Paul Gomme

• Ph.D., University of Western Ontario
• M.A., University of Western Ontario
• B.A. (Honours), Wilfrid Laurier University

• Professor, Concordia University
• Research Fellow, CIREQ

How to contact me:

Prof. Paul Gomme
Department of Economics
1455 de Maisonneuve Blvd. West
Concordia University
Montreal, Quebec H3G 1M8
Canada

Email:

Curriculum Vita

Available in PDF

Related links

My Ideas entry.

My RePEc entry.

Publications:

• ``Money and Growth Revisited: Measuring the Costs of Inflation in an Endogenous Growth Model,'' Journal of Monetary Economics, 32 (1), August 1993, pp. 51-77.
  Abstract: Conventional wisdom is that if public policy can affect the growth rate of the economy, the welfare implications of alternative policies will be large. In this paper, a stochastic, dynamic general equilibrium model with endogenous growth and money is examined. In this setting, inflation lowers growth through its effect on the return to work. However, the welfare costs of higher inflation are modest. The endogenous labor supply is important in producing this result.

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• ``Labor Turnover and the Natural Rate of Unemployment: Efficiency Wage vs Frictional Unemployment,'' Journal of Labor Economics (with W. Bentley MacLeod and James M. Malcomson), 12 (2), April 1994, pp. 276-315.
  Abstract: Wage and unemployment responses to changes in economic environment are compared for efficiency wage and frictional models. Changes in aggregate demand, persistence of job-specific shocks, cost of living, and unemployment benefits are considered. Wages and unemployment move in the same direction in the two models, except that an upward shift in aggregate labor demand can reduce the real wage in the efficiency wage, but not the frictional, model. In a numberical simulation calibrated to U.S. data, real productivity shocks in the efficiency wage model yield a ratio of unemployment to wage variability close to that of the United States.

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• ``On the Cyclical Allocation of Risk,'' Journal of Economic Dynamics and Control (with Jeremy Greenwood), 19 (1), January 1995, pp. 91-124.
  Abstract: A real business cycle model with two types of agents, workers and entrepreneurs, is simulated to see if it can account for some stylized facts characterizing postwar U.S. business cycle fluctuations, such as the countercyclical movement of labor's share of income, and the acyclical behavior of real wages. It can. There exists an economy-wide market for contingent claims. On this market workers purchase insurance from entrepreneurs, through optimal labor contracts, against losses in income due to business cycle fluctuations. Insurance flows protecting workers against aggregate cyclical risk are calculated to be less than one percent of labor income.

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• ``Unemployment Insurance and Labor-market Activity in Canada'' Carnegie-Rochester Conference Series on Public Policy, (with David Andolfatto), 44, June 1996, pp. 47-82.
  Abstract: In 1972, the Canadian Federal government implemented a wide-ranging set of reforms to the nation's unemployment insurance system. The economic impact of these reforms are evaluated in the context of a dynamic general equilibrium model of labor-market search. A calibrated version of the model estimates that the 1972 reforms had only a modest impact on unemployment, but led to a significant increase in the rate of labor-market turnover, particularly on flows into and out of the labor force. The model also estimates that on net, the reforms likely contributed to an increase in social welfare by reducing the level of idiosyncratic income risk.

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• ``U.S. Labour Market Policy and the Canada--U.S. Unemployment Rate Gap'' Canadian Public Policy (with David Andolfatto and Paul Storer) 24 (S1), February 1998, pp. 210-232.
  Abstract: In this paper, we investigate the extent to which changes in U.S. labour market policy in the 1980s may have contributed to the emergence of an unemployment rate gap between Canada and the United States. In that decade, unemployment insurance benefits became taxable, income tax rates fell substantially, and various administrative changes were made that effectively tightened unemployment insurance eligibility requirements. These policy changes are evaluated in the context of a computable equilibrium model of the labour market. Our estimates suggest that all of these reforms together can account for no more than a 0.4 percentage point decline in U.S. natural rate of unemployment; a combined effect which accounts for 20 percent of the unemployment rate gap.

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• ``Applying Evolutionary Programming to Selected Set Partitioning Problems'' International Journal for Fuzzy Sets and Systems (with Paul Harrald) 95 (1), April 1, 1998, pp. 67-76.
  Abstract: Evolutionary programming is applied to several instances of the set partitioning problem. Comparison is made between the distribution of best-evolved solutions arising from implementations of the EP with the empirical distribution of a randomly selected trial solution.

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• ``Shirking, Unemployment and Aggregate Fluctuations'' International Economic Review 40 (1), February 1999, pages 3-21.
  Abstract: Empirically, real wages exhibit relatively little cyclical variation and a weak cyclical pattern. Early real business cycle models predict, to the contrary, large, procyclical real wage movements. Incorporating efficiency wages into a real business cycle environment would seem promising since one prediction from the efficiency wage literature is real wage rigidity. This paper evaluates a common microfoundation for efficiency wages, the shirking model, with respect to its predictions for real wages within a real business cycle-style model. Simulations of the model reveal that it can generate dampened, but still strongly procyclical real wage behavior.

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• ``Home Production Meets Time-to-build'' Journal of Political Economy (with Finn Kydland and Peter Rupert) 109 (5), October 2001, pages 1115-1131.
  Abstract: An innovation in this paper is to introduce a time-to-build technology for the production of market capital into a model with home production. Our main finding is that the two anomalies that have plagued all household production models---the positive correlation between business and household investment, and household investment leading business investment over the business cycle---are resolved when time-to-build is added.
  Scilab Code

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• ``Monetary Policy Regimes and Beliefs'' International Economic Review (with David Andolfatto) 44 (1), February 2003, pages 1-30.
  Abstract: This paper investigates the role of beliefs over monetary policy in propagating the effects of monetary policy shocks within the context of a dynamic, stochastic general equilibrium model. In our model, monetary policy periodically switches between low and high money growth regimes. When individuals are unable to observe the regime directly, they form inferences over regime-type based on historical money growth rates. For an empirically plausible money growth process, beliefs evolve slowly in the wake of a regime change. As a result, our model is able to capture some of the observed persistence of real and nominal variables following such a regime change.

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• ``The Business Cycle and the Life Cycle'' (with Richard Rogerson and Peter Rupert and Randall Wright), NBER Macro Annual 2004, pages 415-461.
  Abstract: This paper explores the variation in hours of work over the life-cycle through the lens of a model incorporating home production. While the model successfully accounts for hours variation of individuals late in their life-cycle, it fails to capture the high variation in hours of work early in the life-cycle.
  Scilab Code

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• ``Theory, Measurement and Calibration of Macroeconomic Models'' (with Peter Rupert) Journal of Monetary Economics 54 (2), March 2007, pages 460-497.
  Abstract: Calibration has become a standard tool of macroeconomics. This paper extends and refines the calibration methodology along several important dimensions. First, accounting for home production is important both in measuring calibration targets and in organizing the data in a model-consistent fashion. For this reason, thinking about home production is important even if the model under consideration does not include home production. Second, investment-specific technological change is included because of its strong balanced growth parameter restrictions. Third, the measurement strategy is laid out as transparently as possible so that others can easily replicate the underlying calculations. The data and calculations used in this paper are available at http://clevelandfed.org/research/Models/rbc/Index.cfm

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Federal Reserve Bank of Cleveland Publications

• ``In search of the NAIRU'' (with David Altig), Economic Commentary, May 1, 1998.

• ``Canada's Money Targeting Experiment'', Economic Commentary, February 1, 1998.

• ``What Labor Market Theory Tells Us about the `New Economy''', Economic Review 1998 Quarter 3, pages 16-24.

• ``Unemployment and Economic Welfare'' (with David Andolfatto), Economic Review, 1998 Quarter 3, pages 25-33.

• ``On the Costs of Inflation'', Economic Commentary, May 15, 2001.

• ``Free Trade and Tariffs-An Uneasy Mix'', Economic Commentary, September 1, 2002.

• ``The Iowa Electronic Markets'', Economic Commentary, April 15, 2003.

• ``Per Capita Income Growth and Disparity in the United States, 1929-2003'' (with Peter Rupert), Economic Commentary, August 15, 2004.

• ``Why Policymakers Might Care about Stock Market Bubbles'', Economic Commentary, May 15, 2005 (reprinted in U.S. Banker, August 1 2005)

• ``Accounting for the Jobless Recoveries'', Economic Commentary, August 1, 2005.

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Working Papers and Work in Progress:

• New: 2008-05 ``Second-order approximation of dynamic models without the use of tensors'' (with Paul Klein)
  Abstract: Several approaches to finding the second-order approximation to a dynamic model have been proposed recently. This paper differs from the existing literature in that it makes use of the Magnus and Neudecker (1999) definition of the Hessian matrix. The key result is a linear system of equations that characterizes the second-order coefficients. No use is made of multi-dimensional arrays or tensors. A practical implication of our approach is that it is much easier to transcribe the mathematical representation of the solution into usable computer code.
  The basic routines for first- and second-order approximations

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• New: 2008-03 ``Estimating Canadian Monetary Policy Regimes'' (with David Andolfatto)
  Abstract: Andolfatto and Gomme (2003) find evidence that Canadian monetary policy appears to alternate between high and low money growth rate regimes, and that private-sector belief formation over these unobserved regimes could induce significant persistence in the propagation of monetary policy shocks. In this paper, we examine the sensitivity of these conclusions by re-estimating the data allowing for the possibility of multiple regimes. In doing so, we find evidence of three (rather than two) distinct monetary policy regimes. In particular, we find that one policy regime is characterized by high money growth with moderate variability. The other two policy regimes are characterized by a common low money growth rate; they are distinguished primarily by their variability (high and low). A simulation exercise based on our three-regime model reveals an improvement in accounting for the behavior of the Canadian economy over some episodes; notably, the sharp increase in interest rates and the curtailment of economic activity in the early 1980s.

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• Updated: 2008-04-07:``The Return to Aggregate Capital and the Business Cycle'' (with B. Ravikumar and Peter Rupert)
  Abstract: While business cycle theory has made considerable progress in accounting for business cycle fluctuations in aggregate quantities, it has been less successful in replicating features of relative prices. In real business cycle theory, the key intertemporal relative price is the real rate of return on a representative unit of capital. In aggregate models, this return is not the rate of return to the S&P 500. Using National Income and Products Account data, we construct an appropriate measure of the return to capital. We find that an off-the-shelf real business cycle model captuures roughly half of the volatility of this return. Higher risk aversion improves the model's ability to account for the variability of the return to capital.

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• ``Human Capital Theory and the Life-Cycle Pattern of Learning and Earning, Income and Wealth'' (with David Andolfatto and Christopher Ferral)
  Abstract: Life-cycle patterns of income, earnings, consumption, labor supply, and wealth vary systematically across educational groups. Human capital theory explains different educational choices in terms of parameters describing tastes and technology. We ask whether differences in these parameters are also consistent with other patterns of behavior. Our preliminary findings suggest that no single form of parameter heterogeneity will be able to account for the joint behavior of life-cycle choices.

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• ``Measuring the Welfare Costs of Inflation in a Lifecycle Model''
  Abstract: The welfare costs of inflation are analyzed in a life-cycle model. In the benchmark model, money is held to satisfy a cash-in-advance constraint. An inflation rate over 200% per annum maximizes lifetime utility because it leads to better smoothing of utility over the life-cycle, in essence because inflation taxes rich, old agents and makes net transfers to poor, young ones. This version of the model suggests that high inflation in developing countries may be part of an optimum policy. Introducing other taxes into the model gives the government alternative sources of revenue and reduces the optimal inflation rate to something close to the Friedman rule. Allowing some goods to be purchased with costly credit also reduces the optimal (lifetime utility-maximizing) inflation rate. However, if seigniorage revenue can be used to lower these other taxes, high inflation is again optimal. Finally, the transitional dynamics following a disinflation are traced out for the costly credit version of the model with U.S. taxes. This policy leads to a Pareto superior allocation.

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• ``Optimal Taxation in an Endogenous Growth Model with Government Supplied Educational Capital'' (available as a postscript file)
  Abstract: Government expenditures are large when measured as a proportion of government spending or relative to GNP. This fact is incorporated into an endogenous growth model in which education produces new human capital. Capital in the education sector is provided by government and financed by distortionary taxes. To incorporate property taxes, an important source of revenues for schooling, household production is incorporated into the model with household capital representing the property tax base. The model is calibrated to match key first moment properties of the post-war U.S. economy. Different mixes of labor income, capital income and property taxes are analyzed with regard to their consequences for the welfare of the representative household. In general, taxes have two opposing effects: higher taxes tend to retard growth and reduce welfare; however, when used to finance educational expenditures, taxes promote human capital accumulation and so growth which is welfare-enhancing.

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• ``Evolutionary Programming as a Solution Technique for the Bellman Equation''
  Abstract: Evolutionary programming is a stochastic optimization procedure which has proved useful in optimizing difficult functions. It is shown that Evolutionary programming can be used to solve the Bellman equation problem with a high degree of accuracy and substantially less CPU time than Bellman equation iteration. Future applications will focus on sometimes binding constraints - a class of problem for which standard solutions techniques are not applicable.

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• ``Anticipated Inflation in a Neoclassical Growth Model with a Cash-in-advance Constraint''
  Abstract: Sufficient conditions for the long run non-superneutrality of money are established in a neoclassical growth model with a labor-leisure choice. Money is held to satisfy a cash-in-advance constraint on consumption purchases. Production requires capital and labor while period utility depends on consumption and leisure. The most important sufficient conditions for increased money growth to reduce output in the long run are: (1) the crosspartial derivative of the production function is non-negative, and (2) the crosspartial derivative of the period utility function is non-negative.

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