Modelling the sectoral allocation of labour in open economy models

Povoledo, Laura (2012): Modelling the sectoral allocation of labour in open economy models.

Abstract

This paper presents an open economy model with tradeable and nontradeable sectors in which households cannot supply labour in both sectors at the same time. In this economy, the Frisch elasticity of labour supply is infinite. I analyse how the infinite labour supply elasticity interacts with the Producer Currency Pricing (PCP) and Local Currency Pricing (LCP) assumptions, and I find that it does not significantly alter the empirical performance of the model with respect to a broad range of statistics.

• Item Type: MPRA Paper
• Language: English
• Keywords: New open economy models; Tradeable and nontradeable sectors; International business cycles; Labour supply elasticity
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Benigno, Gianluca, and Christoph Thoenissen (2003). "Equilibrium Exchange Rates and Supply-Side Performance." Economic Journal, vol. 113(486), pages C103-C124.

Benigno, Pierpaolo (2009). "Price Stability with Imperfect Financial Integration." Journal of Money, Credit and Banking, vol. 41(s1), pages 121-149.

Betts, Caroline, and Michael B. Devereux (2000). "Exchange Rate Dynamics in a Model of Pricing-to-Market." Journal of International Economics, vol. 50(1), pages 215-244.

Betts, Caroline, and Michael B. Devereux (1996). "The Exchange Rate in a Model of Pricing-to-Market." European Economic Review, vol. 40(3-5), pages 1007-1021.

Burnside, Craig, and Martin Eichenbaum (1996). "Factor-Hoarding and the Propagation of Business-Cycle Shocks." American Economic Review, vol. 86(5), pages 1154-74.

Chari, V. V., Patrick J. Kehoe and Ellen R. McGrattan (2002). "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?" Review of Economic Studies, vol. 69(3), pages 533-63.

Chari, V. V., Patrick J. Kehoe and Ellen R. McGrattan (2000). "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?" Econometrica, vol. 68(5), pages 1151-1180.

Chetty, Raj, Adam Guren, Day Manoli and Andrea Weber (2011). "Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins." American Economic Review, vol. 101(3), pages 471-75.

Cooke, Dudley (2010). "Opennes and Inflation." Journal of Money, Credit, and Banking, vol. 42(2-3), pages 267-287.

Corsetti, Giancarlo, Luca Dedola and Sylvain Leduc (2008). "High Exchange-Rate Volatility and Low Pass-Through." Journal of Monetary Economics, vol. 55(6), pages 1113-1128.

Corsetti, Giancarlo, and Paolo Pesenti (2005). "International Dimensions of Optimal Monetary Policy." Journal of Monetary Economics, vol. 52(2), pages 281-305.

Corsetti, Giancarlo, and Paolo Pesenti (2001). "Welfare and Macroeconomic Interdependence." The Quarterly Journal of Economics, vol. 116(2), pages 421-445.

Devereux, Michael B., and Viktoria Hnatkovska (2012). "The Extensive Margin, Sectoral Shares, and International Business Cycles." Canadian Journal of Economics, vol. 45(2), pages 509-534.

Galí, Jordi, and Tommaso Monacelli (2005). "Monetary Policy and Exchange Rate Volatility in a Small Open Economy." Review of Economic Studies, vol. 72(3), pages 707-734.

Hansen, Gary D. (1985). "Indivisible Labor and the Business Cycle." Journal of Monetary Economics, vol. 16(3), pages 309-327.

Hodrick, Robert J., and Edward C Prescott (1997). "Postwar U.S. Business Cycles: An Empirical Investigation." Journal of Money, Credit and Banking, vol. 29(1), pages 1-16.

Kollmann, Robert (2001). "The Exchange Rate in a Dynamic-Optimizing Business Cycle Model with Nominal Rigidities: A Quantitative Investigation." Journal of International Economics, vol. 55(2), pages 243-262.

Ljungqvist, Lars, and Thomas J. Sargent (2011). "A Labor Supply Elasticity Accord?" American Economic Review, 101(3), pages 487--91.

Ljungqvist, Lars, and Thomas J. Sargent (2005). "Lotteries for Consumers versus Lotteries for Firms." In Kehoe, Timothy J.; Srinivasan, T. N.; and Whalley, John. Frontiers in Applied General Equilibrium Modeling. Cambridge University Press, pages 119-126.

Obstfeld, Maurice, and Kenneth Rogoff (2007). "The Unsustainable U.S. Current Account Position Revisited." NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376, National Bureau of Economic Research, Inc.

Obstfeld, Maurice, and Kenneth Rogoff (2005). "Global Current Account Imbalances and Exchange Rate Adjustments." Brookings Papers on Economic Activity, vol. 36(1), pages 67-146.

Obstfeld, Maurice, and Kenneth Rogoff (2001). "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?" NBER Chapters, in: NBER Macroeconomics Annual 2000, vol. 15, pages 339-412, National Bureau of Economic Research.

Obstfeld, Maurice, and Kenneth Rogoff (2000). "New Directions for Stochastic Open Economy Models." Journal of International Economics, vol. 50(1), pages 117-153.

Obstfeld, Maurice, and Kenneth Rogoff (1995). "Exchange Rate Dynamics Redux." Journal of Political Economy, vol. 103(3), pages 624-60.

Povoledo, Laura (2012). "A Note on The Volatility Of The Tradeable And Nontradeable Sectors.", Macroeconomic Dynamics, forthcoming.

Prescott, Edward C. (2004). "The Transformation of Macroeconomic Policy and Research." Nobel Prize in Economics documents 2004-7, Nobel Prize Committee. [http://www.nobelprize.org/nobel_prizes/economics/laureates/2004/prescott-lecture.pdf]

Raffo, Andrea (2008). "Net exports, consumption volatility and international business cycle models" Journal of International Economics, vol. 75(1), pages 14-29.

Rogerson, Richard (1988a). "Indivisible Labor, Lotteries and Equilibrium." Journal of Monetary Economics, vol. 21(1), pages 3-16.

Rogerson, Richard (1988b). "Recursive Competitive Equilibrium in Multi-sector Economies." International Economic Review, vol. 29(3), pages 419-30.

Rogerson, Richard, and Johanna Wallenius (2009). "Micro and Macro Elasticities in a Life Cycle Model with Taxes." Journal of Economic Theory, vol. 144(6), pages 2277-2292.

Sutherland, Alan (2005). "Incomplete Pass-Through and the Welfare Effects of Exchange Rate Variability." Journal of International Economics, vol. 65(2), pages 375-399.

Uhlig, Harald. (1999). "A Toolkit for Analizing Nonlinear Dynamic Stochastic Models Easily." In Computational Methods for the Study of Dynamic Economies, edited by Ramon Marimon and Andrew Scott, pp. 30-61. Oxford: Oxford University Press.