Discussion on the LSM Fontagn, Maffezzoli and Marcellino, by O. Pierrard

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Discussion on the LSM (Fontagné, Maffezzoli and
Marcellino),by O. Pierrard
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DSGES 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) -gt LSM by Fontagné, Maffezzoli and
  Marcellino

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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

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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

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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

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DEMOGRAPHY (ctd)
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DEMOGRAPHY (ctd)
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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)

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LABOUR MARKET (ctd)

• Alternative approach Diamond-Mortensen-Pissarides
  (search unemployment)
• Simulations LSM vs. DMP

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DEMOGRAPHY AND LABOUR MARKET