A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy...
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Transcript of A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy...
![Page 1: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/1.jpg)
A Discussion on “Introducing Financial Frictions and Unemployment
into a Small Open Economy Model”(Christiano, Trabandt, and Walentin)
Ichiro Fukunaga
Research and Statistics Department
Bank of Japan
28 October 2009in Jerusalem
![Page 2: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/2.jpg)
Outline
1. Summary
2. Comments
3. Discussions(questions and suggestions)
![Page 3: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/3.jpg)
Summary (1):model overview
• Based on small open economy model of Adolfson, Laseen, Linde, and Villani.
• Introducing financial frictionsfollowing Bernanke, Gertler, and Gilchrist,and Christiano, Motto, and Rostagno.
• Introducing labor market search and matching framework ofMortensen and Pissarides,Gertler, Sala, and Triagari, etc.
![Page 4: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/4.jpg)
Summary (2):baseline small open economy
• Calvo price setting in both export & import.
• Exchange rate shocks take time to pass into domestic prices.
• Hump-shaped response of output and exchange rate to a monetary policy shock.
• Uncovered interest rate parity
• Unit-root investment technology shock
• Careful treatment of capital income tax
![Page 5: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/5.jpg)
Summary (3):financial frictions
• Asymmetric information between “entrepreneurs” and banks.
• Entrepreneurs have a special skill in operation and management of capital.
• Capital stock includes both housing and business capital.
• Interest rate is nominally not state-contingent. >> Fisher effects
![Page 6: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/6.jpg)
Summary (4):labor market frictions
• Wage setting frictions (Taylor-type) >> not have a direct impact on on-going employment relations but on recruiting.
• Labor services are supplied to labor market by “employment agencies.”
• Wage is determined by Nash bargaining.• Endogenous separation of employment
from their jobs.• Symmetry in modeling idiosyncratic shocks
![Page 7: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/7.jpg)
Summary (5):estimation results
• Bayesian estimation using Swedish data from 1995Q1 to 2008Q1.
• Among 19 shocks, neutral tech. shock is important for both output and inflation,Wealth shock drives 3/4 of investment.Spillover of financial shocks to unemploymt.
• IRFs of model with unemployment is similar to those of EHL model.
• Monetary policy shocks are amplified by financial frictions.
![Page 8: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/8.jpg)
Comments (1):financial frictions
• Modest effects of financial frictions.-- Only operation of capital involves frictions. (Working capital loans are frictionless).-- Entrepreneurs don’t have assets.>> In BGG, they have assets and sell output to Calvo-pricing retailers.
• Too much effects of nominal debt contract?-- It dampens output/investment responses to supply shocks.
![Page 9: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/9.jpg)
Comments (1):financial frictions (cont.)
• External finance premium is not“risk premium.” -- just compensation for monitoring cost. -- Both borrowers and lenders are risk-neutral under debt contract.>> Where’s “true” risk premium?
• Data for entrepreneurs’ “net worth.” -- could be broader than stock market.-- includes collateral value of illiquid assets.
![Page 10: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/10.jpg)
Comments (2):labor market frictions
• Similar effects to EHL (sticky wage model).-- Little effects of unemployment?-- Passive role of “employment agency.”
• Alternative formulations of bargaining.-- Which formulation is better?>> can be decided in terms of marginal likelihood. cf. Ichiue, Kurozumi, and Sunakawa (2008, Bank of Japan WP)
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Comments (3):estimation
• Real variables are log-differenced and demeaned.-- consistent with two-sector growth model?
• Measurement errors for most variables.-- really needed?-- identification problems (markup shocks)
![Page 12: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/12.jpg)
Discussions (1):practical uses
• Forecasting performance-- improved compared with Ramses?-- better than BVAR?
• Policy simulations-- monetary policy rule reacting to credit spread-- tax policies-- welfare evaluation among heterogeneous agents: difficulty?
![Page 13: A Discussion on “Introducing Financial Frictions and Unemployment into a Small Open Economy Model” (Christiano, Trabandt, and Walentin) Ichiro Fukunaga.](https://reader036.fdocuments.us/reader036/viewer/2022082518/56649d985503460f94a81f1d/html5/thumbnails/13.jpg)
Discussions (2):potential output and output gap
• In a simple sticky price/wage model,estimated potential (=efficient/natural) output tends to be too volatile.
• In this model with many real frictions,estimated potential (=efficient) outputmay be reasonably smooth.--- Output gap, in turn, may be volatile reflecting real frictions.