UC San Diego

This thesis examines the dynamics of macroeconomy and investigates the implicationsof changing environments from three different perspectives. Comprising three papers, the thesis contributes to the understanding of macroeconomic dynamics and provides insights on macroeconomic policy. Chapter 1 focuses on the dynamics of labor market. Average hours worked per adult in Japan fell by around one third over the last half-century. The leading explanation focuses on government policies that distort labor supply decisions. This paper provides a new interpretation that stresses the role of income effects in preferences. Through the lens of a model of the market and home sectors and using non-homothetic preferences, I show that the main driver of Japan’s decline in hours worked is income effects, rather than labor-market distortions or population aging. The model predicts that average hours of leisure will rise and home-production hours will remain roughly constant over the period, which is consistent with evidence from time-use surveys. An alternative calibration based on only labor market distortions counterfactually predicts that home production hours will rise. Chapter 2 answers the following questions related to population aging. How does a grayer society affect the political decision making regarding inflation rates? Is deflation preferred as a society ages? In order to answer these questions, the co-authors and I, referred to as “we” throughout this chapter, compute the optimal rates of inflation that maximize the lifetime utility of the young and the old households respectively, and explore how they change with demographic factors, using a New Keynesian model with overlapping generations. The long-run inflation target has a redistribution effect on households’ earnings and thus results in their heterogeneous preferences toward inflation. The rates that maximizes the steady state welfare is nagative for the representative old household but is close to zero for the representative young household. When the transition dynamics are taken into account, their preferred inflation rates both decrease and become negative. Because the old household’s preferred rate is lower, population aging generates a negative composition effect on the population-weighted average of these rates. We find, however, that both rates increase when population aging is made severer, and that the population-weighted average also increases. Chapter 3 turns to an analyses of industrial policy. A key recipe advocated to poorer nations to leapfrog in their socio-economic development is to quickly absorb expertise from countries at the technological frontier. This chapter examines the role of education policies enabling technology diffusion across countries. The co-author and I, referred to as “we” throughout this chapter, use the difference-in-difference framework to assess the role of educational reforms, changes in the length of compulsory schooling, implemented to different degrees and at different timings across countries. Our estimation results suggest that the marginal impact of extending compulsory schooling by one year has a positive effect on a country’s ability to receive products that embodies more advanced technology, while it is not statistically significant.