Economic Fluctuations and Growth

Members of the NBER's Economic Fluctuations and Growth Program met July 11 online. Research Associates Benjamin Moll of Princeton University and Valerie A. Ramey of University of California, San Diego organized the meeting. These researchers' papers were presented and discussed:

Antonio Coppola, Harvard University; Matteo Maggiori, Stanford University and NBER; Brent Neiman, University of Chicago and NBER; and Jesse Schreger, Columbia University and NBER

Redrawing the Map of Global Capital Flows: The Role of Cross-Border Financing and Tax Havens

Global firms finance themselves through foreign subsidiaries, often shell companies in tax havens, which obscures their nationality in aggregate statistics. Coppola, Maggiori, Neiman, and Schreger associate the universe of traded securities with their issuer's ultimate parent and restate bilateral investment positions to better reflect the true financial linkages connecting countries around the world. They find that private capital flows from developed countries to firms in large emerging markets are dramatically larger than previously thought. The national accounts of the United States, for example, understate the U.S. position in Chinese firms by nearly $600 billion, while China's official net creditor position to the rest of the world may be overstated by as much as 50 percent. The researchers additionally show how taking account of offshore issuance is important for their understanding of the currency composition of external liabilities, the nature of foreign direct investment, and the growth of financial globalization.

Kevin Donovan, Yale University; Jianyu Lu, Central Bank of Chile; and Todd Schoellman, Federal Reserve Bank of Minneapolis

Labor Market Dynamics and Development

Donovan, Lu, and Schoellman build a dataset of harmonized rotating panel labor force surveys covering 42 countries across a wide range of development and document three new empirical findings on how labor market dynamics vary with development. First, labor market flows (job-finding rates, employment exit rates, and job-to-job transition rates) are 2–3 times higher in the poorest as compared to the richest countries. Second, employment hazards decline more sharply with tenure in poorer countries; much of their high turnover can be attributed to high separation rates among workers with low tenure. Finally, wage-tenure profiles are much steeper in poorer countries. This last finding is surprising given that he researchers also confirm the finding from the literature that wage-experience profiles are flatter in poorer countries. They show that these facts are consistent with theories with endogenous separation, particularly job ladder and learning models. Finally, Donovan, Lu, and Schoellman disaggregate their results and investigate possible driving forces that might explain why separation operates differently in rich and poor countries.

Martin S. Eichenbaum and Sergio Rebelo, Northwestern University and NBER, and Mathias Trabandt, Freie Universität Berlin

The Macroeconomics of Epidemics (NBER Working Paper 26882)

Eichenbaum, Rebelo, and Trabandt extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Their model implies that people's decision to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths. These decisions exacerbate the size of the recession caused by the epidemic. The competitive equilibrium is not socially optimal because infected people do not fully internalize the effect of their economic decisions on the spread of the virus. In their benchmark model, the best simple containment policy increases the severity of the recession but saves roughly half a million lives in the U.S.

Vasco M. Carvalho, University of Cambridge; Stephen Hansen, Imperial College London; Jose Rodriguez Mora, University of Edinburgh; and Juan R. García, Alvaro Ortiz, Tomasa Rodrigo, and Jose Ruiz, BBVA Research

Tracking the COVID-19 Crisis with High-Resolution Transaction Data

Financial and payments systems throughout the world generate a vast amount of naturally occurring, and digitally recorded, transaction data, but national statistical agencies mainly rely on surveys of much smaller scale for constructing official economic series. This paper considers 2.1 billion transactions from credit- and debitcard data from BBVA, the second largest bank in Spain, as an alternative source of information for measuring consumption, a key component of GDP. While card spending growth is more volatile than non-durable consumption growth, normalized spending correlates strongly with official consumption measures. In the cross section, patterns in card spending match those in official household budget surveys very closely. The implication is that card spending can stand in for consumption surveys in environments where official data is not available, for example due to reporting delays or to insufficient geographic or household detail. Carvalho, García, Hansen, Rodriguez Mora, Ortiz, Rodrigo, and Ruiz apply the idea of card spending as a consumption survey to the COVID-19 crisis in Spain, where they present four findings: (1) a strong consumption reaction to lockdown and its easing at the national and regional levels; (2) a rapid, V-shaped consumption recovery in the aggregate; (3) an adjustment to the average consumption basket during lockdown towards the goods basket of low-income households; (4) a divergence in mobility patterns during lockdown according to income in which poorer households travel more during the workweek. Their main conclusion is that transaction data provides high-quality information about household consumption, which makes it a potentially important input into national statistics and research on household consumption.

Alisdair McKay, Federal Reserve Bank of Minneapolis, and Johannes Wieland, University of California, San Diego and NBER

Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy

The prevailing neo-Wicksellian view holds that the central bank's objective is to track the natural rate of interest (r* ), which itself is largely exogenous to monetary policy. McKay and Wieland challenge this view using a fixed-cost model of durable consumption demand, in which expansionary monetary policy prompts households to accelerate the timing of lumpy durable adjustments. This yields an intertemporal trade-off in aggregate demand as encouraging households to adjust today leaves fewer households acquiring durables going forward. Interest rates must be kept low to support demand going forward, so accommodative monetary policy today reduces r* in the future. They show that this mechanism is quantitatively important in explaining the persistently low level of real interest rates and r* after the Great Recession.

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