Economic Fluctuations and Growth Research Meeting

July 14, 2012
Varadarajan Chari, University of Minnesota, and Xavier Gabaix, New York University's Stern School of Business, Organizers

Alessandra Fogli, University of Minnesota, and Laura Veldkamp, New York University and NBER

Germs, Social Networks, and Growth

Does the pattern of social connections between individuals matter for macroeconomic outcomes? If so, how does this effect operate and how big is it? Using network analysis tools, Fogli and Veldkamp explore how different social structures affect technology diffusion and thereby a country's rate of technological progress. Their network model also explains why societies with a high prevalence of contagious disease might evolve toward growth-inhibiting social institutions and how small initial differences can produce large divergence in incomes. Their empirical work uses differences in the prevalence of diseases spread by human contact and the prevalence of other diseases as an instrument to identify an effect of social structure on technology diffusion.

Ali Shourideh, University of Pennsylvania

Optimal Taxation of Capital Income: A Mirrleesian Approach to Capital Accumulation

Shourideh develops a model of optimal taxation of capital and studies its effect on the long-run distribution of wealth in presence of idiosyncratic capital income risk. In the presence of risk-return trade-offs, he shows that it is typically optimal to have progressive saving taxes. Furthermore, in an intergenerational context, he shows that bequest taxes should be negative and develops a method for characterization of long-run efficient distribution of wealth.

Atif Mian, University of California, Berkeley and NBER, and Amir Sufi, University of Chicago Booth School of Business and NBER

What Explains High Unemployment? The Aggregate Demand Channel(NBER Working Paper No. 17830)

A drop in aggregate demand driven by shocks to household balance sheets is responsible for a large fraction of the decline in U.S. employment from 2007 to 2009. The aggregate demand channel for unemployment predicts that employment losses in the non-tradable sector are higher in high-leverage U.S. counties that were most severely affected by the balance-sheet shock, while losses in the tradable sector are distributed uniformly across all counties. Mian and Sufi find exactly this pattern from 2007 to 2009. Alternative hypotheses for job losses based on uncertainty shocks or structural unemployment related to construction do not explain these results. Using the relation between non-tradable sector job losses and demand shocks, and assuming Cobb-Douglas preferences over tradable and non-tradable goods, the authors quantify the effect of the aggregate demand channel on total employment. Their estimates suggest that the decline in aggregate demand driven by household balance sheet shocks accounts for almost 4 million of the lost jobs from 2007 to 2009, or 65 percent of the lost jobs in their data.

Arvind Krishnamurthy, Northwestern University and NBER, and Zhiguo He, University of Chicago and NBER

A Macroeconomic Framework for Quantifying Systemic Risk

Systemic risk arises when shocks lead to states in which a disruption in financial intermediation adversely affects the economy and feeds back into even more disrupting financial intermediation. Krishnamurthy and He present a macroeconomic model with a financial intermediary sector that is subject to an equity capital constraint. The novel aspect of their analysis is that the model produces a stochastic steady-state distribution for the economy, in which only some of the states correspond to systemic risk states. This model allows them to examine the transition from "normal" states to systemic risk states. They calibrate the model and use it to match the systemic risk apparent during the 2007-8 financial crisis and to compute the conditional probabilities of arriving at a systemic risk state, such as 2007-8. They find that these probabilities are surprisingly small.

Mikhail Golosov, Princeton University and NBER; Pricila Maziero, University of Pennsylvania; and Guido Menzio, University of Pennsylvania and NBER

Taxation and Redistribution of Residual Income Inequality (NBER Working Paper No. 18151)

Golosov, Maziero, and Menzio study the optimal redistribution of income inequality that is caused by the presence of search and matching frictions in the labor market. They study this problem in the context of a directed search model of the labor market populated by homogenous workers and heterogeneous firms. The optimal redistribution can be attained using a positive unemployment benefit and an increasing and regressive labor income tax. The positive unemployment benefit serves to lower the search risk faced by workers. The increasing and regressive labor tax serves to align the cost to the firm of attracting an additional applicant with the value of an application to society.

Chang-Tai Hsieh, University of Chicago and NBER, and Peter J. Klenow, Stanford University and NBER

The Life Cycle of Plants in India and Mexico (NBER Working Paper No. 18133)

In the United States, the average 40-year-old plant employs almost eight times as many workers as the typical five-year-old or less plant. In contrast, surviving plants in India exhibit little growth in terms of either employment or output. Mexico is intermediate to India and the United States in these respects: the average 40-year-old Mexican plant employs twice as many workers as an average new plant in that country. This pattern holds across many industries and for formal and informal establishments alike. This divergence in plant dynamics suggests lower investments by Indian and Mexican plants in process efficiency, quality, and in accessing markets at home and abroad. In simple models, Hsieh and Klenow find that the difference in life-cycle dynamics could lower aggregate manufacturing productivity on the order of 25 percent in India and Mexico relative to the United States.

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