Volume 8, Issue 2, April 2007
The Research Agenda: Matthias Doepke on the Transition from Stagnation to Growth
The major part of my research is concerned with what may be called the
"transition perspective" on economic development. This literature starts
from the observation that economic growth is a historically recent
phenomenon. Until about 200 years ago, living standards were essentially
stagnant in every country in the world. Starting with the industrial
revolution in Britain, an increasing number of countries have undergone a
transformation from a pre-industrial, stagnant, mostly agricultural economy
to a modern society where sustained economic growth is the norm.
Matthias Doepke is Associate Professor of Economics at UCLA. He is interested in the economic growth and development, demographic change,
political economics, and monetary economics. Doepke's RePEc/IDEAS entry
The transition from stagnation to growth is not simply a matter of
increased technical progress or faster capital accumulation, but a sweeping
transformation of a diverse set of aspects of the economy and of society.
For example, all countries that have successfully developed have also
experienced a demographic transition of rapidly falling mortality and
fertility rates, a structural transformation from agriculture to industry
and services, as well as political changes such as the abolishment of child
labor, the introduction of public education, and the expansion of women's
It is precisely because economically successful countries are so similar to
each other in all these dimensions that we think that studying the
transition from stagnation to growth is relevant for economic development
today. By improving our understanding of this transition, we hope to learn
which of the changes that accompany the economic takeoff are essential
ingredients in the growth process rather than luxury goods that merely
happen to be acquired as economies grow rich. In what follows, I will
review my research with a number of coauthors on demographic change,
political reforms, and cultural change during the transition and discuss
what the findings imply for economic development.
The Demographic Transition
The standard explanation for economic stagnation in the pre-industrial era
is the Malthusian income-population feedback. Before industrialization,
living standards and population growth were positively related: when food
and other resources were plentiful, people had more children, and more
children survived to adulthood. This relationship led to a Malthusian trap
where productivity improvements increased population density, which, in
turn, depressed living standards due to the scarcity of land.
Given the central role of population growth in Malthus' theory, it is no
surprise that the first models of the transition from stagnation to growth
(such as Galor and Weil 2000 and Hansen and Prescott 2002) focused on the
demographic dimension of the transition. In my work on the issue, I
concentrate on the question why the speed and timing of fertility decline
varies so substantially across countries. For example, after World War II a
number of Asian countries such as South Korea needed only thirty years to
undergo a demographic shift that in Britain took more than 100 year to
In "Accounting for Fertility Decline during the Transition to Growth" I
develop a theory in which (following Hansen and Prescott 2002) the economic
takeoff is modeled as an endogenous switch from a land-intensive
agricultural technology to a modern industrial technology. Fertility
decisions are endogenous, and are subject to a quantity-quality tradeoff.
The model generates a transition from Malthusian stagnation to growth
accompanied by a demographic transition from high to low fertility.
The theory points to government policies that affect the opportunity cost
of education as a key determinant of demographic change during development.
In particular, the speed and timing of fertility decline is highly reactive
to education subsidies and child labor restrictions. Comparing across
policies, child labor regulations turns out to have larger effects than
education policies. This is due to the fact that before industrialization,
working children used to provide a substantial fraction of the overall
income of the typical family. As a consequence, forgone child-labor income
turns out to be the main component of the overall opportunity cost of
In addition to influencing fertility decisions, child labor and education
policies also have a major impact on the evolution of inequality. The
inequality effects are large because of the impact of government policies
on the fertility differential between the rich and the poor. If poor
unskilled parents have many children who themselves receive little
education, the fraction of unskilled workers in the economy will tend to
increase, which puts further downward pressure on the wages of the
unskilled. The relationship of inequality, differential fertility, and
economic growth is analyzed in more detail in "Inequality and Growth: Why
Differential Fertility Matters" (with David de la Croix). The paper shows
that it is not overall population growth, but the distribution of fertility
within the population which matters most for growth. In other words, who is
having the children is more important than how many children there are
Political Reform: Child Labor and Public Education
The finding that social policies can have a large impact on economic
outcomes in a country undergoing the transition from stagnation to growth
leads to the question of what determines if and when these policies are
adopted. Consider the case of child labor laws. The first countries to
successfully develop all introduced a set of policies that outlawed most
child labor in the late nineteenth century (in addition to direct child
labor restrictions, compulsory schooling laws also played a major role). In
contrast, unregulated child labor continues to be widespread in many
What determines whether a country adopts child labor laws, and why are
differences in child labor regulation so persistent? One possibility, of
course, is that ruling out child labor is socially optimal at some stage of
development. However, in "Origins and Consequences of Child Labor
Restrictions: A Macroeconomic Perspective," Dirk Krueger and I argue that
this is unlikely to be the case; while child labor may lead to specific
inefficiencies, a child labor ban is generally not the best policy to
address these inefficiencies. The alternative is a political-economy
explanation for the existence of child labor laws, which is the angle that
Fabrizio Zilibotti and I pursue in "The Macroeconomics of Child Labor
In our model, the motive that leads to support for child labor restrictions
is the drive to limit competition: unskilled workers compete with children
in the labor market, and therefore stand to gain from higher wages if child
labor is restricted. In this sense, we regard child labor laws as similar
to other forms of labor regulation aimed at, say, union outsiders. There
is, however, one essential difference: in the case of child labor, the
potential competition comes at least partly from inside the unskilled
workers' families. For this reason, workers' attitudes regarding child
labor laws depend not only on the degree to which they compete with
children in the labor market, but also on the extent to which their own
income relies on child labor.
We examine workers' political preferences over child labor laws in a
framework with endogenous fertility and education decisions. The potential
loss of child-labor income is especially severe for workers who have many
children. We show that the irreversible nature of fertility decisions can
lead to multiple politico-economic steady states. Countries can get locked
into an outcome where the average family size is large, households rely on
child labor, and public support for child labor regulation is low.
Alternatively, there is a regime with small family sizes, high levels of
education, and widespread support for regulation. In each case, the
existing political regime induces fertility decisions that lock parents
into supporting the status quo.
The existence of multiple steady states can explain why in some developing
countries a large proportion of children work and political support for the
introduction of child labor laws is weak, while other countries at similar
stages of development have strict regulations and a low incidence of child
labor. Child labor laws are introduced only if an increase in the demand
for human capital induces young families to reduce fertility and educate
their children. This prediction is consistent with the history of child
labor regulation in Britain, where the introduction of regulations in the
nineteenth century followed a period of rising wage inequality, and
coincided with rapidly declining fertility rates and an expansion of
Political Reform: Female Empowerment
In addition to changes in specific laws and regulations, a major political
transformation in the course of development is the expansion of economic
and political rights. Arguably, the people who experienced the most
dramatic improvement in their legal position were married women. In the
U.S. and Britain, until the mid-nineteenth century married women had
essentially no economic or political rights at all: their entire legal
existence was subsumed in marriage, and husbands got to make all the
decisions. A married woman could not own property, she could not make a
will, she usually could not obtain a divorce, in the case of separation she
could not get custody of her children, and she had no right to vote.
The legal position of married women started to improve in the second half
of the nineteenth century. The reforms started well before women obtained
the right to vote, and well before married women's labor force
participation started to rise substantially. In ongoing research with
Michèle Tertilt ("Women's Liberation: What's in It for Men?"), we examine
the reasons behind this transformation from an economic perspective. We
focus on the observation that expanding female rights amounted to a
voluntary ceding of power on the part of men, who at the time were in firm
political control. What, then, are the economic interests of men for
sharing power with women?
In our analysis, we interpret women's rights as a determinant of bargaining
power within marriage. The idea put forth in the paper is that from a man's
perspective, there is a tradeoff between the power of one's own wife and
other men's wives. Men ideally want their wives to have no rights. At the
same time, men care about their daughters, and may prefer them to have some
power vis-à-vis the future sons-in-law. Moreover, men would like their
children (both sons and daughters) to find high-quality spouses. In our
theory, an expansion of women's rights leads to increased investment in
children (including future sons- and daughters-in-law), which provides an
additional motive for men to support women's rights.
We show that the strength of men's incentives for supporting women's rights
depends on the return to education. If parents do not invest into their
children's education, men have little incentive for extending rights. The
situation changes when an increase in the demand for human capital induces
families to reduce fertility and educate their children. If the return to
education is sufficiently high, men stand to benefit from giving equal
rights to women, and they will vote for the reforms. These predictions are
consistent with the observation that the initial phase of expanding women's
rights in the U.S. and Britain coincided with the main phase of fertility
decline and a rapid increase in schooling levels.
Our findings provide a contrast to a recent literature on franchise
extension initiated by Acemoglu and Robinson (2000). In their theory, the
expansion of political rights is driven by the threat of violence: the
elite extend the franchise in order to avert the threat of a revolution. In
the case of women's rights, fear of revolution appears as an unlikely
motive for the reforms. Instead, we suggest that changes in the economic
environment led to a situation where both men and women stood to gain from
an equalized distribution of rights. (Lizzeri and Persico 2004 and Galor
and Moav 2006 apply similar arguments to franchise extension and public
Political Reform: Property-Rights Institutions
In many developing countries, the institutional framework governing
economic life has its roots in the colonial period, when the interests of
European settlers clashed with those of the native population or imported
slaves. A recent historical and empirical literature documents a reversal
of fortune among these former European colonies, i.e., countries that were
initially economically successful were overtaken by others (such as the
U.S. and Canada) that started out relatively poor (See Sokoloff and
Engerman 2000 and Acemoglu, Johnson, and Robinson 2001, 2002).
A number of authors argue that this pattern is due to institutions; in
particular, institutions that were set up in the initially successful
colonies turned out to be a hindrance for development later on. In ongoing
research with Andrea Eisfeldt ("Colonies"), we examine this hypothesis in a
theoretical framework based on endogenous property rights. In our theory,
property rights are represented as a state variable given by the number of
people with power in a country, i.e., 'gun owners.' Gun owners can protect
their own property, they can trade with other gun owners in a standard
market economy, and, crucially, they can exploit and expropriate others who
do not own guns.
We develop a simple theory of colonization where the colonizing power
optimally determines the number of gun-owning settlers to be sent to each
colony. Here a colony is characterized by its technology and factor
endowments, including the number of (unarmed) locals already present. After
the initial colonization stage, political control passes to the gun owners
in each colony. The key decision collectively taken by the gun owners is
emancipation: they can decide to issue guns to some or all of the oppressed
locals and slaves, and thereby issue them with property rights. The
incentives for doing so stem from the fact that free labor is complementary
to physical capital, which, in turn, is owned by the existing gun owners.
Optimal colonization leads to an initial outcome where income per capita is
highest in the colonies with the highest ratio of the unarmed to gun-owning
settlers. Subsequently, capital accumulation leads to a rise of the
industrial sector, with an associated increase in the demand for free
labor. In the long run, full emancipation takes place in all colonies.
Emancipation proceeds faster, however, in colonies that start out with
relatively few oppressed. Intuitively, people whose property rights are
protected accumulate more capital, which in turn makes it attractive to
issue even more property rights in the future in order to raise the return
on this capital. The result is a reversal of fortune: Through faster
emancipation, the initially poor colonies overtake the richer colonies in
terms of income per capita.
One of the puzzles posed by the British industrial revolution is the
observation that the land-owning upper class was not able to maintain its
relative economic position in society, and was instead overtaken by
entrepreneurs and capitalists who, for the most part, rose from the middle
classes. Many observers of the time linked this outcome to differences in
values, attitudes, and ultimately preferences across social classes.
Building on this hypothesis, in "Occupational Choice and the Spirit of
Capitalism" Fabrizio Zilibotti and I develop a theory of preference
formation that is rooted in the rational choice paradigm, and ask whether
such a theory can help explain the success and failure of different social
classes in the industrialization period.
In our theory, altruistic parents strive to shape their children's
preferences in a way that best fits with their future material
circumstances. We focus on two key aspects of preferences: the rate of time
preference (patience) and the taste for leisure (or, conversely, work
ethic). Parental investments in patience interact with the occupational
choice of the child. Lifetime earnings are relatively flat in some
occupations, while high returns are achieved only late in life in others,
in particular those requiring the acquisition of skills. A parent's
incentive for investing in a child's patience increases in the steepness of
the child's future income profile. Parental investments in their children's
taste for leisure hinge on the role of labor effort. Parents who expect
their children to be wholly reliant on labor income will tend to instill
them with a strong work ethic, i.e., a tolerance for hard work and a
reduced taste for leisure. In contrast, parents who anticipate their
children to be rentiers with ample free time will teach them to appreciate
refined leisure activities, from performing classical music to hunting
The theory can account for the reversal in the economic fortunes of
different social classes at the time of the industrial revolution. For
centuries, members of the pre-industrial middle class---artisans, craftsmen,
and merchants---had to sacrifice consumption and leisure in their youths to
acquire skills. Artisans, for instance, could become prosperous masters of
their professions only after undergoing lengthy stages of apprenticeship
and journeymanship. We argue that in response to this economic environment,
the middle classes developed a system of values and preferences centered on
parsimony, work ethic, and delay of gratification. For the landed upper
class, in contrast, neither work ethics nor patience were particularly
valuable, because the members of this class could rely on fairly stable
rental incomes from their estates. As a result, the landowning elite
cultivated refined tastes for leisure and grew less future-oriented.
In the pre-industrial era, these differences in preferences and values had
limited consequences. However, patience and work ethics became a key
asset---a "spirit of capitalism"---when opportunities of economic advancement
through entrepreneurship and investment arose at the outset of the
industrial revolution. In an already stratified society, it was members of
the patient, hard-working middle class who made the most of the new
opportunities and ultimately gained economic ascendancy over the landed
One of the byproducts of the literature on the transition to growth is a
new and, I think, highly productive exchange of ideas between growth
theorists and economic historians. Starting from a situation where most
variables of interest were contained in the Penn World Tables, theorists
have considerably expanded their view of what matters for economic
development, and are now doing research on many aspects of political and
social change that were not traditionally in the realm of growth theory.
Ultimately, we hope that by studying the transition from stagnation to
growth in the countries that successfully completed the transition, we will
be able to learn more about why some countries fail to develop successfully
even today. From this perspective, a recurring theme in the research
described above is the role of human capital as a catalyst for economic and
social change. Most importantly, we believe that increased demand for human
capital changed the nature of the family, with investment in children
steadily gaining in importance. In addition to affecting family decisions
such as fertility, this process also shifted political preferences for
policies such as child labor regulation, public education, and women's
rights. Similarly, we interpret the divergent success of the upper and the
middle class in the course of the industrial revolution as a consequence of
human capital investment, although here the investment is in preferences or
values of varying economic usefulness rather than in productive knowledge
itself. Taken together, these findings suggest that the direct productivity
effect may be only a small part of the overall contribution of human
capital to a successful transition from stagnation to growth.
Acemoglu, Daron, Simon Johnson, and James A. Robinson. 2001. "The Colonial
Origins of Comparative Development: An Empirical Investigation
Economic Review 91(5): 1369-401.
Acemoglu, Daron, Simon Johnson, and James A. Robinson. 2002. "Reversal of
Fortune: Geography and Institutions in the Making of the Modern World
." Quarterly Journal of Economics 117(4): 1231-94.
Acemoglu, Daron, and James Robinson. 2000. "Why Did the West Extend the
Franchise? Democracy, Inequality and Growth in Historical Perspective
Quarterly Journal of Economics 115(4): 1167-1199.
Becker, Gary S., Kevin M. Murphy, and Robert Tamura. 1990. "Human Capital,
Fertility, and Economic Growth
." Journal of Political Economy 98(5):S12-37.
de la Croix, David, and Matthias Doepke. 2003. "Inequality and Growth: Why
Differential Fertility Matters
." American Economic Review 93(4): 1091-1113.
de la Croix, David, and Matthias Doepke. 2006. "To Segregate or to Integrate:
Education Politics and Democracy
." CEPR Discussion Paper 5799.
Doepke, Matthias. 2004. "Accounting for Fertility Decline during the
Transition to Growth
." Journal of Economic Growth 9(3): 347-383.
Doepke, Matthias. 2005. "Child Mortality and Fertility Decline: Does the
Barro-Becker Model Fit the Facts?
" Journal of Population Economics 18(2):
Doepke, Matthias, and Andrea Eisfeldt. 2007. "Colonies
manuscript, UCLA and Northwestern University.
Doepke, Matthias, and Dirk Krueger. 2006. "Origins and Consequences of Child
Labor Restrictions: A Macroeconomic Perspective
." NBER Working Paper 12665.
Doepke, Matthias, and Michele Tertilt. 2007. "Women's Liberation: What's in
It for Men?" Unpublished manuscript, UCLA and Stanford University.
Doepke, Matthias, and Fabrizio Zilibotti. 2005. "The Macroeconomics of Child
." American Economic Review 95(5): 1492-1524.
Doepke, Matthias, and Fabrizio Zilibotti. 2007. "Occupational Choice and the
Spirit of Capitalism
." NBER Working Paper 12917.
Galor, Oded, and Omer Moav. 2006. "Das Human-Kapital: A Theory of the Demise
of the Class Structure
." Review of Economic Studies 73(1): 85-117.
Galor, Oded, and David N. Weil. 2000. "Population, Technology, and Growth,
From Malthusian Stagnation to the Demographic Transition and Beyond
American Economic Review 90(4): 806-28.
Hansen, Gary D., and Edward C. Prescott. 2002. "Malthus to Solow
Economic Review 92(4): 1205-17.
Lizzeri, Alessandro, and Nicola Persico. 2004. "Why Did the Elites Extend the
Suffrage? Democracy and the Scope of Government with an Application to
Britain's Age of Reform
." Quarterly Journal of Economics 119(4): 707-65.
Lucas, Jr., Robert E. 2002. "The Industrial Revolution: Past and Future
Lectures on Economic Growth, Harvard University Press.
Sokoloff, Kenneth L., and Stanley L. Engerman. 2000. "Institutions, Factor
Endowments, and Paths of Development in the New World
." Journal of Economic
Perspectives 14(3): 217-32.
EconomicDynamics Interviews Per Krusell on Search and Matching
Per Krusell is Professor of Economics at Princeton University and Visiting Professor at the Institute for International Economic Studies in Stockholm. Per has worked on macroeconomic issues including technology and economic growth, optimal
fiscal policy and
political economy, and consumer inequality, recently focusing in particular
on wage inequality,
labor-market frictions, and time-inconsistencies in policy for both
consumers and government.
Krusell's RePEc/IDEAS entry
EconomicDynamics: Labor search models have recently come under attack. Hall (2005) and Shimer
(2005) show that they lack some important cyclical properties. With
Hornstein and Violante, you show that they also do not generate any
significant wage dispersion. Why are these results important?
Per Krusell: To answer the question, I think it may be helpful just to be a
little more precise about what we do in our work. Our question is a rather
fundamental one in economics, but applied to labor markets: do products
(workers) that are "identical" receive more or less the same price (wage)
in the market? We approach the question by using quantitative theory. We
first choose what we think is the most natural, or at least the most
commonly used, theory for why the competitive model would not be a good one
for labor markets---the Mortensen-Pissarides model. The idea here is simply
that it is costly to search, and some workers are lucky, so they find good,
well-paid jobs, whereas other workers are unlucky. Then we assign
reasonable values to the model parameters and see what the model predicts
about wage dispersion. We find that there is a wage dispersion statistic---
the mean-min wage ratio, that is, the average wage divided by the lowest
wage, all for equivalent workers---that the model has very sharp
predictions about, independently of the shape of the wage distribution the
workers are drawing from. The key finding in our work is that the mean-min
ratio predicted by a large class of search models is very close to zero:
workers at the bottom of the wage distribution pretty much do just as well
as the average worker.
We calibrate the model based on some well-known statistics. The most
important one is the duration of unemployment. The intuitive interpretation
of our main result is the following: given that unemployed workers take
jobs very quickly (the mean duration of unemployment is about 16 weeks),
they must think that they cannot get much higher wages if they wait and
search more. That is, their observed search behavior reveals that there
cannot be much upside potential in the wage distribution. We think this is
an important result. If our theory is a good rough approximation of
reality, it says that the competitive model is a good approximation to how
labor markets work, at least for the purpose of understanding wage
dispersion. However, there is a problem: just about any measure of wage
dispersion, including those that we painstakingly develop in our research,
suggests that the mean-min ratio for similar workers is very high---on the
order of magnitude of 2, whereas the calibrated model suggests something
like 1.05. There are several alternative ways to interpret this
discrepancy. One is that search frictions really are unimportant, and that
the large dispersion we see in the data is just reflecting our inability to
isolate "identical workers": the wage dispersion is due to workers really
being different. Many do take just this away from our work, though we
really have to caution against this conclusion, because we think that it is
unlikely that the measurement problems are so severe. The alternative
conclusion, then, would be that there is something wrong with the theory.
We go through many different versions of the search theory and find that
most of them are strikingly unable to deliver wage dispersion. The one
version of search theory that seems to have promise is the one where
workers search actively for jobs also when they are employed. These models
come closer to matching the data, but there are still important
You draw a parallel to the findings by Robert Shimer and others that the
same kind of model has trouble generating aggregate fluctuations. It's a
good parallel. Search theory has two main predictions: how prices/wages are
dispersed in the cross-section (our focus) and how match creation varies
over time (Robert's focus). Robert finds that unemployment---for both
searching parties, workers as well as firms---fluctuates much less in the
model than in the data. This has generated a large number of attempts to
better understand the origins of unemployment and vacancy fluctuations. Our
work is far from the first to look quantitatively at frictional wage
dispersion, but I think we have come up with a very simple and transparent
argument that says that there is a severe quantitative limitation that
others had not noticed. I think this is roughly what Robert did too, and I
hope that our work will help stimulate even more research in this area. I
find these research projects very interesting because they ask central
questions: do markets work well, and if they don't, just how do we know and
what are the implications? Wage dispersion and unemployment are also
related in that they are both mechanisms through which workers face risk:
risk of not getting any income at all, and risk of getting income, but very
low income. Andreas, Gianluca, and I are also interested in how economic
policy might be able to shield workers from risk, but it is important to
first understand the nature and origins of this risk.
ED: Can we still trust labor search models to give us important insights about
the labor markets?
PK: Economics is a young discipline, and we should be wary of trusting our
models, I think. But if I interpret the question more broadly as if I think
labor search models are useful for understanding labor markets, then I have
no hesitation in saying yes. They are very useful, and I think that the
current research is producing lots of new insights. One reason, I think, is
that this new research is quantitative; up until recently, search theory
was a "pencil-and-paper" discipline where the model predictions were mainly
compared qualitatively with data. Finn Kydland and Ed Prescott showed how
much more insight could be gained from quantitative business cycle theory
than from abstract discussions about what drive cycles, and I hope that
future researchers will view the current research on frictions in the labor
market in a similar way. It is true that we have discovered several
quantitative limitations of the basic search/matching model. This raises
the standards in the search literature, I think---we need the models to be
quantitatively convincing in their first-order implications. As a result,
search models are better understood now, and new varieties of search models
which come closer to matching the data are being developed as we speak. We
saw this kind development as a response to Finn's and Ed's work---most
business-cycle theories today can be viewed as developments of the
quantitative model Finn and Ed formulated---and I hope that the current
work will be equally successful.
I this context, I remember reading an interview with Tom Sargent where he
was talking about the "good old days" when he, Bob Lucas and Ed Prescott
developing rational-expectations macroeconomics. He said that Bob and Ed
detached themselves from formal econometrics because they felt that "too
many good models were
being rejected". I couldn't agree more with this description, and I am very
happy that Bob and Ed did that. We should see the current work on labor-macro exactly the same way. It's important to realize that economic
research involves a constant interplay between data and theory, and that we
are still at a stage where the question is not about the fine details of
how to understand the economy we live in, but rather about whether our
theories can even roughly capture the central features of economic data.
These are the kinds of questions we are now working with in this field, and
I am very excited about being able to participate in this research. I think
it is one of the most exciting developments in macroeconomics in a while.
ED: You focus in your analysis on the mean/min measure of wage dispersion.
Why focus on this one and not a more complete description of the wage
distribution? In particular, labor economists argue that we know very
little about the tails of the wage distribution, and in ways that matter
for the mean.
PK: The whole point of our paper is that the previous literature, by looking at
more standard measures of wage dispersion, has missed a simple and yet
central implication of the theory, which is the one for the mean-min ratio.
Moreover, although the mean-min ratio is only one measure of wage
dispersion---and one might care about others as well---in practice knowledge
of the mean-ratio places strong restrictions on wage dispersion as measured
by other moments. But more importantly, perhaps, because the benchmark
search theory we look at assumes risk neutrality, for the searching agents
no other moments than the mean matter. Risk neutrality is also a key
assumption behind our main formula, though we obtain approximate bounds on
wage inequality using preferences with risk aversion.
Hall, Robert E. (2005).
"Employment Fluctuations with Equilibrium Wage Stickiness
American Economic Review,
American Economic Association, vol. 95(1), pages 50-65, March.
Hornstein, Andreas, Per Krusell and Giovanni L. Violante (2006a). "Frictional wage dispersion in search models: a quantitative assessment
06-07, Federal Reserve Bank of Richmond.
Hornstein, Andreas, Per Krusell and Giovanni L. Violante (2006b). "Technical appendix for Frictional wage dispersion in search models: a quantitative assessment
06-08, Federal Reserve Bank of Richmond.
Kydland, Finn E., and Edward C. Prescott (1982).
"Time to Build and Aggregate Fluctuations
Econometric Society, vol. 50(6), pages 1345-70, November.
Mortensen, Dale T., and Christopher A. Pissarides (1994).
"Job Creation and Job Destruction in the Theory of Unemployment
Review of Economic Studies,
Blackwell Publishing, vol. 61(3), pages 397-415, July.
Evans, George W., and Seppo Honkapohja (2005).
"An Interview With Thomas J. Sargent
Cambridge University Press, vol. 9(04), pages 561-583, October.
Shimer, Robert (2005). "The Cyclical Behavior of Equilibrium Unemployment and Vacancies
American Economic Review,
American Economic Association, vol. 95(1), pages 25-49, March.
Review of Economic Dynamics: Letter from the Editor
Things are going great for the RED. We continue to receive a large number
of high-quality submissions. Keep them coming!
I want to alert you to two recent publications. As Ph. D. teachers, we're
always looking for papers that provide a unifying overview on
difficult literatures. The lead article in the April 2007 issue of the RED
is one such paper. Many dynamic situations in economic life can be thought
of as repeated games with imperfect public monitoring. A key issue in such
games is how the frequency of this monitoring ends
up affecting the set of equilibrium outcomes. (Thus, how do equilibrium
outcomes change if the Fed releases information every five years or every
In their paper, "Continuous time limits of repeated games with imperfect
public monitoring," Drew Fudenberg and David Levine take up this issue.
They derive important new results about games between a long-run player and
short-run player. (Such games are often a natural way to model games
between governments and private, non-strategic, agents.) Beyond being
important in their own right, their results
greatly clarify the recent breakthrough work of Yuliy Sannikov (and his
co-authors) on this topic.
In a different vein, Robert Shimer's 2005 AER has triggered a flood of
interest in the quantitative modelling of unemployment (see also the above conversation with Per Krusell). Dale Mortensen
and Eva Nagypal have written a paper, "More on unemployment and vacancy
fluctuations," in this line of research that is forthcoming in the RED.
Their paper makes a contribution by proposing a possible solution to the
difficulty isolated by Shimer in his work. Beyond its own contribution,
though, their paper does a particularly good job of unifying and clarifying
the prior literature. The Mortensen-Nagypal article will lead off the July
2007 issue of the RED.
More generally, for those of you who teach labor economics, the entire July
2007 issue will be dedicated to this field. The issue provides a great
snapshot of some of the best work in this area. There is good reason to
hope that the July 2007 issue of our journal will be an
important reference for years to come.
Narayana Kocherlakota, Co-Ordinating Editor
Review of Economic Dynamics
Society for Economic Dynamics: Letter from the President
Dear SED Members and Friends:
There are several things I'd like to highlight in this issue of the
newsletter. First, I'd like to announce that we have revived the position of
Secretary of the SED. Christian Zimmermann, who edits the newsletter as well
as running our website, has kindly agreed to serve in this capacity.
Second, I'd like to thank everyone for the wonderful submissions to the
Prague conference. With the strong work of the local organizers Radim
Bohacek and Michal Kejak and our program co-chairs Ricardo Lagos and Noah
Williams the meeting is shaping up very well. The good news is that we got a
record 991 submissions. The bad news is that this means that not every good
paper will make it on the schedule.
For those planning on attending the meetings, I'd like to remind you that we
have some terrific plenary speakers lined up: Dilip Abreu, Robert Shimer,
and Kenneth Wolpin. We are also going to have a very interesting panel on
energy sponsored by the Czech electrical company CEZ: Edward Prescott and
and Frank A. Wolak will be speaking.
Finally, our 2008 meetings have been scheduled for July 10-12 in Cambridge
MA. More details to be available on the website soon.
I look forward to seeing you in Prague.
David Levine, President
Society for Economic Dynamics
Review: Two Books on Modern Macroeconometrics
by David DeJong with Chetan Dave
Methods for Applied Macroeconomic Research
by Fabio Canova
More and more, dynamic stochastic general equilibrium (DSGE) models are not just calibrated but also estimated, at least in part. There are, however, few works that allow newcomers to enter this field of research. Both books cover this gap and both try to deliver a self-contained treatment of the material. They first detail how to extract stylized facts from the data (filters, impulse responses), and how to approximate and solve a few standard DSGE models. Then, they focus on empirical methods: calibration, moment matching (GMM, SMM), maximum likelihood, and Bayesian methods. In each case the methods are first exposed in general terms, then implemented with examples.
The books are not perfect substitutes, however. DeJong and Dave take a more verbose approach and assume less prerequisites from their readers. They cover thoroughly three examples in each chapter, thus allowing students to learn about these models along with this book. DeJong and Dave additionally cover nonlinear approximations and their empirics.
In contrast, Canova's treatment of the material is more terse, but covers a myriad of examples and includes also a lot of exercices within the text. Those who have appreciated Stokey and Lucas or Ljundqvist and Sargent should find themselves at home. This book therefore need more preparation than the former and should be suitable for a second year PhD course. Canova additionally covers extensively VARs (traditional and Bayesian) as well as panels.
Compared to previous treatments of this topic, both books provide extended coverage of Bayesian methods, in light of their increasing popularity of estimating DSGE models with these methods or using DSGE models for priors. Also, both have up-to-date references to recent literature using all mentioned methods.
"Methods for Applied Macroeconomic Research" and "Structural Macroeonometrics" are both published by Princeton University Press.
The EconomicDynamics Newsletter is a free supplement
the Review of Economic
(RED). It is distributed through the
mailing list and archived at http://www.EconomicDynamics.org/newsletter/. The
editors are Christian
Zimmermann (RED associate editor)
and Narayana Kocherlakota (RED coordinating editor).
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