Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 696 Abstract:
This paper presents a simple formula that relates the tail index of the firm size distribution to the aggregate speed with which an economy converges to its balanced growth path. The fact that there are so many firms in the right tail implies that aggregate shocks that permanently destroy employment among incumbent firms, rather than cause these firms to scale back temporarily, are followed by slow recoveries. This is true despite the presence of many rapidly growing firms. Aggregate convergence rates are non-linear: they can be very high for economies far below the balanced growth path and very low for advanced economies.
Keyword: Recessions, Firm growth, Firm size distribution, and Recoveries Subject (JEL): L10 - Market Structure, Firm Strategy, and Market Performance: General and E10 - General Aggregative Models: General
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 748 Abstract:
Most firms begin very small, and large firms are the result of typically decades of persistent growth. This growth can be understood as the result of some form of capital accumulation-organization capital. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This means that most capital accumulation must be accounted for by incumbent fi rms. This paper describes a range of circumstances in which this implies aggregate convergence rates that are only about half of what they are in the standard Cass-Koopmans economy. Through the lens of the models described in this paper, the aftermath of the Great Recession of 2008 is unsurprising if the events of late 2008 and early 2009 are interpreted as a destruction of organization capital.
Keyword: Firm size distribution, Slow recoveries, Zipf's law, and Business cycles Subject (JEL): E32 - Business Fluctuations; Cycles and L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
Creator: Luttmer, Erzo G. J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 585 Abstract:
Most firms begin very small, and large firms are the result of typically decades of persistent growth. This growth can be understood as the result of some form of organization capital accumulation. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This is shown to imply that incumbent firms account for most aggregate organization capital accumulation. And it implies potentially extremely slow aggregate convergence rates. A benchmark model is proposed in which managers can use incumbent organization capital to create new organization capital. Workers are a specific factor for producing consumption, and they require managerial supervision. Through the lens of the model, the aftermath of the Great Recession of 2008 is unsurprising if the events of late 2008 and early 2009 are interpreted as a destruction of organization capital, or as a belief shock that made consumers want to reduce consumption and accumulate more wealth instead.
Keyword: Zipf's law, Firm size distribution, Slow recoveries, and Business cycles Subject (JEL): L11 - Production, Pricing, and Market Structure; Size Distribution of Firms and E32 - Business Fluctuations; Cycles
Creator: Bajona, Claustre and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 378 Abstract:
In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher-Ohlin model — a combination of a static two-good, two-factor Heckscher-Ohlin trade model and a two-sector growth model — with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per worker may converge or diverge in income levels over time, depending on the elasticity of substitution between traded goods. Divergence can occur for parameter values that would imply convergence in a world of closed economies and vice versa. Second, factor price equalization in a given period does not imply factor price equalization in future periods.
Keyword: Heckscher–Ohlin, Economic growth, Convergence, and International trade Subject (JEL): F11 - Neoclassical Models of Trade, O15 - Economic Development: Human Resources; Human Development; Income Distribution; Migration, O41 - One, Two, and Multisector Growth Models, and F43 - Economic Growth of Open Economies
Creator: Todd, Richard M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 207 Keyword: Time-invariant system, Time-varying system, and Convergence theorem Subject (JEL): C10 - Econometric and Statistical Methods and Methodology: General
Creator: Atkeson, Andrew and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 256 Abstract:
We show that in a dynamic Heckscher-Ohlin model the timing of a country’s development relative to the rest of the world affects the path of the country’s development. A country that begins the development process later than most of the rest of the world—a late-bloomer—ends up with a permanently lower level of income than the early-blooming countries that developed earlier. This is true even though the late-bloomer has the same preferences, technology, and initial capital stock that the early-bloomers had when they started the process of development. This result stands in stark contrast to that of the standard one-sector growth model in which identical countries converge to a unique steady state, regardless of when they start to develop.
Keyword: Convergence Trade and Growth and Two Sector Growth Models Subject (JEL): O11 - Macroeconomic Analyses of Economic Development, F11 - Neoclassical Models of Trade, and O41 - One, Two, and Multisector Growth Models
Creator: Caselli, Francesco, 1966- and Coleman, Wilbur John Series: Productivity and the industrial revolution Abstract:
The process by which per capita income in the South converged to northern levels is intimately related to the structural transformation of the U.S. economy. We find that empirically most of the southern gains are attributable to the nation-wide convergence of agricultural wages to non-agricultural wages, and the faster rate of transition of the Southern labor force from agricultural to non-agricultural jobs. Similar results describe the Mid-West's catch up to the North-East (but not the relative experience of the West). To explain these observations, we construct a model in which the South (Mid-West) has a comparative advantage in producing unskilled-labor intensive agricultural goods. Thus, it starts with a disproportionate share of the unskilled labor force and lower per capita incomes. Over time, declining education/training costs induce an increasing proportion of the labor force to move out of the (unskilled) agricultural sector and into the (skilled) non-agricultural sector. The decline in the agricultural labor force leads to an increase in relative agricultural wages. Both effects benefit the South (Mid-West) disproportionately since it has more agricultural workers. The model successfully matches the quantitative features of the U.S. structural transformation and regional convergence, as well as several other stylized facts on U.S. economic growth in the last century. The model does not rely on frictions on factor mobility, since in our empirical work we find this channel to be less important than the compositional effects the model emphasizes.
Keyword: Regional economies, Agricultural and non-agricultural workers, Skill acquisition, Regional convergence, and Structural transformation Subject (JEL): O41 - One, Two, and Multisector Growth Models, O18 - Economic development - Regional, urban, and rural analyses, and O14 - Economic development - Industrialization ; Manufacturing and service industries ; Choice of technology
Creator: Jovanovic, Boyan, 1951- and Rob, Rafael Series: Models of economic growth and development Abstract:
This paper presents a model of growth through technical progress. The nature and scope of what is learned is derived from a set of axioms, and optimal search behavior by agents is then analyzed. Agents can search intensively or extensively. Intensive search explores a technology in greater depth, while extensive search yields new technologies. Agents alternate between these two modes of search. The economy grows forever and the growth rate is bounded away from zero. The growth rate is on average higher during periods of intensive search than during periods of extensive search. Epochs of higher growth are initiated by discoveries that call for further intensive exploration. This mechanism is reminiscent of the process described by Schumpeter as causing long-wave business cycles. Serial correlation properties of output and growth stem from the presence of intensive rather than extensive search. The two key parameters are technological opportunity and the cost of the extensive search.
Subject (JEL): O30 - Technological change ; Research and development - General and O47 - Economic growth and aggregate productivity - Measurement of economic growth ; Aggregate productivity ; Cross-country output convergence
Creator: Gopinath, Gita, 1971-, Kalemli-Özcan, Şebnem, Karabarbounis, Loukas, and Villegas-Sanchez, Carolina Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 728 Abstract:
Starting in the early 1990s, countries in southern Europe experienced low productivity growth alongside declining real interest rates. We use data for manufacturing ﬁrms in Spain between 1999 and 2012 to document a signiﬁcant increase in the dispersion of the return to capital across ﬁrms, a stable dispersion of the return to labor, and a signiﬁcant increase in productivity losses from capital misallocation over time. We develop a model with size-dependent ﬁnancial frictions that is consistent with important aspects of ﬁrms’ behavior in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a signiﬁcant decline in sectoral total factor productivity as capital inﬂows are misallocated toward ﬁrms that have higher net worth but are not necessarily more productive. We show that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway.
Keyword: Europe, Misallocation, Capital flows, Dispersion, and Productivity Subject (JEL): E22 - Investment; Capital; Intangible Capital; Capacity, O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, D24 - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity, O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance, and F41 - Open Economy Macroeconomics
Creator: Todd, Richard M. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 127 Abstract:
Optimal linear regulator methods are used to represent a class of models of endogenous equilibrium seasonality that has so far received little attention. Seasonal structure is built into these models in either of two equivalent ways: periodically varying the coefficient matrices of a formerly nonseasonal problem or embedding this periodic-coefficient problem in a higher-dimensional sparse system whose time-invariant matrices have a special pattern of zero blocks. The former structure is compact and convenient computationally; the latter can be used to apply familiar convergence results from the theory of time-invariant optimal regulator problems. The new class of seasonality models provides an equilibrium interpretation for empirical work involving periodically stationary time series.