Economic Fluctuations and Growth Research Meeting

October 21, 2011
George-Marios Angeletos, MIT, and Martin Schneider, Stanford University, Organizers

Aysegul Sahin, Joseph Song, and Giorgio Topa, Federal Reserve Bank of New York, and Giovanni L. Violante, New York University and NBER
Measuring Mismatch in the U.S. Labor Market

Sahin, Song, Topa, and Violante measure mismatch between job-seekers and vacancies in the U.S. labor market. Mismatch is defined as the distance between the observed allocation of unemployment across sectors and the optimal allocation chosen by a planner who can freely move labor between sectors. The planner's optimal allocation is dictated by a "generalized Jackman-Roper condition" where (productive and matching) efficiency-weighted vacancy-unemployment ratios are equated across sectors. The researchers develop this condition into mismatch indexes that allow them to quantify how much of the recent rise in U.S. unemployment is due to an increase in mismatch. They use two sources of cross-sectional data on vacancies, JOLTS and HWOL, together with unemployment data from the CPS. Higher mismatch across industries and occupations accounts for 0.8 to 1.4 percentage points of the recent rise in the unemployment rate, whereas geographical mismatch plays no role. They find that the role of mismatch in explaining the increase in unemployment varies considerably by education. Occupational mismatch explains a substantial fraction of the rise in unemployment (one third) for highly educated workers while it is quantitatively less important for less educated workers.

Cristina Arellano, University of Minnesota and NBER; Yan Bai, Federal Reserve Bank of Minneapolis; and Patrick Kehoe, Federal Reserve Bank of Minneapolis and NBER
Financial Markets and Fluctuations in Uncertainty

Raghuram Rajan, University of Chicago and NBER, and Rodney Ramcharan, Federal Reserve Board
The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the 1920s

Does credit availability exacerbate asset price inflation, especially if there are perceived changes in fundamentals? Rajan and Ramcharan address this question by examining the rise (and fall) of farm land prices in the United States in the early twentieth century, attempting to identify the separate effects of changes in fundamentals and changes in the availability of credit on land prices. They find that credit availability likely had a direct effect on inflating land prices. Credit availability may have also amplified the relationship between the perceived improvement in fundamentals and land prices. When fundamentals turned down, however, areas with higher ex ante credit availability suffered a greater fall in land prices, and experienced higher bank failure rates.

Per Krusell, Stockholm University and NBER; Toshihiko Mukoyama, University of Virginia; Richard Rogerson, Princeton University and NBER; and Aysegul Sahin, Federal Reserve Bank of New York
Is Labor Supply Important for Business Cycles?

Krusell, Mukoyama, Rogerson, and Sahin build a general equilibrium model that features idiosyncratic shocks, search frictions and an operative labor supply choice along the extensive margin. They use this model to study the implications of several aggregate shocks for the behavior of labor market aggregates and flows, and in particular the role of labor supply. While shocks to only job finding and job loss rates can account for unemployment fluctuations, the presence of labor supply responses implies that they account for only a small fraction of employment fluctuations and have counterfactual predictions for participation. A model that features shocks to the return to market activity in addition to the job finding and job loss rates accounts for fluctuations in employment and unemployment as well as the main patterns found in the labor market flows. Employment fluctuations in this model are driven by labor supply responses.

Eric R. Sims, University of Notre Dame and NBER
Permanent and Transitory Technology Shocks and the Behavior of Hours: A Challenge for DSGE Models

Sims uses a quarterly version of the Basu, Fernald, and Kimball (2006) utilization-adjusted TFP series and extends the structural VAR analysis of Fisher (2006) to identify three different kinds of technology shocks: permanent neutral, transitory neutral, and investment specific. Positive transitory neutral shocks are associated with an expansion in hours worked; permanent neutral shocks lead to a reduction in hours. There is significant autocorrelation in growth rates conditional on a permanent neutral shock, so that much of the eventual rise in productivity is anticipated well in advance. Investment specific shocks lead to a significant expansion in hours worked. Overall, the three technology shocks combine to explain about 50 percent of the cyclical variation in output and hours. The paper asks how well standard medium scale DSGE models -- with price and wage stickiness and a number of real frictions -- can account for the conditional responses to these technology shocks. Overall, these models fit the responses better with fewer frictions than is typically found in the literature. In particular, the best-fitting parameter configuration features very low investment adjustment costs, no price or wage indexation, and comparatively little price and wage stickiness.

Allen Head, Queen's University; Lucy Qian Liu, International Monetary Fund; Guido Menzio, University of Pennsylvania and NBER; and Randall Wright, University of Wisconsin, Madison and NBER
Sticky Prices: A New Monetarist Perspective

Why do some sellers set nominal prices that apparently do not respond to changes in the aggregate price level? In many models, prices are sticky by assumption; here it is a result. Head, Liu, Menzio, and Wright use search theory, with two consequences: prices are set in dollars, since money is the medium of exchange; and equilibrium implies a nondegenerate price distribution. When the money supply increases, some sellers may keep prices constant, earning less per unit but making it up on volume, so profit stays constant. The calibrated model matches price-change data well. But, in contrast with other sticky-price models, money is neutral.

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