Riccardo DiCecio

Entry costs, industry structure, and cross-country income and TFP differences

Entry costs vary dramatically across countries. To assess their impact on cross-country differences in output and TFP, we construct a model with endogenous entry and operation decisions by firms. We calibrate the model to match the U.S. distribution of employment and firms by size. Higher entry costs lead to greater misallocation of productive factors and lower TFP and output. In the model, countries in the lowest decile of the entry costs distribution have 1.32 to 1.45 times higher TFP and 1.52 to 1.75 times higher output per worker than countries in the highest decile. As in the data, higher entry costs are associated with lower entry rates and business density.

Sticky wages and sectoral labor comovement

A defining feature of business cycles is the comovement of inputs at the sectoral level with aggregate activity. Standard models cannot account for this phenomenon. This paper develops and estimates a two-sector dynamic general equilibrium model that can account for this key regularity. My model incorporates three shocks to the economy: monetary policy shocks, neutral technology shocks, and embodied technology shocks in the capital-producing sector. The estimated model is able to account for the response of the U.S. economy to all three shocks. Using this model, I argue that the key friction underlying sectoral comovement is rigidity in nominal wages.

An Estimated DSGE Model for the United Kingdom

We estimate the dynamic stochastic general equilibrium model of Christiano, Eichenbaum, and Evans (2005) on United Kingdom data. Our estimates suggest that price stickiness is a more important source of nominal rigidity in the U.K. than wage stickiness. Our estimates of parameters governing investment behavior are only well behaved when post-1979 observations are included, which reflects government policies until the late 1970s that obstructed the influence of market forces on investment.

A Flexible Finite-Horizon Alternative to Long-Run Restrictions with an Application to Technology Shocks

Recent studies using long-run restrictions question the validity of the technology-driven real business cycle hypothesis. We propose an alternative identification that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long but finite horizon. In small-sample Monte Carlo experiments, our identification outperforms standard long-run restrictions by significantly reducing the bias in the short-run impulse responses and raising their estimation precision. Unlike its long-run restriction counterpart, when our Max Share identification technique is applied to U.S. data, it delivers the robust result that hours worked responds negatively to positive technology shocks.

Comovement: It's Not a Puzzle

A defining feature of business cycles is the comovement of inputs at the sectoral level with aggregate activity. Standard models cannot account for this phenomenon. This paper develops and estimates a two-sector dynamic general equilibrium model that can account for this key regularity. My model incorporates three shocks to the economy: monetary policy shocks, neutral technology shocks, and embodied technology shocks in the capital-producing sector. The estimated model is able to account for the response of the US economy to all three shocks. Using this model, I argue that the key friction underlying sectoral comovement is rigidity in nominal wages.

Income Convergence in the United States: A Tale of Migration and Urbanization

We use nonparametric distribution dynamics techniques to reassess the convergence of per capita personal income (PCPI) across U.S. states and across metropolitan (metro) and nonmetropolitan (nonmetro) portions of states for the period 1969–2005. The long-run distribution of PCPI is bimodal for both states and metro/nonmetro portions. Furthermore, the high-income mode of the distribution across metro and nonmetro portions corresponds to the single mode of the long-run distribution across metro portions only. These results (polarization or club-convergence) are reversed when weighting by population. The long-run distributions across people are consistent with convergence. Migration and urbanization are the forces behind convergence.

Aggregate shocks and labor market fluctuations

This paper evaluates the dynamic response of worker flows, job flows, and vacancies to aggregate shocks in a structural vector autoregression. We identify demand, monetary, and technology shocks by imposing sign restrictions on the responses of output, inflation, the interest rate, and the relative price of investment. No restrictions are placed on the responses of job and worker flows variables. We find that both investment-specific and neutral technology shocks generate responses to job and worker flows variables that are qualitatively similar to those induced by monetary and demand shocks. However, technology shocks have more persistent effects. The job finding rate largely drives the response of unemployment, though the separation rate explains up to one third. For job flows, the destruction margin is more important than the creation margin in driving employment growth. Measuring reallocation from job flows, we find that monetary and demand shocks do not have significant effects on cumulative job reallocation, whereas expansionary technology shocks have mildly negative effects. We also estimate shock-specific matching functions. Allowing for a break in 1984:Q1 shows considerable subsample differences in matching elasticities and relative shock-specific efficiency.

Supply Shocks, Demand Shocks, and Labor Market Fluctuations

We use structural vector autoregressions to analyze the responses of worker flows, job flows, vacancies, and hours to shocks. We identify demand and supply shocks by restricting the short-run responses of output and the price level. On the demand side we disentangle a monetary and non-monetary shock by restricting the response of the interest rate. The responses of labor market variables are similar across shocks: expansionary shocks increase job creation, the hiring rate, vacancies, and hours. They decrease job destruction and the separation rate. Supply shocks have more persistent effects than demand shocks. Demand and supply shocks are equally important in driving business cycle fluctuations of labor market variables. Our findings for demand shocks are robust to alternative identification schemes involving the response of labor productivity at different horizons and an alternative specification of the VAR. However, supply shocks identified by restricting productivity generate a higher fraction of responses inconsistent with standard search and matching models.

The Great Inflation in the United States and the United Kingdom: Reconciling Policy Decisions and Data Outcomes

We argue that the Great Inflation experienced by both the United Kingdom and the United States in the 1970s has an explanation valid for both countries. The explanation does not appeal to common shocks or to exchange rate linkages, but to the common doctrine underlying the systematic monetary policy choices in each country. The nonmonetary approach to inflation control that was already influential in the United Kingdom came to be adopted by the United States during the 1970s. We document our position by examining official policymaking doctrine in the United Kingdom and the United States in the 1970s, and by considering results from a structural macroeconomic model estimated using U.K. data.

Institutional Causes of Macroeconomic Volatility

In this paper we investigate the relation between the quality of institutions and macroeconomic volatility. Using instrumental variable regressions, we show that higher barriers to entry lead to higher volatility. In particular, a one standard deviation increase in entry costs increases the standard deviation of output growth by roughly 40% of its average value in our sample. To the contrary, property rights protection has no statistically significant effect on volatility.