Research    



Refereed publications 

Does Fiscal Policy Matter? Blinder and Solow Revisited.
 (joint with Roger E.A. Farmer) Macroeconomic Dynamics, 2012 [NBER] [MD]

        This paper uses an incomplete labor markets model (see, for example, Farmer (2011), Kocherlakota (2012)) to answer two questions: 1) do increased 
        government purchases crowd out private consumption? 2) do increased government purchases reduce unemployment? Farmer compared permanent
        tax financed expenditure paths and showed that the answer to 1) was yes and the answer to 2) was no. We generalize his result to temporary 
        bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase
        in government purchases does crowd out private consumption expenditure as in the previous work of R. Farmer. However, in contrast to Farmer’s 
        experiment we find that a temporary increase in government purchases can also reduce unemployment.

        Non technical summary of the paper can be found on VOXeu.

Working Papers


Hysteresis in Unemployment and Jobless Recoveries, Currently under major revision

This paper develops and estimates a general equilibrium rational expectations model with search and multiple equilibria where aggregate shocks have a permanent effect on the unemployment rate. If agents' wealth decreases, the unemployment rate increases for a potentially indefinite period. This makes unemployment rate dynamics path dependent as in Blanchard and Summers (1987). I argue that this feature explains the persistence of the unemployment rate in the U.S. after the Great Recession and over the entire postwar period.
        
The model is driven by two kinds of shocks. Productivity shocks have similar transitory effects to a standard model. But they also have long-lasting   
effects on the unemployment rate, produced by an endogenous propagation mechanism. In addition, non-fundamental sunspot shocks to households'
expectations about their wealth produce permanent changes in the unemployment rate.

What Prevents a Standard Business Cycle Model From Matching the U.S. Data? Decomposing the Labor Wedge

I carry out a business cycle accounting exercise (Chari, Kehoe and McGrattan, 2007) on the U.S. data measured in wage units (Farmer (2010)) for the entire postwar period. In contrast to a conventional approach, this approach preserves common medium-term business cycle fluctuations in GDP, consumption, investment and the unemployment rate. Additionally, it facilitates decomposition of the labor wedge into the labor supply and the labor demand wedges. Using this business cycle accounting methodology, I reverse a key finding of the real business cycle literature which asserts that 70% or more of economic fluctuations can be explained by TFP shocks. In contrast, in the transformed data, most movements in GDP are accounted for by "the labor supply wedge". In other words, the real business cycle model fits the data badly because the assumption that households are on their labor supply equation is flawed. This failure is masked by data that has been filtered with a conventional approach that removes fluctuations at medium frequencies. These findings are consistent with other papers in the literature.

Fiscal policy in a Model with Hysteresis (joint with Roger E.A. Farmer)
  Contact Information

Dmitry Plotnikov
International Monetary Fund
700 19th st, NW
Washington, DC, 20431

Email
dplotnikov at imf dot org

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