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Exogenous shifts in international food commodity prices, which are identified using an SVAR model with global harvest shocks as an external instrument, explain almost 30% of euro-area inflation volatility over the medium term and contributed significantly to the twin puzzle of missing (dis)inflation in the era after the Great Recession. International food price shocks have an impact on food retail prices through the food production chain, but also trigger indirect inflationary effects via a depreciation of the euro and, most important, rising wages. Finally, due to asymmetric wage responses, the inflationary effects are very different across member states.

This paper develops a random-matching model of a frictional labor market with firm and worker dynamics. Multi-worker firms choose whether to shrink or expand their employment in response to shocks to their decreasing returns to scale technology. Growing entails posting costly vacancies, which are filled either by the unemployed or by employees poached from other firms. Firms also choose when to enter and exit the market. Tractability is obtained by proving that, under a parsimonious set of assumptions, all workers��� and firm decisions are characterized by their joint marginal surplus, which in turn only depends on the firm���s productivity and size. As frictions vanish, the model converges to a standard competitive model of firm dynamics which allows a quantification of the misallocation cost of labor market frictions. An estimated version of the model yields cross-sectional patterns of net poaching by firm characteristics (e.g., age and size) that are in line with the micro data. The model also generates a drop in job-to-job transitions as firm entry declines, offering an interpretation to U.S. labor market dynamics around the Great Recession. All these outcomes are a reflection of the job ladder in marginal surplus that emerges in equilibrium.

With the closure of the border with then-Macedonia in early 2016, it was foreseeable that Greece would become the “last station” for a large number of refugees. Flanked by the agreement between Turkey and the European Union of March 2016, Greece underwent a profound transformation from a transit country to a recipient country. Through a new regulation, the Emergency Support Instrument, initially activated by the European Commission 2016–2019, international humanitarian aid operations were supported for the first time in the EU. The article analyzes the resulting frictions on the basis of empirical field research and a broad literature review. While frictions similar to those in other non-European humanitarian operations exist, specific peculiarities due to the operation taking place in an austerity-ridden member state of the EU must also be noted.

Il saggio si concentra sull’analisi dei conflitti locali connessi alla presenza di un impianto di raffinazione di petrolio a Milazzo, nella Sicilia nord-occidentale. A partire da un’esperienza etnografica condotta a stretto contatto con alcuni lavoratori della raffineria e con alcuni militanti dei movimenti per la giustizia ambientale, il contributo evidenzia come le valutazioni pubbliche sull’intreccio tra presenza industriale, ambiente e salute che si definiscono all’interno di conflittuali “campi di causazione” producano vere e proprie frizioni nei nuclei famigliari dei lavoratori. Da questa prospettiva le famiglie e le stesse biografie dei lavoratori rappresentano spazi di attrito utili per comprendere il più complesso sistema che connette le istanze globali del rischio ambientale con le specificità locali e con le esperienze delle persone che vivono e lavorano in aree industriali. The essay focuses on local conflicts related to the presence of an oil refining plant in Milazzo, north-western Sicily. On the basis of an ethnographic research led in close contact with some refinery workers and some members of environmental justice movements, this paper highlights how the public assessments on the interweaving of industrial presence, environment and health, defined in conflicting “causation fields” produce real frictions inside the workers families. From this perspective, the families and the biographies of the workers themselves are spaces of friction useful for the understanding of the more complex system that connects global instances of environmental risk to local specificities and the experiences of the people who live and work in industrial areas.

© 2018 Elsevier B.V. The behavioural model of De Grauwe and Macchiarelli (2015) is extended to include financial frictions on the (aggregate) supply side. The result is a tight and sustained feedback loop between animal spirits on one hand, and supply of credit, capital purchase and production on the other. During phases of optimism, credit is abundant, access to production capital is easy, the cash-in-advance constraint is lax, risks are undervalued, and production is booming. Upon reversal in market sentiment, the contraction is quick and deep. Moreover, the model is capable of replicating the stylized fact of a long and sustained simultaneous growth in credit, production and asset prices observed in the US since mid1990's. Lastly, the behavioural model does a decent job in matching US data including multiple supply-side relations including capital-firm credit and inflation-interest rate. ispartof: JOURNAL OF ECONOMIC DYNAMICS & CONTROL vol:91 pages:206-236 status: published

We show how frictions and continuous transfers jointly affect equilibria in a model of matching in trading networks. Our model incorporates distortionary frictions such as transaction taxes, bargaining costs, and incomplete markets. When contracts are fully substitutable for firms, competitive equilibria exist and coincide with outcomes that satisfy a cooperative stability property called trail stability. In the presence of frictions, competitive equilibria might be neither stable nor (constrained) Pareto-efficient. In the absence of frictions, on the other hand, competitive equilibria are stable and in the core, even if utility is imperfectly transferable.

A classic result by Merton (1973) is that, except just before expiration or dividend payments, one should never exercise a call option and never convert a convertible bond. We show theoretically that this result is overturned when investors face frictions. Early option exercise can be optimal when it reduces short-sale costs, transaction costs, or funding costs. We provide consistent empirical evidence, documenting billions of dollars of early exercise for options and convertible bonds using unique data on actual exercise decisions and frictions. Our model can explain as much as 98% of early exercises by market makers and 67% by customers.

The canonical model of Allingham and Sandmo (1972) predicts that firms evade taxes by optimally trading off between the costs and benefits of evasion. However, there is no direct evidence that firms react to audits in this way. We conducted a large-scale field experiment in collaboration with Uruguay’s tax authority to address this question. We sent letters to 20,440 small- and medium-sized firms that collectively paid more than 200 million dollars in taxes per year. Our letters provided exogenous yet nondeceptive signals about key inputs for their evasion decisions, such as audit probabilities and penalty rates. We measured the effect of these signals on their subsequent perceptions about the auditing process, based on survey data, as well as on the actual taxes paid, based on administrative data. We find that providing information about audits had a significant effect on tax compliance but in a manner that was inconsistent with Allingham and Sandmo (1972). Our findings are consistent with an alternative model, risk-as-feelings, in which messages about audits generate fear and induce probability neglect. According to this model, audits may deter tax evasion in the same way that scarecrows frighten off birds., Centro de Estudios Distributivos, Laborales y Sociales

This paper investigates the properties of distortions that manifest themselves as wedges in the equilibrium conditions of the neoclassical growth model across a sample of 22 OECD countries for the 1970–2011 period. The quantitative relevance of each wedge and its robustness in generating fluctuations in macroeconomic aggregates is assessed. The efficiency wedge proves to be determinant in enabling models to replicate movements in output and investment, while the labor wedge is important to predict fluctuations in hours worked. Modeling distortions to the savings decision holds little quantitative or qualitative relevance. Also, investment seems to be the hardest aggregate to replicate, as prediction errors concerning output and hours worked are typically one order of magnitude smaller. These conclusions are statistically significant across the countries in the sample and are not limited to output drops. Finally, the geographical distance between countries and their degree of openness to trade are shown to contain information with regard to the wedges, stressing the importance of international mechanisms of transmission between distortions to the equilibrium conditions of the neoclassical growth model.

Lorsque l’on s’intéresse à la question du « rapport au monde » d’un pays comme l’Italie, le cadre européen et bilatéral fait l’objet de peu d’analyses. L’intégration européenne représente un modèle au sein duquel les enjeux bilatéraux ne disparaissent pas, bien au contraire. La relation entre la France et l’Italie est le fruit d’une histoire longue et particulière. Depuis les années 1980, les sommets bilatéraux annuels sont censés marquer le rapprochement entre Paris et Rome. Leur contenu, parfois maigre, indique la difficulté à mettre en place un rapport politique privilégié. Les sommets bilatéraux représentent une étape dans l’institutionnalisation de la relation bilatérale, un cadre formel dont l’utilité en termes de recherches d’alliances dans le contexte du jeu européen est certainement supérieure à la pure dimension bilatérale. When considering the “relationship to the world” of a country such as Italy, European and bilateral frameworks are often not taken into account. Yet European integration represents a model in which bilateral interaction does not disappear; on the contrary. The relationship between France and Italy is the product of a long and peculiar history. Since the 1980s, annual bilateral summits have been used to measure improvements in the relationship between Rome and Paris, but the scarce content of the meetings indicates the difficulties involved in creating a special relationship. Bilateral summits represent a stage in the institutionalization of bilateral relations, a formal framework whose added value in terms of establishing alliances within the European arena goes beyond the purely bilateral dimension.

A ferric oxide (Fe2O3)/silicone rubber (SR) composite was prepared to produce a magnetic rubber with good heat-resistant and friction properties: SR and nano-Fe2O3 were used as its raw materials. The heat-resistant, antiflaming, magnetic, and mechanical properties of such composites with different proportions of nano-Fe2O3 were studied. The results showed that the Fe2O3 nanoparticles were uniformly distributed throughout the composites. The physical and mechanical properties of SR were improved when Fe2O3 nanoparticles were added. The maximum elongation and tensile strength of the composites were relatively good when the ratio of Fe2O3 was 20 phr. The heat-resistance and antiflaming properties of SR were improved by adding nano-Fe2O3, which had good combined heat resistance. The friction properties of these composites were optimal at 20 phr addition of nano-Fe2O3, which laid the foundation for further applications of this type of composite in high-temperature sealing and shock absorption environments.

This paper develops a simple accounting framework that measures the effect of resource misallocation on aggregate productivity. This framework is based on a multi-sector equilibrium model with sector-specific frictions in the form of taxes on sectoral factor inputs. Our framework is flexible for the assumption on preferences or aggregate production functions. Moreover, this framework is consistent with that commonly used in productivity analysis. I apply this framework to measure the extent to which resource misallocation explains the difference in aggregate productivity across developed countries. I find that around 9 percentage points of the difference in the measured aggregate productivity between Japan and the US can be accounted for by resource misallocation. Using the framework, I also decompose the causes of the misallocation effect.

We are introducing a model-free control and a control with a restricted model for finite-dimensional complex systems. This control design may be viewed as a contribution to "intelligent" PID controllers, the tuning of which becomes quite straightforward, even with highly nonlinear and/or time-varying systems. Our main tool is a newly developed numerical differentiation. Differential algebra provides the theoretical framework. Our approach is validated by several numerical experiments., This communication is a slightly modified and updated version of a paper by the same authors (Commande sans mod\`ele et commande \`a mod\`ele restreint, e-STA, vol. 5 (\degree 4), pp. 1-23, 2008. Available at http://hal.inria.fr/inria-00288107/en/), which is written in French

Peters and Severinov (2006) (PS henceforth) characterize a perfect Bayesian equilibrium (PBE) in a competing auctions environment, where all buyers are linked to all the sellers. PS characterize a PBE using a simple bidding rule, whereby buyers select in which auction to bid. In this note we show that when buyers are linked with a subset of the sellers (i.e. when there are search frictions), the PS bidding rule is no longer guaranteed to be efficient nor a PBE of the competing auctions game of PS. Our results indicate that researchers should be cautious when using the PS bidding rule to make inference about the behavior of buyers and sellers in a market where frictions are present such as eBay.

We build an equilibrium job search model, where workers engage in both off- and on-the-job search over a set of cities, to quantify the impact of spatial matching frictions and mobility costs on the job search process. Migration decisions, based on a dynamic utility trade-off between locations, can rationalize diverse wage dynamics as part of forward-looking spatial strategies. Our estimation results allow us to characterize each of the largest 200 French cities by a set of city-specific matching and amenity parameters and to measure the impact of distance on spatial constraints. We find that after controlling for frictions, mobility cost parameters are significantly lower than previously reported in the literature. Additional results include a robust positive correlation between on-the-job arrival rates and local wage dispersion, which provides new empirical support to the wage-posting framework and suggests an alternative explanation for the city size wage gap.

This paper examines the effects of short sale deregulation on market quality by examining the implementation of regulation SHO, which removed the uptick rule for a subset of pilot securities. This created an exogenous event, allowing a direct examination of the effect of short sale constraints on the markets. This study builds on Roll and Subrahmanyam (2010) in examining the skewness of bid-ask spreads as they represent information asymmetry and market maker competition. We find that the price tests conducted in regulation SHO evenly effected both pilot and non-pilot securities, including a widening of bid-ask spreads and a decrease in spread skewness. These findings suggest that short sellers are shifting from liquidity demanders in the market to liquidity providers in the markets. This change is associated with positive effects in the price discovery process and overall market quality.

This paper uses networks to study price dispersion in seller-buyer markets where buyers with unit demand interact with multiple, but not all, sellers; and buyers and sellers compete on prices after they meet. Our approach allows for ex post indirect competition, where a buyer who is not directly linked with a seller affects the price obtained by that seller. Indirect competition generates the central finding of our paper: price dispersion depends on both the number of links in the network, and how these links are distributed. Networks with very few links can have no price dispersion, while networks with many links can still support significant price dispersion. We present three main theoretical results. First, for any given network we characterize the pairwise stable matchings and the prices that support them. Second, we characterize the set of all graphs where price dispersion is precluded. Third, we use a theorem from Frieze (1985) to show that the graphs where price dispersion is precluded arise asymptotically with probability one in random Poisson networks, even as the probability of each individual link goes to zero. We also provide quantitative results on the finite sample properties of price dispersion in random networks. Finally, we present an application to eBay to show that: (i) a calibration of our model reproduces the price dispersion documented in eBay quite well, and (ii) the amount of price dispersion in eBay would decrease substantially (35-45 percent as measured by the coefficient of variation) in a counterfactual analysis, where we change eBay’s network structure so that links are drawn with equal probability for all sellers and buyers.

Using a competitive search (price-posting) model, Lester (2011) shows that improving buyers’ price information can counter-intuitively lead to higher prices. We test this result using a lab experiment. Moving from 0 to 1uninformed buyers leads to higher prices in both 2(seller)x2(buyer) and 2x3 markets: the former as predicted, the latter the opposite of the theoretical prediction. Perceptions of “fair” prices are a powerful driver of behavior. For buyers, these perceptions correlate with price-responsiveness, which varies systematically across treatments and impacts sellers’ pricing incentives. For sellers, these perceptions correlate with under-pricing, which also varies systematically across treatments.

This paper examines the effect of real-world, investor-level investment constraints, including several that have not been studied before, on hedge fund performance and its persistence. Using a large consolidated database, we demonstrate that hedge fund performance persistence is significantly reduced when rebalancing rules reflect fund size restrictions and liquidity constraints but remains statistically significant at higher rebalancing frequencies. Hypothetical investor portfolios that incorporate additional minimum diversification constraints, minimum investment requirements, and focus on open funds suggest that the performance and its persistence documented in earlier studies of hedge funds is not easily exploitable, especially by large investors.

We study the impact of frictions on the prevalence of systemic crises. Agents privately learn about a fixed payoff parameter, and repeatedly adjust their investments while facing transaction costs in a dynamic global game. The model has a rich structure of externalities: payoffs may depend on the volume of aggregate investment, on the concentration of investment, or on its volatility. We examine how small frictions, including those similar to the Tobin tax, affect the equilibrium. We identify conditions under which frictions discourage harmful behavior without compromising investment volume. The analysis is driven by a robust invariance result: the volume of aggregate investment (measured in a pivotal contingency) is invariant to a large family of frictions.

The evidence strongly suggests a robust negative relationship between income and fertility, and a positive relationship between income and longevity. This is puzzling for standard dynamic models. For instance, altruistic models that use the most standard preferences in macro --time separable CRRA with low elasticity of intertemporal substitution (EIS)-- correctly predict a positive longevity-income relationship for rich individuals, but also predict a positive fertility-income relationship, contrary to the data. We show that a non-separable formulation of preferences that allows for a low EIS but a high "elasticity of intergenerational substitution" (EGS) can simultaneously account for the evidence of declining demand for children and increasing demand for longevity as income increases. The model with a single elasticity cannot account for both. Our results suggests a major role for a new parameter in macro, the EGS. While the EIS mostly influences short-term economic decisions, the EGS influences mostly long-term economic choices.

Asset liquidity in modern financial markets is a key but elusive concept. A market is often said to be liquid when the prevailing structure of transactions provides a prompt and secure link between the demand and supply of assets, thus delivering low costs of transaction. Providing a rigorous and empirically relevant definition of market liquidity has, however, provided to be a difficult task. This paper provides a critical review of the frameworks currently available for modelling and estimating the market liquidity of assets. We consider definitions that stress the role of the bid-ask spread and the estimation of its components that arise from alternative sources of market friction. In this case, intra-daily measures of liquidity appear relevant for capturing the core features of a market, and for their ability to describe the arrival of new information to market participants.

Why do people live in particular cities? We can list many reasons, but two are undoubtedly relevant. Agents can enjoy the city or be more productive there. A combination of life amenities and productivity levels determines the size of cities, but the positive effects of these characteristics are capped by the costs and frictions arising from congestion. Depending on city governance and the flexibility of markets, these costs and frictions can be more or less important. These city characteristics are in turn enhanced and amplified by the presence of urban externalities. Understanding the different forces that determine city sizes is crucial for answering a broad set of questions. What is the relative importance of these forces in determining the size distribution of cities? How much would we gain or lose if cities had similar amenities, technology levels, or frictions? How much reallocation would this cause? More generally, what are the welfare implications of the location of agents across cities? In this paper we provide a simple way of decomposing the characteristics that lead to the size distribution of cities into three main components: efficiency, amenities, and excessive frictions. We use a simple urban theory to calculate these components and to carry out a wide set of counterfactual exercises that provide answers to the questions we asked above. The theory consists of a multi-city model with monocentric cities that produce a single good. Workers decide how much to work and where to live. Efficiency is modeled as TFP, amenities as directly affecting preferences

In a frictional environment, technological complexity creates adaptability returns to schooling. This paper provides microfoundations to such an argument, and revisits the impacts of worker heterogeneity and risk aversion. In our model, firms and workers are located on a knowledge space. Education widens the measure of the knowledge subset that the worker embodies, while technological complexity expands the measure of the knowledge subset that is required to operate on the job. We find uncertainty with regard to the type of the future partner motivates schooling, while it inhibits technological complexity. When workers differ in scholastic ability, the welfare of a given group increases with the proportion of workers of this group. Finally, risk aversion motivates a precautionary demand for education, which in turn creates income risk through firms' technological choices.

Fluctuations in firms' revenues reduce firms' viability and are costly from a social welfare point of view even when agents are risk neutral if (i) the decision to continue operating a firm is not efficient at the margin so that fluctuations shorten firms' life expectancy (because they increase the chance revenue levels are such that discontinuation is unavoidable) and (ii) the shortening of the life expectancy reduces entry. Welfare consequences are large, even for moderate fluctuations: Implied estimates for the per period costs of business cycles can easily be equal to several percentage points of GDP. These estimates are based on a direct measurement of cyclical changes in the value added generated by workers that recently were not employed. This extensive margin measure of the cyclical change in output is of independent interest.

In this paper we argue that the promotion of women in microfinance initiatives and the bias against men is taking place in the absence of solid empirical evidence on the effects of this approach in the balance of powers in households and on the health, education and well-being of all household members. We hold these to be key aspects of development. We further argue that this issue deserves further empirical attention given the possibility of unforeseen outcomes that run counter to the goal to encourage microfinance to promote women empowerment and economic development.

We study three cases in which specialized arbitrageurs lost significant amounts of capital and, as a result, became liquidity demanders rather than providers. The effects on security markets were large and persistent: Prices dropped relative to fundamentals and the rebound took months. While multi-strategy hedge funds who were not capital constrained increased their positions, a large fraction of these funds actually acted as net sellers consistent with the view that information barriers within a firm (not just relative to outside investors) can lead to capital constraints for trading desks with mark-to-market losses. Our findings suggest that real world frictions impede arbitrage capital.

This Paper solves explicitly a simple equilibrium asset pricing model with liquidity risk – the risk arising from unpredictable changes in liquidity over time. In our liquidity-adjusted capital asset pricing model, a security’s required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with market return and market liquidity. In addition, the model shows how a negative shock to a security’s liquidity, if it is persistent, results in low contemporaneous returns and high predicted future returns. The model provides a simple, unified framework for understanding the various channels through which liquidity risk may affect asset prices. Our empirical results shed light on the total and relative economic significance of these channels.

In an infinite-horizon economy with matching frictions, I study the efficient assignment between workers of different skill levels and machines of different quality levels. Under some restrictions I show that the efficient allocation assigns a unique machine quality and market tightness to each skill, and that the assignment is saddle-path stable. The efficient assignment is not necessarily positively assortative and efficient wages do not necessarily increase with the skill level. Nevertheless, the social value of workers always increases with the skill level. I then show that the efficient allocation can be decentralized by a market mechanism, in which the firms direct workers' search by announcing and committing to the machine quality, the skill level they intend to hire for such machines, and the time-path of wages. Finally, I calibrate the model to the US data and examine how a skill-biased technological progress affects the assignment and inequality. (Copyright: Elsevier)

This handbook shows how to set up, approximate, and estimate a standard real business cycle model enriched with labour market frictions. The structural equations of the model are derived by maximizing the agents’ objective function subject to the structure of the economy. Given the complexity of the resulting equations, we show how to approximate the model around its long-run equilibrium. We then use the approximated equations to take the model to the data and estimate it using Bayesian techniques. To perform the analysis we use a simple real business cycle model for two reasons. First, due to its simplicity, we can primarily focus on the modelling and estimation techniques; second, this simple framework constitutes the backbone model on which central banks build microfounded models to support the policy analysis. A series of forthcoming Handbooks will document how to enrich this simple framework. To motivate the exercise we start from recent empirical evidence suggesting that a positive technology shock leads to a decline in labour inputs. The standard real business model fails to account for this empirical regularity. The question we analyze in this handbook is whether the presence of labour market frictions addresses this problem, without otherwise altering the functioning of the standard model. To this end, we develop and estimate a real business cycle model using Bayesian techniques that allows, but does not require, labour market frictions to generate a negative response of employment to a technology shock. The results of the estimation support the hypothesis that labour market frictions are the factor responsible for the negative response of employment. Given the pedagogical nature of this handbook, we provide documentation of the MATLAB codes used to implement the modelling and estimation techniques described. To make the programming simple, we used Dynare version 3. We thank Michel Juillard for making his routines publicly available.