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A Unified Theory of Growth, Cycles and Unemployment (current version: 2022-12-14; manuscript available on request)
Part I: Technology, Competition and Growth
Part I of this paper proposes a model of endogenous growth, in which the scale of individual production units is endogenously determined in a novel way. The basic model has desirable growth and static properties, including the following:
(1) The economy exhibits productivity growth at a constant rate that only depends on technology parameters; (2) at the aggregate level, the economy is identical to the neoclassical growth model, thus (3) featuring the full medium-term capital dynamics familiar
from this framework; moreover, (4) the model explains why the aggregate production function and many industries exhibit constant returns to scale; (5) there are no unrealistic constraints on the firm-level production technology;
in particular, production is not linear in a capital-like input and (6) the notion that R&D investments become less effective with rising technology levels is accounted for; (7) generally, there are no knife-edge conditions or implausible
scale effects; (8) no particular assumptions regarding market power or the competitive structure of industries are required; markets can be modelled as perfectly competitive, but the framework is robust to alternative assumptions
such as monopolistic competition; (9) being based on the quality-ladder idea, the model can be extended to feature the rich industry-level dynamics that have been studied using Schumpeterian growth models; (10) in its basic version, the model is far simpler
while being more general than popular models of endogenous growth.
Part II: Business Cycles and Unemployment
The growth framework presented in part I of this paper is extended to include labour market frictions, resulting in a model that has interesting cyclical properties, including the following:
(1) In response to investment-reducing shocks, the model endogenously creates recessions followed by drawn-out recoveries, closely resembling time series data on unemployment, output, investment and asset prices; (2) recessions are fully explained as periods
during which frictions prevent instantaneous reallocation, resulting in (3) stock market crashes at the beginning of recessions; (4) the persistently elevated unemployment following recessions is explained as a result of investment dynamics; (5) the model incorporates
a mechanism that strongly amplifies investment-reducing shocks while dampening investment-increasing shocks; this leads to (6) a pronounced asymmetry in business cycles, even for symmetric shocks; (7) the model further explains why output can be above trend during
investment booms; (8) cyclical fluctuations can be triggered by a variety of shocks, including for example productivity or financial shocks; (9) the model is capable of expectation-driven cycles: the anticipation of future changes can trigger investment booms or recessions
without the need for any contemporary productivity changes; (10) the shape of recessions and recoveries is largely driven by model mechanics, and does not rely on particular characteristics of the shock; (11) the model matches the usual cyclical correlations as well as typical
RBC models, and in addition to that replicates the skewness of cyclical variables; (12) the model is simpler than most alternative business cycle frameworks and more robust with regards to its reliance on household characteristics for cyclical patterns.
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Unemployment Insurance Differentiation over the Business Cycle
This paper quantitatively investigates the welfare implications of varying unemployment insurance
(UI) generosity with labour market conditions, in particular over the business cycle.
Using a life-cycle model with two-sided matching in the labour market, which is calibrated to match the Canadian economy, I conduct policy experiments that
qualitatively confirm results from the theoretical literature that differentiation of UI generosity over the business cycle
improves welfare by providing better insurance in times when labour market conditions are difficult.
However, I show that quantitatively, the welfare improvements possible though optimal benefit differentiation are very small for UI systems that
are reasonably efficient to start with.
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