Economic Fluctuations and Growth Research Meeting

October 23, 2009
Mark Aguiar and Jonathan Parker, Organizers

Lawrence Christiano, Northwestern University and NBER; Martin S. Eichenbaum, Northwestern University and NBER; and Sergio Rebelo, Northwestern University and NBER
When is the government spending multiplier large?

Christiano, Eichenbaum, and Rebelo conclude that the government spending multiplier will be large when the nominal interest rate is constant.

Charles I. Jones, Stanford University and NBER
The Costs of Economic Growth

The benefits of economic growth are widely touted in the literature. But what about the costs? Pollution, nuclear accidents, global warming, the rapid global transmission of disease, and bioengineered viruses are just some of the dangers created by technological change. How should these be weighed against the benefits, and in particular, how does the recognition of these costs affect the theory of economic growth? This paper shows that taking these costs into account has firstorder consequences. Under standard preferences, the value of life may rise faster than consumption, leading society to value safety over economic growth. As a result, the optimal rate of growth may be substantially lower than what is feasible, in some cases falling all the way to zero.

Mark Bils, University of Rochester and NBER; Peter J. Klenow, Stanford University and NBER; and Benjamin Malin, Federal Reserve Board
Reset Price Inflation and the Impact of Monetary Policy Shocks

A standard state-dependent pricing model generates little monetary non-neutrality. Two ways of generating more meaningful real effects are time-dependent pricing and strategic complementarities. These mechanisms have telltale implications for the persistence and volatility of "reset price inflation." Reset price inflation is the rate of change of all desired prices (including for goods that have not changed price in the current period). Using the micro data underpinning the CPI, Bils, Klenow,and Malin construct an empirical measure of reset price inflation. They find that time-dependent models imply unrealistically high persistence and stability of reset price inflation. This discrepancy is exacerbated by adding strategic complementarities, even under state-dependent pricing. A state-dependent model with no strategic complementarities aligns most closely with the data.

Craig Burnside, Duke University and NBER; and Alexandra M. Tabova, Duke University
Risk, Volatility, and the Global Cross-Section of Growth Rates

Burnside and Tabova reconsider the empirical links between volatility and growth between 1970 and 2007. There is a strong and significant correlation between individual country growth rates and global factors that are arguably exogenous with respect to their economies. The amount of volatility driven by these external factors is highly correlated, cross-sectionally, with the overall amount of volatility in GDP growth. There is also a strong correlation between a country's average growth rate and the magnitude and sign of its exposure to global factors. The authors interpret their findings as a partial answer to the question "Why doesn't capital flow from rich to poor countries?" They argue that low-income countries that grow slowly are riskier from the perspective of the marginal international investor.

Marcus Hagedorn, University of Zurich; and Iourii Manovskii, University of Pennsylvania and NBER
Spot Wages over the Business Cycle?

Hagedorn and Manovskii consider a model with on-the-job search where current wages depend only on current aggregate labor market conditions and match-specific idiosyncratic productivities. The authors nevertheless show that the model replicates findings which have been interpreted as evidence against a spot wage model. Past aggregate labor market conditions, such as the unemployment rate at the start of the job, the lowest unemployment rate since the start of a job, or the number of outside job offers received since the start of the job, have explanatory power for current wages because these variables are correlated with pro-cyclical match qualities. The business-cycle volatility of wages is higher for newly hired workers than for job stayers because workers can sample from a larger pool of job offers in a boom than in a recession. Using NLSY and PSID data, the researchers find that the existing evidence against a spot wage model is rejected once they control for match-specific productivity as implied by their theory.

John H. Cochrane, University of Chicago and NBER
Understanding Fiscal and Monetary Policy in 2008-2009

Cochrane uses the money demand equation and the valuation equation of government debt to understand fiscal and monetary policy in 2008-9, to think about whether the United States is headed for a fiscal inflation, and to consider what that inflation mightl look like. He emphasizes that inflation can come well before large deficits or monetization are realized.

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