Large Open Economies and Fixed Costs of Capital Adjustment (joint with Christian Bayer) [Download]
Excess volatility in investment is an ubiquitous problem in two-country open economy models. Introducing convex adjustment costs to capital at the aggregate level has become a widespread remedy for this. However, it lacks explicit microfoundation, as there is overwhelming evidence for non-convex costs to capital adjustment being the pivotal form of adjustment costs at the firm level. This paper analyzes the role of fixed costs to capital adjustment in a two country business cycle model. We find that fixed costs in this setup - unlike in closed economies - have an impact on aggregate investment volatilities. Moreover, we find that convex adjustment costs can serve as a stand-in for these fixed adjustment costs when one is interested in replicating aggregate dynamics only. Finally, we check whether these stand-in quadratic costs are subject to Lucas' critique in that their size co-depends on model parameters other than fixed adjustment costs.
We empirically establish that one third of job transitions lead to wage losses. Using a quantitative on the job search model we find that 60 percent of them are movements down the job ladder. Accounting for them, our baseline calibration matches the large residual wage inequality in US data while attributing only 13.7 percent of overall wage inequality to the presence of search frictions in the labor market. We can trace the difference between ours and previous much higher estimates to our explicit modeling of non-value improving job to job transitions.
Foreign Customer Accumulation and Export Dynamics [Download]
I present a dynamic fixed cost model of export participation extended by a capital theoretic concept of the customer stock. Plants that want to start exporting have to invest into a market specific factor which serves as input into a decreasing returns to scale technology generating sales demand. Customer capital, like phyical capital, depreciates over time and its accumulation is subject to adjustment costs. It allows the model to reproduce the empirical fact that new exporters show above average revenue growth rates and a declining exit hazard in the years after entry. I structurally estimate the model on a rich panel data set of German manufacturing plants between 1995 and 2008. During the observed time span, plants in the sample saw a strong increase in export activity which provides a suitable case study for the predictive power of the model. Unlike a pure fixed cost version, the model correctly forecasts a steep rise in exports after 2003. It is also able to reconcile a strong export reaction to trade liberalizations with a low elasticity of aggregate exports to exchange rate movements. Customer capital accumulation therefore offers a potential resolution to the elasticity puzzle in international economics.