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Creator: Arellano, Cristina, Bai, Yan, and Zhang, Jing Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 392 Abstract:
This paper studies the impact of cross-country variation in financial market development on firms’ financing choices and growth rates using comprehensive firm-level datasets. We document that in less financially developed economies, small firms grow faster and have lower debt to asset ratios than large firms. We then develop a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk. We parameterize the model to the firms’ financial structure in the data and show that financial restrictions can account for the majority of the difference in growth rates between firms of different sizes across countries.
Palavra-chave: Default risk, Cross-country firm level dataset, and Firm investment and growth Sujeito: F20 - International Factor Movements and International Business: General and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Atkeson, Andrew, Chari, V. V., and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 419 Abstract:
In standard approaches to monetary policy, interest rate rules often lead to indeterminacy. Sophisticated policies, which depend on the history of private actions and can differ on and off the equilibrium path, can eliminate indeterminacy and uniquely implement any desired competitive equilibrium. Two types of sophisticated policies illustrate our approach. Both use interest rates as the policy instrument along the equilibrium path. But when agents deviate from that path, the regime switches, in one example to money; in the other, to a hybrid rule. Both lead to unique implementation, while pure interest rate rules do not. We argue that adherence to the Taylor principle is neither necessary nor sufficient for unique implementation with pure interest rate rules but is sufficient with hybrid rules. Our results are robust to imperfect information and may provide a rationale for empirical work on monetary policy rules and determinacy.
Sujeito: E58 - Central Banks and Their Policies, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, E52 - Monetary Policy, and E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
Creator: Asturias, Jose, Hur, Sewon, Kehoe, Timothy Jerome, 1953-, and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 521 Abstract:
In what order should a developing country adopt policy reforms? Do some policies complement each other? Do others substitute for each other? To address these questions, we develop a two-country dynamic general equilibrium model with entry and exit of firms that are monopolistic competitors. Distortions in the model include barriers to entry of firms, barriers to international trade, and barriers to contract enforcement. We find that a reform that reduces one of these distortions has different effects depending on the other distortions present. In particular, reforms to trade barriers and barriers to the entry of new firms are substitutable, as are reforms to contract enforcement and trade barriers. In contrast, reforms to contract enforcement and the barriers to entry are complementary. Finally, the optimal sequencing of reforms requires reforming trade barriers before contract enforcement.
Palavra-chave: Sequencing reforms, Trade barriers, Entry barriers, and Contract enforcement Sujeito: O24 - Development Planning and Policy: Trade Policy; Factor Movement; Foreign Exchange Policy, O19 - International Linkages to Development; Role of International Organizations, O11 - Macroeconomic Analyses of Economic Development, F13 - Trade Policy; International Trade Organizations, and F40 - Macroeconomic Aspects of International Trade and Finance: General
Creator: Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 527 Abstract:
This essay reviews the development of neoclassical growth theory, a unified theory of aggregate economic phenomena that was first used to study business cycles and aggregate labor supply. Subsequently, the theory has been used to understand asset pricing, growth miracles and disasters, monetary economics, capital accounts, aggregate public finance, economic development, and foreign direct investment.
The focus of this essay is on real business cycle (RBC) methodology. Those who employ the discipline behind the methodology to address various quantitative questions come up with essentially the same answer—evidence that the theory has a life of its own, directing researchers to essentially the same conclusions when they apply its discipline. Deviations from the theory sometimes arise and remain open for a considerable period before they are resolved by better measurement and extensions of the theory. Elements of the discipline include selecting a model economy or sometimes a set of model economies. The model used to address a specific question or issue must have a consistent set of national accounts with all the accounting identities holding. In addition, the model assumptions must be consistent across applications and be consistent with micro as well as aggregate observations. Reality is complex, and any model economy used is necessarily an abstraction and therefore false. This does not mean, however, that model economies are not useful in drawing scientific inference.
The vast number of contributions made by many researchers who have used this methodology precludes reviewing them all in this essay. Instead, the contributions reviewed here are ones that illustrate methodological points or extend the applicability of neoclassical growth theory. Of particular interest will be important developments subsequent to the Cooley (1995) volume, Frontiers of Business Cycle Research. The interaction between theory and measurement is emphasized because this is the way in which hard quantitative sciences progress.
Palavra-chave: Aggregate financial economics, Development, Business cycle fluctuations, Prosperities, RBC methodology, Neoclassical growth theory, Depressions, Aggregate economic theory, and Aggregation Sujeito: B40 - Economic Methodology: General, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E32 - Business Fluctuations; Cycles, E13 - General Aggregative Models: Neoclassical, C10 - Econometric and Statistical Methods and Methodology: General, and E00 - Macroeconomics and Monetary Economics: General
Creator: Huo, Zhen and Ríos-Rull, José-Víctor Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 526 Abstract:
We study financial shocks to households’ ability to borrow in an economy that quantitatively replicates U.S. earnings, financial, and housing wealth distributions and the main macro aggregates. Such shocks generate large recessions via the negative wealth effect associated with the large drop in house prices triggered by the reduced access to credit of a large number of households. The model incorporates additional margins that are crucial for a large recession to occur: that it is difficult to reallocate production from consumption to investment or net exports, and that the reductions in consumption contribute to reductions in measured TFP.
Palavra-chave: Balance sheet recession, Labor market frictions, Asset price, and Goods market frictions Sujeito: E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), E44 - Financial Markets and the Macroeconomy, and E32 - Business Fluctuations; Cycles
Creator: Krueger, Dirk, Mitman, Kurt, and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 532 Abstract:
How big are the welfare losses from severe economic downturns, such as the U.S. Great Recession? How are those losses distributed across the population? In this paper we answer these questions using a canonical business cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find that the welfare cost of losing one’s job in a severe recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low-wealth households. The cost increases to approximately 8% for low-wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but hurts households that keep their job, even in a version of the model in which output is partly demand determined, and therefore unemployment insurance stabilizes aggregate demand and output.
Palavra-chave: Welfare loss from recessions, Social insurance, Wealth inequality, and Great Recession Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, E32 - Business Fluctuations; Cycles, and J65 - Unemployment Insurance; Severance Pay; Plant Closings
Creator: Brinca, Pedro, Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 531 Abstract:
We elaborate on the business cycle accounting method proposed by Chari, Kehoe, and McGrattan (2007), clear up some misconceptions about the method, and then apply it to compare the Great Recession across OECD countries as well as to the recessions of the 1980s in these countries. We have four main findings. First, with the notable exception of the United States, Spain, Ireland, and Iceland, the Great Recession was driven primarily by the efficiency wedge. Second, in the Great Recession, the labor wedge plays a dominant role only in the United States, and the investment wedge plays a dominant role in Spain, Ireland, and Iceland. Third, in the recessions of the 1980s, the labor wedge played a dominant role only in France, the United Kingdom, Belgium, and New Zealand. Finally, overall in the Great Recession the efficiency wedge played a more important role and the investment wedge played a less important role than they did in the recessions of the 1980s.
Palavra-chave: 1982 recession, Business cycle accounting, and Great Recession Sujeito: G28 - Financial Institutions and Services: Government Policy and Regulation, G33 - Bankruptcy; Liquidation, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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.
Palavra-chave: Intangible investments, Input-output linkages, Total factor productivity, and Business cycles Sujeito: E32 - Business Fluctuations; Cycles, D57 - General Equilibrium and Disequilibrium: Input-Output Tables and Analysis, and O41 - One, Two, and Multisector Growth Models
Creator: Conesa, Juan Carlos, Costa, Daniela, Kamali, Parisa , Kehoe, Timothy Jerome, 1953-, Nygaard, Vegard M., Raveendranathan, Gajendran, and Saxena, Akshar Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 548 Abstract:
This paper develops an overlapping generations model to study the macroeconomic effects of an unexpected elimination of Medicare. We ﬁnd that a large share of the elderly respond by substituting Medicaid for Medicare. Consequently, the government saves only 46 cents for every dollar cut in Medicare spending. We argue that a comparison of steady states is insufficient to evaluate the welfare effects of the reform. In particular, we ﬁnd lower ex-ante welfare gains from eliminating Medicare when we account for the costs of transition. Lastly, we ﬁnd that a majority of the current population benefits from the reform but that aggregate welfare, measured as the dollar value of the sum of wealth equivalent variations, is higher with Medicare.
Palavra-chave: Steady state, Medicare, Transition path, Medicaid, and Overlapping generations Sujeito: I13 - Health Insurance, Public and Private, E21 - Macroeconomics: Consumption; Saving; Wealth, E62 - Fiscal Policy, and H51 - National Government Expenditures and Health
Creator: Fitzgerald, Doireann and Haller, Stefanie Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 549 Abstract:
We use micro data for Ireland to estimate how export participation and the export revenue of incumbent exporters respond to tariffs and real exchange rates. Both participation and revenue, but especially revenue, are more responsive to tariffs than to real exchange rates. Our estimates translate into an elasticity of aggregate exports with respect to tariffs of between -3.8 and -5.4, and with respect to real exchange rates of between 0.45 and 0.6, consistent with estimates in the literature based on aggregate data. We argue that forward-looking investment in customer base combined with the fact that tariffs are much more predictable than real exchange rates can explain why export revenue responds so much more to tariffs.
Palavra-chave: Tariffs, Real exchange rates, and International elasticity puzzle Sujeito: F41 - Open Economy Macroeconomics and F14 - Empirical Studies of Trade
Creator: Kehoe, Timothy Jerome, 1953-, Pujolas, Pau S., and Rossbach, Jack Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 537 Abstract:
Applied general equilibrium (AGE) models, which feature multiple countries, multiple industries, and input-output linkages across industries, have been the dominant tool for evaluating the impact of trade reforms since the 1980s. We review how these models are used to perform policy analysis and document their shortcomings in predicting the industry-level effects of past trade reforms. We argue that, to improve their performance, AGE models need to incorporate product-level data on bilateral trade relations by industry and better model how trade reforms lower bilateral trade costs. We use the least traded products methodology of Kehoe et al. (2015) to provide guidance on how improvements can be made. We provide further suggestions on how AGE models can incorporate recent advances in quantitative trade theory to improve their predictive ability and better quantify the gains from trade liberalization.
Palavra-chave: Trade costs, Input-output linkages, Armington elasticities, Trade liberalization, and Applied general equilibrium Sujeito: F13 - Trade Policy; International Trade Organizations, F11 - Neoclassical Models of Trade, F17 - Trade: Forecasting and Simulation, and F14 - Empirical Studies of Trade
Creator: Conesa, Juan Carlos and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 550 Abstract:
In the early 1970s, hours worked per working-age person in Spain were higher than in the United States. Starting in 1975, however, hours worked in Spain fell by 40 percent. We find that 80 percent of the decline in hours worked can be accounted for by the evolution of taxes in an otherwise standard neoclassical growth model. Although taxes play a crucial role, we cannot argue that taxes drive all of the movements in hours worked. In particular, the model underpredicts the large decrease in hours in 1975–1986 and the large increase in hours in 1994–2007. The lack of productivity growth in Spain during 1994–2015 has little impact on the model’s prediction for hours worked.
Palavra-chave: Distortionary taxes, Total factor productivity, Hours worked, and Dynamic general equilibrium Sujeito: C68 - Computable General Equilibrium Models, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, E13 - General Aggregative Models: Neoclassical, and H31 - Fiscal Policies and Behavior of Economic Agents: Household
Creator: Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 551 Abstract:
This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.
Palavra-chave: Skill investment, Labor supply, Tax progressivity, Incomplete markets, Income distribution, and Life cycle Sujeito: J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, J22 - Time Allocation and Labor Supply, H20 - Taxation, Subsidies, and Revenue: General, D30 - Distribution: General, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), and H40 - Publicly Provided Goods: General
Creator: Perri, Fabrizio and Stefanidis, Georgios Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 554 Abstract:
We use balance sheet data and stock market data for the major U.S. banking institutions during and after the 2007-8 financial crisis to estimate the magnitude of the losses experienced by these institutions because of the crisis. We then use these estimates to assess the impact of the crisis under alternative, and higher, capital requirements. We find that substantially higher capital requirements (in the 20% to 30% range) would have substantially reduced the vulnerability of these financial institutions, and consequently they would have significantly reduced the need of a public bailout.
Palavra-chave: Financial crises and Too big to fail Sujeito: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages and G01 - Financial Crises
Creator: Han, Suyoun and Kleiner, Morris Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 556 Abstract:
The length of time from the implementation of an occupational licensing statute (i.e., licensing duration) may matter in influencing labor market outcomes. Adding to or raising the entry barriers are likely easier once an occupation is established and has gained influence in a political jurisdiction. States often enact grandfather clauses and ratchet up requirements that protect existing workers and increase entry costs to new entrants. We analyze the labor market influence of the duration of occupational licensing statutes for 13 major universally licensed occupations over a 75-year period. These occupations comprise the vast majority of workers in these regulated occupations in the United States. We provide among the first estimates of potential economic rents to grandfathering. We find that duration years of occupational licensure are positively associated with wages for continuing and grandfathered workers. The estimates show a positive relationship of duration with hours worked, but we find moderately negative results for participation in the labor market. The universally licensed occupations, however, exhibit heterogeneity in outcomes. Consequently, unlike some other labor market public policies, such as minimum wages or direct unemployment insurance benefits, occupational licensing would likely influence labor market outcomes when measured over a longer period of time.
Palavra-chave: Duration and grandfathering effects on wage determination, Labor market regulation, Hours worked, Occupational licensing, and Workforce participation Sujeito: L88 - Industry Studies: Services: Government Policy, J80 - Labor Standards: General, L38 - Public Policy, J38 - Wages, Compensation, and Labor Costs: Public Policy, J30 - Wages, Compensation, and Labor Costs: General, L51 - Economics of Regulation, K00 - Law and Economics: General, J08 - Labor Economics Policies, J44 - Professional Labor Markets; Occupational Licensing, K20 - Regulation and Business Law: General, L12 - Monopoly; Monopolization Strategies, J88 - Labor Standards: Public Policy, and L84 - Personal, Professional, and Business Services
Creator: Johnson, Janna and Kleiner, Morris Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 561 Abstract:
Occupational licensure, one of the most significant labor market regulations in the United States, may restrict the interstate movement of workers. We analyze the interstate migration of 22 licensed occupations. Using an empirical strategy that controls for unobservable characteristics that drive long-distance moves, we find that the between-state migration rate for individuals in occupations with state-specific licensing exam requirements is 36 percent lower relative to members of other occupations. Members of licensed occupations with national licensing exams show no evidence of limited interstate migration. The size of this effect varies across occupations and appears to be tied to the state specificity of licensing requirements. We also provide evidence that the adoption of reciprocity agreements, which lower re-licensure costs, increases the interstate migration rate of lawyers. Based on our results, we estimate that the rise in occupational licensing can explain part of the documented decline in interstate migration and job transitions in the United States.
Palavra-chave: Interstate migration, Labor market regulation, and Occupational licensing Sujeito: L38 - Public Policy, K00 - Law and Economics: General, J44 - Professional Labor Markets; Occupational Licensing, J10 - Demographic Economics: General, and J01 - Labor Economics: General
Creator: Kehoe, Patrick J., Midrigan, Virgiliu, and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 566 Abstract:
Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real business cycle models can account, respectively, for the aggregate and the cross-regional fluctuations observed in the Great Recession in the United States.
Palavra-chave: New Keynesian models, Financial frictions, and External validation Sujeito: E52 - Monetary Policy, E32 - Business Fluctuations; Cycles, E13 - General Aggregative Models: Neoclassical, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: McGrattan, Ellen R. and Waddle, Andrea Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 542 Abstract:
Using simulations from a multicountry neoclassical growth model, we analyze several post-Brexit scenarios. First, the United Kingdom unilaterally imposes tighter restrictions on FDI and trade from other EU nations. Second, the European Union retaliates and imposes the same restrictions on the UK. Finally, the United Kingdom reduces restrictions on other nations during the post-Brexit transition. Model predictions depend crucially on the policy response of multinationals’ investment in technology capital, accumulated know-how from investments in R&D, brands, and organizations used simultaneously in their domestic and foreign operations.
Palavra-chave: United Kingdom, FDI, Foreign investment, European Union, and Brexit Sujeito: F41 - Open Economy Macroeconomics, O34 - Intellectual Property and Intellectual Capital, O33 - Technological Change: Choices and Consequences; Diffusion Processes, and F23 - Multinational Firms; International Business
Creator: Atkeson, Andrew, Burstein, Ariel, and Chatzikonstantinou, Manolis Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 573 Abstract:
What quantitative lessons can we learn from models of endogenous technical change through innovative investments by firms for the impact of changes in the economic environment on the dynamics of aggregate productivity in the short, medium, and long run? We present a unifying model that nests a number of canonical models in the literature and characterize their positive implications for the transitional dynamics of aggregate productivity and their welfare implications in terms of two sufficient statistics. We review the current state of measurement of these two sufficient statistics and discuss the range of positive and normative quantitative implications of our model for a wide array of counterfactual experiments, including the link between a decline in the entry rate of new firms and a slowdown in the growth of aggregate productivity given that measurement. We conclude with a summary of the lessons learned from our analysis to help direct future research aimed at building models of endogenous productivity growth useful for quantitative analysis.
Palavra-chave: Transitional dynamics, Endogenous growth, and Innovative investment Sujeito: O30 - Innovation; Research and Development; Technological Change; Intellectual Property Rights: General and O40 - Economic Growth and Aggregate Productivity: General
Creator: Hur, Sewon, Kondo, Illenin O., and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 574 Abstract:
This paper argues that the comovement between inflation and economic activity is an important determinant of real interest rates over time and across countries. First, we show that for advanced economies, periods with more procyclical inflation are associated with lower real rates, but only when there is no risk of default on government debt. Second, we present a model of nominal sovereign debt with domestic risk-averse lenders. With procyclical inflation, nominal bonds pay out more in bad times, making them a good hedge against aggregate risk. In the absence of default risk, procyclical inflation yields lower real rates. However, procyclicality implies that the government needs to make larger (real) payments when the economy deteriorates, which could increase default risk and trigger an increase in real rates. The patterns of real rates predicted by the model are quantitatively consistent with those documented in the data.
Palavra-chave: Nominal bonds, Inflation risk, Government debt, and Sovereign default Sujeito: F34 - International Lending and Debt Problems, E31 - Price Level; Inflation; Deflation, G12 - Asset Pricing; Trading Volume; Bond Interest Rates, and H63 - National Debt; Debt Management; Sovereign Debt