In this paper, we extend the basic Mortensen-Pissarides search and matching model along two dimensions. First, we allow for ex-ante heterogeneity between workers. Second, two technology shocks, neutral and investment-specific, are the driving forces of the economy. Specifically, we integrate the framework of Krusell, Ohanian, Ríos-Rull, and Violante (2000)- a production function with capital-skill complementarity and two skill-groups- into a business-cycle search and matching model. We calibrate the model extending the approach in Hagedorn and Manovskii (2006) and find that the model accounts well for the cyclical behavior of labor market variables in the aggregate and for each demographic group. We show that the response of unemployment to changes in taxes or unemployment insurance benefits is substantially reduced in the model with worker heterogeneity.

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We estimate the degree of ‘stickiness ’ in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption-growth and Campbell–Mankiw models work about equally well.

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We thank David Albouy and Francesco Trebbi for kindly sharing their data as well as Chris Recent approaches to development accounting reflect substantial model uncertainty at both the instrument and the development determinant level. Bayesian Model Averaging (BMA) has been proven useful in resolving model uncertainty in economics, and we extend BMA to formally account for model uncertainty in the presence of endogeneity. The new methodology is shown to be highly efficient and to reduce many-instrument bias; in a simulation study we found that IVBMA estimates reduced mean squared error by 60 % over standard IV estimates. We also introduce Bayesian over and under-identification tests that are based on model averaged predictive p-values. This approach is shown to mitigate the reduction in power these tests experience as dimension increases. In a simulation study where the exogeneity of the instrument is compromised we show that the classical Sargan test has a power of 0.2 % while our Bayesian over-identification test has a power of 98 % at detecting the violation of the exogeneity assumption. An application of our method to a prominent development accounting approach leads to new insights regarding the primacy of institutions.

In 2008 all ECB publications feature a motif taken from the 10 banknote. This paper can be downloaded without charge from

In 2007 all ECB publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

In 2008 all ECB publications feature a motif taken from the 10 banknote. This paper can be downloaded without charge from

In 2008 all ECB publications feature a motif taken from the 10 banknote. This paper can be downloaded without charge from