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Fed Economists.

Research in Progress:

  • Capital-Task Complementarity
    and the Decline of the U.S. Labor Share of Income. 
    [Download here!]
    Abstract: This paper provides evidence that shifts in the occupational composition of the U.S. workforce are the most important factor explaining the trend decline in the labor share over the past four decades. Estimates suggest that while there is unitary elasticity between equipment capital and non-routine tasks, equipment capital and routine tasks are highly substitutable. Through the lenses of a general equilibrium model with occupational choice and the estimated production technology, I document that the fall in relative price of equipment capital alone can explain 72 percent of the observed decline in the U.S. labor share. In addition, I find that differences in labor share trends across sectors can be accounted for by varying sensitivities of cost of production to the price of equipment capital.
  • Impact of Information Technology on the Labor Share: Evidence from the U.S. Sectoral Data.
    This paper contributes to the debate over the relationship between capital deep- ening and the aggregate labor share from a sectoral perspective. The study focuses on a specific group of equipment capital: information and communication technology (ICT) capital and exploits various sectoral heterogeneities to characterize the conditions under which the surge in ICT capital cause the labor share to fall. First, I document significant capital- task complementarity at each sector. Second, decline in ICT capital prices turns out to have a positive impact on the labor share. However, gains of labor devoted to non-routine task occupations are offset by the losses of labor employed in routine task occupations when a sector has: (i) initially high load of employment in routine task occupations, and (ii) weak absolute complementarity between ICT capital and labor working in occupations associated with non-routine tasks. Since sectors satisfying these two conditions have compromised the majority of the economy, the aggregate labor share has exhibited a downward trend so far, leading to the illusion that information technology has been driving the labor share down- wards. However, there are two promising facts concerning the future: in one hand, the share of these sectors in value added is persistently falling and on the other hand, the share of routine task employment continues to fall at every sector. Thus, once the structural shifts and within sectoral adjustments are completed, the decline in the labor share should revert back.
  • Capital-Skill Complementarity, Inequality, and Labor’s Share of Income (with Lee Ohanian).
    Abstract: In this paper, we extend the dataset of Krusell et. al. (2000) for the 1963- 2013 period and assess the implications of their model for the skill premium and the labor share in two decades following the period of their study. We document that capital-skill complementarity and changes in observed inputs alone can account for the increase in the skill premium until early 2000s as well as the flattening of it since then. However, the decline in the labor share in last two decades turns out to be inconsistent with the existing measures of capital-skill complementarity. A re-estimation of the elasticities of substitution between equipment capital and skilled and unskilled labor for the entire 1963-2013 period reveals that capital-skill complementarity has been significantly weaker in last two decades. This is mainly due to increasing vulnerability of the skilled labor to technological progress. We find that a significant portion of the decline in the labor share can be attributed to this increasing substitutability between equipment capital and skilled labor.

  • Job Polarization, Skill Accumulation and Wealth Inequality.
    Abstract: This essay is one of the first attempts in literature to incorporate the job polarization idea into an otherwise standard incomplete markets model with heterogeneous agents in two dimensions: skills and idiosyncratic productivity shocks. This set up allows us to contribute to the existing literature in two ways: (i) linking job polarization with rising wealth concentration, and (ii) modeling the continuous rise in skill supply in response to technological progress and job polarization accompanying it over time. When calibrated and solved for the years 1981 and 2011, the model shows that the decline in relative computer (ICT) capital prices alone accounts for a significant portion of the increases in employment share and relative wages of high skill occupations, as well as the increase in the supply of labor with a college or above-college degree. Consistent with the routinization hypothesis, the model also shows that advances in computer technology can account for most of the decline of the employment share and relative wage of middle class over the three decades between 1981 and 2011. Furthermore, the model successfully captures the erosion of middle-class wealth, whereas wealth concentration rises substantially at the right tail and slightly at the left tail of the wealth distribution.
  • PPP Puzzle in a Heterogeneous Sticky Price Model with Variable Markups – 2nd year International Macroeconomics Field Paper Requirement.  [Download here!]
    Abstract: In this paper, we study the real exchange rate (RER) dynamics in a multi sector, sticky price model with local currency pricing, heterogeneity in frequency of price adjustment and variable markups. More speci…cally, we focus on producing the RER persistence seen in data for levels of nominal aggregate demand persistence matching the “nominal” exchange rate dynamics, unlike earlier studies that rely on high degrees of aggregate demand persistence. We …nd that heterogeneity in price stickiness alone ampli…es the aggregate RER persistence considerably and brings it to the levels consistent with data. Despite this improvement, the model with constant markups still relies heavily on existence of high degrees of aggregate persistence. Introducing variable markups improves the aggregate RER persistence further and closes some of the gap between theory and data. Hence, the model with variable markups is superior to the constant markup model in explaining RER dynamics since it relies less on high degrees of nominal aggregate demand persistence. Yet, somewhat high (even though lower than before) degree of aggregate persistence is still needed to explain RER dynamics seen in data. Thus, consistent with the literature, we reach to the conclusion that the contribution of variable markups remains relatively modest and other sources of real rigidities should be sought.



  • Harun Alp, Hakan Kara, Gürsu Keleş, Refet Gürkaynak and Musa Orak. Measuring Market Based Monetary Policy Expectations in Turkey”June 2010, Iktisat Isletme ve Finans, vol 25(295), pages 21-45. Click for the working paper version. – email me for an English translation of the paper.
    Abstract: This paper compares the ability of different market instruments in terms of predicting monetary policy decisions to find out which one best captures market participants’ policy expectations. Towards this end, policy rate expectations implied by various market instruments and different approaches are derived for the period between July 2006 and October 2009. Empirical results show that market based monetary policy expectations in Turkey can most successfully be obtained by using the one week Turkish Lira Interbank Bid Rate (TRLIBID).
  • Yusuf Soner Baskaya, Eda Gulsen and Musa Orak. “The Effects of Inflation Target Revision in Turkey on Expectation Formation Behavior”. Economic Notes Discussion Series, Central Bank of Turkey. December 2009. Click here for the paper. – email me for an English translation of the paper.
    Abstract: This note investigates how the behavior of the economic agents regarding 12 and 24 months ahead inflation expectation formation has changed with the revision of inflation targets in June 2008 as a result of the joint decision of the Government and the Central Bank of Turkey. The results suggest that the role of inflation targets on the determination of the inflation expectations has increased, while that of the past inflation has weakened.
  • Zelal Aktas, Harun Alp, Refet Gurkaynak, Mehtap Kesriyeli and Musa Orak, “Monetary Policy Transmission Mechanism in Turkey: The Effect of Monetary Policy on Financial Markets”. Iktisat, Isletme ve Finans (SSCI-Indexed), Volume 24, Issue 278. May 2009. Click here for the working paper version. – email me for an English translation of the paper.
    Abstract: In this paper the effects of Central Bank of Turkey’s interest rate decisions on relatively longer-term interest rates in financial markets and risk premia as well as on returns of the ISE-100, ISE-Financial indexes and exchange rates are studied by separating the anticipated component of monetary policy from that unexpected by financial markets. The results show that policy rate changes have significant effects on financial markets, especially on bond yields. Equity returns are not significantly driven by monetary policy surprises, whereas the responses of exchange rates are small. Thus, it appears that the transmission of monetary policy in Turkey is mainly through its effects on longer-term interest rates.
  • Ali Hakan Kara and Musa Orak, “Inflation Targeting”. CBRT Books (also a chapter of the book “Crises, Money and Economists” by Ercan KUMCU). October 2008. Working paper version (in Turkish).