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Alfred Anate Bodurin Mayaki

Fiscal policy, aggregate demand, and sectoral labor reallocation

Tuesday 28 October 2025 at 15:32
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Edited by Alfred Anate Bodurin Mayaki, Wednesday 29 October 2025 at 06:24

Overview

Speaker: Antonella Trigari

Presentation of a work-in-progress paper on how countercyclical fiscal policy and aggregate demand interact with sectoral labor reallocation. The study documents U.S. sectoral reallocation patterns, estimates policy effects on reallocation and unemployment, and develops a multi-sector heterogeneous-agent New Keynesian framework with search and matching frictions and input-output linkages to analyze mechanisms and policy transmission.

Participants

Motivation and Research Goals

  • Shocks have become increasingly asymmetric and sectoral (pandemic, trade, energy, climate, artificial intelligence), generating uneven labor displacement and making labor reallocation central for adjustment.
  • Policy responses often remain untargeted across sectors; debate centers on transfers to households vs. subsidies to firms.
  • Goals:
    • Document U.S. sectoral labor reallocation and sectoral heterogeneity over the last two decades, introducing new gross reallocation indices.
    • Estimate effects of countercyclical fiscal policy—e.g., Unemployment Insurance (UI) extensions and firm subsidies like PPP (Paycheck Protection Fund)—on reallocation and aggregate unemployment, both directly and via reallocation.
    • Develop and calibrate a multi-sector Heterogeneous Agent New Keynesian (HANK) model with search and matching frictions and an input-output (IO) network to study policy transmission and connect model counterfactuals to empirical estimates.

Key Empirical Evidence and Measures

  • Data and approach: CPS (Current Population Survey) longitudinal data used to measure “realized reallocation” via cross-sector new hires and last pre-unemployment sector.
  • Realized reallocation magnitude: On average, 48% of job finders move to a sector different from their last employment sector.
  • Search reallocation (unobserved search sectors): New method combining data and a recursive stock equation for sectoral searchers, using estimated sectoral job-finding rates, to infer switching across search sectors.
    • Finding: 32% of job seekers switch the sector in which they search.
  • Cyclicality: Both realized and search-based reallocation indices are cyclical and decline during major recessions.
  • Sectoral heterogeneity in risk and insurance:
    • Scatter of sectoral unemployment rates (by last employment and search-based measures) versus a consumption ratio (consumption of unemployed relative to employed) shows substantial heterogeneity.
    • Negative correlation: Sectors with higher unemployment risk tend to offer lower consumption insurance.

Mechanisms: Aggregate Demand Amplifications and Reallocation

  • HANK feedback loop (aggregate demand–unemployment risk):
    • Compositional channel: As workers move across sectors with heterogeneous insurance against unemployment risk, aggregate demand effects shift with sectoral composition.
    • Within-sector channel: Reallocation alters sectoral conditions (e.g., sectors losing workers may see higher job-finding rates for remaining workers; receiving sectors may see higher risk).
    • Shock increases unemployment risk → stronger precautionary saving → lower consumption/aggregate demand → with nominal frictions, firms post fewer vacancies → unemployment risk rises further.
    • Interaction with reallocation:
  • IO amplification (HANK–IO):
    • Sectoral demand shocks cascade through input-output linkages, reducing demand in connected sectors and amplifying initial shocks.
    • Also features compositional and within-sector effects.

Model: Structure and Novel Elements

  • Baseline: Tractable HANK-SAM setup with incomplete markets and endogenous idiosyncratic unemployment risk.
  • Additions:
    • Multiple ex-ante heterogeneous sectors with input-output linkages.
    • Sectoral reallocation via a family construct implying cross-reallocation across sectors.
    • Randomness in sectoral search choices (as in trade literature) to match observed gross flows where moves occur even when sector values are similar.
  • Labor market: Search and matching frictions; vacancy posting responds to demand conditions.
  • Firms: New Keynesian Dixit–Stiglitz structure with an additional wholesale layer to separate price-setting decisions.

Policy Focus and Examples

  • Countercyclical fiscal policies examined include:
    • UI extensions (e.g., during the Great Recession or COVID).
    • Firm subsidies such as PPP (Paycheck Protection Fund), noted during the Great Recession.

Positioning in Related Literature

  • Contrasts with the Lilien (1982) perspective, where desired reallocation across sectors, slowed by frictions, causes unemployment.
  • Focus here is on realized reallocation—actual worker movements—mediating the transmission and effects of shocks and policies.

Planned Components and Application

  • Presentation plan includes evidence, a model sketch, and “an application to an automata.”
  • Claimed contribution: First model combining heterogeneous agents, endogenous unemployment risk, search and matching, input-output linkages, and endogenous sectoral reallocation in a tractable setup.

Next Steps / Ongoing Work

  • Continue estimating the impact of countercyclical fiscal policies on sectoral reallocation and aggregate unemployment, both directly and via reallocation channels.
  • Calibrate the model to U.S. data.
  • Use model counterfactuals to connect predictions to empirical estimates.
  • Refine and apply new indices of gross labor reallocation to additional episodes and shocks.

References

Tags: economics, ecb, conference, monetary, fiscal, labor, sectoral reallocation
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Alfred Anate Bodurin Mayaki

Default amplification in a New Keynesian sovereign risk model

Tuesday 21 October 2025 at 16:20
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Edited by Alfred Anate Bodurin Mayaki, Monday 27 October 2025 at 07:31

Overview

Speaker: Ozge Akinci

This discussion reviews a paper proposing an open-economy New Keynesian DSGE model with two frictions—sticky prices and sovereign default risk—to study how fiscal policy interacts with monetary policy when default risk is present. The core result: expectations of default act like a cost-push shock in the New Keynesian framework, making inflation stabilization harder and generating co-movements observed in data: high inflation, high sovereign spreads, high nominal interest rates, and low output.

Model and Mechanism: “Default Amplification”

  • Adverse productivity shock triggers an output collapse. In a small open economy, agents borrow internationally to smooth consumption, raising external debt.
  • Higher external debt increases the likelihood of default. Because default states feature low consumption and high inflation, firms expect higher future inflation and higher marginal utility of consumption.
  • Via the New Keynesian Phillips curve, higher expected future inflation (and higher marginal utility) raises current pricing, lifting current inflation even without directly linking inflation to productivity.
  • Under a standard Taylor rule, the central bank increases the nominal interest rate, which reduces current domestic consumption (via the Euler equation), amplifying the downturn.
  • Outcome: the mechanism aligns with observed episodes of high inflation, high spreads, high nominal rates, and low output.

Scope of Shocks and Key Questions Raised

  • Beyond supply/productivity shocks: Does the mechanism extend to any shock that raises default likelihood (e.g., demand shocks)?
  • Global financial cycle: Can the New Keynesian default framework reconcile empirical spillovers from US monetary policy to emerging markets (EM), notably the inflation response?
  • Exchange rate role: In EM contexts, how do exchange rate movements contribute to the mechanism and observed outcomes?

Global Financial Cycle Evidence and Interpretation

  • Empirical results (quarterly data for 25 EM from 1965; local projections on identified US monetary policy shocks):
    • An unexpected 100 basis point increase in the federal funds rate reduces US GDP by 0.8%.
    • EM GDP falls by more than the US; EM headline inflation rises significantly, and short-term PPI (domestic prices) also increases.
    • EM central banks raise policy rates (Taylor rule) despite the output drop.
  • State dependence: When EM inflation is elevated, PPI and nominal interest rates increase markedly despite a large output decline.
  • Limitation of the New Keynesian Reference Model (Gali-Monecelli): It delivers spread and output spillovers but implies falling producer price inflation and lower nominal interest rates—at odds with EM inflation dynamics.
  • Alternative (discussant’s prior work with Albert Queralto): Unanchored inflation expectations (partly adaptive) can explain co-movement of high inflation and low output after large depreciations; the default-risk mechanism may be complementary.

Authors’ Responses

  • Generalization across shocks: The mechanism persists for any shock that raises future default risk; through the New Keynesian Phillips curve, higher default risk increases expected future inflation or raises future marginal utility, acting like a cost-push shock that lifts current inflation.
  • US monetary policy shock: Not studied in the paper; in the model, tighter US policy raises international borrowing costs and default risk, triggering the same amplification. The net effect among channels merits future study.
  • Exchange rate: With flexible exchange rates (as in EM inflation targeting), model-implied exchange rate movements are consistent with data, though not very volatile.

Audience Q&A Highlights

  • EM specificity: The framework applies to any country with default risk and inflation targeting; the author cautioned it may not yet be a good model for France because of the monitoring unit.
  • Global factor in risk pricing: For EM, about 80% of the variation in the CBS price is attributed to a global factor, underscoring the importance of global shocks (including US monetary policy and related shocks). Authors agree risk-per-membership would be another useful shock to assess.
  • Debt maturity: The paper uses long-term debt following the literature; in a simple example, short-term debt also works.

Next Steps / Actions

  • Extend the framework to a two-country setting to analyze US monetary policy spillovers, tracking how default likelihood transmits and affects EM inflation and output.
  • Quantify the relative strength of default-amplification versus demand channels under US monetary tightening.
  • Evaluate additional shocks (e.g., risk-per-membership) and assess model fit against global factor-driven movements in EM spreads.
  • Further examine the role and volatility of exchange rate dynamics under flexible regimes within the model.
Tags: economics, ecb, conference, monetary, fiscal, sovereign default risk
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