Migration and Macroeconomics

Clemens, M., Hart, J.: A Search and Matching Approach to Business-Cycle Migration in the Euro Area
Recently migration patterns in the euro area changed markedly in response to increasing unemployment disparities. This reinforced the interest in labor mobility as stabilization tool against the background of heterogeneous labor market conditions.  We propose a two-country DSGE model with price rigidities and migration that is able to replicate the empirical facts on business cycle migration in the euro area. In this model unemployment arises from search and matching frictions. We start by modeling migration as a proportional outflow from unemployed workers and in a second step endogenize migration via the unemployed workers’ choice on which labor market to search for a job. The framework allows to account for wage and unemployment gaps between natives and immigrants over the cycle as well as for factors such as language barriers that hinder the labor market integration of foreigners. We find that the impact of migration on country-specific average wages and unemployment depends crucially on the characteristics of immigrants and natives as well as the institutional characteristics of the total corridor, i.e. search efficiency. The model will be used to analyze the effects of different immigration and labor market policies on migration patterns and welfare.

Paper presented at the Young economists’ competition ECB Forum 2019 @Sintra, Verein für Socialpolitik 2019@Leipzig, EEA-ESEM 2019@Manchester, CEF 2018@Milano, ESPE 2018@Antwerpen,  EALE 2018@Lyon, SMYE 2017@Halle, EEA-ESEM 2016@Geneva, Econometric Society NASM* 2016@Philadelphia, 12th Dynare Conference@Rome, 10th CFE Conference@Sevilla, BERA Macroeconomic Workshop@Berlin,Lyon.

Clemens, M., Hart, J.: Migration, Unemployment and the Business Cycle - A Euro Area Perspective -
In the recent European debt crisis, internal migration flows in the euro area reacted strongly to diverging labor market conditions. This experience points towards the prominent role of short-term business cycle migration in the euro area and the consequent need to understand the motives behind it.
Investigating the business cycle in 55 bilateral migration corridors in the euro area over the period 1980-2010, we find evidence for business cycle related fluctuations in net migration flows and the crucial role of unemployment in shaping migration patterns. While on average wage and unemployment differentials are negatively correlated with net migration, across migration corridors we document a considerable heterogeneity in both dimensions that is more pronounced for wages. In line with these findings, we built a two-country dynamic stochastic general equilibrium (DSGE) model of internal business cycle migration in the euro area and allow for unemployment that occurs as a consequence of labor market frictions and rigidities in both countries. Our model is able to replicate the empirical observations and explains the heterogeneity of migration corridors by differences in the type of shock that hits an economy and the relative price/wage rigidity. We contribute to the literature on the causes and consequences of temporary migration and bridge it to DSGE models with unemployment.

Paper presented at the EEA-ESEM* 2018@Cologne, Verein für Socialpolitik* Annual Conference 2016@Augsburg, 11th Dynare Conference@Brussels, CEF* 2015, Taipeh, HU Brown Bag Seminar@Berlin, PRSE Seminar*@Potsdam.

Fiscal and Monetary Integration

Claveres, G. , Clemens, M.: Unemployment Insurance Union

A European unemployment insurance scheme has gained increased attention as a new and ambitious common fiscal instrument which could be used for temporary cross-country transfers. Part of the national stabilizers composing unemployment insurance schemes would be transferred to the central level. Unemployed are then insured by both layers. When a country is hit by an asymmetric shock, it would receive positive net transfers from the central
fund in the form of reduced taxes and increased benefits, providing risk-sharing for the whole union.
We build a two-country DSGE model with supply, demand and labor market shocks in order to capture the recent national insurance system and the unemployment insurance union (UIU) design. The model is calibrated to the euro area core and periphery data and matches the empirically observed cyclicality of the net replacement rate, the wage and unemployment dynamics. This baseline scenario is then compared to a optimal unemployment insurance union with passive and active benefit policies. For all underlying shocks, we find that the UIU reduces the fluctuation of consumption and  unemployment while it increases the fluctuation of the trade balance. In case of a positive domestic government spending shock the UIU reduces the negative crowding out effect on private consumption and investment. The model will be used to analyze the effects of national and supranational benefit policies on labour market patterns and welfare.

Paper presented at the EALE* 2018@Lyon, Verein für Socialpolitik* 2018@Freiburg, CEF 2018*@Milano, SED 2017@Edingburgh, EEA-ESEM 2017@Lisbon, EUROFRAME 2017@Berlin

Clemens, M., Gebauer, S., König, T.: The Macroeconomic Effects of a European Deposit (Re-)Insurance Scheme

While the first two pillars of the European Banking Union have been im-plemented, a European deposit insurance scheme (EDIS) is still not in place.To facilitate the introduction of EDIS, recent proposals argue in favor of are-insurance scheme. In this paper, we assess the relative efficiency of sucha scheme in the absorption of macroeconomic and financial shocks. We usea regime-switching open-economy DSGE model with bank default and tightlinkages between banks and governments and calibrate the model to matchempirical moments for Germany and the rest of the euro area. With an en-dogenous probability, the national deposit insurance becomes constrained andeither EDIS or the national government steps in. We find that with EDIS,long term macroeconomic activity can deteriorate if banks’ contribution toEDIS is non-deductible and poorly designed. Nevertheless, business cyclefluctuations in response to a country-specific bank risk shock are reduced byhalf once EDIS is in place, independent of the contribution design.

Paper will be presented at 13th RGS Doctoral Conference in Economics 2020 @Dortmund, SMYE 2020 @Bologna, RES Annual Conference 2020 @Belfast, CEF 2020 @Warsaw.

Clemens, M.: Oil Prices, Terms of Trade and Optimal Monetary Policy
Recent studies show that considering external channels, i.e. exports, imports, terms of trade, is necessary to explain the observed changing pattern between oil prices and macroeconomic activity. We derive the optimal monetary policy for oil-importing countries under a given oil supply in a three-country DSGE model and explicitly analyze these channels. We found that the terms of trade channel and monetary policy with a terms of trade target can dampen the effect of oil price fluctuations in oil-importing economies depending on structural parameters. We then extend the basic model by assuming different degrees of international central bank cooperation. With respect to the optimal monetary policy reaction on demand and supply-driven oil price changes we derive three noteworthy results. First, central banks of oil importers minimize the welfare loss of real oil price changes by influencing the terms of trade and stabilizing the producer price inflation rate. Second, central banks are able to fully stabilize global and local demand-driven oil price changes depending on the relative size of the countries and the strategic behavior between central banks. Third, welfare losses resulting from global oil supply disruptions can be minimized by a cooperative central bank that stabilizes a weighted consumer price inflation rate and a weighted output gap. A cooperative monetary policy cannot minimize the welfare losses from local oil supply changes.

Paper presented at the EEA-ESEM* 2016@Geneva, RES* Annual Conference 2016@Brighton, PRSE Seminar@University of Potsdam.

Fiscal Policy & Heterogenous Agents

Clemens, M., Eydam, U., Hartjenstein, S., Heinemann, M.: A Modified Truncated History Approach to Solve
Heterogeneous Agents Models with Aggregate Shocks

We augment the ‘truncated history approach’ with a loss (penalty) function in order to approximate the solution of a heterogeneous agent model with aggregate shocks. We apply the solution technique to a standard real business cycle model hit by TFP and fiscal shocks and assess the goodness of the approximation in comparison to the non-linear solution of the model without aggregate uncertainty. We find that incorporating the loss function does a better job in tracing the ’true’ responses of aggregate variables and inequality measures for both, TFP and fiscal shocks. Importantly, in contrast to the baseline truncated history approach, Ricardian equivalence breaks down in the model with a loss function. This feature allows to compare the welfare effects of different fiscal policies according to their financing conditions, i.e. debt-intensive vs. tax-intensive policy. We use the augmented model to compute welfare effects of business cycles and different fiscal policies. In summary, our results are twofold: First, and more general, we find that the average welfare costs of business cycles over time and households are smaller than in the representative agent model. Second, with regards to fiscal rules,  we find that switching from a debt-intensive fiscal rule to a tax-intensive fiscal rule is associated with small welfare losses on average. However, we also find that such a switch would yield moderate welfare gains for roughly 20% of households.

Paper presented at the 2nd Behavioral Macroeconomics Workshop 2019@Bamberg.

Clemens, M., Eydam, U., Heinemann, M.: Inequality over the Business Cycle – The Role of Distributive Shocks

This paper examines the dynamics of wealth and income inequality along thebusiness cycle and assesses how they are related to fluctuations in the functionalincome distribution. In a panel estimation for OECD countries between 1970 and2016 we find that on average income inequality – measured by the Gini coefficient – iscountercyclical and also shows a significant association with the capital share. Up on acloser look, we find that a remarkable share of one third of all countries display a ratherpro- or acyclical relationship. In order to understand the underlying cyclical dynamicsof inequality we incorporate distributive shocks, modeled as exogenous changes in thecapital share, into a real business cycle model, where agents are ex-ante heterogeneouswith respect to wealth and ability. We show how to derive standard inequality measureswithin this framework, which allow us to analyze how productivity and distributiveshocks affect both, the macroeconomic variables and the personal income and wealthdistribution over the business cycle.We find that whether wealth and income inequality in the model behaves counter-cyclical or not depends on two aspects. The intertemporal elasticity of substitutionand the persistence of the shocks. We use Bayesian techniques in order to match GDP,capital share and consumption to quarterly U.S. data. The resulting parameter estimatespoint towards a non-monotonic relationship between productivity fluctuations andinequality. On impact, inequality increases in response to TFP shocks but declinesin later periods. This pattern is consistent with the empirically observed relationshipin the USA. Furthermore, we find that TFP shocks explain about 17 percent of thecyclical fluctuations in inequality in the USA.

Paper presented at the CEF 2019@Ottawa. DIW DP 1852

* own presentation