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Discussion on the LSM (Fontagné, Maffezzoli and Marcellino), by O. Pierrard. 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 - PowerPoint PPT Presentation
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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
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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
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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
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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
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DEMOGRAPHY (ctd)Death probability (expected life: 83 y)
0,00
0,10
0,20
0,30
0,40
0,50
0,60
0,70
0,80
0,90
<5 10-14 20-24 30-34 40-44 50-54 60-64 70-74 80-84 90-94
Average BE-FR(2003)
LSM
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DEMOGRAPHY (ctd)Implied population (for 1000 births)
0
200
400
600
800
1000
1200
Average BE-FR(2003)
LSM
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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) :
corr(x,y) DE EA US
empl. 0.81 0.76 0.85
wages 0.31 0.56 -0.03
(x)/(y) DE EA US
empl. 0.90 0.85 1.19
wages 0.90 0.64 0.87
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LABOUR MARKET (ctd)
Alternative approach: Diamond-Mortensen-Pissarides (search unemployment)
Simulations: LSM vs. DMP
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%
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DEMOGRAPHY AND LABOUR MARKETActivity rate (2006, Eurostat)
0
10
20
30
40
50
60
70
80
90
100
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
LU
EA13