Discussion of the paper 'An RBC Model with Market and Political Power Interactions' by Tryphon Kollintzas (Athens University of Economics and Business, CEPR)

1. Introducing Market and Political Power Interactions
into a SOE RBC Model
Discussion by Andresa Lagerborg
Tryphon Kollintzas1
Dimitris Papageorgiou2
Vanghelis Vassilatos3
November 17, 2017
ADEMU Conference, EUI
Winners, Losers, and Policy Reforms after the Euro Crisis
1
Athens University of Economics and Business, CEPR, and ADEMU
2
Bank of Greece
3
Athens University of Economics and Business
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 1 / 9

2. Motivation
Relevant Question: reason for lengthy duration of crisis in GIPS?
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 2 / 9

3. Motivation
Relevant Question: reason for lengthy duration of crisis in GIPS?
Premise: market and political power interactions can propagate shocks
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 2 / 9

4. Motivation
Relevant Question: reason for lengthy duration of crisis in GIPS?
Premise: market and political power interactions can propagate shocks
Contribution: neo-corporatist state with endogenous wages/employment
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 2 / 9

5. Motivation
Relevant Question: reason for lengthy duration of crisis in GIPS?
Premise: market and political power interactions can propagate shocks
Contribution: neo-corporatist state with endogenous wages/employment
⇒ combines insiders-outsiders of labor market with elite government
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 2 / 9

6. Motivation
Relevant Question: reason for lengthy duration of crisis in GIPS?
Premise: market and political power interactions can propagate shocks
Contribution: neo-corporatist state with endogenous wages/employment
⇒ combines insiders-outsiders of labor market with elite government
Key elements:
Outsiders: workers in competitive private sector
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 2 / 9

7. Motivation
Relevant Question: reason for lengthy duration of crisis in GIPS?
Premise: market and political power interactions can propagate shocks
Contribution: neo-corporatist state with endogenous wages/employment
⇒ combines insiders-outsiders of labor market with elite government
Key elements:
Outsiders: workers in competitive private sector
Insiders (powerful): unionized workers in public sector industries with
influence over government policy, leading to a wage premium (wedge) and
labor misallocation.
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 2 / 9

8. Motivation
Relevant Question: reason for lengthy duration of crisis in GIPS?
Premise: market and political power interactions can propagate shocks
Contribution: neo-corporatist state with endogenous wages/employment
⇒ combines insiders-outsiders of labor market with elite government
Key elements:
Outsiders: workers in competitive private sector
Insiders (powerful): unionized workers in public sector industries with
influence over government policy, leading to a wage premium (wedge) and
labor misallocation.
Ramsey allocation: optimal policy reflecting median voter and preferences
of insiders’ unions gives rise to politico-economic equilibrium (high fraction of
public employment).
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 2 / 9

9. Motivation
Relevant Question: reason for lengthy duration of crisis in GIPS?
Premise: market and political power interactions can propagate shocks
Contribution: neo-corporatist state with endogenous wages/employment
⇒ combines insiders-outsiders of labor market with elite government
Key elements:
Outsiders: workers in competitive private sector
Insiders (powerful): unionized workers in public sector industries with
influence over government policy, leading to a wage premium (wedge) and
labor misallocation.
Ramsey allocation: optimal policy reflecting median voter and preferences
of insiders’ unions gives rise to politico-economic equilibrium (high fraction of
public employment).
Calibrate model to GIPS with USA and Germany as benchmark.
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 2 / 9

10. Model: fiscal policy inefficiency
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 3 / 9

11. Summary Findings
1. Higher public wages does not necessarily mean less public employment, if government
increases Nt .
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 4 / 9

12. Summary Findings
1. Higher public wages does not necessarily mean less public employment, if government
increases Nt .
2. Effect of ↑ Nt on TFP, depends on complementarity of public goods:
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 4 / 9

13. Summary Findings
1. Higher public wages does not necessarily mean less public employment, if government
increases Nt .
2. Effect of ↑ Nt on TFP, depends on complementarity of public goods:
Gross complements: ↑ v(Nt ) → TFP(⇑ Nt ,
−
↑ v(Nt )) i.e. labor misallocation effect
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 4 / 9

14. Summary Findings
1. Higher public wages does not necessarily mean less public employment, if government
increases Nt .
2. Effect of ↑ Nt on TFP, depends on complementarity of public goods:
Gross complements: ↑ v(Nt ) → TFP(⇑ Nt ,
−
↑ v(Nt )) i.e. labor misallocation effect
Gross substitutes: ↓ v(Nt ) → TFP(↑ Nt , ↓ v(Nt )) i.e. smaller variety effect
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 4 / 9

15. Summary Findings
1. Higher public wages does not necessarily mean less public employment, if government
increases Nt .
2. Effect of ↑ Nt on TFP, depends on complementarity of public goods:
Gross complements: ↑ v(Nt ) → TFP(⇑ Nt ,
−
↑ v(Nt )) i.e. labor misallocation effect
Gross substitutes: ↓ v(Nt ) → TFP(↑ Nt , ↓ v(Nt )) i.e. smaller variety effect
⇒ smaller rise in output than baseline RBC
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 4 / 9

16. Summary Findings
1. Higher public wages does not necessarily mean less public employment, if government
increases Nt .
2. Effect of ↑ Nt on TFP, depends on complementarity of public goods:
Gross complements: ↑ v(Nt ) → TFP(⇑ Nt ,
−
↑ v(Nt )) i.e. labor misallocation effect
Gross substitutes: ↓ v(Nt ) → TFP(↑ Nt , ↓ v(Nt )) i.e. smaller variety effect
⇒ smaller rise in output than baseline RBC
3. Overall inefficiencies of large Nt :
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 4 / 9

17. Summary Findings
1. Higher public wages does not necessarily mean less public employment, if government
increases Nt .
2. Effect of ↑ Nt on TFP, depends on complementarity of public goods:
Gross complements: ↑ v(Nt ) → TFP(⇑ Nt ,
−
↑ v(Nt )) i.e. labor misallocation effect
Gross substitutes: ↓ v(Nt ) → TFP(↑ Nt , ↓ v(Nt )) i.e. smaller variety effect
⇒ smaller rise in output than baseline RBC
3. Overall inefficiencies of large Nt :
labor misallocation effect (↓ productivity)
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 4 / 9

18. Summary Findings
1. Higher public wages does not necessarily mean less public employment, if government
increases Nt .
2. Effect of ↑ Nt on TFP, depends on complementarity of public goods:
Gross complements: ↑ v(Nt ) → TFP(⇑ Nt ,
−
↑ v(Nt )) i.e. labor misallocation effect
Gross substitutes: ↓ v(Nt ) → TFP(↑ Nt , ↓ v(Nt )) i.e. smaller variety effect
⇒ smaller rise in output than baseline RBC
3. Overall inefficiencies of large Nt :
labor misallocation effect (↓ productivity)
political effect (deadweight loss )
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 4 / 9

19. Summary Findings
1. Higher public wages does not necessarily mean less public employment, if government
increases Nt .
2. Effect of ↑ Nt on TFP, depends on complementarity of public goods:
Gross complements: ↑ v(Nt ) → TFP(⇑ Nt ,
−
↑ v(Nt )) i.e. labor misallocation effect
Gross substitutes: ↓ v(Nt ) → TFP(↑ Nt , ↓ v(Nt )) i.e. smaller variety effect
⇒ smaller rise in output than baseline RBC
3. Overall inefficiencies of large Nt :
labor misallocation effect (↓ productivity)
political effect (deadweight loss )
debt effects (higher risk spread and lower transfers next period)
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 4 / 9

20. Comments
1. Motivation: different duration of shocks in GIPS vs. US/Germany
But also very different nature of shocks and policy responses
Some similarities: surprise news about financial soundness/ fundamentals
Key disparitites:
private sector (US) vs. public sector (GIPS) vs. contagion (Germany)
solution: public sector liquidity - easy injection (US)
vs. sovereign debt crisis and IMF/ECB package (GIPS) Figure
GIPS had no independent monetary nor fiscal policy (mandated reforms)
In this model translates to: tax (↑ τt ) and public sector (↓ Nt ↓ wi
t ↓ Li
t )
Greece
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 5 / 9

21. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

22. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

23. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

24. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

25. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Responses to other demand (discount factor or taste) and supply shocks
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

26. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Responses to other demand (discount factor or taste) and supply shocks
News shock to bD
t + bF
t pushing up rB
t
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

27. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Responses to other demand (discount factor or taste) and supply shocks
News shock to bD
t + bF
t pushing up rB
t
4. Mechanisms
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

28. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Responses to other demand (discount factor or taste) and supply shocks
News shock to bD
t + bF
t pushing up rB
t
4. Mechanisms
Discuss steady state: higher public debt and lower transfers? lower growth?
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

29. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Responses to other demand (discount factor or taste) and supply shocks
News shock to bD
t + bF
t pushing up rB
t
4. Mechanisms
Discuss steady state: higher public debt and lower transfers? lower growth?
What else does the model match? Compare calibration to U.S. and developing c’s.
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

30. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Responses to other demand (discount factor or taste) and supply shocks
News shock to bD
t + bF
t pushing up rB
t
4. Mechanisms
Discuss steady state: higher public debt and lower transfers? lower growth?
What else does the model match? Compare calibration to U.S. and developing c’s.
Risk-sharing across public/private workers. Idiosync. risk → precautionary savings.
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

31. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Responses to other demand (discount factor or taste) and supply shocks
News shock to bD
t + bF
t pushing up rB
t
4. Mechanisms
Discuss steady state: higher public debt and lower transfers? lower growth?
What else does the model match? Compare calibration to U.S. and developing c’s.
Risk-sharing across public/private workers. Idiosync. risk → precautionary savings.
5. Empirical evidence
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

32. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Responses to other demand (discount factor or taste) and supply shocks
News shock to bD
t + bF
t pushing up rB
t
4. Mechanisms
Discuss steady state: higher public debt and lower transfers? lower growth?
What else does the model match? Compare calibration to U.S. and developing c’s.
Risk-sharing across public/private workers. Idiosync. risk → precautionary savings.
5. Empirical evidence
VAR could include share of employment in public sector
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

33. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Responses to other demand (discount factor or taste) and supply shocks
News shock to bD
t + bF
t pushing up rB
t
4. Mechanisms
Discuss steady state: higher public debt and lower transfers? lower growth?
What else does the model match? Compare calibration to U.S. and developing c’s.
Risk-sharing across public/private workers. Idiosync. risk → precautionary savings.
5. Empirical evidence
VAR could include share of employment in public sector
Estimated parameters: Are public goods complements or substitutes?
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

34. Comments (cont’d)
2. Fiscal multipliers
Compute government spending multipliers: ∆Yt /∆Gt
Compare increase in Nt to rise in ft / reduction in τt financed by debt
Is the fiscal multiplier reduced in the presence of a wage premium?
3. Other shocks
Responses to other demand (discount factor or taste) and supply shocks
News shock to bD
t + bF
t pushing up rB
t
4. Mechanisms
Discuss steady state: higher public debt and lower transfers? lower growth?
What else does the model match? Compare calibration to U.S. and developing c’s.
Risk-sharing across public/private workers. Idiosync. risk → precautionary savings.
5. Empirical evidence
VAR could include share of employment in public sector
Estimated parameters: Are public goods complements or substitutes?
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 6 / 9

35. Last but not least...
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 7 / 9

36. GIPS or PIGS?
Ph.D. FREEDOM
=
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 8 / 9

37. GIPS or PIGS?
Ph.D. FREEDOM
=
Back
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 8 / 9

38. Thank you!
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 9 / 9

39. Sovereign Spreads
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 1 / 3

40. U.S. Treasury Yields
Back
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 2 / 3

41. Fiscal policy reform in Greece
Back
Kollintzas et al. (2017) Introducing Market and Political Power Interactions into a SOE RBC Model 3 / 3