Vivien Lewis

Employment, Hours and Optimal Monetary Policy

We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex wage curve’ linking wages to hours. Since the steady-state real marginal wage is low, wages respond little to hours. As a result, firms overuse the hours margin at the expense of hiring, which makes hours too volatile. The Ramsey planner uses inflation as a instrument to dampen inefficient hours fluctuations.

Product Diversity, Demand Structures, And Optimal Taxation

This paper studies optimal taxation in a general equilibrium model with endogenous entry. We compare the constant elasticity of substitution (CES) model to three alternative demand structures: oligopolistic competition in prices, oligopolistic competition in quantities, and translog preferences. Our economy is characterized by two distortions: a labor distortion due to the misalignment of markups on goods and leisure, and an entry distortion due to the misalignment of the consumer surplus effect and the profit destruction effect of entry. The two distortions interact in determining the wedge between the market-driven and optimal level of product diversity. We show how optimal labor and entry taxes depend upon the prevailing demand structure, the nature and size of entry costs, and the degree of substitutability between goods.

Fiscal Policy and Business Formation in Open Economies

According to empirical evidence, expansionary government spending policies increase consumption and the number of active firms in an economy and have large positive international spillover effects. Using a two-country sticky-price model with a variable number of producers, we analyze movements in output, consumption, extensive-margin investment and foreign output in response to government spending expansions. Our baseline results show that, first, there is divergence between consumption and firm entry; and second, spillovers are generally small. A large share of imports in government spending or a high trade elasticity can generate large spillovers in the model, but do not induce consumption-investment comovement. We propose useful government spending as a device to induce both large spillovers and positive consumption-investment comovement.

Government Spending, Entry, And The Consumption Crowding‐In Puzzle

This article documents empirically that net firm entry robustly rises after a U.S. government spending expansion. We use this new finding to test the empirical validity of various model features that have been proposed to generate consumption crowding‐in after positive expenditure shocks. Endogenous‐entry models typically fail to generate the observed joint increase in consumption and entry. Model features that dampen the wealth effect, such as rule‐of‐thumb households or complementarity between labor and consumption in preferences, tend to reduce entry. We show that utility‐ or productivity‐enhancing public spending can reconcile the model with our documented fact and performs well empirically.

Interest Rate Rules Under Financial Dominance

In our dynamic stochastic general equilibrium model, capital-constrained entrepreneurs finance risky projects by borrowing from banks. Banks make loans using equity and deposits. Because financial contracts are non-state-contingent, bank balance sheets are exposed to entrepreneurial defaults. Macroprudential policy imposes a positive response of the bank capital ratio to lending. Our main result is that the Taylor Principle is violated when this response is too weak. Then macro-prudential policy is ineffective in stabilising debt and monetary policy is subject to ‘financial dominance’. Under a constant bank capital requirement, a strong reaction of the interest rate to inflation destabilises the financial sector.

The Financial Market Effects of the ECB's Balance Sheet Policies

The European Central Bank’s balance sheet policies have been criticized as ineffective or even harmful to the economy. This paper aims at gauging the effects on financial markets, the banking sector and lending to non-financial firms. Using a structural vector autoregression analysis, we find that balance sheet innovations help to decrease financial stress, stock market risk and default rates initially. However, these beneficial effects on financial markets are overturned in the medium run. Credit expands significantly and persistently. While output rises immediately, the positive effect is short-lived and economically small. Prices do not respond significantly to the shock.