Journal articles

Low Wage Growth and Job-to-Job Transitions: Evidence from Administrative Data in New Zealand (2024)

with Christopher Ball, Ozer Karagedikli, Nicolas Groshenny, and Finn Robinson

International Journal of Central Banking, Vol. 20, No.1, February.

We use administrative data from New Zealand and exploit regional variations to evaluate the predictive power for wage dynamics of the job-finding and job-to-job transition rates. We find that the job-finding rate from unemployment plays a role in describing the wage dynamics of newly hired workers even after controlling for the job-to-job transition rate. The wages of new hires are much more responsive to both transition rates than the wages of job stayers. We then distinguish between the new hires transitioning from employment (job switchers) and the new hires coming from unemployment. The wages of job switchers are primarily related to the pace of job-to-job reallocation, and less significantly, to the job-finding rate. The wages of new hires from unemployment are exclusively linked to the job-finding rate and this association is stronger at the lower half of the wage distribution. Additionally, the wages of new hires from unemployment are more responsive to the job-finding rate than the wages of job stayers. The job-to-job transition rate has no impact on the wage dynamics of job stayers once the job-finding rate and the transition rate from inactivity to employment are controlled for.


Age, Industry, and Unemployment Risk during a Pandemic Lockdown (2021)

with James Graham

Journal of Economic Dynamics and Control, Vol.133, December

This paper models the macroeconomic and distributional consequences of lockdown shocks during the COVID-19 pandemic. The model features heterogeneous life-cycle households, labor market search and matching frictions, and multiple industries of employment. We calibrate the model to data from New Zealand, where the health effects of the pandemic were especially mild. In this context, we model lockdowns as supply shocks, ignoring the demand shocks associated with health concerns about the virus. We then study the impact of a large-scale wage subsidy scheme implemented during the lockdown. The policy prevents job losses equivalent to 6.5% of steady state employment. Moreover, we find significant heterogeneity in its impact. The subsidy saves 17.2% of jobs for workers under the age of 30, but just 2.6% of jobs for those over 50. Nevertheless, our welfare analysis of fiscal alternatives shows that the young prefer increases in unemployment transfers as this enables greater consumption smoothing across employment states.  


Gains from Reducing the Implementation Delays in Public Investment (2020) 

IMF Economic Review, Vol.68(4), Pages 815-847, December.

This paper studies the welfare impact of reducing delays in the implementation of public investment projects, using Turkish data pertaining to a revealed policy action in the early 2000s. I find that the reduction in the completion duration of the public capital from 11 to 4 years corresponds to a welfare gain of 1.9% in terms of compensating variations in consumption and an output gain of 2.7%. When most public investment management reforms are akin to a permanent positive marginal efficiency shock, I show that the elimination of implementation delays is similar to a cut in public capital “tax.” Lastly, I find that the potential gains from a similar reform are considerable for some other emerging market economies. 


Welfare Implications When Closing Small Open Economy Models (2017)

Journal of International Money and Finance, Vol.70, Pages 471-493, February

This paper establishes that the closing method matters when the small open economy model is used for welfare analysis. The differences stem from the impact of the closing method on debt dynamics. When the ad-hoc parameters are set so that the current account volatility is controlled for across models, the welfare properties of versions with portfolio adjustment costs (PAC) and debt elastic interest rates (DEIR) are significantly different from the version with an endogenous discount factor (EDF). Nevertheless, this outcome is an artifact of an unrealistically dispersed distribution of the net foreign assets under PAC and DEIR, and can disappear under alternative calibrations of the ad-hoc parameters. In this sense, a seemingly innocuous application of PAC and DEIR versions may imply spurious results regarding welfare especially if a highly volatile economy is studied. Under commonly used functional forms, the spuriousness of welfare implications is found to be more radical under DEIR than PAC. 


Currency Substitution, Inflation, and Welfare (2012)

Journal of Development Economics, Vol. 99(2), Pages 358-369, November

The model of this paper has been recently utilized by IMF economists to model digital currencies. See it here. 

Currency substitution affects the mapping between social welfare and inflation by altering the underlying money demand function and influencing interest rates. In order to explore the essence of this effect, I build a model with working capital under which foreign currency is substituted with the less liquid components of domestic money. The framework closely mimics the actual pattern of currency substitution across varying rates of inflation and enables the study of an additional channel that works through the impact of currency substitution on interest rates. It is found that there is a threshold inflation rate, which turns out to be 44% under baseline calibration, below which currency substitution decreases welfare and vice versa. A practical implication is that, at inflation rates lower (greater) than the threshold, the potential welfare gains from disinflation to a near-zero inflation rate are higher (lower) if there is currency substitution than otherwise. 


Financial Market Participation and the Developing Country Business Cycle (2010)

Journal of Development Economics, Vol. 92(2), Pages 125-137, July

I explore the implications of limited participation in financial markets on a standard small open economy business cycle model. Despite its parsimony, the limited participation model developed in this paper improves over the standard model in terms of explaining two important features of business cycle facts of developing countries: high volatility of consumption, and high negative correlation between the trade balance and output. Limited participation model is then used to inspect the effects of financial development and integration on macroeconomic volatility. Under a standard calibration, limited participation model leads to the conclusion that financial development and integration are associated with higher investment and output volatility. Effect of more participation on consumption volatility is dependent on the specification of the risk premium function. 

Other publications

New Zealand Demographics and Their Role in an Overlapping Generations Model, (2024)

with Andrew Binning, Susie McKenzie and Christie Smith

New Zealand Treasury Analytical Note, AN 24/00}, September

Like many developed countries, New Zealand’s population is ageing. Its population is living longer and fertility rates have fallen, shifting the age composition towards older generations. This change in demographics is expected to continue into the future. In this paper, we explore a demographic model based on three core components: fertility rates, survival probabilities, and net migration. We illustrate how varying the assumptions affects the size and age-composition of the long-run population. The baseline projections indicate that New Zealand’s population could reach approximately 7.5 million beyond 2100, though there is considerable uncertainty about all of the demographic assumptions that underpin such a long-run projection. Given the fertility rates that currently prevail in New Zealand, net migration is likely to play a large role in maintaining New Zealand’s population. If current sub-replacement fertility rates continue, New Zealand’s population would eventually decline to zero if there was no net migration inflow.


Solving Stochastic OLG Models Using Chebyshev Parameterized Expectations, (2024)

with Robert Kirkby, 

New Zealand Treasury Working Paper, 24/03, June

This paper presents an efficient solution method for solving stochastic overlapping generations (S-OLG) models. We use the Chebyshev parameterized expectation algorithm (C-PEA) developed by Christiano and Fisher (2000) to solve the life cycle block of S-OLGs. The method is well suited for this family of models, capable of handling nonlinearities inherent in the life-cycle aspect of S-OLGSs, and occasionally binding constraints associated with borrowing constraints. We carefully examine practical considerations and describe how to efficiently implement this method. To illustrate the method’s effectiveness, we apply it to solve a standard S-OLG model with idiosyncratic risk and two permanent types. We calculate Euler equation errors throughout the life cycle and measure computational time to demonstrate that C-PEA can perform well under these computational challenges with reasonable accuracy and efficiency. Our results show that, together with its scalability to higher dimensional problems, C-PEA can be a valuable tool for policy analysts and researchers working with S-OLG models. 


Labour Market Cycles across Different Groups: What Does History Tell Us? Part I: Ethnicities, Part II: Age and Sex, Part III: Regions. (2022)

with Shaun Markham and Finn Robinson

Reserve Bank of New Zealand Analytical Notes, AN2022/03-04-05, March 2022

COVID-19 and the associated lockdown and travel restrictions resulted in a severe recession in New Zealand during the middle and latter stages of 2020, where employment dropped below its maximum sustainable level (MSE). However, while the recovery to date has been strong and has outpaced initial expectations, its effect on employment remains uneven across regions, sexes, and other groups.

To put these developments into context, we analyse the past experiences of different ethnicities, age groups, sexes, and regions during historical recessions in New Zealand in a series of three Analytical Notes. This will provide us with a better understanding of how unemployment in these groups has changed in a more typical recession than the current one, and a good foundation for more in-depth comparisons and analysis in future work. In this first Note we analyse how previous labour market cycles have impacted Māori, Pasifika, and European people; the other two Notes will address employment by age group and sex, and regions.

It is well-known that labour market outcomes for Māori and Pasifika are consistently worse than for other groups in New Zealand (figure 1). In this paper we are interested specifically in labour market cycles, and whether outcomes over these cycles are different for Māori, Pasifika, and Europeans.

We find that labour market cycles are much more severe for Pasifika and Māori than for European, and labour market contractions generally last much longer than contractions in GDP. 


Welfare Gains in a Small Open Economy with a Dual Mandate for Monetary Policy (2021) 

with Punnoose Jacob

2021-89, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University, October.

In March 2019, the Reserve Bank of New Zealand was entrusted with a new employment stabilisation objective, that complements its traditional price-stability mandate. Against this backdrop, we assess whether the central bank’s stronger emphasis on the stabilisation of employment, and more broadly, resource utilisation enhances social welfare. We calibrate an open-economy growth model to New Zealand data. In a second-order approximation of the model, we evaluate how lifetime household utility is affected by a wide range of simple and implementable monetary policy rules that target both inflation and resource utilisation. We find that additionally stabilising resource utilisation always improves social welfare at any given level of inflation stabilisation. However, the welfare gains from stabilising resource utilisation get milder as the central bank is increasingly sensitive to inflation. 


Mixed in New Zealand: Nowcasting Labour Markets with MIDAS (2019) 

with Ozer Karagedikli

Reserve Bank of New Zealand Analytical Notes, AN2019/04, March 2019.

Decision-making in monetary policy is based on a large amount of information arriving at different frequencies. Given that many important economic variables are released with considerable time lags at low frequencies, policymakers often face the problem of assessing the current state of the economy with incomplete information. In New Zealand, the key labour market indicators, such as the unemployment rate, employment growth and labour force participation rate, are all published at a quarterly frequency and are published with some delay. In this paper, we use the so-called MIDAS (mixed-data sampling) approach to incorporate mixed-frequency data to “nowcast” the current state of the labour market, based on monthly indicators, taking into account publication lags. By taking into account the persistence and lags of the indicators, MIDAS builds a complicated dynamic relationship between the indicators and the labour market variables we investigate. The main purpose of the current study is to demonstrate the power of MIDAS in a prototypical model and its potential in building more comprehensive forecast models of labour market variables. We show that better nowcasts of the current state of the labour market are obtained by using monthly data on dwelling consents, motor vehicle registrations, international migration and business confidence data compared to first-order autoregressive and time-averaging benchmarks. The improvement is more dramatic in the case of forecast combinations. We also show that most of the improvement in forecast accuracy is obtained from the data available in the first month of the quarter. These results suggest that taking care of the mixed-frequency data with MIDAS improves our assessment of the current state of labour markets in New Zealand. 


Forecasting the Growth Cycles of the Turkish Economy (2017) 

Working Papers 1715, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, July

This paper first specifies the medium-term growth cycles for the Turkish economy. The impact of the frequency transformation methods and the time-serious filters on cycles and potential output are discussed. Then a composite leading indicator (CLI) is constructed that is correlated with the third lead of the GDP with a coefficient of 0.9. The CLI signals 11 out of 13 turning points in the Turkish growth cycle in the 1993-2016 period. The CLI is coincident with the remaining two turning points, hence still providing early warning. Within the same period, only two false signals are generated by the CLI. Finally, building on the seminal paper by Neftci (1982), a method for computation of the turning point probabilities is developed. The virtue of the method is that it takes into account the observed deepness and steepness in the series. 


A Review on the Relationship Between the Real Exchange Rate, Productivity, and Growth (2015)

Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, Vol. 15(2), Pages 61-77, May

This article aims to review some of the findings in the literature on the relationship between the real exchange rate, productivity, and growth. A minimal recapitulation of the concepts that are necessary to be able to read through this literature is also provided. The article tries to reflect on studies focusing on various directions within the complicated feedback mechanisms between the real exchange rate, and productivity and growth. The primary intention is to represent the mixed evidence on the relationship provided by the literature and the resulting inconclusiveness, as well as to emphasize certain channels offered previously which are thought to be operating on the backdrop. 


“House of Debt” by Atif Mian and Amir Sufi (2015)

Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, Vol. 15(1), Pages 95-108, January

Through a unique and powerful analysis of the Great Recession, Atif Mian and Amir Sufi establish that the main culprit was the over-indebtedness of households, in contrast with the dominant view that the problems in the financial intermediaries and the resulting disruption of credit were at the core. Their analysis yields a set of novel empirical findings that have solid implications about the mechanisms at play leading the economy towards the catastrophe. This enables the authors to provide a theoretical framework for the researchers that strive to write models capable of generating recessions such as the latest. Furthermore, by the same virtue, they manage to provide a valuable evaluation of the policy responses in the face of the crisis. The authors conclude the book with a groundbreaking policy recommendation to avoid similar recessions in the future: replacement of debt with equity-like instruments that provide a better sharing of aggregate risk. 

Work in progress