Paul Gomme

Concordia University Montreal · Department of Economics

COVID‐related government outlays will increase the level of government debt. A macroeconomic model, calibrated to the US, quantitatively assesses potential responses to this higher debt. In terms of economic welfare, reducing debt through capital incomes tax hikes is the least desirable option considered: the associated tax base is small, and antic...

Following the Great Recession, U.S. government debt levels exceeded 100% of output. We develop a macroeconomic model to evaluate the role of various shocks during and after the Great Recession; labor market shocks have the greatest impact on macroeconomic activity. We then evaluate the consequences of using alternative fiscal policy instruments to...

We solve the Ramsey-optimal tax plan for a small open economy with an endogenously-determined real exchange rate. The open economy constrains the government's setting of the capital income tax rate since physical capital cannot be dominated in rate of return by foreign assets. However, the endogenous real exchange rate loosens this constraint relat...

Raising children takes considerable time, particularly for women. Yet, the role of childcare time has received scant attention in the macroeconomics literature. We develop a life-cycle model in which the time dimension of childcare plays a central role. An important contribution of the paper is estimation of the parameters of a childcare production...

Can the neoclassical growth model generate fluctuations in the return to capital similar to those observed in the United States? Equating stock market returns with the return to capital, the bulk of the literature concludes that it cannot. This article makes two contributions. First is an equivalence for the neoclassical growth model between a stoc...

To evaluate fiscal policy reforms for Euro-area countries, this article develops and calibrates a small open economy model. Debt reduction reforms require higher tax rates in the short term in exchange for lower rates in the long term as the debt-servicing burden falls. Using the capital income tax to implement such a policy leads to welfare gains;...

It is well known that the Diamond-Mortensen-Pissarides model exhibits a strong trade-off between cyclical unemployment fluctuations and the size of rents to employment. Introducing endogenous job search effort reduces the strength of the trade-off while bringing the model closer to the data. Ignoring worker search effort leads to a large upward bia...

Based on a two sector dynamic new Keynesian model with sticky prices, this paper makes two contributions to the Pigou cycle literature. First, the paper quantifies the contribution of `news shocks' -- signals of future productivity changes. Maximum likelihood estimates indicate that nondurable sector news shocks are roughly as volatile as contempor...

Recent financial crises in Europe as well as the periodic battles in the U.S. over the debt ceiling point to the importance of fiscal discipline among developed countries. This paper develops an open economy model, calibrated to the U.S. and a subset of the EMU, to evaluate the impact of various permanent tax changes. The first set of experiments c...

Several approaches to finding the second-order approximation to a dynamic model have been proposed recently. This paper differs from the existing literature in that it makes use of the Magnus and Neudecker (1999) definition of the Hessian matrix. The key result is a linear system of equations that characterizes the second-order coefficients. No use...

Throughout the 20th century home production was revolutionized by the introduction of new technologies, from running water to modern appliances, that significantly reduced the time de-mands of home production. This paper examines whether these changes can explain the important increase in the labor force participation of married women during the 20t...

Reasonably calibrated versions of the Diamond-Mortensen-Pissarides search and matching model of unemployment underpredict, by a wide margin, the volatility of vacancies, unemployment, and the vacancies-unemployment ratio - variables at the heart of this model. These shortcomings motivate two modifications to the Diamond-Mortensen-Pissarides model....

Consumption is more volatile than output in developing countries while it is less volatile than output in developed economies. This paper shows that the relatively large home sector in developing economies contributes to this difference, and the driving force for this difference is technology. Thus this paper suggests that volatile market consumpti...

production. This paper examines whether these changes can explain the important increase in the labor force participation of married women during the 20th century. It contributes to the existing literature by including childcare constraints consistent with U.S. time use data, to examine whether the durable good revolution can also explain the histo...

In macroeconomics, life-cycle models are typically used to address exclusively life-cycle issues. This paper shows that modeling the life-cycle may be important when addressing public policy issues, in this case the welfare costs of inflation. In the representative agent model, the optimal inflation rate is characterized by the Friedman rule: defla...

Andolfatto and Gomme (2003) find evidence that Canadian monetary policy appears to alternate between high and low money growth rate regimes, and that private-sector belief for-mation over these unobserved regimes could induce significant persistence in the propagation of monetary policy shocks. In this paper, we examine the sensitivity of these con...

We measure the return to capital directly from the NIPA and BEA data and examine the return implications of the real business cycle model. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&P 500 returns. The standard business cycle model captures almost 50% of the...

Major League Baseball Commissioner Bud Selig announced he would crack down on steroid use in baseball, hoping to stop players from doping. He was forced to discipline stars like Rafael Palmeiro, possibly hurting the game immediately, in order to develop a reputation for being tough on steroids. The Federal Reserve System has worked hard over the pa...

Calibration has become a standard tool of macroeconomics. This paper extends and refines the calibration methodology along several important dimensions. First, accounting for home production is important both in measuring calibration targets and in organizing the data in a model-consistent fashion. For this reason, thinking about home production is...

Much has been made of the so-called jobless recovery of the past two business cycles—that is, their atypically weak employment growth early in the expansion phase. This Commentary examines the factors that account for this behavior, focusing on two key measures: the probabilities of job finding and job separation.

This Commentary makes a case for Fed action in the event of a stock market bubble. Because stock market prices serve as a signal to business managers to invest, bubbles can mislead managers into investing when it is not profitable. The overinvestment, which becomes apparent after the bubble bursts, can lead to a period of low investment, which can...

The paper documents how cyclical fluctuations in market work vary over the life cycle and then assesses the predictions of a life-cycle version of the growth model for those observations. The analysis yields a simple but striking finding. The main discrepancy between the model and that data lies in the inability of the model to account for fluctuat...

Recent Bureau of Labor Statistics (BLS) data show labor’s share of income at a historic low. This Policy Discussion Paper explores the BLS calculations with an eye to understanding the factors leading to the recent fall in labor’s share. While data limitations prohibit replication of the BLS series, alternative measures of labor’s share of income,...

Economic theory says the average income of different regions should grow closer over time. Within the United States and across some of the richer countries, evidence suggests this is true.

In 1998, University of Iowa faculty members created their own futures markets. These experimental markets, designed to provide insights into the behavior of traders and naturally occurring markets, are still going strong. Their clever design gives them another practical use: They can be used to predict future events such as election outcomes and Fe...

When U.S. steel corporations began declaring bankruptcy and laying off thousands of workers, tariffs on foreign steel seemed a reasonable way of preventing further damage to the industry. But why do most economists favor free trade?

As part of a fiscal stimulus package, some members of Congress have recently proposed a temporary investment subsidy. This paper uses the neoclassical growth model to evaluate the likely macroeconomic effects of such a subsidy. The model predicts a 0.8 percentage point increase in output growth for the quarter in which the policy is implemented. In...

An innovation in this paper is to introduce a time-to-build technology for the production of market capital into a model with home production. Our main finding is that the two anomalies that have plagued all household production modelsthe positive correlation between business and household investment, and household investment's leading business inv...

The FOMC has two objectives: maximizing sustainable economic growth and maintaining price stability. At times-like the past year-these goals appear to be in conflict. This Commentary outlines some economic theory that suggests that in the long run, the FOMC can achieve its two objectives by focusing primarily on its price stability target.

A real business cycle model, with two types of agents, workers, and entrepreneurs, is simulated to see if it can account for some stylized facts characterizing postwar U.S. business cycle fluctuations, such as the countercyclical movement of labor's share of income and the acyclical behavior of real wages. It can, There exists an economy-wide marke...

this paper is concerned with developing a simple theoretical framework that might be used to interpret the labor market behavior described above; this interpretive device is then used to determine under what conditions changes in employment and unemployment can be associated with changes in economic welfare. The analysis proceeds in two steps. Firs...

Empirically, real wages exhibit relatively little cyclical variation and a weak cyclical pattern. Early real business cycle (RBC) models predict, to the contrary, large, procyclical real wage movements. Incorporating efficiency wages into a RBC environment would seem promising since one prediction from the efficiency wage literature is real wage ri...

: Evolutionary programming is a stochastic optimization procedure which has proved useful in optimizing difficult functions. It is shown that evolutionary programing can be used to solve the Bellman equation problem with a high degree of accuracy and substantially less CPU time than Bellman equation iteration. Future applications will focus on some...

Recent monetary history has been characterized by monetary authorities that appear to shift periodically between distinct policy regimes associated with higher or lower average rates of money creation. As policy regimes are not directly observable and as the rate of monetary expansion varies for reasons other than regime changes, the general public...

Government expenditures are large when measured as a proportion of government spending or relative to GNP. This fact is incorporated into an endogenous growth model in which education produces new human capital. Capital in the education sector is provided by government and financed by distortionary taxes. To incorporate property taxes, an important...

Sufficient conditions for the long run non-superneutrality of money are established in a neoclassical growth model with a labor-leisure choice. In the basic model, money is held to satisfy a cia{} constraint on consumption purchases. Production requires capital and labor while period utility depends on consumption and leisure. The most contentious...

Evolutionary programming is applied to several instances of the set partitioning problem. Comparison is made between the distribution of best-evolved solutions arising from implementations of the EP with the empirical distribution of a randomly selected trial solution.

In this paper, we investigate the extent to which changes in US labour market policy in the 1980s may have contributed to the emergence of an unemployment rate gap between Canada and the United States. In that decade, unemployment insurance benefits became taxable, income tax rates fell substantially, and various administrative changes were made th...

An investigation of whether economic theory supports the claim that a technology shock can change the "natural rate of unemployment."

Statistics that measure labor market activity are often interpreted as measures of economic performance and social well being. This article demonstrates that such interpretations are not justified in the absence of information concerning the economic circumstances that determine individual labor market choices.

An inquiry into why the Bank of Canada was unable to bridle the inflation of the 1970s by controlling money growth.

The relationship between the unemployment rate and the nonaccelerating inflation rate of unemployment (NAIRU) is presumed to be an inflationary bellwether, but recent inflation predictions based on it have not been successful. The authors explore the reasons for this failure and suggest that it may be time to replace the NAIRU.

In 1972, the Canadian Federal government implemented a wide-ranging set of reforms to the nation's unemployment insurance system. The economic impact of these reforms are evaluated in the context of a dynamic general equilibrium model of labor-market search. A calibrated version of the model estimates that the 1972 reforms had only a modest impact...

In this paper, we investigate the extent to which changes in US labour market policy in the 1980s may have contributed to the emergence of an unemployment rate gap between Canada and the United States. In that decade, unemployment insurance benefits became taxable, income tax rates fell substantially, and various administrative changes were made th...

Wage and unemployment responses to changes in economic environment are compared for efficiency wage and frictional models. Changes in aggregate demand, persistence of job-specific shocks, cost of living, and unemployment benefits are considered. Wages and unemployment move in the same direction in the two models, except that an upward shift in aggr...

Conventional wisdom is that if public policy can affect the growth rate of the economy, the welfare implications of alternative policies will be large. In this paper, a stochastic, dynamic general equilibrium model with endogenous growth and money is examined. In this setting, inflation lowers growth through its effect on the return to work. Howeve...

A real business cycle model, with two types of agents, workers, and entrepreneurs, is simulated to see if it can account for some stylized facts characterizing postwar U.S. business cycle fluctuations, such as the countercyclical movement of labor's share of income and the acyclical behavior of real wages. It can. There exists an economy-wide marke...

This paper explores the booms and busts induced by news shocks in a model econ- omy with nancial market frictions. Firms can accumulate capital through either

Life-cycle patterns of income, earnings, consumption, labor supply, and wealth vary sys- tematically across educational groups. Human capital theory explains different educational choices in terms of parameters describing tastes and technology. We ask whether differences in these parameters are also consistent with other patterns of behavior. Our p...

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Thesis (Ph. D.)--University of Western Ontario, 1991. Includes bibliographical references (leaves 72-76). Photocopy.