30th Annual Conference on Macroeconomics

April 17 and 18, 2015
Martin Eichenbaum of Northwestern University and Jonathan Parker of MIT, Organizers

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Hanming Fang, University of Pennsylvania and NBER; Quanlin Gu and Li-An Zhou, Peking University; and Wei Xiong, Princeton University and NBER

Demystifying the Chinese Housing Boom

Fang, Gu, Xiong, and Zhou construct housing price indices for 120 major cities in China in 2003-13 based on sequential sales of new homes within the same housing developments. By using these indices and detailed information on mortgage borrowers across these cities, the researchers find enormous housing price appreciation during the decade, which was accompanied by equally impressive growth in household income, except in a few first-tier cities. Housing market participation by households from the low-income fraction of the urban population remained steady. Nevertheless, bottom-income mortgage borrowers endured severe financial burdens by using price-to-income ratios over eight to buy homes, which reflected their expectations of persistently high income growth into the future. Such future income expectations could contract substantially in the event of a sudden stop in the Chinese economy and present an important source of risk to the housing market.

Chun Chang, SAIF Shanghai Jiao Tong University; Kaiji Chen, Emory University; Daniel F. Waggoner, Federal Reserve Bank of Atlanta; and Tao Zha, Emory University and NBER

Trends and Cycles in China's Macroeconomy

Chang, Chen, Waggoner, and Zha make three contributions in this paper. First, they provide a core of macroeconomic time series usable for systematic research on China. Second, the researchers document, through various empirical methods, the robust findings about striking patterns of trend and cycle. Third, they build a theoretical model that accounts for these facts. The model's mechanism and assumptions are corroborated by institutional details, disaggregated data, and banking time series, all of which are distinctive of Chinese characteristics. The departure of the authors' theoretical model from standard ones offers a constructive framework for studying China's macroeconomy.

Nicola Gennaioli, Università Bocconi; Yueran Ma, Harvard University; and Andrei Shleifer, Harvard University and NBER

Expectations and Investment

Using micro data from a Duke University quarterly survey of Chief Financial Officers, Gennaioli, Ma, and Shleifer show that corporate investment plans as well as actual investment are well explained by CFOs' expectations of earnings growth. The information in expectations data is not subsumed by traditional variables, such as Tobin's Q or discount rates. The researchers also show that errors in CFO expectations of earnings growth are predictable from past earnings and other data, pointing to extrapolative structure of expectations and suggesting that expectations may not be rational. This evidence, like earlier findings in finance, points to the usefulness of data on actual expectations for understanding economic behavior.

Regis Barnichon, CREI, and Andrew Figura, Federal Reserve Board

Declining Desire to Work and Downward Trends in Unemployment and Participation

The U.S. labor market has witnessed two apparently unrelated trends in the last 30 years: a decline in unemployment between the early 1980s and the early 2000s, and a decline in labor force participation since the early 2000s. The researchers show that a substantial factor behind both trends is a decline in desire to work among individuals outside the labor force, with a particularly strong decline during the second half of the 90s. A decline in desire to work lowers both the unemployment rate and the participation rate, because a nonparticipant who wants to work has a high probability to join the unemployment pool in the future, while a nonparticipant who does not want to work has a low probability to ever enter the labor force. The authors use cross-sectional variation to estimate a model of nonparticipants' propensity to want a job, and they find that changes in the provision of welfare and social insurance, possibly linked to the mid-90s welfare reforms, explain about 50 percent of the decline in desire to work.

Daron Acemoglu, MIT and NBER; Ufuk Akcigit, University of Pennsylvania and NBER; and William R.Kerr, Harvard University and NBER

Networks and the Macroeconomy: An Empirical Exploration

The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. Acemoglu, Akcigit, and Kerr first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission whereby demand-side shocks propagate upstream (to input supplying industries) and supply-side shocks propagate downstream (to customer industries) and that there is a tight relationship between the direct impact of a shock and the magnitudes of the downstream and the upstream indirect effects. The researchers then investigate the short-run propagation of four different types of industry-level shocks: two demand-side ones (the exogenous component of the variation in industry imports from China and changes in federal spending) and two supply-side ones (TFP shocks and variation in knowledge/ideas coming from foreign patenting). In each case, the authors find substantial propagation of these shocks through the input-output network, with a pattern broadly consistent with theory. Quantitatively, the network-based propagation is larger than the direct effects of the shocks, sometimes by several-fold. The authors also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. The results suggest that the transmission of various different types of shocks through economic networks and industry interlinkages could have first-order implications for the macroeconomy.

Cristina Arellano, Federal Reserve Bank of Minneapolis and NBER; Andrew Atkeson, University of California, Los Angeles and NBER; and Mark L. J. Wright, Federal Reserve Bank of Chicago and NBER

External and Public Debt Crises

In recent years, the members of two advanced monetary and economic unions — the nations of the Eurozone and the states of the United States of America — experienced debt crises with spreads on government borrowing rising dramatically. Despite the similar behavior of spreads on public debt, these crises were fundamentally different in nature. In Europe, the crisis occurred after a period of significant increases in government indebtedness from levels that were already substantial, whereas in the U.S. state government borrowing was limited and remained roughly unchanged. Moreover, whereas the most troubled nations of Europe experienced a sudden stop in private capital flows and private sector borrowers also faced large rises in spreads, there is little evidence that private borrowing in U.S. states was differentially affected by the creditworthiness of state governments. In this sense, we can say that the U.S. states experienced a public debt crisis, whereas the nations of Europe experienced an external debt crisis affecting both public and private borrowers. Why did Europe experience an external debt crisis and the U.S. states only a public debt crisis? And, why did the members of other economic unions, such as the provinces of Canada, not experience a debt crisis at all despite high and rising provincial public debt levels? In this paper, Arellano, Atkeson, and Wright construct a model of default on domestic and external public debt and interference in private external debt contracts and use it to argue that these different debt experiences result from the interplay of differences in the ability of governments to interfere in the private external debt contracts of their citizens, with differences in the flexibility of state fiscal institutions. The researchers also assemble a range of empirical evidence that suggests that the U.S. states are less fiscally flexible but more constrained in their ability to interfere in private contracts than the members of other economic unions, which simultaneously exposes the states to public debt crises while insulating them from an external debt crisis affecting private sector borrowers within the state. In contrast, Eurozone nations are more fiscally flexible but have a greater ability to interfere with the contracts, which together allow for more public borrowing at the cost of a joint public and private external debt crisis. Lastly, Canadian provincial governments are both fiscally flexible and limited in their ability to interfere, which allows both for more public borrowing and limits the likelihood of either a public or external debt crisis occurring. The authors draw lessons from these findings for the future design of Eurozone economic and legal institutions.