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We adapt the model of Menzio and Moen (2010) to consider a labour marketwith directed search in which …rms can commit to wage contracts but cannotcommit not to replace incumbent workers. Workers are risk averse, so thatthere exists an incentive for …rms to smooth wages over time and in the face ofshocks to labour productivity. To avoid worker replacement (which saves onthe ex ante wage bill), they may choose a wage for new hires that is equallyunresponsive to shocks. This leads to a large degree of downward rigidityin the wages of new hires, and magni…es the response of unemployment andvacancies to negative shocks. Our version of the Menzio-Moen model allowsfor the analysis of positive probability shocks in a tractable way. Moreover, weargue that the model provides a useful framework for analysing other sourcesof wage rigidity; for example adding asymmetric information can substantiallyenhance the rigidity and the responsiveness of unemployment and vacanciesto productivity shocks.

In this paper we show that the inclusion of unemployment-tenure interaction variates in Mincer wage equations is subject to serious pitfalls. These variates were designed to test whether or not the sensitivity to the business cycle of a worker’s wage varies according to her tenure. We show that three canonical variates used in the literature - the minimum unemployment rate during a worker’s time at the firm(min u), the unemployment rate at the start of her tenure(Su) and the current unemployment rate interacted with a new hire dummy(δu) - can all be significant and "correctly" signed even when each worker in the firm receives the same wage, regardless of tenure (equal treatment). In matched data the problem can be resolved by the inclusion in the panel of firm-year interaction dummies. In unmatched data where this is not possible, we propose a solution for min u and Su based on Solon, Barsky and Parker’s(1994) two step method. This method is sub-optimal because it ignores a large amount of cross tenure variation in average wages and is only valid when the scaled covariances of firm wages and firm employment are acyclical. Unfortunately δu cannot be identified in unmatched data because a differential wage response to unemployment of new hires and incumbents will appear under both equal treatment and unequal treatment.

Standard measures of inequality have been criticized for a longtime on the grounds that they are snap shot measures which do nottake into account the process generating the observed distribution.Rather than focusing on outcomes, it is argued, we should be interestedin whether the underlying process is “fair”. Following this lineof argument, this paper develops statistical tests for fairness within awell defined income distribution generating process and a well speci-fied notion of “fairness”. We find that standard test procedures, suchas LR, LM and Wald, lead to test statistics which are closely relatedto standard measures of inequality. The answer to the “process versusoutcomes” critique is thus not to stop calculating inequality measures,but to interpret their values differently–to compare them to criticalvalues for a test of the null hypothesis of fairness.

This paper analyses a model in which firms cannot pay discriminate based on year of entry to a firm, and develops an equilibrium model of wage dynamics an unemployment. The model is developed under the assumption of worker mobility, so that workers can costlessly quit jobs at any time. Firms on the other hand are committed to contracts. Thus the model is related to Beaudry and DiNardo (1991). We solve for the dynamics of wages and unemployment, and show that real wages do not necessarily clear the labor market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match actual unemployment and wage series. We also show that equal treatment follows in our model from the assumption of at-will employment contracting.

In this paper we propose a new testing procedure to detect the presence of a cointegrating relationship that follows a globally stationary smooth transition autoregressive (STAR) process. We start from a general VAR model, embed the STAR error correction mechanism (ECM) and then derive the generalised nonlinear STAR error correction model. We provide two operational versions of the tests. Firstly, we obtain the associated nonlinear ECM-based test. Secondly, we generalise the well-known residual-based test for cointegration in linear models by Engle and Granger (1987) and obtain its nonlinear analogue. We derive the relevant asymptotic distributions of the proposed tests. We find via Monte Carlo simulation exercises that our proposed tests have much better power than the Engle and Granger test against the alternative of a globally stationary STAR cointegrating process. In an application to the price-dividend relationship, we also find that our test is able to find cointegration, whereas the linear-based tests fail to do so. Further analysis of impulse response functions of error correction terms (under the alternative) shows that the time taken to recover one half of a one standard deviation shock varies between five and twenty years, whereas the time taken to recover one half of a large shock varies between just 4 to 18 months. This clearly implies that data periods dominated by extreme volatility may display substantial mean reversion of the price-dividend relationship. By contrast this relationship may well look like a unit root when the underlying shocks take on smaller values.

This thesis examines certain key problems that the existence of forward rational expectations poses for policy analysis. The separate stages of estimating, testing and solving an econometric model are dealt with in turn. The main body of original work is in chapters four and six. In chapter four the problem of the existence of a continuum of solutions to a rational expectations model is addressed. We show that the existing practice of imposing terminal conditions is arbitrary and a procedure is advanced which in principle at least, can be used to estimate the solution jointly with the parameters. In chapter six analytical closed forms for the first order conditions of the likelihood function of the endogenous variables of a general rational expectations model are derived. We believe this is a major contribution to the literature because it opens the door to computationally efficient and cheap likelihood estimation, something not previously available. The first order conditions for a class of models with no predetermined variables has been programmed in Fortran IV and this has been used in chapter seven to estimate a model of financial asset demands. A likelihood ratio test of restrictions implied by rational expectations is comfortably passed so establishing empirical support for the hypothesis. Other original work in the thesis is contained in chapter five. Here we scrutinise the validity of a simulation technique advanced by Fair and Anderson which it is claimed solves a standard non rational model to yield an approximate rational expectations solution. The results of the chapter suggest the method is better in certain circumstances than in others and these circumstances pertain to the make up of the model in question. Finally, chapters two and three cast a critical eye over the policy analysis literature to which a minor contribution is made.