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Creator: McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 545 Abstract:
Because ﬁrms invest heavily in R&D, software, brands, and other intangible assets—at a rate close to that of tangible assets—changes in measured GDP, which does not include all intangible investments, understate the actual changes in total output. If changes in the labor input are more precisely measured, then it is possible to observe little change in measured total factor productivity (TFP) coincidentally with large changes in hours and investment. This mismeasurement leaves business cycle modelers with large and unexplained labor wedges accounting for most of the ﬂuctuations in aggregate data. To address this issue, I incorporate intangible investments into a multi-sector general equilibrium model and parameterize income and cost shares using data from an updated U.S. input and output table, with intangible investments reassigned from intermediate to ﬁnal uses. I employ maximum likelihood methods and quarterly observations on sectoral gross outputs for the United States over the period 1985–2014 to estimate processes for latent sectoral TFPs—that have common and sector-speciﬁc components. Aggregate hours are not used to estimate TFPs, but the model predicts changes in hours that compare well with the actual hours series and account for roughly two-thirds of its standard deviation. I ﬁnd that sector-speciﬁc shocks and industry linkages play an important role in accounting for ﬂuctuations and comovements in aggregate and industry-level U.S. data, and I ﬁnd that the model’s common component of TFP is not correlated at business cycle frequencies with the standard measures of aggregate TFP used in the macroeconomic literature.
Palabra clave: Intangible investments, Input-output linkages, Total factor productivity, and Business cycles Tema: E32 - Business Fluctuations; Cycles, D57 - General Equilibrium and Disequilibrium: Input-Output Tables and Analysis, and O41 - One, Two, and Multisector Growth Models
Creator: Christiano, Lawrence J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 339 Palabra clave: Fluctuations, Investment, Inventory investments, and Inventory Tema: G31 - Capital Budgeting; Fixed Investment and Inventory Studies; Capacity and E32 - Business Fluctuations; Cycles
Creator: Thomas, Julia Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 302 Abstract:
Previous research has suggested that discrete and occasional plant-level capital adjustments have significant aggregate implications. In particular, it has been argued that changes in plants’ willingness to invest in response to aggregate shocks can at times generate large movements in total investment demand. In this study, I re-assess these predictions in a general equilibrium environment. Specifically, assuming nonconvex costs of capital adjustment, I derive generalized (S,s) adjustment rules yielding lumpy plant-level investment within an otherwise standard equilibrium business cycle model. In contrast to previous partial equilibrium analyses, model results reveal that the aggregate effects of lumpy investment are negligible. In general equilibrium, households’ preference for relatively smooth consumption profiles offsets changes in aggregate investment demand implied by the introduction of lumpy plant-level investment. As a result, adjustments in wages and interest rates yield quantity dynamics that are virtually indistinguishable from the standard model.
Palabra clave: Business Cycles, Lumpy Investment, and (S,s) Adjustment Tema: E32 - Business Fluctuations; Cycles and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Khan, Aubhik and Thomas, Julia Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 352 Abstract:
We solve equilibrium models of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity. Nonconvex adjustment costs lead plants to pursue generalized (S, s) rules with respect to capital; thus, their investments are lumpy. In partial equilibrium, this yields substantial skewness and kurtosis in aggregate investment, though, with differences in plant-level productivity, these nonlinearities are far less pronounced. Moreover, nonconvex costs, like quadratic adjustment costs, increase the persistence of aggregate investment, yielding a better match with the data. In general equilibrium, aggregate nonlinearities disappear, and investment rates are very persistent, regardless of adjustment costs. While the aggregate implications of lumpy investment change substantially in equilibrium, the inclusion of fixed costs or idiosyncratic shocks makes the average distribution of plant investment rates largely invariant to market-clearing movements in real wages and interest rates. Nonetheless, we find that understanding the dynamics of plant-level investment requires general equilibrium analysis.
Palabra clave: Establishment investment, (S,s), Lumpy investment, Nonlinearities, and Policies Tema: E32 - Business Fluctuations; Cycles and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Khan, Aubhik and Thomas, Julia Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 306 Abstract:
Recent empirical analysis has found nonlinearities to be important in understanding aggregated investment. Using an equilibrium business cycle model, we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs. We find that, while such costs lead to nontrivial nonlinearities in aggregate investment demand, equilibrium investment is effectively unchanged. Our finding, based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity, is robust to the introduction of shocks to the relative price of investment goods.
Palabra clave: Adjustment costs, Lumpy investment, Nonlinearities, and Business cycles Tema: E32 - Business Fluctuations; Cycles and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Khan, Aubhik and Thomas, Julia Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 329 Abstract:
We develop an equilibrium business cycle model where producers of final goods pursue generalized (S,s) inventory policies with respect to intermediate goods due to nonconvex factor adjustment costs. When calibrated to reproduce the average inventory-to-sales ratio in postwar U.S. data, our model explains over half of the cyclical variability of inventory investment. Moreover, inventory accumulation is strongly procyclical, and production is more volatile than sales, as in the data.
The comovement between inventory investment and final sales is often interpreted as evidence that inventories amplify aggregate fluctuations. In contrast, our model economy exhibits a business cycle similar to that of a comparable benchmark without inventories, though we do observe somewhat higher variability in employment, and lower variability in consumption and investment. Thus, our equilibrium analysis reveals that the presence of inventories does not substantially raise the cyclical variability of production, because it dampens movements in final sales.
Palabra clave: (S,s) inventories and Business cycles Tema: E32 - Business Fluctuations; Cycles and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 494 Abstract:
During the downturn of 2008–2009, output and hours fell significantly while labor productivity rose. These facts have led many to conclude that there is a significant deviation between observations and current macrotheories that assume business cycles are driven, at least in part, by fluctuations in total factor productivities of firms. We show that once investment in intangible capital is included in the analysis, there is no inconsistency. Measured labor productivity rises if the fall in output is underestimated; this occurs when there are large unmeasured intangible investments. Microevidence suggests that these investments are large and cyclically important.
Palabra clave: Intangible capital, Productivity, and Business cycles Tema: E32 - Business Fluctuations; Cycles and E13 - General Aggregative Models: Neoclassical
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 399 Abstract:
Robert Solow has criticized our 2006 Journal of Economic Perspectives essay describing “Modern Macroeconomics in Practice.” Solow eloquently voices the commonly heard complaint that too much macroeconomic work today starts with a model with a single type of agent. We argue that modern macroeconomics may not end too far from where Solow prefers. He is also critical of how modern macroeconomists use data to construct models. Specifically, he seems to think that calibration is the only way that our models encounter data. To the contrary, we argue that modern macroeconomics uses a wide variety of empirical methods and that this big-tent approach has served macroeconomics well. Solow also questions our claim that modern macroeconomics is firmly grounded in economic theory. We disagree and explain why.
Tema: E40 - Money and Interest Rates: General, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian, E21 - Macroeconomics: Consumption; Saving; Wealth, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E13 - General Aggregative Models: Neoclassical, E22 - Investment; Capital; Intangible Capital; Capacity, E52 - Monetary Policy, and E32 - Business Fluctuations; Cycles
Creator: Gavazza, Alessandro, Mongey, Simon J., and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 553 Abstract:
We develop an equilibrium model of firm dynamics with random search in the labor market where hiring firms exert recruiting effort by spending resources to fill vacancies faster. Consistent with microevidence, fast-growing firms invest more in recruiting activities and achieve higher job-filling rates. These hiring decisions of firms aggregate into an index of economy-wide recruiting intensity. We study how aggregate shocks transmit to recruiting intensity, and whether this channel can account for the dynamics of aggregate matching efficiency during the Great Recession. Productivity and financial shocks lead to sizable pro-cyclical fluctuations in matching efficiency through recruiting effort. Quantitatively, the main mechanism is that firms attain their employment targets by adjusting their recruiting effort in response to movements in labor market slackness.
Palabra clave: Firm dynamics, Unemployment, Macroeconomic shocks, Recruiting intensity, Aggregate matching efficiency, and Vacancies Tema: E44 - Financial Markets and the Macroeconomy, E32 - Business Fluctuations; Cycles, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, D25 - Intertemporal Firm Choice: Investment, Capacity, and Financing, G01 - Financial Crises, J23 - Labor Demand, J64 - Unemployment: Models, Duration, Incidence, and Job Search, and J63 - Labor Turnover; Vacancies; Layoffs