CER-ETH Research Seminar, Spring Term 2022

Everyone who is interested is cordially invited!

If you would like to receive our weekly invitation via e-mail, or if you have any other question, please contact Zelzner Sebastian.

Speakers

Jeanne Commault

Title: How Does Permanent Income Affect the Response to a Transitory Income Shock?

Abstract: I examine the effect of a change in permanent income on people's marginal propensity to consume (MPC). First, I prove the unintuitive result that, in a life-cycle model with a transitory-permanent income process, everything else being equal, people with a higher level of permanent income have a higher MPC. This is because, at a higher level of permanent income, people have a stronger precautionary motive (from the shocks to their future income being larger). Their optimal level of saving is therefore more sensitive to fluctuations in their cash-in-hand, and so is their consumption. Second, I show that this theoretical prediction holds true in the NY Fed Survey of Consumer Expectations. In these data, an increase in permanent income by one standard-deviation raises people's reported MPC for total consumption out of a transitory change in income by 0.03. Third, I run numerical simulations of a calibrated life-cycle model, and find that the magnitude of the relations between people's permanent income and their MPC are quantitatively similar in survey data and in simulated data.

Frank Krysiak

Title: New designs for electricity markets: How to cope with technological change

Abstract: During the past decades, technological change has changed fundamental elements of the electricity system. Smart grid technology has made supply security an almost private (instead of a public) good; renewables have altered the cost structure, rendering it difficult to refund investments via selling energy; decentralization has increased the number and heterogeneity of market actors substantially. The question is whether and how we should adjust the design of electricity markets to these technological changes. Due to recent „blackouts“ (e.g., in Texas), this question has gained considerable public attention. In this paper, we advance a model of electricity markets that is able to describe many of the above changes and use this model to compare different options for market designs. We show that the current design leads to inefficient investments and an inefficient deployment of technologies. In contrast, a novel market design, where electricity has different qualities (reliability of supply) and where customers can choose a quality mix, can enhance investment incentives and reduce welfare losses. We explore how such a novel market design can be translated into contracts between customers and retailers as well as between retailers and generators. Furthermore, we investigate what kind of regulation is required to ensure that investment and usage decisions are close to the social optimum. Finally, we argue that the novel market design has several advantages compared to real-time pricing.

Per Krusell

Title: Macroeconomic Dynamics with Rigid Wage Contracts

Abstract: We adapt the wage contracting structure in Chari (1983) to a dynamic, balanced-growth setting with re-contracting à la Calvo (1983). The resulting wage-rigidity framework delivers a model very similar to that in Jaimovich and Rebelo (2009), with their habit parameter replaced by our probability of wage-contract resetting. That is, if wage contracts can be reset very frequently, labor supply behaves in accordance with King, Plosser, and Rebelo (1988) preferences, whereas if they are sticky for a long time, we obtain the setting in Greenwood, Hercowitz, and Huffman (1988), thus allowing significant responses of hours to wage changes.

Jeremy Lucchetti

Title: Ethnic Conflicts and the Informational Dividend of Democracy

Abstract: Prevailing theories of democracy focus on class conflict. In contrast, we study democratic transition when ethnic tensions are more salient than the poor/rich divide, building a model where (i) ethnic groups negotiate about allocating the economic surplus and (ii) military and political mobilizations rest on unobserved ethnic identity. Free and fair elections elicit information and restore inter-ethnic bargaining efficiency. Autocrats can rationally choose democratic transition, even if they risk losing power, as elections reduce the opposition’s informational rent. The predictions of our framework are consistent with novel country-level and ethnic group-level panel correlational evidence on democratization in the post-decolonization period.

Pierpaolo Benigno

Title: The Economics of Helicopter Money

Abstract: An economy plagued by a slump and in a liquidity trap has some options to exit the crisis. We discuss helicopter money and other equivalent policies that can reflate the economy and boost consumption. Traditional helicopter money, via the joint cooperation between the treasury and the central bank, depends critically on the central bank fully guaranteeing treasury's debt. We show that the central bank can do helicopter money on its own, without any treasury's involvement.

Benjamin Moll

Title: What if? The Economic Effects for Germany of a Stop of Energy Imports from Russia

Abstract: This article discusses the economic effects of a potential cut-off of the German economy from Russian energy imports. We show that the effects are likely to be substantial but manageable. In the short run, a stop of Russian energy imports would lead to a GDP decline in range between 0.5% and 3% (cf. the GDP decline in 2020 during the pandemic was 4.5%).

Brian Hill

Title: Confidence in Beliefs : Rational Decision, Uncertainty Reporting and Aggregation

Abstract: Bayesianism provides a powerful benchmark for treating uncertainty, on topics ranging from rational belief and decision to learning, uncertainty reporting and belief aggregation. However, it is often argued to be unable to cope properly with severe uncertainty, of the sort ubiquitous in some areas of policy making. Here we present parts of an on-going project developing an adequate replacement notably as a guide for rational belief and decision making, but also in other domains where it serves as a benchmark.
A central insight in our approach is the relevance of the decision maker’s confidence in her beliefs. We set out a representation of belief states and an account of decision that incorporates confidence in beliefs, and show that it has strong normative credentials on the main fronts typically evoked concerning rational belief and decision. It fares particularly well, we argue, in comparison to other prominent non-Bayesian models in the literature. Time-permitting, we then discuss some applications of the approach for uncertainty reporting, notably at the science-policy interface, and argue that confidence also has a role in rational belief aggregation, showing how it can resolve some of the recently highlighted issues with standard Bayesian-based approaches.