Macroeconomic Policy under Market Imperfections
Market economies experience frequent and prolonged fluctuations in economic activity, with booms followed by recessions. Recessions are of particular concern to the general public and for policymakers alike because they imply declining income and increasing unemployment. On the other hand, booms can lead to an overheating economy and inflationary pressures. Monetary policy is a very powerful instrument to dampen these fluctuations.
We believe that business cycle fluctuations are affected by market imperfections and institutions. Examples for market imperfections are the costs of hiring workers, the costs to obtain credit or the barriers to enter new markets. Examples for relevant institutions are trade unions and employment protection legislation. We analyze the role of market imperfections and institutions in dynamic general equilibrium models. Much of our analysis naturally leads to important policy implications, like the optimal conduct of monetary policy.
- Selection on labor markets: We have developed a micro-founded and intuitive alternative to the search and matching framework for modeling unemployment.
- Heterogeneity: We emphasize heterogeneity among agents or technologies. E.g., we account for differences between new and established firms, or institutional differences between countries.
- Global perspective: We use open economy models, e.g., to assess the importance of labor market asymmetries in a currency union and to analyze the consequences of protectionism during a crisis.
- Methodology: While the modeling of market imperfections within the DSGE-framework is our core theoretical expertise, the intensive interaction with the Institute’s Forecasting Center provides us with strong expertise in empirical methods such as VAR modeling and Bayesian estimation.
The research area organizes the policy-oriented network “Ensuring Economic and Employment Stability” (EES), which addresses the link between the business cycle and unemployment. The network brings together leading researchers in the field to discuss cutting edge research. Among the participants of our workshops and conferences were Chris Pissarides and Dale Mortensen (both winners of the 2010 Nobel Prize in Economics), Robert Hall, Robert Shimer, Lawrence Christiano, Martin Eichenbaum, Jordi Galí, Per Krusell, John Haltiwanger, Eran Yashiv, Guiseppe Moscarini and Richard Rogerson. For more details on the network and its member institutions follow this link (www.ees.ifw-kiel.de/).