rigidity (DNWR) arises endogenously through the wage bargaining institutions. It is shown that the optimal (discretionary) monetary policy response to changing economic conditions then becomes asymmetric. Interestingly, we find that the welfare loss is actually slightly smaller in an economy with DNWR. This is due to that DNWR is not an additional constraint on the monetary policy problem. Instead, it is a constraint that changes the choice set and opens up for potential welfare gains due to lower wage variability. Another finding is that the Taylor rule provides a fairly good approximation of optimal policy under DNWR. In contrast, this result does not hold in the unconstrained case. In fact, under the Taylor rule, agents would clearly prefer an economy with DNWR before an unconstrained economy ex ante.

Labor-Market Frictions and Optimal Inflation

In central theories of monetary non-neutrality the Ramsey optimal inflation rate varies between the negative of the real interest rate and zero. This paper explores how the interaction of nominal wage and search and matching frictions affect the policy prescription. We show that adding the combination of such frictions to the canonical monetary model can generate an optimal inflation rate that is significantly positive. Specifically, for a standard U.S. calibration, we find a Ramsey optimal inflation rate of 1.11 percent per year.