Twenty-seventh Annual Conference on Macroeconomics
April 20-21, 2012
Tobias Adrian, Federal Reserve Bank of New York; Paolo Colla, Universita Bocconi; and Hyun Song Shin, Princeton University and NBER
The financial crisis of 2007-9 has sparked keen interest in models of financial frictions and their impact on macroeconomic activity. Most models share the feature that borrowers suffer a contraction in the quantity of credit. However, the evidence suggests that although bank lending to firms declines during the crisis, bond financing actually increases to make up much of the gap. Adrian, Colla, and Shin review both aggregate and micro level data and highlight the shift in the composition of credit between loans and bonds. Motivated by the evidence, they formulate a model of direct and intermediated credit that captures the key stylized facts. In their model, the impact on real activity comes from the spike in risk premiums, rather than from contraction in the total quantity of credit.
Timothy J. Besley, London School of Economics; Neil Meads, Bank of England; and Paolo Surico, London Business School
Besley, Meads, and Surico use data on about 600,000 mortgage contracts to estimate a credit supply function that allows for heterogeneity in risk pricing. Changes in the tax system for housing transactions are an instrument for loan demand. The results for 1975-2005 are suggestive of significant price heterogeneity with riskier borrowers increasingly penalized for borrowing more. However, a sub-sample analysis reveals that the period before the financial crisis was characterized by a sharp fall in risk pricing and little evidence of heterogeneity, consistent with a relaxation of credit conditions.
Raj Chetty, Harvard University and NBER, Adam Guren, Harvard University; Day Manoli, University of California at Los Angeles and NBER; and Andrea Weber, University of Mannheim
Macroeconomic calibrations imply much larger labor supply elasticities than microeconometric studies do. The most well known explanation for this divergence is that indivisible labor generates extensive margin responses that are not captured in micro studies of hours choices. Chetty, Guren, Manoli, and Weber evaluate whether existing calibrations of macro models are consistent with micro evidence on extensive margin responses using two approaches: first, a standard calibrated macro model that simulates the effects of tax policy changes on labor supply; then, by presenting a meta-analysis of quasi-experimental estimates of extensive margin elasticities. The researchers find that micro estimates are consistent with macro evidence on the steady-state (Hicksian) elasticities that are relevant for cross-country comparisons. However, the micro estimates of extensive-margin elasticities are an order-of-magnitude smaller than needed to explain business cycle fluctuations in aggregate hours. Hence, indivisible labor supply does not explain the large gap between micro and macro estimates of elasticities of intertemporal substitution (Frisch) . The synthesis of the micro evidence points to Hicksian elasticities of 0.3 on the intensive and 0.25 on the extensive margin and Frisch elasticities of 0.5 on the intensive and 0.25 on the extensive margin.
Sylvain Leduc and Daniel Wilson, Federal Reserve Bank of San Francisco
Leduc and Wilson examine the dynamic macroeconomic effects of public infrastructure investment, both theoretically and empirically, using a novel dataset on various highway spending measures. Relying on the institutional design of federal grant distributions among states, they first construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. They find that shocks to federal highway funding have a positive effect on local GDP, both upon impact and after six to eight years, with the impact effect coming from shocks during (local) recessions. However, they find no permanent effect (as of ten years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. The transmission channel for these responses appears to be through initial funding, leading to building, over several years, of public highway capital. That in turn temporarily boosts private sector productivity and local demand. To interpret their findings, the authors develop an open economy New Keynesian model with productive public capital in which regions are part of a monetary and fiscal union. They show that the presence of productive public capital in this model can yield impulse responses with the same qualitative pattern that they find empirically.
Etienne Gagnon and David Lopez-Salido, Federal Reserve Board, and Nicolas Vincent, HEC Montreal
As the recent literature makes clear, firms use a rich variety of price-setting strategies with often diverging implications for aggregate price dynamics. This heterogeneity poses a challenge for macroeconomists interested in bridging micro and macro price stickiness. In responding to this challenge, Gagnon, Lopez-Salido, and Vincent follow Caballero and Engel (2007): they express the initial macro price response to shocks in terms of micro price adjustment along an intensive and an extensive margin. The intensive margin captures the response of price adjustments determined ahead of shocks and is closely related to the frequency of price changes. The extensive margin captures price adjustments that are triggered or cancelled by aggregate shocks. The authors use variation in the shape of the distribution of consumer price changes to show that adjustment along the extensive margin has been key to the price level response to several macroeconomic shocks. They then use a variety of micro datasets to show that items with large deviations from their optimum are more likely than others to adjust their price. Their evidence points to the extensive margin playing an economically important role in macro price adjustment.
Mark Bils, University of Rochester and NBER; Peter J. Klenow, Stanford University and NBER; and Benjamin Malin, Federal Reserve Board
According to the textbook sticky-price model, the short-run demand for labor is driven by the demand for goods. In this view, sellers will deviate from setting the marginal product of labor equal to the real wage, if necessary, in order to satisfy the demand for goods. Bils, Klenow, and Malin test this prediction across U.S. industries in the two decades up through the Great Recession. To identify movements in the demand for goods , they exploit how durability varies across 70 categories of consumption and investment. They also take into account the flexibility of prices and the capital intensity of production across goods. They find evidence in support of Keynesian labor demand over a constant-markup version of flexible-price labor demand.