1

Discussion on the LSM (Fontagné, Maffezzoli and Marcellino),

by O. Pierrard

2

DSGE’S IN HISTORICAL PERSPECTIVE

Backward looking macroeconometric models (Keynes, Hicks, IS-LM) from data to theory

Lucas’ critique on deep structural parameters (1976) and rational expectations

Forward looking micro founded models (Kydland and Prescott, 1982) from theory to data

Last generation of New-Keynesian models (or DSGE models) -> LSM by Fontagné, Maffezzoli and Marcellino

3

POTENTIAL UTILIZATIONS

Short run forecasts ??? Need of heterogeneity, need to escape from steady state in case of crises. Difficult with DSGE models.

Understanding of shock transmission channels

Medium and/or long run forecasts

4

LSM

Impressive work at the frontier of research

Utilisation to explain potential effects of policies and medium/long run forecasts: great!

Essential if we want to be serious about policy implementation and recommendation

Nice: assets, goods market, open economy

Exogenous but probably difficult to endogenise: commuters’ behaviour

Discussion: demography and labour market

5

DEMOGRAPHY

Blanchard (1985) OLG approach: households have constant probability to die

Advantage: simplicity (easy aggregation)

and ‘households have finite lives’ : yes but…

Strong implications for demography

Difficult to study demography and/or retirement related questions

6

DEMOGRAPHY (ctd)Death probability (expected life: 83 y)

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0,80

0,90

<5 10-14 20-24 30-34 40-44 50-54 60-64 70-74 80-84 90-94

Average BE-FR(2003)

LSM

7

DEMOGRAPHY (ctd)Implied population (for 1000 births)

0

200

400

600

800

1000

1200

Average BE-FR(2003)

LSM

8

LABOUR MARKET

Wage formation mechanism not benchmark

With some simulations (mainly productivity shocks), strong effect on wages which leaves employment almost unaffected (also in QUEST)

Potential implication (at least with productivity shocks): volatile and procyclical wages, rigid and acyclical employment

Real data (1984-2006, CKL 2008) :

corr(x,y) DE EA US

empl. 0.81 0.76 0.85

wages 0.31 0.56 -0.03

(x)/(y) DE EA US

empl. 0.90 0.85 1.19

wages 0.90 0.64 0.87

9

LABOUR MARKET (ctd)

Alternative approach: Diamond-Mortensen-Pissarides (search unemployment)

Simulations: LSM vs. DMP

TFP (+1%) GDP w Nr Nc

LSM +1.5% +1.5% -0.1% -0.1%

DMP +2% +1.5% +0.6% +0.6%

EP (+1%) GDP w Nr Nc

LSM +0.9% +0.8% +0% +0%

DMP +1.4% +1.0% +0.4% +0.4%

10

DEMOGRAPHY AND LABOUR MARKETActivity rate (2006, Eurostat)

0

10

20

30

40

50

60

70

80

90

100

15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64

LU

EA13