Asset Pricing Implications of Equilibrium Business Cycle Models: Operating Leverage Redux

Transcription

1 Asse Pricing Implicaions of Equilibrium Business Cycle Models: Operaing Leverage Redux Hyung Seok Eric Kim Sogang Universiy Preliminary and incomplee December 24h, 2 Absrac Operaing Leverage, he observaion ha he share of capial is riskier han he share of labour due o he prioriy saus of wage claims over he business cycles, has been believed o relevan o a resoluion of he equiy premium puzzle.this paper asks wheher asse pricing ucuaions induced by a DSGE model wih operaing leverage are empirically plausible. Keywords: Operaing Leverage; Saggered Nash Bargaining; business cycles; equiy premium puzzle This paper bene ed from discussions wih **. I am especially graeful o John Donaldson for commens and suggesions. The usual disclaimer applies.

2 Inroducion As a possible soluion o he equiy premium puzzle, Donaldson and Mehra (984) enerain he hypohesis ha he share of capial is riskier han he share of labour, which is largely negoiaed prior o he realizaion of oupu, which creaes operaing leverage. However, Rouwenhors (995) demonsraes ha equilibrium business cycle models wih operaing leverage are irrelevan for he price of aggregae (non-diversi able) risk. This paper asks wheher operaing leverage speci ed by GHH preferences and real wage rigidiy in he form of saggered Nash bargaining wage in a DSGE model has an e ec on he premium for aggregae risk. Firs, wih GHH preferences, here is no wealh e ec on labour supply choice, so labour hours are srongly procyclical due o he subsiuion e ec of wages over he business cycle, making i a less e ecive ool for smoohing ucaions in marginal uiliy. Hence GHH preferences guaranee he procyclicaliy of hours worked over he business cycle even if wages are weakly procyclical. Second, as subsiues for wage rigidiy, we choose a Taylor-ype saggered Nash bargainin wage based on a model of he labour marke wih labour adjusmen coss. The model, however, di ers from he Morensen- Pissarides labour search model because we absrac from explici maching and search fricions of he labour marke. Raher, our model can be viewed as a real version of he Cho-Cooley model wih labour adjusmen coss (Janko (28)), alhough our wage is derived from he celebraed Nash bargaining problem. The model also can be viewed a real version of he moneary model wih saggered Nash bargaining wage in Chrisiano e al (27) bu wihou maching and search fricions. The res of he paper is srucured as follows. Secion 2 presens he basic ingrediens of he model. In Secion 3, we presen he basis for is calibraion, examine he quaniaive performance of our model and show ha he model can accoun roughly for he basic feaures of he US daa, including macroeconomic dynamics and nancial saisics. Secion 4 concludes he paper. 2 The Model 2. Households There is a coninuum of in niely lived households uniformly disribued on a se of Lebesgue measure. Following Merz (995) and Chrisiano e al. (27), each household is viewed as a large exended family which conains a coninuum of family members uniformly disribued on a se of Lebesgue measure. Individual workers in each household, each endowed wih one uni of ime, supply heir labour hours. In he labour marke employmen varies a he exensive margin and labour hours worked varies a he inensive margin. Alhough heir employmen saus varies a he exensive margin, individual workers in each household perfecly insure each oher agains labour income variaion. Each household has he oal fracion of workers employed, n, wihin which he di eren cohors l; i i = ; :::; N are allocaed 2

3 according o heir saggered wage bargaining saus. For insance, he rs cohor l will engage in wage bargaining wih rm in period, receive he same wage from period o period +N and renegoiae in period + N, while he second cohor l already bargained over wage in period and receives he same wage from period o period 2 + N: Hence, he wage paid o an individual worker is deermined by Nash bargaining (speci ed laer), which occurs once every N periods. Therefore, our saggered wage seing is characerized by a Taylor-ype fricion. Households also have access o he nancial markes, where hey rade equiy claims o he rm s fuure dividend sream and one-period risk-free bonds (in zero ne supply). Given is informaion se h, he represenaive household maximizes is lifeime expeced uiliy as given by: V h ( h ) = max fh ;c ;e +;b +g E s.. c + p e e + + p f b + (p e + d )e + b + X [u(c n H(h ))] () = NX i= w i l i h l i+ + = ( )l i + x i l i for i = ; ; :::; N (2) In problem (), u() denoes he period uiliy funcion, H() he household s disuiliy of labour hours supplied, c is period consumpion, and h is period labour hours supplied. d denoes he period dividend paymen by he rm o is capial owners; e ; and b, respecively, he household s period sock and bond holdings; and he corresponding period prices of hese securiies are p e and p f. w i is he bargained wage rae of each cohor. Equaion (2) represens he law of moion of each cohor: is he probabiliy of separaion and x i denoes he rm s hiring rae wih respec o he ih cohor. n is he oal fracion of workers employed and hus we have n = NX i= The oal number of unemployed workers, u, is given by he di erence beween uniy (he oal populaion of workers) and he number of employed workers a he end of period, n. l i : u n : Accordingly, E E( j h ) denoes he expecaion operaor condiional on his informaion se h, and is he economy-wide subjecive discoun facor. Here, we adop GHH preferences for he represenaive household. I is known ha he class of GHH preferences has an exremely weak shor-run wealh e ec on he labor supply. In fac, he Hicksian wealh e ec of he real wage increase on hours worked is zero for his class of preferences. For more deail, see Jaimorvich and Rebelo (26). The class of 3

4 GHH preferences implies ha he marginal rae of subsiuion beween consumpion and labour supply depends only on he labour supply. Thus ineremporal subsiuion of consumpion has no e ec on he labour supply. Indeed, he marginal rae of subsiuion beween consumpion and labour supply in his model economy reads as: is: u h (c F n H(h )) u c (c F n H(h )) = H (h ): (3) Condiional upon his informaion se h, he recursive formulaion of he represenaive s problem V h ( h ) = max fc ;h ;e +;b +g u(c F n H(h )) + [(p e + d )e + b + P N i= wi l i h c p e e + p f b + ] +E(V h ( h +) j h ) (4) where is he marginal uiliy of he represenaive household, i.e. = u c (c n H(h )): The soluion o he recursive problem (4) is characerized by h : NX i= w i l i = H (h ) (5) e : p e = E [ ;+ (p e + + d + ) j h ] (6) b : p f = E [ ;+ j h ] (7) where ;+ is he household s marginal rae of subsiuion, Firm Each period, he rm can produce y according o he following aggregae producion funcion: y = f(k ; h n )z where z, k, and h n denoe aggregae produciviy shock, capial sock in period, and oal labour hours supplied by employed workers, respecively. Each cohor l i evolves according o he following law of moion: l i+ + = ( )li + x i l i for i = ; ; :::; N : Each period, l i separaes exogenously from each cohor of employed workers l i, and he rm organizes he new cohor l i+ +, augmened by new hires xi l i from he pool of he unemployed. x i is he hiring rae of he represenaive rm wihin he exising cohor i: in oher words, x i new hires from pool of he unemployed l i 4

5 The rm owns he (physical) capial sock, k. Each period he capial sock depreciaes a he rae of and is augemened by new invesmen i. We inroduce wo coss of adjusing he rm s capial sock and labour force. Merz and Yashiv (27) repor ha he simulaneous inroducion of hese wo adjusmen coss empirically a ecs he marke value of he rm; ignoring eiher cos does no mach wih he empircal evidence. Capial adjusmen coss have a long radiion in he invesmen heory lieraure. Such coss form a wedge beween he shadow price of capial insalled wihin he rm and he price of an addiional uni of capial. We replace he sandard capial-accumulaion echnology wih he speci caion employed in Jermann (998): k + = ( The adjusmen cos funcion G() is given by G( i k ) = a )k + G( i k )k : ( i ) + a2 k where a and a 2 are chosen so ha G() =, and G () =. The elasiciy parameer G () > is independen of he deerminaion of he model s seady-sae equilibrium. A cos of adjusing labour force is a device for capuring he allocaional feaure of wages: wages a ec employmen a he exensive margin; hey in uences he rae a which rms add new workers o heir exising labour forces. As in Gerler and Trigari (27), he adjusmen coss of he employmen size of each cohor l i are given by where is a xed cos. 2 (xi ) 2 l i : The saggered wage seing specializes o he case of N = 2 for simpliciy s sake. Then he laws of moion of each cohor can be rewrien as: l + = ( )l + x l (8) l + = ( )l + x l n = l + l : The rm seeks o maximize is pre-dividend sock marke value d + p e on a period-by-period basis given is informaion se f : max fi ;h s ;xgd + p e d + E( ;+ (p e + + d + ) j f ) (9) 5

6 s.. d f(k ; h n )z i w h l w h l k + = ( )k + G( i )k k l+ = ( )l + x l l + = ( )l + x l 2 (x ) 2 l 2 (x ) 2 l n = l + l In problem (9), w i, i = ; is he Nash bargaining wage for each cohor i (speci ed laer): by: Leing V f ( f ) d + p e, he recursive represenaion of he rm s problem is wrien as: V f ( f ) = d + E( ;+ V f ( f + ) j f ): The necessary and su cien rs-order condion for he rm s opimal invesmen decision is given By he envelope heorem, i : ( ) + E( ;+ V f k + j f = : k f ( f ) = f (k ; h n )z + E( ;+ V f + j f + = The Euler equaion is represened as: = E( s ;+G ( i k )[f (k + ; h + n + )z + + i ( ) + G( + k + ) G ( i+ k + ) The rs-order condiions for he rm s opimal hiring decision of workers are given by i + k + ] j f ): () x : x = E ;+ J + () x : x = E ;+ J + where f ( ) f ( ) ; respecively, are he rm s shadow value of one added from he cohor and he shadow value of one added worker from he cohor. 2.3 Nash Bargaining In his secion, we inroduce a (Nash) bargaining wage conrac beween he rm and workers wih a Taylor-ype fricion. Unlike he sandard Morensen-Pissarides framework, we absrac from he explici formulaion of he labour marke wih search and maching fricions. Raher, he rm s maching surplus and he household s maching surplus are de ned respecively as he rm s shadow value of one added worker and as he household s shadow value of one employed worker. We hen apply he sandard rs-order condiion of Nash bargaining, he consan surplus sharing rule. Again, for simpliciy, he saggered wage seing specializes o he case of N = 2 for simpliciy s sake. 6

7 Firm s maching surplus value (is pre-dividend sock marke value), V f ( f ) V f form as follows: Presuming ha he rm s decision variables are chosen opimally, he rm V f = d + p e = d + E( ;+ (p e + + d + ) j f ) = d + E( ;+ V f + j f ): d + p s can be represened in he recursive Le f f be he rm s shadow value of one added worker from he cohor he shadow value of one added worker from he cohor. J and J ; respecively, may be described recursively as: J = f n w h + 2 (x ) 2 + ( + x )E ;+ J + (2) where workers." 2 J = f n w h + 2 (x ) 2 + ( + x )E ;+ J = h f 2 (k ; h n )z is de ned as "exensively marginal produc labour of The rs-order condions for hiring also can be wrien as: x : x = E ;+ J + (3) x : x = E ;+ J +: Noe ha he wage bargaining occurs beween he rm and he workers from cohor : Therefore, he shadow value J produc. only plays he role of he rm s maching surplus as one par of he sandard Nash Worker s surplus We now derive he worker s surplus from employmen. This is de ned as he shadow value of one worker employed in erms of curren consumpion of nal goods. Because each household has wo cohors of workers employed, wo surpluses should be aken ino accoun. 2 In he maching labour marke for ousiders, we disinguish beween "exensively marginal produc of ousiders labour" and "inensively marginal produc of insiders labour". Similarly, inensively marginal produc labour, MP L h n, is de n = n z f 3 (k ; h s ; hn n): 7

8 When N = 2, he recursive represenaion of he household s problem can be rewrien as: V h ( h ) 2 = max fc ;h ;e +;b +g 6 4 s.. l+ = ( )l + x l u(c n H(h ))+ [(p e + d )e + b + w l h + w l h c p e e + p f b + ] +E(V h ( h +) j h ) (4) l + = ( )l + x l n = l + l : From he above recursive represenaion (4), i is possible o derive he marginal bene s of one worker employed from each cohor: l : l h = ( H(h )) + w h + E h + = ( H(h )) + w h + E h @l ) where V h V h ( h ) and E E( j h ). S Then, he shadow values of one worker employed from each cohor in erms of curren consumpion, and S, are de ned as Therefore S and S read as: Saggered Nash bargaining wage wih he rm and receives w. Then he l : S = w h H(h ) + ( + x )E ( + S +) (5) S = w h H(h ) + ( + x )E ( + S +) (6) and producion akes place. Afer producion, he l reasons and cohor is augmened by hiring he x l Nex period, he cohor is renamed as he cohor in fac, l + = ( A he beginning of period, he cohor bargains over wage workers of cohor supply heir labour hours o he rm workers separae from cohor for exogenous workers from he pool of umemployed workers. )l + x l and he workers of cohor supply heir labour hours and receive he wage previously deermined: in oher words, w + = w : In he same manner, he l + separaes from cohor and cohor is augmened by hiring 8

9 he x +l + workers from he pool of umemployed workers. In period + 2; cohor is renamed as cohor, which will bargain over heir wage. Thus, he wage bargaining (or renegoiaion) occurs once every 2 periods. Since he wage bargaining always involves cohor, he shadow value J only plays he role of he rm s maching surplus as one par of he sandard Nash produc, while he shadow value S on he worker side consiues he oher par of he Nash produc. The Nash bargaining problem is formulaed as: max(j w ) (S ) : h Under his Nash bargaining problem, he rm and he worker choose he wage w of work h o maximize he Nash produc. The wage w opimaliy condiion 3 : and he hours chosen by he bargaining mus saisfy he J = ( )S. (7) Using he equaions (2) and (3), J can be represened as: 2 J f = 4 n w h + 2 (x ) 2 +( + x )E ;+ [f n+ w+h (x +) 2 + ( + x +)E + +;+2 J+2] 3 5 Similarly, using he equaions (5) and (6), S is wrien as 2 S w = 4 h H(h ) +( + x )E ;+ [w+h + H(h + ) + ( + x +)E + +;+2 S+2] 3 5 Noe ha due o he Taylor-ype saggered wage seing he wage w, paid o he workers of cohor, is equal o w, i.e. w = w : (8) Using relaion (8) and he opimaliy condiion of Nash bargaining (7), J furher o he racable forms: 2 3 f n + 2 (x ) 2 + ( + x )E ;+ [f n+ + 2 (x +) 2 ] J = 6 4 w [h + ( + x )E ;+ h + ] 7 5 +( + x )E ;+ [( + x +)E + +;+2 J+2] 2 3 w [h + ( + x )E ;+ h + ] S = 6 4 [H(h ) + ( + x )E ;+ H(h + )] 7 5 +( + x )E ;+ [( + x +)E + +;+2 J +2] and S can be reduced The reapplicaion of he opimaliy condiion of Nash bargaining (7) generaes he desired saggered Nash bargaining wage: w = f n + 2 (x ) 2 + ( + x )E ;+ [f n+ + 2 (x +) 2 ] h + ( + x )E ;+ h + +( ) H(h ) + ( + x )E ;+ H(h + ) h + ( + x )E ;+ h + : 3 This condiion is he consan surplus sharing rule. 9

10 2.4 Equilibrium In his economy, marke clearing requires ha for all, e = = Z Z e d' = b d' where ' sands for he measure of households. y = c + i + 2 (x ) 2 l + 2 (x ) 2 l De niion Under he above marke-clearing condiions, a decenralized saionary recursive equilibrium is de ned as: a se of decision rules fc (); h (); e + (); b + (); i (); x (); x ()g and a se of wage and price funcions fw (); w (); p e (); p f (); d ()g given he informaion se of aggregae saes = fk ; l ; l ; z g such ha (i) fc (); h (); e + (); b + ()g sais es a se of he opimaliy condiions (5),(6) and (7) (iii)fw ()g sais es he opimaliy condiion for Nash bargaining (7) (iv) fi (); x ()g sais es he opimaliy condiions for invesmen and hiring () and () (vi) w () sais es he condiion (8) (vii)fp e (); d ()g sais es he Lucas asse pricing equaion (6), while f p f ()g sais es he equaion (7) (ix) The economy follows four laws of moion: k + = ( )k + G( i k )k, and l + = ( )l + x l, l + = ( )l + x l. 2.5 Asse Pricing Under he decenralized saionary recursive equilibrium de ned in Secion 2.4, i is possible o de ne and compue nancial variables. Using he dividend series, he condiional price p e ( ) of an equiy securiy is recursively compued according o he Lucas asse pricing equaion: p e ( ) = E( + [p e ( + ) + d( + )] j ); where = fk ; l ; l ; z g is he aggregae sae of economy and = u c (c marginal uiliy. n H(h )) is he household s Using hese prices, he ime series of equiy reurns is compued in he convenional way: R e ;+ = pe ( + ) + d( + ) p e ( ) In a similar fashion, he price of a one-period risk-free real bond is given by The risk-free rae of reurn, R f, is compued using p f ( ) = E( + j ): R f = p f ( ) :.

11 3 Calibraion The ime uni of he models is hree monhs. We calibrae he process for aggregae produciviy shocks o mach he quarerly AR() process found by Cooley and Presco (995) o mach he US Solow residual. The produciviy shock z evolves according o he law of moion: log z + = :95 log z + + where is disribued normally, wih mean zero and sandard deviaion. The quarerly volailiy of produciviy shock,, is se o be.72% which is he sandard parameerizaion in he business cycle lieraure. For all simulaion runs, he producion funcion employed is he cusomary Cobb-Douglas funcion z f(k ; h n ) = z k (h n ) : The parameer is ypically calibraed o reproduce he observed share of capial in oal value added. We adop he mos commonly used value, :36. Thus, he share of income going o wages, :64, falls in he range [:6; :72] and is broadly consisen wih he OECD cross-counry daa. The subjecive discoun facor is xed a = :99, corresponding o a seady sae reurn on capial of 4%. Following Kydland and Presco (982), he quarerly capial depreciaion rae is :25. As in secion 3.3, here exiss observaional equivalence beween our labour marke and he labour marke wih maching and search fricions. Therefore, we calibrae he labour marke using he sandard parameers for labour marke search and maching. The suggesions of he empirical lieraure vary wih several measures of he US worker separaion rae. We follow he repor of Davis, Haliwanger and Schuh (996) so ha he quarerly separaion rae is se o be 8 percen. The seady sae value of employmen of ousider-nonsockholders n is se o be.89 as in den Haan, Ramey, and Wason (2). We assume ha he seady sae value of he size of every cohor is equal, i.e. l = l = n 2 ; hus wo laws of moion of labour cohors (8) imply ha he seady sae values of he hiring raes, x and x are also equal. The vacancy cos and he bargaining power parameer are derived from he seady sae relaionships so ha he seady sae raio of adjusmen coss o oupu 2 x2 n y is.4; his raio is broadly consisen wih he empirical ndings of labour adjusmen coss in he US (Janko (28)). The seady sae value of he vacancy- lling probabiliy q is aken o be.7 in he lieraure (for insance, Cooley and Quadrini (999)) and his value enables us o derive he observaionally equivalen number of job vacancies :The period uiliy funcion of he represenaive household is posulaed as u(c H(h )) = (cj;s B(h ) ) wih = :3: = :3 implies ha he Frisch elasiciy of labour supply is :3 = 3:33. We choose he adjusmen cos parameer = :23, used by Jermann (998).

12 4 Model Resuls Equiy premium Table displays he saisics from he simulaed models along wih heir empirical counerpars from he hisorical US daa. Table : Financial saisics for he US economy and model economies E[R f ] [Rf ] E[Re ;+ R f ] [R e ;+ R f ] Daa :8 5:67 6:8 6:67 Model = 2:76 9:4 2:3 4:47 = 5 2:3 :5 3:35 8:27 = 2 :92 3:35 4:6 2:55 = 3 :4 6:7 5:8 23:84 4. Business Cycle Implicaions In Table 2 he business-cycle implicaions of our baseline models are repored alongside he US daa. Table 2: Business cycle saisics for model economies y c = y i = y w = y u = y = y Daa :59 :77 3:9 :43 6:92 8:27 Model = :23 :88 2:7 :33 7:74 2:5 = 5 = 2 :7 :63 2:79 :32 7:8 2:64 = 3 5 Concluding Remarks Operaing Leverage, he observaion ha he share of capial is riskier han he share of labour due o he prioriy saus of wage claims over he business cycles, has been believed o relevan o a resoluion of he equiy premium puzzle.this paper asks wheher asse pricing ucuaions induced by a DSGE model wih operaing leverage are empirically plausible. 2

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