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Research
New perspectives on depreciation shocks as a source of business cycle fluctuations (pdf) »
Joint with Francesco Furlanetto (Norges Bank).
Central Bank of Iceland Working Paper No. 48, July 2010; Norges Bank Working Paper 2011/02, March 2011.
In this paper we study the transmission for capital depreciation shocks. The existing literature in the Real Business Cycle tradition has concluded that these shocks are irrelevant for business cycle fluctuations. We show that these shocks are potentially important drivers of aggregate fluctuations in a New Keynesian model. Nominal rigidities and some persistence in the shock process are the key ingredients to generate co-movement across real variables.
Investment-specific technology shocks and consumption (pdf) »
Joint with Francesco Furlanetto (Norges Bank).
Central Bank of Iceland Working Paper No. 49, July 2010; Norges Bank Working Paper 2010/30, December 2010.
Current business cycle models systematically underestimate the correlation between consumption and investment. One reason for this failure is that a positive investment-specific technology shock generally induces a negative consumption response. The objective of this paper is to investigate whether positive consumption responses to investment-specific technology shocks can be obtained in a modern business cycle model. We find that the answer to this question is yes. With a combination of nominal rigidities and non-separable preferences, the consumption response is positive for general parameterisations of the model.
A DSGE model for Iceland (pdf) »
Central Bank of Iceland Working Paper No. 50, September 2010.
This paper presents a dynamic stochastic general equilibrium (DSGE) model for a small open economy fitted to Icelandic data. The model has been developed at the Central Bank of Iceland as a tool for policy analysis and forecasting purposes in support of inflation targeting. As the existing macroeconometric model at the Central Bank, the model is a dynamic quarterly model. But it differs by being fully founded on well-defined microeconomic decision problems of agents in the economy. This allows for a structural interpretation of shocks to the economy. The model features endogenous capital accumulation subject to investment adjustment costs, variable capacity utilisation, habit formation in consumption, monopolistic competition in goods and labour markets, as well as sticky prices and wages. The home economy engages freely in international trade, while international financial intermediation is subject to endogenous costs. Monetary policy is conducted by an inflation targeting central bank. The model is fitted to Icelandic data for the sample period 1991-2005 through a combination of calibration and formal Bayesian estimation. The paper presents the estimation results, and it discusses the model’s properties. Finally, first applications are shown to illustrate the model’s potential in guiding monetary policy.
Rule-of-thumb Consumers, Productivity and Hours (pdf) »
Joint with Francesco Furlanetto (Norges Bank).
Scandinavian Journal of Economics, forthcoming.
Danmarks Nationalbank Working Paper 48; Norges Bank Working Paper 2007/5.
In this paper we study the transmission mechanism of productivity shocks in a model with rule-of-thumb consumers. In the literature, this financial friction has been studied only with reference to fiscal shocks. We show that the presence of rule-of-thumb consumers is also very helpful in accounting for recent empirical evidence on productivity shocks. Rule-of-thumb agents, together with nominal and real rigidities, play an important role in reproducing the negative response of hours and the delayed responses of output and consumption after a productivity shock.
Labour Market Asymmetries in a Monetary Union »
Joint with Torben M. Andersen (University of Aarhus), 2010.
Open Economies Review, Vol. 21, No. 4, 483-514.
Kiel Working Paper No. 1331, June 2007; CEPR Discussion Paper No. 6800, April 2008; Danmarks Nationalbank Working Paper No. 53, May 2008.
This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both countryspecific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries are not only critical for countryspecific performance but also for the overall performance of the monetary union. A striking finding is that aggregate output volatility is not strictly increasing in nominal rigidities but hump-shaped. Moreover, a disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks, a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, while this is not necessarily the case for aggregate shocks. There may thus be a tension between the degree of flexibility considered optimal at the country level and at the aggregate level within the monetary union.
Fiscal shocks and real rigidities »
Joint with Francesco Furlanetto (Norges Bank), 2009.
The B.E. Journal of Macroeconomics, Vol. 9, Iss. 1 (Topics), Article 2.
Danmarks Nationalbank Working Paper No. 55, June 2008; Norges Bank Working Paper 2008/10, June 2008.
In this paper we show that results on the effects of fiscal shocks in Galí, López-Salido and Vallés (2007) rely on a high degree of price stickiness and a large percentage of financially constrained agents. Real rigidities in the form of habit persistence, fixed firm-specific capital and Kimball demand curves interact in interesting ways with nominal and financial rigidities and allow us to reproduce the same consumption multiplier as Galí et al. (2007) under only two and a half quarters of price stickiness, instead of four, and only 30 per cent of constrained agents instead of 50 per cent. Therefore, real rigidities are useful in the study of fiscal shocks in addition to monetary and productivity shocks as has been shown in the previous literature, though rule-of-thumb consumption remains too crude a mechanism for accounting for the hump-shaped response of consumption found in the data.
Turnover in the Foreign-Exchange and Derivatives Markets in April 2001 (pdf) »
Joint with Tina Christoffersen (Danmarks Nationalbank), 2001.
Danmarks Nationalbank, Monetary Review, 4th Quarter 2001.
Turnover in the Danish foreign-exchange market has declined since 1998, according to the Danish part of an international survey. One explanation may be the introduction of the euro. This pattern is also reflected in global trends. Turnover of financial derivatives has increased during the same period.
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"The real trouble with this world of ours is not that it is an unreasonable one, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait."
- G.K. Chesterton.
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