Creator: Bianchi, Javier, Ottonello, Pablo, and Presno, Ignacio Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 762 Abstract:
The excess procyclicality of fiscal policy is commonly viewed as a central malaise in emerging economies. We document that procyclicality is more pervasive in countries with higher sovereign risk and provide a model of optimal fiscal policy with nominal rigidities and endogenous sovereign default that can account for this empirical pattern. Financing a fiscal stimulus is costly for risky countries and can render countercyclical policies undesirable, even in the presence of large Keynesian stabilization gains. We also show that imposing austerity can backfire by exacerbating the exposure to default, but a well-designed "fiscal forward guidance" can help reduce the excess procyclicality.
Keyword: Procyclicality, Fiscal stabilization policy, and Sovereign default Subject (JEL): F44 - International Business Cycles, H50 - National Government Expenditures and Related Policies: General, E62 - Fiscal Policy, F41 - Open Economy Macroeconomics, and F34 - International Lending and Debt Problems
Creator: Engbom, Niklas Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 756 Abstract:
I develop an idea flows theory of firm and worker dynamics in order to assess the consequences of population aging. Older people are less likely to attempt entrepreneurship and switch employers because they have found better jobs. Consequently, aging reduces entry and worker mobility through a composition effect. In equilibrium, the lower entry rate implies fewer new, better job opportunities for workers, while the better matched labor market dissuades job creation and entry. Aging accounts for a large share of substantial declines in firm and worker dynamics since the 1980s, primarily due to equilibrium forces. Cross-state evidence supports these predictions.
Keyword: Demographics, Entrpreneurial choice, Labor turnover, Economic growth, and Employment Subject (JEL): J11 - Demographic Trends, Macroeconomic Effects, and Forecasts, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, and O40 - Economic Growth and Aggregate Productivity: General
Creator: Bengui, Julien and Bianchi, Javier Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 754 Abstract:
The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages undermine the effectiveness of macroprudential taxes but do not necessarily call for weaker interventions. A quantitative analysis of the model suggests that aggregate welfare gains and reductions in the severity and frequency of financial crises remain, on average, largely unaffected by even significant leakages.
Keyword: Regulatory arbitrage, Macroprudential policy, Financial crises, and Limited regulation enforcement Subject (JEL): F32 - Current Account Adjustment; Short-term Capital Movements, E44 - Financial Markets and the Macroeconomy, E32 - Business Fluctuations; Cycles, F41 - Open Economy Macroeconomics, and D62 - Externalities
Creator: Hevia, Constantino and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 744 Abstract:
In this paper, we use a simple model of money demand to characterize the behavior of monetary aggregates in the United States from 1960 to 2016. We argue that the demand for the currency component of the monetary base has been remarkably stable during this period. We use the model to make projections of the nominal quantity of cash in circulation under alternative future paths for the federal funds rate. Our calculations suggest that if the federal funds rate is lifted up as suggested by the survey of economic projections made by the members of the Federal Open Market Committee (FOMC), the fall in total currency demanded in the next two years ranges between 50 and 200 billion. Our discussion suggests that specific measures by the Federal Reserve to absorb that cash could be worth considering to make the future path of the price level consistent with the price stability mandate.
Keyword: Money demand, Inflation, and Currency in circulation Subject (JEL): E51 - Money Supply; Credit; Money Multipliers, E41 - Demand for Money, and E31 - Price Level; Inflation; Deflation
Creator: Eggertsson, Gauti B., Mehrotra, Neil R., and Robbins, Jacob A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 742 Abstract:
This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from -1.5% to -2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates.
Keyword: Secular stagnation, Zero lower bound, and Monetary policy Subject (JEL): E32 - Business Fluctuations; Cycles, E31 - Price Level; Inflation; Deflation, and E52 - Monetary Policy
Creator: Crouzet, Nicolas and Mehrotra, Neil R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 741 Abstract:
Drawing from confidential firm-level data of US manufacturing firms, we provide new evidence on the cyclicality of small and large firms. We show that the cyclicality of sales and investment declines with firm size. The effect is primarily driven by differences between the top 0.5% of firms and the rest. Moreover, we show that, due to the skewness of sales and investment, the higher cyclicality of small firms has a negligible influence on the behavior of aggregates. We argue that the size asymmetry is unlikely to be driven by financial frictions given 1) the absence of statistically significant differences in the behavior of production inputs or debt in recessions, 2) the survival of the size effect after directly controlling for proxies of financial strength, and 3) the predictions of a simple financial frictions model, in which unconstrained (large) firms contract more in recessions than constrained (small) firms.
Keyword: Financial accelerator, Firm size, and Business cycles Subject (JEL): E32 - Business Fluctuations; Cycles, G30 - Corporate Finance and Governance: General, and E23 - Macroeconomics: Production
Creator: Holmes, Thomas J. and Singer, Ethan Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 739 Abstract:
This paper develops and estimates a model of indivisibilities in shipping and economies of scale in consolidation. It uses highly detailed data on imports where it is possible to observe the contents of individual containers. In the model, ﬁrms are able to adapt to indivisibility constraints by using consolidation strategies and by making adjustments to shipment size. The ﬁrm determines the optimal number of domestic ports to use, taking into account that adding more ports lowers inland freight cost, at the expense of a higher indivisibility cost. The estimated model is able to roughly account for Walmart’s port choice behavior. The model estimates are used to evaluate how mergers or dissolutions of ﬁrms or countries, and changes in variety, affect indivisibility costs and inland freight costs.
Keyword: Scale economies, Walmart, Indivisibilities, and Technological change Subject (JEL): F14 - Empirical Studies of Trade, R40 - Transportation Economics: General, and L10 - Market Structure, Firm Strategy, and Market Performance: General
Creator: Lagos, Ricardo and Zhang, Shengxing Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 734 Abstract:
We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence.
Keyword: Liquidity, Monetary transmission, Monetary policy, and Asset prices Subject (JEL): G12 - Asset Pricing; Trading Volume; Bond Interest Rates, D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness, and E52 - Monetary Policy
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: Misallocation, Productivity, Dispersion, Europe, and Capital flows Subject (JEL): F41 - Open Economy Macroeconomics, D24 - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity, O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance, O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Aizawa, Naoki and Fang, Hanming Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 727 Abstract:
We present and empirically implement an equilibrium labor market search model where risk averse workers facing medical expenditure shocks are matched with firms making health insurance coverage decisions. Our model delivers a rich set of predictions that can account for a wide variety of phenomenon observed in the data including the correlations among firm sizes, wages, health insurance offering rates, turnover rates and workers’ health compositions. We estimate our model by Generalized Method of Moments using a combination of micro datasets including Survey of Income and Program Participation, Medical Expenditure Panel Survey and Robert Wood Johnson Foundation Employer Health Insurance Survey. We use our estimated model to evaluate the equilibrium impact of the 2010 Affordable Care Act (ACA) and find that it would reduce the uninsured rate among the workers in our estimation sample from about 22% in the pre-ACA benchmark economy to less than 4%. We also find that income-based premium subsidies for health insurance purchases from the exchange play an important role for the sustainability of the ACA; without the premium subsidies, the uninsured rate would be around 18%. In contrast, as long as premium subsidies and health insurance exchanges with community ratings stay intact, ACA without the individual mandate, or without the employer mandate, or without both mandates, could still succeed in reducing the uninsured rates to 7.34%, 4.63% and 9.22% respectively.
Keyword: Health, Health care reform, Labor market equilibrium, and Health insurance Subject (JEL): G22 - Insurance; Insurance Companies; Actuarial Studies, J32 - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions, I13 - Health Insurance, Public and Private, and I11 - Analysis of Health Care Markets