George-Marios Angeletos, MIT and NBER, and Jennifer La'O, University of Chicago
Decentralization, Communication, and the Origins of Fluctuations
Angeletos and La'O consider a class of convex, competitive, neoclassical economies in which agents are rational; the equilibrium is unique; there is no room for randomization devices; and there are no shocks to preferences, technologies, endowments, or other fundamentals. In short, they rule out every known source of macroeconomic volatility. And yet, they show that these economies can be ridden with large and persistent fluctuations in equilibrium allocations and prices. These fluctuations emerge merely because decentralized trading impedes communication and, in so doing, permits self-fulfilling waves of optimism and pessimism to obtain even when the equilibrium is unique. What is more, these fluctuations require no divergence between private and social motives. They therefore need not open the door to stabilization policy, despite their apparent arbitrariness and their total disconnect from fundamentals.
Paul Beaudry, University of British Columbia and NBER; David A. Green, University of British Columbia; and Benjamin M. Sand, Copenhagen Business School
How Elastic is the Job Creation Curve?
Beaudry, Green, and Sand use search and bargaining theory to develop an empirically tractable specification of the job creation curve and to derive an instrumental variable strategy to estimate and test its validity. They estimate the job creation curve using city level observations for 1970-2007 and find that U.S. city-industry-level labor market outcomes conform well to restrictions implied by search and bargaining theory. Using 10-year differences, they estimate the elasticity of the job creation curve with respect to wages to be -0.3. They interpret this relatively low elasticity as reflecting a low propensity for individuals to become entrepreneurs when labor costs decline.
Veronica Guerrieri, University of Chicago and NBER, and Guido Lorenzoni, MIT and NBER
Credit Crises, Precautionary Savings, and the Liquidity Trap
Guerrieri and Lorenzoni use a model a la Bewly-Huggett-Ayagari to explore the effects of a credit crunch on consumer spending. Households borrow and lend to smooth idiosyncratic income shocks facing an exogenous borrowing constraint. The authors look at the economy response after an unexpected permanent tightening of this constraint: the interest rate drops sharply in the short run, then adjusts to a lower steady-state level. That is because after the shock a large fraction of agents are far below their target holdings of precautionary savings and this generates a large temporary positive shock to net lending. The researchers then look at the effects on output. Here, two opposing forces are present, as households can de-leverage in two ways: by consuming less and by working more. They show that under a reasonable parametrization, the effect on consumer spending dominates and precautionary behavior generates a recession. If they add nominal rigidities, two things happen: supply-side responses are mute, and there is a lower bound on the interest-rate adjustment. These two elements tend to amplify the recession caused by the credit tightening.
Mark A. Aguiar and Mark Bils, University of Rochester and NBER
Has Consumption Inequality Mirrored Income Inequality
(NBER Working Paper No. 16807)
Aguiar and Bils revisit how the increase in income inequality over the last 30 years has been mirrored by consumption inequality by constructing alternative measures of consumption expenditure using data from the Consumer Expenditure Survey (CE). They first show that the budget constraint does not hold in the CE data: reports of active savings and after tax income suggest an increase in consumption inequality that is larger than that reported directly in the survey. In particular, they find that the consumption inequality implied by savings behavior largely tracks income inequality between 1980 and 2007, suggesting that a closer look at reported expenditure inequality is warranted. To this end, they use a demand system to correct for systematic measurement error in the CE's expenditure data. Specifically, they consider trends in the relative expenditure of high income and low income households for different goods with different income (total expenditure) elasticities. Their estimation exploits the difference in the growth rate of luxury consumption inequality versus necessity consumption inequality. This "double-differencing," which they implement in a regression framework, corrects for mismeasurement that can systematically vary over time by good and in- come group. This exercise indicates that consumption inequality has closely tracked income inequality over the period 1980-2007.
Francois Gourio, Boston University and NBER
Credit Risk and Disaster Risk (NBER Working Paper No. 17026)
Standard macroeconomic models imply that credit spreads directly reflect expected losses (the probability of default and the loss in the event of default). In contrast, in the data credit spreads are significantly larger than expected losses, suggestive of an aggregate risk premium. Building on the idea that corporate debt, while safe in normal times, is exposed to economic depressions, Gourio embeds a trade-off theory of capital structure into a real business cycle model with a small, time-varying risk of economic disaster. The model replicates the level, volatility, and cyclicality of credit spreads, and variation in the corporate bond premium amplifies macroeconomic fluctuations in investment, employment, and GDP.
Nicholas Bloom, Stanford University and NBER; Benn Eifert, University of California, Berkeley; Aprajit Mahajan and John Roberts, Stanford University; and David McKenzie, The World Bank
Does Management Matter: Evidence from India
(NBER Working Paper No. 16658)
A long-standing question is whether differences in management practices across firms can explain differences in productivity, especially in developing countries where these spreads appear particularly large. To investigate this, Bloom, Eifert, Mahajan, McKenzie, and Roberts ran a management field experiment on large Indian textile firms. They provided free consulting on management practices to randomly chosen treatment plants and compared their performance to a set of control plants. They find that adopting these management practices raised productivity by 18 percent through improved quality and efficiency and reduced inventory. Since these practices were profitable, this raises the question of why firms had not previously adopted them. The results suggest that informational barriers were the primary factor explaining this lack of adoption. Since reallocation across firms appeared to be constrained by limits on managerial time and delegation, competition did not force badly managed firms from the market.