Transcript TARGET in Luxembourg

Discussion on the LSM (Fontagné,
Maffezzoli and Marcellino),
by O. Pierrard
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DSGE’S IN HISTORICAL PERSPECTIVE
 Backward looking macroeconometric models
(Keynes, Hicks, IS-LM)
from data to theory
 Lucas’ critique on deep structural parameters (1976)
and rational expectations
 Forward looking micro founded models (Kydland and
Prescott, 1982)
from theory to data
 Last generation of New-Keynesian models (or DSGE
models) -> LSM by Fontagné, Maffezzoli and
Marcellino
2
POTENTIAL UTILIZATIONS
 Short run forecasts ??? Need of heterogeneity, need
to escape from steady state in case of crises.
Difficult with DSGE models.
 Understanding of shock transmission channels
 Medium and/or long run forecasts
3
LSM
 Impressive work at the frontier of research
 Utilisation to explain potential effects of policies and
medium/long run forecasts: great!
 Essential if we want to be serious about policy
implementation and recommendation
 Nice: assets, goods market, open economy
 Exogenous but probably difficult to endogenise:
commuters’ behaviour
 Discussion: demography and labour market
4
DEMOGRAPHY
 Blanchard (1985) OLG approach: households have
constant probability  to die
 Advantage: simplicity (easy aggregation)
 and ‘households have finite lives’ : yes but…
 Strong implications for demography
 Difficult to study demography and/or retirement
related questions
5
DEMOGRAPHY (ctd)
Death probability (expected life: 83 y)
0,90
Average BE-FR
(2003)
0,80
LSM
0,70
0,60
0,50
0,40
0,30
0,20
0,10
0,00
<5
6
10-14 20-24
30-34 40-44
50-54 60-64
70-74 80-84
90-94
DEMOGRAPHY (ctd)
Implied population (for 1000 births)
1200
1000
800
600
400
Average BE-FR
(2003)
200
LSM
7
14
5
14
0-
4
4
4
4
90
-9
80
-8
70
-7
60
-6
4
4
4
50
-5
40
-4
30
-3
4
4
20
-2
10
-1
<5
0
LABOUR MARKET
 Wage formation mechanism not benchmark
 With some simulations (mainly productivity
shocks), strong effect on wages which leaves
employment almost unaffected (also in QUEST)
 Potential implication (at least with productivity
shocks): volatile and procyclical wages, rigid and
acyclical employment
 Real data (1984-2006, CKL 2008) :
(x)/(y) DE EA
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US
corr(x,y) DE EA
US
empl.
0.90 0.85 1.19
empl.
0.81 0.76 0.85
wages
0.90 0.64 0.87
wages
0.31 0.56 -0.03
LABOUR MARKET (ctd)
 Alternative approach: Diamond-MortensenPissarides (search unemployment)
 Simulations: LSM vs. DMP
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TFP (+1%) GDP
w
Nr
Nc
LSM
+1.5%
+1.5%
-0.1%
-0.1%
DMP
+2%
+1.5%
+0.6% +0.6%
EP (+1%)
GDP
w
Nr
Nc
LSM
+0.9%
+0.8%
+0%
+0%
DMP
+1.4%
+1.0%
+0.4% +0.4%
DEMOGRAPHY AND LABOUR MARKET
Activity rate (2006, Eurostat)
100
90
LU
EA13
80
70
60
50
40
30
20
10
0
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
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