Why is Europe Falling Behind? Structural Transformation and Services' Productivity Differences between Europe and the U.S.
(with Cesare Buiatti and Luis Felipe Saenz) | pdf
We explain labor productivity differences of the service sector between Europe and the U.S. through the labor allocation taking place within the service sector. We measure labor productivity using a multisector structural transformation model that decomposes services into 11 sub-sectors comparable across Europe and the U.S. We identify wholesale and retail trade and business services as the two sectors that are responsible for most of the lack of catch-up in labor productivity between Europe and the U.S. We also investigate which institutional characteristics have contributed to the different performances of sectoral productivity across sectors. We empirically explore our estimated country-sector panel of labor productivity levels, and our results suggest that differences in taxation, pro-business attitudes, ICT diffusion and rates of innovation are disproportionally correlated with the productivity of wholesale and retail, and business services relative to all other sectors.
Housing And Monetary Policy In The Business Cycle: What Do Housing Rents Have To Say?
(with Daniel A. Dias,) | pdf
In this paper we unveil a feedback loop between monetary policy, housing tenure choice (own vs rent) and measured inflation and quantify its consequences. This feedback loop is explained in three parts: i) Housing rents respond positively to contractionary monetary policy shocks; ii) This effect of interest rates on housing rents gives rise to an important and systematic inflation mismeasurement problem because, directly and indirectly, housing rents weigh approximately 30% in the CPI and 13% in the PCE; iii) When interest rates are set according to a Taylor rule, the systematic mismeasurement of inflation gives rise to a feedback loop by which the monetary authority keeps setting interest rates too high (low) because inflation is apparently too high (low). To rationalize i) and quantify the importance of iii) we propose a standard New Keynesian model augmented with an endogenous housing tenure choice mechanism. Using a calibrated version of the model, we do a counterfactual exercise and estimate that, when the monetary authority targets the implied consumer price index net of housing rents instead of the implied consumer price index, the loss function of monetary policy is 14.5% lower and the welfare in terms of consumption equivalent variation is 0.9% higher. Finally, analysing the same alternative scenario for the 1983-2006 US experience, we find that the standard deviation of housing prices and nominal inflation would have been 24.8% and 19.9% lower, respectively.
The Effect Of Monetary Policy On Housing Tenure Choice As An Explanation For The Price Puzzle (R&R at the Journal of Applied Econometrics)
(with Daniel A. Dias) | pdf
In this paper we provide an alternative explanation for the price puzzle (Sims 1992) based on the effect of monetary policy on housing tenure choice and the weight of the shelter component in overall CPI. In the presence of nominal or financial frictions, when interest rates increase, the real cost of owning a house increases, and this increase may make some people prefer to rent instead of buying. This change in consumption behavior increases the price of rents relative to other goods. Starting in 1983, homeownership costs are based on a measure of implied owner equivalent rent, which is calculated using observed house rents. This change implies that, directly and indirectly, prices in the rental market almost entirely command the shelter component of CPI, which weighs around 30% in the overall index. When we take these two pieces into account and use CPI net of shelter services as a measure of inflation, we obtain impulse responses of prices to a monetary contraction shock more in line with what is predicted by theory. In addition, our results also suggest that inflation is much less persistent than what is implied by analyses using a measure of inflation that includes shelter services. Our results pass a long list of robustness check exercises and compare well against other explanations of the price puzzle.