Macroeconomics must take radical uncertainty into account, if it aims at contributing to the solution of serious real-world problems such as climate change. Allowing for radical uncertainty must happen at two levels: the level of modeling and the level of the scientifi c discipline. I argue that the complexity approach which sees the economy as a complex adaptive system is better suited to deal with radical uncertainty than the mainstream DSGE approach. I review a number of agent-based models that are promising starting points to incorporate radical uncertainty into macroeconomics. Discussing the examples of the fi nancial crisis and climate change, I establish why methodological monism is dangerous and why macroeconomics needs more pluralism and openness towards other scientifi c approaches. Radical uncertainty and the complexity approach have important implications for macroeconomic policy and the advice that economists can give to policy makers. Under radical uncertainty it does not make sense to look for optimal policies.
{"title":"The Macroeconomics of Radical Uncertainty","authors":"Michael W. M. Roos","doi":"10.2139/ssrn.2721683","DOIUrl":"https://doi.org/10.2139/ssrn.2721683","url":null,"abstract":"Macroeconomics must take radical uncertainty into account, if it aims at contributing to the solution of serious real-world problems such as climate change. Allowing for radical uncertainty must happen at two levels: the level of modeling and the level of the scientifi c discipline. I argue that the complexity approach which sees the economy as a complex adaptive system is better suited to deal with radical uncertainty than the mainstream DSGE approach. I review a number of agent-based models that are promising starting points to incorporate radical uncertainty into macroeconomics. Discussing the examples of the fi nancial crisis and climate change, I establish why methodological monism is dangerous and why macroeconomics needs more pluralism and openness towards other scientifi c approaches. Radical uncertainty and the complexity approach have important implications for macroeconomic policy and the advice that economists can give to policy makers. Under radical uncertainty it does not make sense to look for optimal policies.","PeriodicalId":11754,"journal":{"name":"ERN: Other Macroeconomics: Aggregative Models (Topic)","volume":"106 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2015-11-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77893696","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper reexamines the efficiency of participation with heterogeneous workers in a search-matching model with bargained wages and free entry. Assuming that firms hire their best applicants, we state that participation is insufficient whatever workers' bargaining strengths. The reason for this is that, when holding a job, the marginal participant should receive the entire output. As a consequence, introducing a (small) minimum wage raises participation, job creation, and employment. Therefore the aggregate income of the economy is enhanced.
{"title":"Participation, Recruitment Selection, and the Minimum Wage","authors":"Frédéric Gavrel","doi":"10.1111/sjoe.12106","DOIUrl":"https://doi.org/10.1111/sjoe.12106","url":null,"abstract":"This paper reexamines the efficiency of participation with heterogeneous workers in a search-matching model with bargained wages and free entry. Assuming that firms hire their best applicants, we state that participation is insufficient whatever workers' bargaining strengths. The reason for this is that, when holding a job, the marginal participant should receive the entire output. As a consequence, introducing a (small) minimum wage raises participation, job creation, and employment. Therefore the aggregate income of the economy is enhanced.","PeriodicalId":11754,"journal":{"name":"ERN: Other Macroeconomics: Aggregative Models (Topic)","volume":"130 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2015-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77204590","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This note develops simple conditions from which to determine the most concise VARMA representation of a given DSGE model. It is proven analytically that the Smets and Wouters (2007) model has exact VARMA(3,2) representation. In this model, the largest possible subset of structural parameters which is locally identifiable from the entire likelihood is also so merely from the subset of identifiable VARMA parameters.
{"title":"VARMA Representation of DSGE Models","authors":"Stephen D. Morris","doi":"10.2139/ssrn.2657799","DOIUrl":"https://doi.org/10.2139/ssrn.2657799","url":null,"abstract":"This note develops simple conditions from which to determine the most concise VARMA representation of a given DSGE model. It is proven analytically that the Smets and Wouters (2007) model has exact VARMA(3,2) representation. In this model, the largest possible subset of structural parameters which is locally identifiable from the entire likelihood is also so merely from the subset of identifiable VARMA parameters.","PeriodicalId":11754,"journal":{"name":"ERN: Other Macroeconomics: Aggregative Models (Topic)","volume":"12 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2015-09-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78242279","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Extended Abstract: Driving behavior plays a central role in instigating traffic accidents. Hence, affecting the driving behavior of individuals remains a top priority for policy makers around the globe. Standard economic and deterrence theory predicts that rational drivers will respond to policy instruments (or reforms) that increase the expected cost of committing traffic violations (see Becker 1968; Polinksy and Shavell 1979). Following this justification, both monetary and non-monetary penalties are commonly used as key instruments to ensure public road safety. The most common monetary instruments involve traffic tickets (fines), whereas driving license revocation based on point recording is a recently emerging non-monetary instrument for safe driving. Many developed countries now use a point recording system for drivers violating traffic rules. In some countries, this point recording scheme is integrated with insurance premiums (see Dionne et al. 2013). Thus, the point recording scheme serves as incentive for safe driving by increasing the expected pecuniary cost in terms of forgone income associated with loss of driving privilege or through indirect costs on insurance premiums and license redemption. Although the implementation of the point recording system varies across countries, it is common that accumulating demerit points above some threshold in some specified period leads to revocation of the driving license. Therefore, the point recording scheme serves a dual purpose of incentivizing car users to drive carefully and incapacitating reckless drivers (see Bourgeon and Picard 2007). Denmark introduced the demerit point system (DPS) in September 2005. The point recording scheme in Denmark applies to different types of traffic violations and three demerit points in three years lead to conditional suspension of the driving license. While policy instruments such as fines and the point recording scheme have long been used, little is known about the effect of these instruments on inducing safe driving and improving public road safety. This is mainly because most of these instruments are endogenously introduced, a problem that saddles evaluation techniques with simultaneity and reverse causality problems. That is, areas with higher records of traffic violations (or accidents) are subject to higher levels of traffic enforcement. In the absence of longitudinal data, this problem can lead to misleading inferences on the effect of traffic (police) enforcement on driving behavior and public road safety. A few recent studies, including those of Bourgeon and Picard (2007) and Dionne et al. (2011), provide theoretical foundations on the efficacy of the point recording scheme. Bourgeon and Picard (2007) present a theoretical model that demonstrates the effectiveness of the point recording scheme in different scenarios. Dionne et al. (2011) extend Bourgeon and Picard’s (2007) model by linking the point recording scheme to insurance pricing, and provide so
驾驶行为在引发交通事故中起着核心作用。因此，影响个人的驾驶行为仍然是全球决策者的首要任务。标准的经济和威慑理论预测，理性的司机会对增加交通违规预期成本的政策工具(或改革)做出反应(见Becker 1968;Polinksy and Shavell 1979)。根据这一理由，货币和非货币处罚通常被用作确保公共道路安全的关键手段。最常见的货币手段包括交通罚单(罚款)，而基于积分记录的吊销驾驶执照是最近出现的一种安全驾驶的非货币手段。许多发达国家现在对违反交通规则的司机使用记分系统。在一些国家，这一点位记录方案与保险费相结合(见Dionne et al. 2013)。因此，积分记录制度通过增加与失去驾驶特权相关的收入的预期金钱成本或通过保险费和执照赎回的间接成本来激励安全驾驶。虽然各国的记分制度不尽相同，但在一定时间内积分数超过某一阈值将导致吊销驾驶执照的情况很常见。因此，积分记录方案具有双重目的，即激励汽车用户小心驾驶，并使鲁莽的司机丧失驾驶能力(见Bourgeon和Picard 2007)。丹麦在2005年9月引入了记分制度(DPS)。丹麦的记分制度适用于不同类型的交通违规行为，三年内扣三分将被有条件吊销驾驶执照。虽然长期以来一直使用罚款和记分计划等政策工具，但人们对这些工具在诱导安全驾驶和改善公共道路安全方面的作用知之甚少。这主要是因为大多数这些工具都是内源性引入的，这一问题使评估技术面临同时性和反向因果关系问题。也就是说，交通违规(或事故)记录较高的地区受到更高水平的交通执法。在缺乏纵向数据的情况下，这个问题可能导致对交通(警察)执法对驾驶行为和公共道路安全的影响的误导性推论。最近的一些研究，包括Bourgeon和Picard(2007)和Dionne等人(2011)的研究，为点记录方案的有效性提供了理论基础。Bourgeon和Picard(2007)提出了一个理论模型，证明了在不同情况下点记录方案的有效性。Dionne等人(2011)扩展了Bourgeon和Picard(2007)的模型，将点位记录方案与保险定价联系起来，并提供了公共道路安全中道德风险的一些经验证据。尽管Dionne等人(2011)采用了创新的方法，以经验检验公共道路安全中道德风险的普遍性，但他们并没有同时捕捉(或解开)未观察到的异质性和行为反应(道德风险)效应。本文使用丹麦异常丰富的纵向交通违法数据来估计基于记分的非金钱处罚对驾驶行为的影响。纵向交通违法数据使我们能够跟踪丹麦引入记分制度前后个人的驾驶行为。本研究为现有的惩罚和威慑文献增加了至少两个新颖的贡献:(a)我们使用详细的纵向数据，基于记过点估计驾驶员对非金钱处罚的行为反应，这使我们能够明确地区分不同驾驶员群体的行为反应(道德风险)和未观察到的异质性(选择)效应;(b)除了评估非金钱激励对安全驾驶的有效性外，本研究还估计了司机的巨大异质性反应，并强调了非金钱惩罚的短期和长期影响。我们的识别策略利用交通违规数据的纵向特征，并使用标准的差中差方法。我们比较了在丹麦引入DPS之前和之后，通过扣分受到非金钱惩罚的个人(治疗组)和那些只受到金钱惩罚的司机(对照组)的驾驶行为。我们利用了改革引入的一项具体规则，该规则根据30%的速度阈值对超速违规者进行两种处罚之一。
{"title":"How Effective are Non‐Monetary Instruments for Safe Driving? Panel Data Evidence on the Effect of the Demerit Point System in Denmark","authors":"K. Abay","doi":"10.1111/sjoe.12235","DOIUrl":"https://doi.org/10.1111/sjoe.12235","url":null,"abstract":"Extended Abstract: Driving behavior plays a central role in instigating traffic accidents. Hence, affecting the driving behavior of individuals remains a top priority for policy makers around the globe. Standard economic and deterrence theory predicts that rational drivers will respond to policy instruments (or reforms) that increase the expected cost of committing traffic violations (see Becker 1968; Polinksy and Shavell 1979). Following this justification, both monetary and non-monetary penalties are commonly used as key instruments to ensure public road safety. The most common monetary instruments involve traffic tickets (fines), whereas driving license revocation based on point recording is a recently emerging non-monetary instrument for safe driving. Many developed countries now use a point recording system for drivers violating traffic rules. In some countries, this point recording scheme is integrated with insurance premiums (see Dionne et al. 2013). Thus, the point recording scheme serves as incentive for safe driving by increasing the expected pecuniary cost in terms of forgone income associated with loss of driving privilege or through indirect costs on insurance premiums and license redemption. Although the implementation of the point recording system varies across countries, it is common that accumulating demerit points above some threshold in some specified period leads to revocation of the driving license. Therefore, the point recording scheme serves a dual purpose of incentivizing car users to drive carefully and incapacitating reckless drivers (see Bourgeon and Picard 2007). Denmark introduced the demerit point system (DPS) in September 2005. The point recording scheme in Denmark applies to different types of traffic violations and three demerit points in three years lead to conditional suspension of the driving license. While policy instruments such as fines and the point recording scheme have long been used, little is known about the effect of these instruments on inducing safe driving and improving public road safety. This is mainly because most of these instruments are endogenously introduced, a problem that saddles evaluation techniques with simultaneity and reverse causality problems. That is, areas with higher records of traffic violations (or accidents) are subject to higher levels of traffic enforcement. In the absence of longitudinal data, this problem can lead to misleading inferences on the effect of traffic (police) enforcement on driving behavior and public road safety. A few recent studies, including those of Bourgeon and Picard (2007) and Dionne et al. (2011), provide theoretical foundations on the efficacy of the point recording scheme. Bourgeon and Picard (2007) present a theoretical model that demonstrates the effectiveness of the point recording scheme in different scenarios. Dionne et al. (2011) extend Bourgeon and Picard’s (2007) model by linking the point recording scheme to insurance pricing, and provide so","PeriodicalId":11754,"journal":{"name":"ERN: Other Macroeconomics: Aggregative Models (Topic)","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2015-07-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74595832","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
D. Aikman, Michael T. Kiley, S. J. Lee, M. Palumbo, Missaka Warusawitharana
We provide a framework for assessing the build-up of vulnerabilities to the U.S. financial system. We collect forty-six indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging the financial crisis. We also highlight several statistical properties of our approach: most importantly, our summary measures of system-wide vulnerabilities lead the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. Thus, our framework may provide useful information for setting macroprudential policy tools such as the countercyclical capital buffer.
{"title":"Mapping Heat in the U.S. Financial System","authors":"D. Aikman, Michael T. Kiley, S. J. Lee, M. Palumbo, Missaka Warusawitharana","doi":"10.2139/ssrn.2642442","DOIUrl":"https://doi.org/10.2139/ssrn.2642442","url":null,"abstract":"We provide a framework for assessing the build-up of vulnerabilities to the U.S. financial system. We collect forty-six indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging the financial crisis. We also highlight several statistical properties of our approach: most importantly, our summary measures of system-wide vulnerabilities lead the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. Thus, our framework may provide useful information for setting macroprudential policy tools such as the countercyclical capital buffer.","PeriodicalId":11754,"journal":{"name":"ERN: Other Macroeconomics: Aggregative Models (Topic)","volume":"6 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2015-06-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79783819","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper quantifies the effect of a complete liberalization of international migration on the world GDP and its distribution across regions. We build a general equilibrium model endogenizing bilateral migration and wage disparities between and within countries. A dual strategy is developed to identify total migration costs and their legal component. Contrary to existing studies, we obtain limited efficiency gains. Accounting for incompressible moving costs strongly reduces the benefits from liberalization. When we account for endogenous productivity, congestion, heterogeneous education quality, imperfect substitution between migrants and natives, and network effects, efficiency gains reach about 4 percent of the world GDP.
{"title":"Efficiency Gains from Liberalizing Labor Mobility","authors":"F. Docquier, Joël Machado, Khalid Sekkat","doi":"10.1111/sjoe.12097","DOIUrl":"https://doi.org/10.1111/sjoe.12097","url":null,"abstract":"This paper quantifies the effect of a complete liberalization of international migration on the world GDP and its distribution across regions. We build a general equilibrium model endogenizing bilateral migration and wage disparities between and within countries. A dual strategy is developed to identify total migration costs and their legal component. Contrary to existing studies, we obtain limited efficiency gains. Accounting for incompressible moving costs strongly reduces the benefits from liberalization. When we account for endogenous productivity, congestion, heterogeneous education quality, imperfect substitution between migrants and natives, and network effects, efficiency gains reach about 4 percent of the world GDP.","PeriodicalId":11754,"journal":{"name":"ERN: Other Macroeconomics: Aggregative Models (Topic)","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2015-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89237766","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines policy measures that foster the creation of innovations with high inherent potential and that simultaneously provide the right incentives for individuals to create and expand firms that disseminate such innovations in the form of highly valued products. In so doing, we suggest an innovation policy framework based on two pillars: (i) the accumulation, investment, and upgrading of knowledge and (ii) the implementation of mechanisms that enable knowledge to be exploited such that growth and societal prosperity are encouraged. Knowledge is a necessary but far from sufficient condition for growth. To secure industrial dynamics and growth in the long term, institutions must be designed both to encourage sophisticated knowledge investments and to stimulate the creation, diffusion and productive use of knowledge in all sectors of the economy. We argue that the latter area has been overlooked in the policy discussion and that a coherent innovation policy framework must include tax policy, labor market regulation, savings channeling, competition policy, housing market regulation, and infrastructure to foster growth and future prosperity.
{"title":"An Innovation Policy Framework: Bridging the Gap between Industrial Dynamics and Growth","authors":"P. Braunerhjelm, Magnus Henrekson","doi":"10.2139/ssrn.2993108","DOIUrl":"https://doi.org/10.2139/ssrn.2993108","url":null,"abstract":"This paper examines policy measures that foster the creation of innovations with high inherent potential and that simultaneously provide the right incentives for individuals to create and expand firms that disseminate such innovations in the form of highly valued products. In so doing, we suggest an innovation policy framework based on two pillars: (i) the accumulation, investment, and upgrading of knowledge and (ii) the implementation of mechanisms that enable knowledge to be exploited such that growth and societal prosperity are encouraged. Knowledge is a necessary but far from sufficient condition for growth. To secure industrial dynamics and growth in the long term, institutions must be designed both to encourage sophisticated knowledge investments and to stimulate the creation, diffusion and productive use of knowledge in all sectors of the economy. We argue that the latter area has been overlooked in the policy discussion and that a coherent innovation policy framework must include tax policy, labor market regulation, savings channeling, competition policy, housing market regulation, and infrastructure to foster growth and future prosperity.","PeriodicalId":11754,"journal":{"name":"ERN: Other Macroeconomics: Aggregative Models (Topic)","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2015-01-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88665115","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Ursel Baumann, A. Dieppe, Alberto González Pandiella, Alpo Willman
The model presented here is an estimated medium-scale model for the United States (US) economy developed to forecast and analyse policy issues for the US. The model is specified to track the deviation of the medium- run developments from the balanced-growth-path via an estimated CES production function for the private sector, where factor augmenting technical progress is not constrained to evolve at a constant rate. The short-run deviations from the medium run are estimated based on three optimising private sector decision making units: firms, trade unions and households. We assume agents optimise under limited-information model-consistent learning, where each agent knows the parameters related to his/her optimization problem. Under this learning approach the effect of a monetary policy shock on output and inflation is more muted but persistent than under rational expectations, but both specifications are broadly comparable to other US macro models. Using the learning version, we .find stronger expansionary effects of an increase in government expenditure during periods of downturns compared to booms. JEL Classification: C51, C6, E5
{"title":"Model of the United States Economy with Learning MUSEL","authors":"Ursel Baumann, A. Dieppe, Alberto González Pandiella, Alpo Willman","doi":"10.2139/ssrn.2528429","DOIUrl":"https://doi.org/10.2139/ssrn.2528429","url":null,"abstract":"The model presented here is an estimated medium-scale model for the United States (US) economy developed to forecast and analyse policy issues for the US. The model is specified to track the deviation of the medium- run developments from the balanced-growth-path via an estimated CES production function for the private sector, where factor augmenting technical progress is not constrained to evolve at a constant rate. The short-run deviations from the medium run are estimated based on three optimising private sector decision making units: firms, trade unions and households. We assume agents optimise under limited-information model-consistent learning, where each agent knows the parameters related to his/her optimization problem. Under this learning approach the effect of a monetary policy shock on output and inflation is more muted but persistent than under rational expectations, but both specifications are broadly comparable to other US macro models. Using the learning version, we .find stronger expansionary effects of an increase in government expenditure during periods of downturns compared to booms. JEL Classification: C51, C6, E5","PeriodicalId":11754,"journal":{"name":"ERN: Other Macroeconomics: Aggregative Models (Topic)","volume":"37 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2014-11-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84781811","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a model that is a synthesis of the two-sided markets duopoly model of Armstrong (2006) with the nested vertical and horizontal di erentiation model of Gabszewicz and Wauthy (2012), which consists of a linear city with di erent consumer densities on the left and on the right side of the city. In equilibrium, the high-quality platform sells at a higher price and captures a greater market share than the low-quality platform, despite the indiff erent consumer being closer to the high-quality platform. The di fference between market shares is lower than socially optimal, because of the inter-group externality and because the high-quality platform sells at a higher price. We conclude that a perturbation that introduces a negligible di erence between the consumer density on the left and on the right side of the city may disrupt the existence of equilibrium in the model of Armstrong (2006). Finally, we show that inter-group externalities make it easier to deter an inferior-quality entrant and make it easier for a superior-quality entrant to conquer the market.
{"title":"Nesting Vertical and Horizontal Differentiation in Two‐Sided Markets","authors":"V. Ribeiro, João Correia-da-Silva, J. Resende","doi":"10.1111/boer.12084","DOIUrl":"https://doi.org/10.1111/boer.12084","url":null,"abstract":"We develop a model that is a synthesis of the two-sided markets duopoly model of Armstrong (2006) with the nested vertical and horizontal di erentiation model of Gabszewicz and Wauthy (2012), which consists of a linear city with di erent consumer densities on the left and on the right side of the city. In equilibrium, the high-quality platform sells at a higher price and captures a greater market share than the low-quality platform, despite the indiff erent consumer being closer to the high-quality platform. The di fference between market shares is lower than socially optimal, because of the inter-group externality and because the high-quality platform sells at a higher price. We conclude that a perturbation that introduces a negligible di erence between the consumer density on the left and on the right side of the city may disrupt the existence of equilibrium in the model of Armstrong (2006). Finally, we show that inter-group externalities make it easier to deter an inferior-quality entrant and make it easier for a superior-quality entrant to conquer the market.","PeriodicalId":11754,"journal":{"name":"ERN: Other Macroeconomics: Aggregative Models (Topic)","volume":"24 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2014-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81194689","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet. One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects. We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. Central bank asset purchases have the potential to affect households’ choices by changing the composition and return of their asset portfolios. We find that the effect is weak, and that its size depends on how fiscal policy is conducted. That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is weak. That is not inconsistent with the evidence that large-scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.
{"title":"The Relevance or Otherwise of the Central Bank's Balance Sheet","authors":"D. Miles, J. Schanz","doi":"10.2139/ssrn.2689732","DOIUrl":"https://doi.org/10.2139/ssrn.2689732","url":null,"abstract":"This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet. One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects. We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. Central bank asset purchases have the potential to affect households’ choices by changing the composition and return of their asset portfolios. We find that the effect is weak, and that its size depends on how fiscal policy is conducted. That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is weak. That is not inconsistent with the evidence that large-scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.","PeriodicalId":11754,"journal":{"name":"ERN: Other Macroeconomics: Aggregative Models (Topic)","volume":"20 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2014-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90218744","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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