Paul Gomme

Money and growth revisited: Measuring the costs of inflation in an endogenous growth model

Results in Lucas (1987) suggest that if public policy can affect the growth rate of the economy, the welfare implications of alternative policies will be large. In this paper, a stochastic, dynamic general equilibrium model with endogenous growth and money is examined. In this setting, inflation lowers growth through its effect on the return to work. However, the welfare costs of higher inflation are modest.

On the cyclical allocation of risk

A real business cycle model with heterogeneous agents is parameterized, calibrated, and simulated to see if it can account for some stylized facts characterizing postwar U.S. business cycle fluctuations, such as the countercyclical movement of labor’s share of income, and the acyclical behavior of real wages. There are two types of agents in the model, workers and entrepreneurs, who participate on an economy-wide market for contingent claims. On this market workers purchase insurance from entrepreneurs, through optimal labor contracts, against losses in income due to business cycle fluctuations. The model is used to study the allocation of risk and the distribution of income over the business cycle.

Home Production Meets Time to Build

An innovation in this paper is to introduce a time‐to‐build technology for the production of market capital into a model with home production. Our main finding is that the two anomalies that have plagued all household production models—the positive correlation between business and household investment, and household investments leading business investment over the business cycle—are resolved when time to build is added.

Measuring labor’s share of income

Recent Bureau of Labor Statistics (BLS) data show labor’s share of income at a historic low. This Policy Discussion Paper explores the BLS calculations with an eye to understanding the factors leading to the recent fall in labor’s share. While data limitations prohibit replication of the BLS series, alternative measures of labor’s share of income, based on either the nonfinancial corporate business sector or the macroeconomy more generally, are near their historic averages, quite unlike the BLS series.

Unemployment insurance and labor-market activity in Canada

Abstract In 1972, the Canadian Federal government implemented a wide-ranging set of reforms to the nations unemployment insurance system. The economic impact of these reforms are evaluated in the context of a dynamic general equilibrium model of labor-market search. A calibrated version of the model estimates that the 1972 reforms had only a modest impact on unemployment, but led to a significant increase in the rate of labor-market turnover, particularly on flows into and out of the labor force. The model also estimates that on net, the reforms likely contributed to an increase in social welfare by reducing the level of idiosyncratic income risk.

Shirking, Unemployment and Aggregate Fluctuations

Empirically, real wages exhibit relatively little cyclical variation and a weak cyclical pattern. Early real business cycle (RBC) models predict, to the contrary, large, procyclical real wage movements. Incorporating efficiency wages into a RBC environment would seem promising since one prediction from the efficiency wage literature is real wage rigidity. This paper evaluates a common microfoundation for efficiency wages, the shirking model, with respect to its predictions for real wages within a RBC-style model. Simulations of the model reveal that it can generate dampened but still strongly procyclical real wage behavior. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

US Labour Market Policy and the Canada-US Unemployment Rate Gap

In this paper, we investigate the extent to which changes in US labour market policy in the 1980s may have contributed to the emergence of an unemployment rate gap between Canada and the United States. In that decade, unemployment insurance benefits became taxable, income tax rates fell substantially, and various administrative changes were made that effectively tightened unemployment insurance eligibility requirements. These policy changes are evaluated in the context of a computable equilibrium model of the labour market. Our estimates suggest that all of these reforms together can account for no more than a 0.4 percentage point decline in the US natural rate of unemployment; a combined effect which accounts for 20 percent of the unemployment rate gap.

Nominal Rigidities, Monetary Policy and Pigou Cycles

Capturing the boom phase of Pigou cycles and resolving the comovement problem requires positive sectoral comovement. This paper addresses these observations using a two sector New Keynesian model. Price rigidities dampen movements in the relative price of durables following a monetary policy shock. Durables and nondurables are estimated to be complements in utility, allowing for a resolution of the comovement problem for modest degrees of price rigidity. Nominal rigidities also make firms forward-looking in their pricing behaviour which leads to relative price dynamics that generate positive sectoral comovement in the boom phase of a Pigou cycle.

A Tale of Tax Policies in Open Economies

Recent financial crises in Europe as well as the periodic battles in the U.S. over the debt ceiling point to the importance of fiscal discipline among developed countries. This paper develops an open economy model, calibrated to the U.S. and a subset of the EMU, to evaluate the impact of various permanent tax changes. The first set of experiments considers a targeted one percentage point reduction in the government deficit-to-GDP ratio through raising one of : the consumption tax, the labor income tax, or the capital income tax. In terms of welfare, the consumption tax is found to be the least costly of the tax increases. A second set of experiments looks at deficit-neutral tax changes : partially replacing the capital income tax with either a higher labor income tax or higher consumption tax ; and partially replacing the labor income tax with an increased consumption tax. Reducing reliance on capital income taxation is welfare-enhancing, although it leads to short term losses. Reducing labor income taxation improves international competitiveness and is welfare-improving.

Calibration and simulation of DSGE models

Many interesting macroeconomic models are either sufficiently complex that they must be solved computationally, or the questions being asked are inherently quantitative and so they should be solved computationally. The first group includes almost any empirically relevant version of the neoclassical growth model. The second group includes such basic questions as business cycle fluctuations: How well does the the neoclassical growth model do in producing variation in macroaggregates (like output, consumption, investment and hours worked) that “look like” those seen in the data. These are quantitative questions for which qualitative answers are insufficient. Calibration is an effective tool for imposing discipline on the choice of parameter values that arise in such models, taking what would otherwise be a numerical example into the realm of an empirically relevant exercise with parameters tightly pinned ∗We received helpful comments from Stephane Auray and David Fuller. The research assistance of Saeed Zaman is gratefully acknowledged. Gomme received financial support from Fonds de Recherche Societe et Culture Quebec. Except in very special cases, the neoclassical growth model does not allow for closed-form solutions (that is, ones that can be worked out by hand). Perhaps the best known of these is when utility is logarithmic in consumption, separable between consumption and hours worked, the production function is Cobb-Douglas, and depreciation is 100%. These restrictions are very special, and in the case of depreciation, clearly at odds with the data.