Andreas Hornstein

• Doctor of Philosophy
• Federal Reserve Bank of Richmond

I incorporate quarantine, contact tracing, and random testing in the basic SEIR model of infectious disease diffusion. A version of the model that is calibrated to known characteristics of the spread of COVID-19 is used to estimate the transmission rate of COVID-19 in the United States in 2020. The transmission rate is then decomposed into a part t...

We find disparate trend variations in TFP and labor growth across major U.S. production sectors and study their implications for the post-war secular decline in GDP growth. We describe how capital accumulation and the network structure of U.S. production interact to amplify the effects of sectoral trend growth rates in TFP and labor on trend GDP gr...

Many successful examples of economic development, such as South Korea, exhibit long periods of sustained capital accumulation. This process is characterized by a gradually rising investment rate along with a moderate rate of return to capital, both of which are strongly at odds with the standard neoclassical growth model that predicts an initially...

Many successful examples of economic development, such as South Korea, exhibit long periods of sustained capital accumulation. This process is characterized by a gradually rising investment rate along with a moderate rate of return to capital, both of which are strongly at odds with the standard neoclassical growth model that predicts an initially...

Shimer (2012) accounts for the volatility of unemployment based on a model of homogeneous unemployment. Using data on short-term unemployment he finds that most of unemployment volatility is accounted for by variations in the exit rate from unemployment. The assumption of homogeneous exit rates is inconsistent with the observed negative duration de...

Long-term unemployment rose dramatically during the recent recession and remains elevated. In this essay, Richmond Fed vice president Andreas Hornstein and senior economist Thomas A. Lubik analyze the potential causes of this increase and explore various explanations of “duration dependence,” the fact that the likelihood of finding a job decreases...

The search-and-matching model of the labor market fails to match two important business cycle facts: (i) a high volatility of unemployment relative to that of labor productivity, and (ii) a mild correlation between these two variables. We address these shortcomings by focusing on the implementation process of technological innovation, that is, the...

An introduction to the special issue on modern macroeconomic theory.

The literature on optimal monetary policy in New Keynesian models under both commitment and discretion usually solves for the optimal allocations that are consistent with a rational expectations market equilibrium, but it does not study whether the policy can be implemented given the available policy instruments. Recently, King and Wolman (2004) ha...

The literature on optimal monetary policy in New Keynesian models under both commitment and discretion usually solves for the optimal allocations that are consistent with a rational expectations market equilibrium, but it does not study whether the policy can be implemented given the available policy instruments. Recently, King and Wolman (2004) ha...

Since the fall of 2008, the amount of outstanding reserves on the Federal Reserve's balance sheet has increased from about 100 billion dollars to more than 1 trillion dollars. There is some concern that the magnitude of outstanding reserves might affect the ability of the Federal Reserve to conduct monetary policy through an interest rate policy. I...

These notes provide the derivations of results stated without proof in Hornstein (2009). For a simple model of the demand for housing, it is shown that on a balanced growth path, the rate at which the relative price of housing changes over time is determined by the relative productivity growth rates of the housing sector and the rest of the economy...

Whether technological progress raises or lowers employment in the short run has been the subject of much debate in the recent years. We show that cross-industry differences in inventory holding costs, demand elasticities, and price rigidities potentially all affect employment decisions in the face of productivity shocks. In particular, the employme...

We describe a simple model of the demand for housing and show that on a balanced growth path the rate at which the relative price of housing changes over time is determined by the relative productivity growth rates of the housing sector and the rest of the economy. A calibrated version of the model has only limited success in accounting for the inc...

Currently there is a growing literature exploring the features of optimal monetary policy in New Keynesian models under both commitment and discretion. This literature usually solves for the optimal allocations that are consistent with a rational expectations market equilibrium, but it does not study how the policy can be implemented given the avai...

Long-term unemployment rose dramatically during the recent recession and remains elevated. A primary cause may be the fact that more workers with inherently low job finding rates have become unemployed. This would suggest that the natural rate of unemployment has increased, and that additional monetary stimulus may have only a limited effect on red...

In most industrialized economies inflation tends to be pro-cyclical; that is, inflation is high during times of high economic activity. When economic activity is measured by the unemployment rate this statistical relationship is known as the Phillips curve.

Studying the incentives and constraints in the non-market sector – that is, home production – enhances our understanding of economic behaviour in the market. In particular, it helps us to understand (a) small variations of labour supply over the life cycle, (b) the low correlation between employment and wages over the business cycle, and (c) large...

To be added.

Does capital-embodied technological change play an important role in shaping labour-market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate tha...

Currently there is a growing literature exploring the features of optimal monetary policy in New Keynesian models under both commitment and discretion. With respect to time consistent policy, the literature focuses on solving for allocations. Recently, however, King and Wolman (2004) have examined implementation issues involved under time consisten...

n most industrialized economies, periods of above average inflation tend to be associated with above average economic activity, for example, as measured by a relatively low unemployment rate. This statistical rela- tionship, known as the Phillips curve, is sometimes invoked when economic commentatorssuggestthatmonetarypolicyshouldnottrytosuppresssi...

These notes contain the derivations for results stated without proof in Hornstein (2007). First, I derive the log-linear approximation of the inflation dynamics in the Calvo-model with elements of backward-looking pricing when the approximation takes place around a positive average inflation rate. I derive a version of the "hybrid" New Keynesian Ph...

Capital deepening has played an important role for the economic development of many countries, especially for the East Asian 'Growth Miracles.' At the same time the fraction of output invested in capital increased gradually over time. These growth characteristics appear to be at odds with the standard growth model which predicts that investment rat...

In this paper we document that "frictional wage inequality" (i.e. due to pure luck in the matching process in the labor market) is large and that both the standard McCall search model and the simplest Diamond-Mortensen-Pissarides matching model, reasonably calibrated, are strikingly unable to generate the amount of dispersion observed in the data....

Analysis of the the standard labor-market matching model usually focuses on labor productivity as an important source business of cycles. A shortcoming of this model is that it cannot account for observed labor market fluctuations with aggregate labor pro-ductivity as the only shock in the economy. Yet analysis of this framework disregards another...

Standard search and matching models of equilibrium unemployment, once properly calibrated, can generate only a small amount of frictional wage dispersion, i.e., wage differentials among ex-ante similar workers induced purely by search frictions. We derive this result for a specific measure of wage dispersion---the ratio between the average wage and...

Whether technological progress raises or lowers aggregate employment in the short run has been the subject of much debate in recent years. Using a simple model of in-dustry employment, we show that cross-industry differences of inventory holding costs, demand elasticities, and price rigidities potentially all affect employment decisions in the face...

We propose a new measure of frictional wage dispersion: the mean-min wage ratio. For a large class of search models, we show that this measure is independent of the wage-offer distribution but depends on statistics of labor-market turnover and on preferences. Under plausible preference parameterizations, observed magnitudes for worker flows imply t...

Optimal monetary policy analysis can be viewed as a constrained optimization problem: the policymaker chooses a competitive equilibrium allocation that maximizes social welfare among the set of all feasible competitive equilibrium allocations. Part of the solution to this problem is a monetary policy rule that determines how variables that are unde...

Studying the incentives and constraints in the non-market sector — that is, home production — enhances our understanding of economic behavior in the market. In particular, it helps us to understand (1) small variations of labor supply over the life cycle, (2) large variations of employment relative to wages over the business cycle, and (3) large in...

In this Technical Appendix to Hornstein, Krusell, and Violante (2006) (HKV, 2006, hereafter) we provide a detailed characterization of the search model with (1) wage shocks during employment and (2) on-the-job search outlined in Sections 6 and 7 of that paper, and we derive all of the results that are only stated in HKV (2006). In particular, we de...

In this paper we examine Australian data on national and regional employment numbers, focusing in particular on whether there have been common national and regional changes in the volatility of employment. A subsidiary objective is to assess whether the results derived from traditional growth rate models are sustained when alternative filtering met...

We show that immigrant managers are substantially more likely to hire immigrants than are native managers. The finding holds when comparing establishments in the same 5-digit industry and location, when comparing different establishments within the same firm, when analyzing establishments that change management over time, and when accounting for wi...

In this chapter we inspect economic mechanisms through which technological progress shapes the degree of inequality among workers in the labor market. A key focus is on the rise of U.S. wage inequality over the past 30 years. However, we also pay attention to how Europe did not experience changes in wage inequality but instead saw a sharp increase...

We examine how technological change affects wage inequality and unemployment in a calibrated model of matching frictions in the labour market. We distinguish between two polar cases studied in the literature: a ‘creative destruction’ economy where new machines enter chiefly through new matches, and an ‘upgrading’ economy where machines in existing...

In this chapter we inspect economic mechanisms through which technological progress shapes the degree of inequality among workers in the labour market. A key focus is on the rise of US wage inequality over the past 30 years. However, we also pay attention to how Europe did not experience changes in wage inequality but instead saw a sharp increase i...

Abstract The productivity slowdown in the 1970s and the speedup in the late 1990s presented di‐cult challenges to monetary policymakers. The productivity slowdown has been blamed for the 1970s stag∞ation episode|contemporaneous stagnant growth, high un- employment, and high in∞ation|while the productivity acceleration has similarly been credited wi...

We examine how technological change affects wage inequality and unemployment in a cali-brated model of matching frictions in the labor market. We distinguish between two polar cases studied in the literature: a "creative destruction" economy, where new machines enter chiefly through new matches and an "upgrading" economy, where machines in existing...

Early empirical studies of the New Keynesian Phillips Curve imply implausibly high levels of price stickiness for standard monetary models with Calvo-type nominal rigidities. More recently researchers have found that the addition of real rigidities through firm-specific capital adjustment costs allows for a reinterpretation of estimated New Keynesi...

Andreas Hornstein (Richmond Fed economist and vice president), Per Krusell (economics professor, University of Rochester, and Richmond Fed visiting scholar), and Giovanni L. Violante (assistant professor of economics, New York University) review recent research on a widely used search model of unemployment. While the search model accounts for the q...

Does capital-embodied technological change play an important role in shaping labor market outcomes? This paper addresses the question in a model with vintage capital and search-matching frictions where costly capital investment leads to heterogeneity in productivity among vacancies in equilibrium. The paper first demonstrates analytically 1) how te...

Most economic theory on long-run growth is organized around the concept of balanced growth. On a balanced growth path, all economic variables grow at constant but possibly different rates. The concept of balanced growth paths is usually motivated by the "stylized facts" of growth, which state that for most industrialized countries, certain ratios,...

We present a simple sticky-price model with inventories and show that the employment response to a productivity shock depends crucially on the extent to which goods are storable. If firms hold inventories, then, in response to a favorable cost shock, firms can expand output relative to sales. They would do so to exploit low production costs as well...

The question of how technological change affects labor markets is a classical one in macroeconomics. A standard framework for addressing this question is the matching model with vintage capital and exogenous technical progress. Within this framework, it has been argued that the impact of technological change on labor market outcomes differs accordi...

This paper examines whether monetary indicators are useful in implementing optimal discretionary monetary policy when the policymaker has incomplete information about the environment. We find that money does not contain useful information for the policymaker, if we calibrate the model to the U.S. economy. If money demand were to be appreciably less...

The skill premium — the wage of skilled labor relative to the wage of unskilled labor — has increased substantially in the United States since the 1970s. The higher skill premium has been attributed to skill-biased factor-specific technical change or to capital accumulation when skilled labor is relatively more complementary to capital than is unsk...

Does capital-embodied technological change play an important role in shaping labor market outcomes? This paper addresses this question by examining how vintage capital interacts with labor market imperfections -- modeled as search/matching frictions -- to determine wage inequality and unemployment. The theoretical framework differs from the standar...

Detailed macroeconomic data to accompany the article in the Review of Economic Dynamics

Does capital-embodied technological change play an important role in shaping labor market inequalities? This paper addresses the question in a model with vintage capital and search / matching frictions where costly capital investment leads to large heterogeneity in productivity among vacancies in equilibrium. The paper first demonstrates analytical...

Capacity utilization, that is, the intensity with which the economy's capital stock is used, is an important source of output variations over business cycles. A straightforward measure of capacity utilization is the workweek of capital, or how long capital is operated on average. The workweek of capital differs from the workweek of labor because of...

This paper examines whether monetary indicators are useful in implementing optimal discretionary monetary policy when the policy maker has incomplete information about the environment. We find that money does not contain useful information for the policy maker, if we calibrate the model to the U.S. economy. If money demand were to be appreciably le...

We study the behavior of output, employment, consumption, and investment in Germany during the Great Depression of 1928-37. In this time period, real wages were countercyclical, and productivity and fiscal policy was procyclical. We use the neoclassical growth model to investigate how much these factors contribute to the depression. We find that re...

A vast and often confusing economics literature relates competition to investment in innovation. Following Joseph Schumpeter, one view is that monopoly and large scale promote investment in research and development by allowing a firm to capture a larger fraction of its benefits and by providing a more stable platform for a firm to invest in R&D. Ot...

We study the behavior of output, employment, consumption, and investment in Germany during the Great Depression of 1928-37. In this time period, real wages were countercyclical, and productivity and fiscal policy were procyclical. We use the neoclassical growth model to investigate how much these factors contribute to the Depression. We find that r...

ments, where the quality (hence productivity) of a given set of intermediate goods improves continuously and fosters long-run growth. 1. Romer P., "Increasing Returns and Long-Run Growth", Journal of Political Economy, 94(5), 1986, 1002-1036 2. Romer P., "Endogenous Technical Change", Journal of Political Economy, 98(5), 1986, S71-S102 3. R Barro R...

We study the aggregate implications of (S, s) inventory policies in a dynamic general equilibrium model with aggregate uncertainty. Firms in the model's retail sector face idiosyncratic demand risk, and (S, s) inventory policies are optimal because of fixed order costs. The distribution of inventory holdings affects the aggregate outcome in two way...

What is the source of interest rate volatility? Why do low interest rates precede business cycle booms? Most observers tend to assume that monetary policy is largely responsible for it. Indeed, a standard real business cycle model delivers rather small fluctuations in real interest rates. Here, however, we present two models of the real business cy...

The recent boom in information technology (IT) provides a useful backdrop against which to consider the methodology of productivity accounting. The standard methodology introduced by Robert Solow permits the isolation of total factor productivity (TFP) and its disaggregated sectoral components, but it fails to offer a framework for understanding ho...

The U.S. business cycle is characterized by the general increase and decrease of activity across all industries. When the pattern of industry comovement (documented here) is compared to corresponding properties of multi-sector growth models, a striking mismatch appears. Simply put, the basic multi-sector model has trouble accounting for the pattern...

We study the aggregate implications of (S, s) inventory policies in a dynamic general equilibrium model with aggregate uncertainty. Firms in the model's retail sector face idiosyncratic demand risk, and (S, s) inventory policies are optimal because of fixed order costs. The distribution of inventory holdings affects the aggregate outcome in two way...

We construct a simple general equilibrium model of unemployment and calibrate it to the Canadian economy. Job creation and destruction are endogenous. In this model we consider several potential factors that could contribute to the long-run increase in the Canadian unemployment rate: a more generous unemployment insurance system, higher layoff cost...

Generally, technological progress proceeds at a slow and measured pace, with only incremental improvements seen in existing products and technologies in the economy. At times, however, the pace accelerates, and the economy experiences a technological revolution during which radically new products and technologies are introduced. Recent discussions...

In an economy where growth is determined by the interaction of R&D and learning-by-doing (LBD), changes of factors that stimulate either one of these activities affect growth differently than in an economy where growth is determined by either R&D or LBD alone. In particular, when firms anticipate that R&D for new types of goods threatens the future...

Inventory investment, one of the more volatile components of gross domestic product, is often considered to be a major contributor to aggregate fluctuation. A review of previous work by Blinder and Maccini (1991) on the stylized facts of inventory investment confirms that, over the business cycle, production is more volatile than sales, and invento...

Staggered nominal price setting introduces predictable sales variations at the firm level. We study the implications of staggered prices in a framework where, because of increasing marginal cost, firms use inventories to smooth production and thereby separate sales from production. Conventional criticisms of production smoothing models have focused...

The post-war US business cycle is characterized by positive comovement of employment and output across sectors. It has been argued that multi-sector growth models are inconsistent with this observation when changes in relative productivities are the main source of fluctuations. We suggest that the input-output structure of an economy, in particular...

The postwar U.S. business cycle is characterized by positive comovement of employment and output across sectors. It has been argued that multi-sector growth models are inconsistent with this observation when changes in relative productivities are the main source of fluctuations. We suggest that the input-output structure of an economy, in particula...

We explore two channels through which increases in the rate of investment-specific technological change can lead to decreases in measured productivity growth. The first channel is learning; with an increase in the rate of adoption more resources are devoted to new technologies where experience is low. As a result, labor productivity and TFP growth...

We describe the postwar U.S. business cycle for the durable and nondurable goods producing sector. The business cycle is characterized by positive comovement of output, employment, and investment across the two sectors. We develop a two sector growth model to explain the observed pattern of comovements, and suggest that intermediate inputs produced...

This chapter presents the firm and the plant into classical general equilibrium theory. The approach follows McKenzie's approach in having a convex cone aggregate technology. McKenzie shows that this formulation is equivalent to the one of Arrow and Debreu, who assume a finite set of technologies and an ownership distribution. The nature of McKenzi...

The neoclassical growth model is extended to incorporate monopolistic competition and increasing returns to scale. Implications for the measurement of productivity change through the Solow residual are studied. It is found that for this extension productivity fluctuations continue to account for a substantial fraction of output volatility. The mode...

We study the effects of introducing a feasible insurance market into the spatial separation model of money described in Mitsui and Watanabe (1989). We show that the insurance contract may or may not drive out money. We also show that, depending on the degree of risk aversion, the additional market can reduce welfare for all agents, increase welfare...

This paper extends recent developments in general equilibrium theory and applies them to the problem of measuring the real output of an economy's insurance sector. These developments permit a priced commodity to be a complex incentive-compatible contract. These contracts are not bundles of more basic commodities. These contracts are elementary in t...

The general equilibrium formulations are developed for two important economic environments. The first environment is the Lucas managerial span-of-control theory of the firm. It is shown that, in the spirit of McKenzie, the aggregate production set can be characterized by a convex cone. The second environment permits both the number of hours plants...

This paper demonstrates that the standard search and matching models of equi- librium unemployment, once properly calibrated, can generate only a tiny amount of frictional wage dispersion, i.e., wage differentials among ex-ante similar work- ers induced purely by search frictions. The analysis is centered around a specific measure of wage dispersio...

Thesis (Ph. D.)--University of Minnesota, 1991. Includes bibliographical references.