Abstract: Standard business cycle models cannot account for the magnitude and persistence of the cyclical fluctuations in the labor share of output in the United States. A model with search frictions in the labor market and a technology choice can resolve this shortcoming. The technology choice allows for general patterns of capital- and labor-augmenting technical change in the short run while being consistent with Hicks-neutral technical change in the long run when adjustment costs vanish. Production is CES in the short run and Cobb-Douglas in the long run, consistent with a balanced growth path under standard restrictions on preferences. We calibrate the model to U.S. data and quantify that the technology choice with adjustment costs enhances propagation relative to the model with fixed Cobb-Douglas technology. The model also reproduces the labor share overshooting property in the data.

Abstract: This letter presents new empirical evidence on the economic impact of tariffs on the US economy using structural vector autoregressions (SVARs). A persistent increase in tariffs on imports from the rest of the world reduces real GDP growth, permanently lowering real GDP relative to the trend before the tariff increase. The magnitudes are broadly consistent with available estimates of the negative impact of increases in average personal income tax rates. The contraction in economic activity is associated with a decrease in stock market capitalization. The federal deficit in percent of GDP worsens. Inflation increases initially, but then falls below average for a few years, implying a negligible effect on the price level. 

Abstract: This paper develops a novel theory of domestic outsourcing grounded in search frictions and worker-firm heterogeneity. The theory is motivated by new evidence of white-collar domestic outsourcing in the U.S., notably an outsourcing wage premium driven by worker selection on unobserved ability. In the model, workers, firms, and labor intermediaries participate in a frictional labor market. These intermediaries serve as a matching market for workers’ abilities and firms’ productivities. The model posits a threshold in workers’ ability above which they select into outsourcing roles. A calibrated version implies that outsourcing raises output in the white-collar labor market by 5.25 percent.

Abstract: Per capita hours worked in the United States have shown virtually no secular trend in the postwar period. This absence of trend masks two offsetting forces: hours per worker steadily decrease throughout the period, whereas the employment-to-population ratio increases. Using data and quantitative theory, we attribute these patterns to a slowdown in the rate of technical progress. 

Abstract: We gauge the impact of tariffs on the US economy using tariff data from the World Integrated Trade Solution (WITS) and structural vector autoregressions (SVARs). We find that when the United States increases tariffs on imports from the rest of the world, other countries respond by increasing tariffs on US exports. As a result, real GDP growth slows considerably, the federal funds rate declines, and inflation increases, while mortgage financing conditions tighten. The housing outlook worsens in the short term, with the greatest slowdown occurring in the early stages of residential investment. Our estimates imply that housing permits and housing starts decline by approximately 250,000 and 189,000 units, respectively, relative to what would have occurred absent the tariff increase. The federal deficit-to-GDP ratio worsens, and economic policy uncertainty rises sharply, though both gradually revert toward baseline in subsequent years. 

Abstract: Recessions shift the pool of unemployed toward the more skilled. We show that the participation margin demonstrates the same skill gradient, i.e., in downturns the nonemployed with higher predicted wages hold on to the labor force proportionally more than those with lower predicted wages. Overall, the participation margin contributes to roughly a quarter and a third of the unemployment volatility of the high-skilled and low-skilled workers, respectively. A representative-household RBC model with search-and-matching frictions, heterogeneous worker types, and a participation choice can account for these differential cyclical sensitivities. Two forces drive the skill gradient in the participation margin: low-skilled workers are more discouraged by falling job prospects, and job loss raises attachment more among high-skilled workers.

Abstract: High rates of labor turnover early in jobs point to substantial information frictions about underlying match quality in the labor market. How do these information frictions interact with skill accumulation and search frictions to shape aggregate outcomes like employment, lifecycle wage growth, inequality, and welfare? To answer this question, we build and calibrate a lifecycle equilibrium model with uncertain match quality, frictional search, and skill accumulation. Match quality uncertainty is partially resolved in a screening stage before job matches are formed and further revealed over the course of the employment relationship. In the aggregate, the screening stage is far more consequential than the learning stage. Eliminating information frictions at the screening stage yields welfare and output gains of 10.2% and 18.3%, while eliminating them at the learning stage yields only 3.3% and 2.2%, respectively.

Abstract: We examine the interaction between unemployment benefits and subsistence self-employment in developing countries, where limited opportunities in formal labor markets push low-productivity individuals into self-employment. We develop a model that incorporates occupational choices, search frictions, and borrowing constraints, allowing individuals to choose between wage work, own-account work, and entrepreneurship. Our model highlights how low-wealth, low-ability individuals select into own-account work due to their inability to sustain the search for wage employment in a frictional labor market. Calibrating the model to Mexico, we explore the effects of introducing U.S.-style unemployment benefits. Our results indicate that if own-account workers can conceal their employment status, unemployment benefits lead to an excessive increase in own-account work and a reduction in aggregate output. However, when employment status is effectively monitored, unemployment benefits can reduce subsistence self-employment by 15 percentage points and generate significant output gains of nearly 2%.

Abstract: How much capital should the central bank of a country hold? There is no consensus on this matter. We review the balance sheets of 45 central banks from around the world to describe actual practices. The principal findings are: (a) the average capital-asset ratio of central banks globally (net of revaluation capital which is purely an accounting entry) is 6.56 percent while the number in emerging economies is 6.96 percent; and (b) our Value-at-Risk estimates for the RBI excluding exchange rate risk indicate that the current level of the core capital of the RBI as mandated by the Jalan committee may be too low. We also discuss the policy moral hazards associated with mandating RBI equity payouts to the government.