UC San Diego

Chapter I estimates a series of shocks to a labor matching model with money and sticky prices, using U.S. data from the Great Depression. These shocks consist of shocks to the supply and demand for money, to short-run and long-run productivity, to labor supply, and to labor's share of bargaining surpluses. The estimates, based on a persistent downward shift in the Beveridge curve combined with persistently high wages, suggest that a rise in labor's share of bargaining surpluses accounts for a large part of the contraction and most of the slow recovery during the Depression. Shocks to labor supply explain some the slow recovery and monetary shocks explain some of the contraction. Shocks to productivity do not seem to have been important during this period. Chapter II shows that the same model can match labor's share of income rather well using postwar data. However, it cannot explain much of the behavior of employment and vacancies without resorting to additional shocks beyond monetary and productivity shocks. As with other New Keynesian models, the model suggests that monetary policy shocks can account for only a small portion of postwar fluctuations apart from the Volcker episode. Productivity shocks can account for some of the behavior of labor's share and employment during the late 1960s and the early 1980s. Most recessions, however, appear driven by other shocks. Chapter III estimates a fiscal policy rule using postwar U.S. data in order to understand how governments set fiscal policy in order to stabilize the debt-GDP ratio. This chapter synthesizes the literature on fiscal Taylor rules and error correction models, treating the former as a special case of the latter. The estimated rule suggests that the government sector has stabilized deficits through adjustments to purchases and taxes, in that order. It has appeared extremely reluctant to adjust transfers in response to fiscal imbalances. Cyclically, government spending and transfers as a share of output rise strongly with unemployment while taxes fall strongly. Furthermore, since 1981, the government sector has stabilized deficits much less aggressively, while the cyclical behavior of fiscal variables has not changed