C.V. Starr Research by Topic – page 3

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Energy Economics | Markets and the Welfare | Financial Crises and Macro-Finance Policy | Institutions and Economic Performance | Wealth distribution, Inequality and Redistributive Policies | Banking Systems, Risk and Financial Markets | Polarization and Conflict | Health and Healthcare | Education and Education Policy | Monetary Policy and Prices | Modern Fiscal Policy | The Economics of Development | Labor Force Dynamics and Household Economics | Unemployment and the Labor Market | Experimental Methods, Game theory and the Economics of Social Psychology | Housing and the Financial Crisis | International Capital Flows, International Prices, and Trade | Stock Markets and Asset Pricing | Economics of Fluctuations and Dynamics | Migration | Misallocation

Housing and the Financial Crisis

'Liquidity Constraints in the U.S. Housing Market,' Midrigan, V. (with D. Gorea), 2017.

We study the severity of liquidity constraints in the U.S. housing market using a lifecycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents have the option to refinance their long-term mortgages or obtain home equity loans. The model reproduces well the distribution of individual-level balance sheets – the fraction of housing, mortgage debt and liquid assets in households’ wealth, the fraction of hand-to-mouth homeowners (Kaplan and Violante, 2014), as well as the frequency of housing turnover and home equity extraction in the 2001 data. The model implies that 75% of homeowners are liquidity constrained and willing to pay an average of 8 cents to extract an additional dollar of liquidity from their home. Liquidity constraints imply sizable welfare losses equivalent to a 1.2% permanent reduction in consumption.

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'Debt Constraints and Employment,' Midrigan, V. (with P. Kehoe and E. Pastorino), 2017.

During the Great Recession, the regions of the United States that experienced the largest declines in household debt also had the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector. Motivated by these findings, we develop a search and matching model with credit frictions. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job-finding rates and employment. The key new feature of our model, on-the-job human capital accumulation, is critical to generating sizable drops in employment. On-the-job human capital accumulation increases the duration of the flows of benefits from posting vacancies and, in our quantitative model, amplifies the employment drop from a credit tightening tenfold relative to the standard
Diamond-Mortensen-Pissarides model. We show that our model reproduces well the salient cross-regional features of the U.S. economy during the Great Recession.

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'Liquidity Constraints in the U.S. Housing Market,' Midrigan, V. (with D. Gorea), 2017.

We study the severity of liquidity constraints in the U.S. housing market using a lifecycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents have the option to refinance their long-term mortgages or obtain home equity loans. The model reproduces well the distribution of individual-level balance sheets – the fraction of housing, mortgage debt and liquid assets in households’ wealth, the fraction of hand-to-mouth homeowners (Kaplan and Violante, 2014), as well as the frequency of housing turnover and home equity extraction in the 2001 data. The model implies that 75% of homeowners are liquidity constrained and willing to pay an average of 8 cents to extract an additional dollar of liquidity from their home. Liquidity constraints imply sizable welfare losses equivalent to a 1.2% permanent reduction in consumption.

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'Household Leverage and the Recession,' Midrigan, V. (with T. Philippon and C. Jones), 2017.

During the Great Recession, employment declined more in regions where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model using Bayesian likelihood methods on state-level and aggregate data. Credit shocks account well for the differential rise and fall of employment across individual states. Credit shocks explain a smaller fraction of the initial drop in aggregate employment but the tightening of household credit greatly contributes to the slow recovery in the aftermath of recession.

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International Capital Flows, International Prices, and Trade

'Foreign Ownership of U.S. Safe Assets: Good or Bad?' Ludvigson, S.C. (with J. Favilukis and S. Van Nieuwerburgh), 2016.

The last 20 years have been marked by a sharp rise in international demand for U.S. reserve assets, or safe stores-of-value. What are the welfare consequences to U.S. households of these trends, or of a reversal? In a lifecycle model with aggregate and idiosyncratic risks, the young and oldest households may benefit substantially from such capital inflows, but middle-aged savers may suffer from greater exposure to systematic risk in equity and housing markets. Under the veil of ignorance, a newborn in the lowest wealth quantile is willing to forego 3% of lifetime consumption to avoid a large capital outflow.

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'Shock restricted structural vector-autoregressions' Ludvigson, S.C. and S. Ma (with S. Ng) , 2017.

Identifying assumptions need to be imposed on autoregressive models before they can be used to analyze the dynamic e§ects of economically interesting shocks. Often, the assumptions are only rich enough to identify a set of solutions. This paper considers two types of restrictions on the structural shocks that can help reduce the number of plausible solutions. The Örst is imposed on the sign and magnitude of the shocks during unusual episodes in history. The second restricts the correlation between the shocks and components of variables external to the autoregressive model. These non-linear inequality constraints can be used in conjunction with zero and sign restrictions that are already widely used in the literature. The e§ectiveness of our constraints are illustrated using two applications of the oil market and Monte Carlo experiments calibrated to study the role of uncertainty shocks in economic áuctuations.

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'Can heterogeneity in price stickiness account for the persistence and volatility of good-level real exchange rates?,' Midrigan, V. (with P. Kehoe), 2007.

The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods have differing degrees of price stickiness then relatively more sticky goods tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we find only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatility fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. We show that allowing for pricing complementarities leads to a modest improvement in the theory’s predictions for persistence but little improvement in the theory’s predictions for conditional variances.

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'Elasticity Pessimism: Economic Consequences of Black Wednesday,' Rotemberg, M. (with S. Bustos), 2017.

We document the ramifications of a large devaluation episode: the U.K.’s “Black Wednesday”
in 1992. Relative to synthetic counterfactuals, U.K. export and import prices in pounds increased by roughly 20 percent, a similar magnitude to the nominal devaluation. Inflation declined after the devaluation, although the prices of fuels increased. Contrary to the conventional belief that the UK experienced an export led boom after the devaluation, we find no evidence that exports or nominal GDP increased. We also find no evidence of a “J-curve:” imports
declined immediately after the devaluation, and stayed persistently below their counterfactual value. We test a wide variety of theories of elasticity pessimism, and find that none do well at explaining patterns in the data.

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'Occupations and Import Competition: Evidence from Denmark,' Traiberman, S., 2017.

In this paper, I argue that occupational reallocation plays a crucial role in the determining the distributional consequences of lower import prices. Adjustment to lower foreign prices can be protracted and costly, even intrasectorally. To quantify these effects, I estimate a dynamic model of the Danish labor market, and find very large frictions to occupational mobility. A counterfactual based on the observed changes in import prices from 1996 to 2005 reveals an adjustment period of several years. Welfare increases for all workers, but the dispersion across workers is large relative to the average gain, with very different patterns in the short and long run.

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Stock Markets and Asset Pricing

'Empirical Evaluation of Overspecified Asset Pricing Models' Manresa, E. (with F. Penaranda, and E. Sentana), 2017.

Asset pricing models with potentially too many risk factors are increasingly commonin empirical work. Unfortunately, they can yield misleading statistical inferences. Unlikeother studies focusing on the properties of standard estimators and tests, we estimate thesets of SDFs and risk prices compatible with the asset pricing restrictions of a given model. We also propose tests to detect problematic situations with economically meaningless SDFsuncorrelated to the test assets. We conÖrm the empirical relevance of our proposed estimatorsand tests with Yogoís (2006) linearized version of the consumption CAPM, and provide MonteCarlo evidence on their reliability in finite samples.

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'On Interest Rate Policy and Asset Bubbles' Gale, D. (with F. Allen, and G. Barlevy), 2017.

In a provocative paper, Gali (2014), showed that a policymaker who raises interest rates to rein in a potential bubble will only make a bubble bigger if one exists. This poses a challenge to advocates of lean-against-the-wind policies that call for raising interest rates to mitigate potential bubbles. In this paper, we argue there are situations in which the lean-against-the wind view is justified. First, we argue GalÌís framework abstracts from the possibility that a policymaker who raises rates will crowd out resources that would have otherwise been spent on the bubble. Once we modify Galiís model to allow for this possibility, policymakers can intervene in ways that raise interest rates and dampen bubbles. However, there is no reason policymakers should intervene to dampen the bubble in this case, since the bubble that arises in Gali’s setup is not one that society would be better o§ without. We then further modify Gali’s model to generate the type of credit-driven bubbles that alarm policymakers, and argue
there may be justification for intervention in that case.

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'Windfall Gains and Stock Market Participation,' Cesarini, D. (with J.S Briggs, E. Lindqvist, and R. Östling), 2015.

We estimate the causal effect of wealth on stock market participation using administrative data on Swedish lottery players. A $150,000 windfall gain increases stock ownership probability among pre-lottery non-participants by 12 percentage points, while pre-lottery stock holders are unaffected. The effect is immediate, seemingly permanent and heterogeneous in intuitive ways. Standard lifecycle models predict wealth effects far too large to match our causal estimates under common calibrations. Additional analyses suggest a limited role for explanations such as procrastination or real-estate investment. Overall, results suggest that “nonstandard” beliefs or preferences contribute to the nonparticipation of households across many demographic groups.

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'The quality expectations hypothesis: model ambiguity, consistent representations of market forecast, and sentiment,' Frydman, R. (with S. Johansen, A. Rahbek, and M.N. Tabor) , 2017.

We introduce the Qualitative Expectations Hypothesis (QEH) as a new approach to modeling macroeconomic and financial outcomes. Building on John Muth’s seminal insight underpinning the Rational Expectations Hypothesis (REH), QEH represents the market’s forecasts to be consistent with the predictions of an economist’s model. However, by assuming that outcomes lie within stochastic intervals, QEH, unlike REH, recognizes the ambiguity faced by an economist and market participants alike. Moreover, QEH leaves the model open to ambiguity by not specifying a mechanism determining specific values that outcomes take within these intervals. In order to examine a QEH model’s empirical relevance, we formulate and estimate its statistical analog based on simulated data. We show that the proposed statistical model adequately represents an illustrative sample from the QEH model. We also illustrate how estimates of the statistical model’s parameters can be used to assess the QEH model’s qualitative implications.

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'Dispersion and Skewness of Bid Prices,' Jovanovic, B. (with A.J. Menkeveld), 2015.

Competitive bidding by homogeneous agents in a first-price auction could yield a non-degenerate bid price distribution. This price dispersion is the unique equilibrium in a setting where bidders “pay to play.” Ex ante, bidders decide simultaneously on whether to play or not. Ex post, those who play submit their bid simultaneously not knowing who else is in the market. The price-dispersion result is applied to high-frequency bidding in limit-order markets. The parsimonious model fits the bid price dispersion for S&P 500 stocks remarkably well.

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'Trading on Sunspots,' Jovanovic, B. (with V. Tsyrennikov), 2015.

In a model with multiple Pareto-ranked equilibria we endogenize the equilibrium selection probabilities by adding trade in assets that pay based on the realization of a sunspot. Asset trading imposes restrictions on the equilibrium set in a way that raises welfare. When the probability of a low-output outcome is high enough, the coordination game becomes more like a prisoner’s dilemma in which the high-output equilibrium disappears because of the asset positions that agents trade towards induce some agents not to invest. We derive an upper bound on the probabilities of the low-output equilibrium that we interpret as a disaster. We derive asset pricing implications including the disaster premium, and we study the effect on stock prices of news shocks to beliefs.

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'Monetary Policy and Asset Valuation,' Ludvigson, S.C. (with F. Bianchi and M. Lettau), 2018.

We find evidence of infrequent shifts, or “regimes,” in the mean of the asset valuation variable cay_t that are strongly associated with low-frequency fluctuations in the real federal funds rate, with low policy rates associated with high asset valuations, and vice versa. There is no evidence that infrequent shifts to high asset valuations are associated with higher expected economic growth or lower economic uncertainty; indeed, the opposite is true. Additional evidence shows that regimes of low interest rates and high asset valuations are characterized by lower equity market risk premia and monetary policy that is less responsive to inflation.

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'Capital Share Risk in U.S. Asset Pricing,' Ludvigson, S.C. and S. Ma (with M. Lettau), 2018.

A single macroeconomic factor based on growth in the capital share of aggregate income exhibits significant explanatory power for expected returns across a range of equity characteristic portfolios and non-equity asset classes, with risk price estimates that are of the same sign and similar in magnitude. Positive exposure to capital share risk earns a positive risk premium, commensurate with recent asset pricing models in which redistributive shocks shift the share of income between the wealthy, who finance consumption primarily out of asset ownership, and workers, who Önance consumption primarily out of wages and salaries.

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'Origins of Stock Market Fluctuations,' Ludvigson, S.C. (with D.L. Greenwald and M. Lettau), 2016.

Three mutually uncorrelated economic disturbances that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. A model is employed to interpret these disturbances in terms of three latent primitive shocks. In the short run, shocks that affect the willingness to bear risk independently of macroeconomic fundamentals explain most of the variation in the market. In the long run, the market is profoundly affected by shocks that reallocate the rewards of a given level of production between workers and shareholders. Productivity shocks play a small role in historical stock market fluctuations at all horizons.

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'Sets of Models and Prices of Uncertainty,' Sargent, T. (with L.P. Hansen), 2015.

A decision maker constructs a convex set of nonnegative martingales to use as likelihood ratios that represent parametric alternatives to a baseline model and also nonparametric models statistically close to both the baseline model and the parametric alternatives. Max-min expected utility over that set gives rise to equilibrium prices of model uncertainty expressed as worst-case distortions to drifts in a representative investor’s baseline model. We offer quantitative illustrations for baseline models of consumption dynamics that display long-run risk. We describe a set of parametric alternatives that generates countercyclical prices of uncertainty.

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'Prices of Macroeconomics Uncertainties with Tenuous Beliefs,' Sargent, T. (with L.P. Hansen), 2017.

A dynamic extension of max-min preferences allows a decision maker to consider both a parametric family of what we call structured models and unstructured alternatives that are statistically close to them. The decision maker suspects that parameter values vary over time in unknown ways that he cannot describe probabilistically. Because he suspects that all of these parametric models are misspecified, he evaluates decisions under alternative probability distributions with much less structure. We characterize equilibrium uncertainty prices by confronting a representative investor with a portfolio choice problem. We offer a quantitative illustration that focuses on the investor’s uncertainty about the size and persistence of macroeconomic growth rates. Nonlinearities in marginal valuations induce time variations in market prices
of uncertainty. Prices of uncertainty fluctuate because a representative investor especially fears high persistence in bad states and low persistence in good ones.

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Economics of Fluctuations and Dynamics

'The Anatomy of sentiment- driven fluctuations,' Benhabib, J. (with S. Acharya and Z. Huo), 2017.

We characterize the entire set of linear equilibria of beauty contest games under general information structures. In particular, we focus on equilibria in which sentiments, that is self-fulfilling changes in beliefs that are orthogonal to fundamentals and exogenous noise, can drive aggregate fluctuations. We show that, under rational expectations, there exists a continuum of sentiment-driven equilibria that generate aggregate fluctuations. Without having to take a stance on the private information agents might possess, we provide a general characterization of necessary and sufficient conditions under which a change in sentiments can have prolonged effects on aggregate outcomes and when it can only have short-lived effects. In addition, we also provide a practical way to characterize these equilibria.

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'Reconciling Models of Diffusion and Innovation: A Theory of the Productivity Distribution and Technology Frontier,' Benhabib, J. (with J. Perla and C. Tonetti), 2017.

We study how innovation and technology diffusion interact to endogenously determine the productivity distribution and generate aggregate growth. We model firms that choose to innovate, adopt technology, or produce with their existing technology. Costly adoption creates a spread between the best and worst technologies concurrently used to produce similar goods. The balance of adoption and innovation determines the shape of the distribution; innovation stretches the distribution, while adoption compresses it. Whether and how innovation and diffusion contribute to aggregate growth depends on the support of the productivity distribution. With finite support, the aggregate growth rate cannot exceed the maximum growth rate of innovators. Infinite support allows for “latent growth”: extra growth from initial conditions or auxiliary stochastic processes. While innovation drives long-run growth, changes in the adoption process can influence growth by affecting innovation incentives, either directly, through licensing excludable technologies, or indirectly, via the option value of adoption.

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'On the Joint Evolution of Culture and Institutions,' Bisin, A. (with T. Verdier), 2017.

Explanations of economic growth and prosperity commonly identify a unique causal effect, e.g., institutions, culture, human capital, geography. In this paper we provide instead a theoretical modeling of the interaction between culture and institutions and their effects on economic activity. We characterize conditions on the socio-economic environment such that culture and institutions complement (resp. substitute) each other, giving rise to a multiplier effect which amplifies (resp. dampens) their combined ability to spur economic activity. We show how the joint dynamics of culture and institutions may display interesting non-ergodic behavior, hysteresis, oscillations, and comparative dynamics. Finally, in specific example societies, we study how culture and institutions interact to determine the sustainability of extractive societies as well as the formation of civic capital and of legal systems protecting property rights.

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'Learning from Others: The Aggregate Dynamics,' Jovanovic, B., 2018.

We solve for the full dynamics in a model where agents learn from others through meetings. Two versions are solved: A continuous-time and a discrete time version. In both versions search is undirected, but the continuous-time version also has a random in the number of meetings per person. When we equate the parameters and number of meetings in the two models, the continuos time model features a positive long-run-level advantage over the continuous version. The takeoff rate initially accelerates: The delay between the takeoff of the top percentile and that of the second percentile is higher than the delay between the second and third, etc.. The acceleration continues until at most sixty three percent have taken off. Thereafter takeoff slows down. With a 1600-year delay until takeoff, and 2% growth thereafter, the level advantage of the continuous time version is about 50%.

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'Recurrent Structural Breaks, Uncertainty Shocks,
and Endogenous Growth,' Jovanovic, B. and Cogley T., 2018.

Are learning episodes similar to episodes where shock volatilities rise? The answer is no. Learning has bigger e§ects and the e§ects go in the opposite direction when learning is about investment-speciÖc shocks. We study a representative agent Ak growth model with aggregate shocks to TFP and the efficiency of investment. Regime shifts occur periodically prompting learning episodes. We contrast it to models where the changes in the distributions of aggregate shocks are known. Episodes where agents learn about the distribution of TFP shocks are qualitatively similar to episodes where agents face a more volatile TFP-shock: Precautionary savings and the rate of growth rise. In the case of investment-efficiency shocks, however, consumption rises and growth declines in the learning model but the opposite happens in the no-learning case. And when the marginal distributions of the shocks are equated at each date, we show that the e§ects are much larger in the case of learning. This is because lifetime utility varies considerably more as shocks shift beliefs and
perceived wealth.

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'The Macroeconomics of Private Equity,' Jovanovic, B. and Rousseau T., 2018.

We ask two questions about private equity. Why are returns to venture funds higher than those of buyout funds? And why does the investment of venture funds respond more strongly to the business cycle than that of buyout funds? To address them, we build a model in which venture and buyout play different roles in the private equity market. Venture brings in new capital whereas buyout largely reorganizes existing capital, and this can explain the stronger co-movement of venture investment with aggregate Tobin’s Q.
This stronger co-movement stems from a higher correlation of venture returns with aggregate consumption and therefore a higher premium than buyout, and a thicker right tail in the distribution of projects funded through venture magnifies that difference. The model embodies this logic and fits the aggregate time series of private equity investment and returns well.

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'Product Recalls and Firm Reputation,' Jovanovic, B. and Rousseau T., 2018.

We model reputation capital as a reward for good behavior of
sellers of a product the quality of which is not contractible. The market reacts unfavorably to product recalls which are the result of product defects. A recall triggers a reduction in the firm’s value which then rises steadily until its next defect occurs. We fit the model to data on product recalls in the transportation-equipment sector, and on stock-price reductions following such recalls and find that reputation accounts for about 11.2 percent of firm value. Contract incompleteness leads to a welfare level of 49 percent of first best. A simple policy intervention attains first best, namely a recall tax and a production subsidy.

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'Growth through Learning,' Jovanovic, B., 2016.

This paper analyzes a decision problem under parameter uncertainty; first that of a single agent, and then for a group of agents that face related problems and that can invest in information that they share. Each period the unknown parameter has a permanent and a transitory component. The distinctive aspect is that the N-player game generates endogenous growth via statistical learning alone. The equilibrium growth rate rises with agents’ risk aversion and its distribution has a thick right tail. Research entails a free riding problem, but the scale effect dominates and growth rises with the number of agents.

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'Reputation Cycles,' Jovanovic, B. (with J. Prat), 2016.

This paper shows that two-period cycles arise endogenously when contracts are incomplete and when products are experience goods. Then firms invest in the quality of their output in order to establish a good reputation. Cyclical equilibria arise because investment in reputation causes self-fullfilling changes in the discount factor. Cycles are more likely to occur when information diffuses slowly and consumers exhibit high risk aversion. The frequency of booms and recessions depends on how fast reputation spreads: The faster it spreads, the more frequent are the booms and recessions. A rise in idiosyncratic uncertainty is of two kinds that work in opposite ways: Noise in observing effort is contractionary as it generally is in agency models. But a rise in the variance of the distribution of abilities is expansionary. A calibrated version produces realistic fluctuations in terms of peak-to-trough movements in consumption and the spacing of time between recessions.

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'Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?,' Ludvigson, S.C., and S. Ma (with S. Ng), 2018.

Uncertainty about the future rises in recessions. But is uncertainty a source of business cycles or an endogenous response to them, and does the type of uncertainty matter? To address these questions, we propose a novel shock-restricted identification strategy. We find that sharply higher uncertainty about macroeconomic activity in recessions is often an endogenous response to output shocks, while uncertainty about financial markets is a likely source of output fluctuations. The findings point to the need for a better understanding of how uncertainty in financial markets is transmitted to the macroeconomy.

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'Origins of Stock Market Fluctuations,' Ludvigson, S.C. (with D.L. Greenwald and M. Lettau), 2016.

Three mutually uncorrelated economic disturbances that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. A model is employed to interpret these disturbances in terms of three latent primitive shocks. In the short run, shocks that affect the willingness to bear risk independently of macroeconomic fundamentals explain most of the variation in the market. In the long run, the market is profoundly affected by shocks that reallocate the rewards of a given level of production between workers and shareholders. Productivity shocks play a small role in historical stock market fluctuations at all horizons.

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'Discount Rates, Learning by Doing, and Employment Fluctuations,' Midrigan, V. (with P. Kehoe and E. Pastorino), 2015.

We revisit the Shimer (2005) puzzle in a search and matching model with on-the-job human capital accumulation in which households exhibit preference for consumption smoothing. We parameterize the model so that it accords with the micro-evidence on returns to tenure and experience as well as individual life-cycle earning profiles. We find that employment fluctuations in response to productivity shocks are greatly amplified in this environment.

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'Can heterogeneity in price stickiness account for the persistence and volatility of good-level real exchange rates?,' Midrigan, V. (with P. Kehoe), 2007.

The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods have differing degrees of price stickiness then relatively more sticky goods tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we find only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatility fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. We show that allowing for pricing complementarities leads to a modest improvement in the theory’s predictions for persistence but little improvement in the theory’s predictions for conditional variances.

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'Inequality, Business Cycles and Fiscal-Monetary Policy,' Sargent, T. (with A. Bhandari, D. Evans and M. Golosov), 2017.

We study fluctuations in macroeconomic aggregates and cross-section income and wealth distributions in a heterogeneous agent model with incomplete markets and sticky nominal prices. Optimal fiscal-monetary policy balances gains from ”fiscal hedging” against benefits from redistributional hedging that responds to social concerns about inequality. A Ramsey planner uses inflation to offset inequality-increasing shocks to the cross-section distribution of labor earnings. A calibration that imitates how US recessions reshape that cross section distribution in ways documented by Guvenen et al. (2014) indicates that substantial welfare benefits come from making inflation respond to aggregate shocks.

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'Pricing in multiple currencies in domestic markets,' Perez, D. (with A. Drenik), 2018.

We document that a significant fraction of prices in domestic markets of emerging economies are set in dollars. More expensive goods are more likely to be priced in dollars. This fact is generalized across countries and holds within goods categories. More tradeable goods are also more likely to be set in dollars. We develop a search model of currency choice of prices to study how inflation and demand characteristics affect price dollarization. Sellers may set prices in dollars to avoid a rapid erosion of the real value of prices at the expense of experiencing a lower willingness to pay by certain buyers.

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'The Currency Composition of Sovereign Debt,' Perez, D. (with P. Ottonello), 2018.

We study the currency composition of sovereign external debt in emerging economies through the lens of a quantitative model in which the government lacks commitment regarding debt and monetary policy. High levels of debt in local currency give rise to incentives to dilute debt repayment through currency depreciation. Governments tilt the currency composition of debt towards foreign currency to avoid inflationary costs and real exchange rate distortions, at the expense of foregoing the hedging properties of local currency debt. Our model is used to shed light on the recent dynamics of the currency composition of debt and on its cyclical behavior.

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'The Fundamental Surplus,' Sargent, T., and L. Ljungqvist, 2017.

To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, by assuming fixed matching costs, or by positing government mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job’s output that the invisible hand can allocate to vacancy creation. Business cycles and welfare state dynamics of an entire class of reconfigured matching models all operate through this common channel.

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'Long Swings in Currency Markets: Imperfect Knowledge and I(2) Trends,' Frydman, R. (with M.D. Goldberg, S. Johansen, and K. Juselius), 2012.

Using multivariate unit-root tests, the paper finds that real and nominal exchange rates are more persistent than univariate unit-root studies suggest. It shows that an imperfect knowledge economics model of currency swings and risk is able to account for this greater persistence, even though it recognizes that market participants revise their forecasting strategies in non-routine ways, and thus, does not impose a fixed probability distribution on how these strategies unfold over time. The model provides the micro-foundations for a persistent segmented trends process, thereby explaining the tendency for asset prices to move in one direction for long stretches of time. The paper shows that if one were prepared to assume away the importance of non-routine revisions of forecasting strategies and impose a Markov chain on such change, the Engel and Hamilton (1990) segmented-trends model of long swings would result.

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'Technology Innovation and Diffusion as Sources of Output and Asset Price Fluctuations,' Gertler, M. (with D. Comin and A.M. Santacreu), 2009.

We develop a model in which innovations in an economy’s growth potential are an important driving force of the business cycle. The framework shares the emphasis of the recent ”news shock” literature on revisions of beliefs about the future as a source of fluctuations, but differs by tieing these beliefs to fundamentals of the evolution of the technology frontier. An important feature of the model is that the process of moving to the frontier involves costly technology adoption. In this way, news of improved growth potential has a positive effect on current hours. As we show, the model also has reasonable implications for stock prices. We estimate our model for data post-1984 and show that the innovations shock accounts for nearly a third of the variation in output at business cycle frequencies. The estimated model also accounts reasonably well for the large gyration in stock prices over this period. Finally, the endogenous adoption mechanism plays a significant role in amplifying other shocks.

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'Endogenous Technology Adoption and R&D as Sources of Business Cycle Persistence,' Gertler, M., D. Anzoategui, and J. Martinez (with D. Comin), 2017.

We examine the hypothesis that the slowdown in productivity following the Great Recession was in significant part an endogenous response to the contraction in demand that induced the downturn. To do so we augment a workhorse New Keynesian DSGE model with an endogenous TFP mechanism that allows for both costly development and adoption of new technologies. We then estimate the model and use it to assess the sources of the productivity slowdown. We find that the post-Great Recession fall in productivity was a largely endogenous phenomenon. The endogenous productivity mechanism also helps account for the slowdown in productivity prior to the Great Recession. Overall, the results are consistent with the view that demand factors have played a role in the slowdown of capacity growth. More generally, they provide insight into why recoveries from financial crises may be so slow.

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Migration

'Repeated Circular Migration: Theory and Evidence from Undocumented Migrants,' Thom, K., (2010).

This paper contributes to the literature on temporary migration by developing a model of repeated circular migration that accounts for saving behavior. Using Mexican Migrant Project data on undocumented migrants and non-migrants, I estimate the parameters of the model through the Method of Simulated Moments. The intensity of U.S. border enforcement is found to have a significant positive effect on the cost of migration for at least one group of individuals. Counterfactual experiments suggest that an increase in the intensity of border enforcement over the sample period would have reduced migration rates in the sample, but would have increased trip durations. I do not find evidence for the hypothesis that tougher border enforcement increases the population of undocumented migrants by trapping them in the United States. Counterfactual simulations suggest that continual increases in border enforcement will not produce continual reductions in migration rates because some individuals are immune to the effects of such policy changes. Migration behavior is also found to be sensitive to changes in the exchange rate, which alter both the cost of migration and the value of foreign earnings.

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'Occupations and Import Competition: Evidence from Denmark,' Traiberman, S., 2017.

In this paper, I argue that occupational reallocation plays a crucial role in the determining the distributional consequences of lower import prices. Adjustment to lower foreign prices can be protracted and costly, even intrasectorally. To quantify these effects, I estimate a dynamic model of the Danish labor market, and find very large frictions to occupational mobility. A counterfactual based on the observed changes in import prices from 1996 to 2005 reveals an adjustment period of several years. Welfare increases for all workers, but the dispersion across workers is large relative to the average gain, with very different patterns in the short and long run.

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Misallocation

'Accounting for Plant-Level Misallocation,' Midrigan, V. (with D. Yu), (2009).

We use panel data for Korean Manufacturing plants to document substantial dispersion in the average product of capital, three times greater than dispersion in the average product of other factors. If one interprets this as evidence of misallocation (dispersion in the marginal product of capital), aggregate productivity losses are substantial, about 40 percent: We evaluate the ability of a model of industry dynamics in which firms face non-convex capital adjustment costs, financing frictions, and uninsurable investment risk to account for the dispersion in the marginal product of capital. We show that the frictions necessary to reconcile the model’s predictions with the data are large and account for the bulk of within-plant time-series variance in the average product of capital. They are incapable, however, of sustaining the large and persistent differences in the marginal product of capital in the cross-section and thus account for a small fraction (less than 10%) of the misallocation in the data.

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'Measuring Cross-Country Differences in Misallocation,' Rotemberg, M. (with K. White), (2017).

We describe differences between the commonly used cleaned version of the U.S. Census of Manufactures and what establishments themselves report. Following the methodology of Hsieh and Klenow (2009), we show that several editing strategies, including industry analysts’ manual edits, dramatically lower measured losses in the U.S. data: from around 371% in the collected data to 62% in the Census-cleaned data. Many of these types of edits are infeasible in non-U.S. datasets. We therefore reanalyze the iconic Hsieh and Klenow (2009) result using common data cleaning strategies for the U.S. and for India: a standard trimming-outliers approach and a new Bayesian approach for editing and imputation. Under both methods, there is little evidence that measured misallocation is significantly higher in India than in the United States.

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'Are We Undercounting Reallocation’s Contribution to Growth?,' Rotemberg, M. (with M.Nishida, A. Petrin, and K. White), (2015).

There has been a strong surge in aggregate productivity growth in India since 1990, following significant economic reforms. Three recent studies have used two distinct methodologies to decompose the sources of growth, and all conclude that it has been driven by within-plant increases in technical efficiency and not between-plant reallocation of inputs. Given the nature of the reforms, where many barriers to input reallocation were removed, this finding has surprised researchers and been dubbed “India’s Mysterious Manufacturing Miracle.” In this paper, we show that the methodologies used may artificially understate the extent of reallocation. One approach, using growth in value added, counts all reallocation growth arising from the movement of intermediate inputs as technical efficiency growth. The second approach, using the OlleyPakes decomposition, uses estimates of plant-level total factor productivity (TFP) as a proxy for the marginal product of inputs. However, in equilibrium, TFP and the marginal product of inputs are unrelated. Using microdata on manufacturing from five countries – India, the U.S., Chile, Colombia, and Slovenia – we show that both approaches significantly understate the true role of reallocation in economic growth. In particular, reallocation of materials is responsible for over half of aggregate Indian manufacturing productivity growth since 2000, substantially larger than either the contribution of primary inputs or the change in the covariance of productivity and size.

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