Government intervention and labor market dynamics

This thesis contributes to the general equilibrium modelling of monetary economies from both the theoretical and empirical perspectives. Research outcomes are summarized in three original research papers. The first introduces a non zero sovereign and private default probability in a large scale monetary, open economy, search and matching model. The main research objective is testing whether the emergence of a financial wedge modelled in the form of a sovereign risk channel can reduce the size or even reverse the sign of the Keynesian fiscal multiplier, conditional to alternative fiscal consolidation measures. The subset of the model parameter space that satisfies the empirical identification requirements issubset of the model parameter space that satisfies the empirical identification requirements is estimated with Bayesian techniques using a large set of data of EZ peripheral countries (Greece, Ireland, Italy, Portugal and Spain). From stochastic simulation analyses conducted at the posterior mean estimates posterior simulations it is shown that the unconditional relation between sovereign risk and macroeconomic fundamentals is weak, and that fiscal contractions are self-defeating, such that the sovereign risk channel, contrary to the theoretical predictions of a recent literature, amplifies the Keynesian effects of the fiscal contraction. The consideration of a liquidity trap environment does not reverse, but reinforces, these results. The second paper introduces a distinction between the wage negotiated by newly hired workers and incumbents in a monetary, open economy, search and matching model. The main research objective is to evaluate the efficacy of two labor market targeted fiscal policies, a hiring subsidy and a wage subsidy for new hires of labor, and to compare them with that implied by standard fiscal instruments. Even in this case, the subset of the model parameter space that satisfies the empirical identification requirements is estimated with Bayesian techniques using data for high unemployment countries of the EZ periphery (Greece, Ireland, Italy, Portugal and Spain). From posterior simulations it is shown that, except Greece, the labor market policies are not superior to standard fiscal expansions in stimulating economic activity, and their employment-enhanching effects are clearly dominant only in the long term and at the Greece and Ireland's model parameter estimates. The consideration of a liquidity trap environment reinforces these results, showing that expansionary policy actions triggering a deflation can be procyclical when the interest rate zero lower bound binds. The third paper addresses the issue of the consideration of heteogeneous consumers in general equilibrium models. Heterogeneity in consumption behavior is generally recognized as a useful and powerful modelling assumption from both the theoretical and empirical perspectives. This paper shows that most of the analyses considering such an assumption are characterized by somehow strong assumptions which make the apparent heterogeneity illusory in many respects. By relaxing some of the contextual hypotheses in the labor market dimension that seem to be crucial in the previous literature, and considering type-specific workers at the very root of the microfoundations, the paper proves that substantial differences emerge in both the static solutions and in model dynamics. By means of a calibration experiment differences are shown to be relevant not only for the labor market variables but also for that of real and monetary variables.