Economic Fluctuations and Growth Research Meeting

February 4, 2011
Mark Gertler and Russell Cooper, Organizers

Robert Shimer, University of Chicago and NBER
Wage Rigidities and Jobless Recoveries

Shimer explores how real wage rigidities can generate jobless recoveries. Suppose that after a transitory shock, the capital stock lies below trend. If wages are flexible, they decline as the economy grows back to trend. If wages are completely rigid and the labor market is otherwise frictionless, then a transitory shock causes a proportional and permanent decline in employment, capital, output, consumption, and investment relative to trend. In a search model with rigid wages, the impact of the shock eventually disappears, but the behavior of the economy is quantitatively very similar.

Alan B. Krueger, Princeton University, and Andreas Meuller, Stockholm University
Job Search and Job Finding in a Period of Mass Unemployment: Evidence from High-Frequency Longitudinal Data

Krueger and Mueller present findings from a survey of 6,025 unemployed workers who were interviewed every week for up to 24 weeks in the fall of 2009 and spring of 2010. The researchers find that:(1) the amount of time devoted to job search declines sharply over the spell of unemployment; 2) the self-reported reservation wage predicts whether a job offer is accepted or rejected; 3) the reservation wage is remarkably stable over the course of unemployment for most workers, with the notable exception of workers who are over age 50 and those who had nontrivial savings at the start of the study; 4) many workers who seek full-time work will accept a part-time job that offers a wage below their reservation wage; and 5) the amount of time devoted to job search and the reservation wage help predict early exits from Unemployment Insurance (UI).

Virgiliu Midrigan and Daniel Xu, New York University and NBER
Finance and Misallocation: Evidence from Plant-level Data (NBER Working Paper No. 15647)

Midrigan and Xu study a model of establishment dynamics in which entrepreneurs face a financing constraint and ask: when parameterized to match salient features of plant-level data, does the model predict large aggregate TFP losses from misallocation? Their answer i: "no": efficient establishments quickly accumulate internal funds and grow out of their borrowing constraint. Thus the model predicts TFP losses from misallocation, even in an economy with no external finance, of at most 5-7 percent. The researchers present parameterizations of the model in which finance frictions cause substantially larger TFP losses. However, such parameterizations are at odds with important features of plant-level data: the variability and persistence of plant-level output, and differences in the return to capital and in output growth rates across young and old plants.

Craig Burnside, Duke University and NBER, and Martin S. Eichenbaum and Sergio Rebelo, Northwestern University and NBER
Understanding Booms and Busts in Housing Markets (NBER Working Paper No. 16734)

Some booms in housing prices are followed by busts while others are not. In either case it is difficult to find observable fundamentals that are correlated with price movements. Burnside, Eichenbaum, and Rebelo develop a model that is consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of "social dynamics" Agents meet randomly, and those with tighter priors are more likely to convert other agents to their beliefs. This model generates a "fad": the fraction of the population with a particular view rises and then falls. Depending on which agent is correct about fundamentals, these fads generate either boom-busts or protracted booms.

Andrew Glover, University of Minnesota; Jonathan Heathcote, Federal Reserve Bank of Minneapolis; Dirk Krueger, University of Pennsylvania and NBER; and Jose-Victor Rios-Rull, University of Minnesota and NBER
Inter-generational Redistribution in the Great Recession

Glover, Heathcote, Krueger, and Rios-Rull construct stochastic overlapping-generations general equilibrium models in which households are subject to aggregate shocks that affect both wages and asset prices. They then use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across different age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages. Asset price declines hurt the old, who rely on asset sales to finance consumption, but benefit the young, who purchase assets at depressed prices. In the authors' preferred calibration, asset prices decline more than twice as much as wages, consistent with the experience of the U.S. economy in the Great Recession. A model recession is approximately welfare-neutral for households in the 20-29 age group, but translates into a large welfare loss of around 10 percent of lifetime consumption for households aged 70 and over.

Vasco M. Carvalho, CREI, and Xavier Gabaix, New York University and NBER
The Great Diversification and Its Undoing (NBER Working Paper No. 16424)

Carvalho and Gabaix investigate the hypothesis that macroeconomic fluctuations are the results of many microeconomic shocks, and show that it has significant explanatory power for the evolution of macroeconomic volatility. They define "fundamental" volatility as what would arise from an economy made entirely of idiosyncratic microeconomic shocks, occurring at the level of sectors or firms. In its empirical construction, motivated by a simple model, the sales share of different sectors will vary over time, while the volatility of those sectors remains constant. The authors find that fundamental volatility accounts for the swings in macroeconomic volatility in the United States and the other major world economies in the past half century. It also explains the "great moderation" and its undoing. Controlling for their measure of fundamental volatility, there is no break in output volatility. The initial great moderation is caused by a decreasing share of manufacturing between 1975 and 1985. The recent rise of macroeconomic volatility is attributable to the increase in the size of the financial sector. The authors provide a model to think quantitatively about the large comovement generated by idiosyncratic shocks. Because the origin of aggregate shocks can be traced to identifiable microeconomic shocks, we may be able to better understand the origins of aggregate fluctuations.

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