Twenty-eighth Annual Conference on Macroeconomics

April 12 and 13, 2013
Jonathan Parker or Northwestern University and Michael Woodford of Columbia University, Organizers

Elena Asparouhova, University of Utah; Peter Bossaerts and Nilanjan Roy, California Institute of Technology; and William Zame, University of California, Los Angeles

Experiments on the Lucas Asset Pricing Model

Asparouhova, Bossaerts, Roy, and Zame report on experimental tests of the Lucas asset pricing model with heterogeneous agents and time-varying private income streams. In order to emulate key features of the model (such as infinite horizon, stationarity, and perishability of consumption), they use a novel experimental design. Their experimental evidence broadly supports the cross-sectional and inter-temporal pricing predictions of the model, but asset prices display substantial volatility that is unexplained by fundamentals. Consistent with Pareto efficiency under homothetic utility, consumption shares of the two types of agents in their experiment are constant across states and time; under autarky, consumption would have been negatively correlated. Generalized Method of Moments tests reject the asset pricing restrictions. They suggest that the coexistence of bad prices (excess volatility) and good allocations (Pareto efficiency) arises from participants' expectations about future prices, which are at odds with the theoretical predictions of the Lucas model but are nonetheless almost self-fulfilling.

Venky Venkateswaran, Pennsylvania State University, and Randall Wright, University of Wisconsin, Madison and NBER

Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity

When limited commitment hinders unsecured credit, assets help by serving as collateral. Venkateswaran and Wright study models in which assets differ in pledgability -- the extent to which they can be used to secure loans -- and hence liquidity. Although many previous analyses of imperfect credit focus on producers, they emphasize consumers. Household debt limits are determined by the cost that households incur when assets are seized in the event of default. The framework, which nests standard growth and asset-pricing theory, is calibrated to analyze the effects of monetary policy and financial innovation. They show that inflation can raise output, employment, and investment, plus improve housing and stock markets. For the baseline calibration, optimal inflation is positive. Increases in pledgeability can generate booms and busts in economic activity, but still may be good for welfare.

Paul Beaudry, University of British Columbia and NBER, and Franck Portier, Toulouse School of Economics

Understanding Non Inflationary Demand Driven Business Cycles

During the last thirty years, U.S. business cycles have been characterized by counterc-yclical technology shocks and very low inflation variability. While the first fact runs counter to an RBC view of fluctuation, and calls for demand shocks as a source of fluctuations, the second fact is difficult to reconcile with a New Keynesian model in which demand shocks are accommodated. Beaudry and Portier show that non-inflationary demand driven business cycles can be explained easily if one moves away from the representative agent framework on which the New Keynesian model and the RBC model are based. They show how changes in demand, induced by changes in perceptions about the future, can cause business cycle type fluctuations when agents are not perfectly mobile across sectors. Because they use an extremely simple framework, they discuss the generality of the results and develop a modified New Keynesian model with non-inflationary demand driven fluctuations. They also document the relevance of their main assumptions regarding labor market segmentation and incomplete insurance using PSID data over the period 1968-2007.

Martin Lettau, University of California at Berkeley and NBER, and Sydney C. Ludvigson, New York University and NBER

Shocks and Crashes (NBER Working Paper No. 16996)

Lettau and Ludvigson identify three shocks, distinguished by whether their effects are permanent or transitory, to characterize the post-war dynamics of aggregate consumer spending, labor earnings,and household wealth. The first shock accounts for virtually all of the variation in consumption; they argue that it can be plausibly interpreted as a permanent total factor productivity shock . The second shock, which underlies the vast bulk of quarterly fluctuations in labor income growth, permanently reallocates rewards between shareholders and workers but leaves consumption unaffected. Over the last 25 years, the cumulative effect of this shock has persistently boosted stock market wealth and persistently lowered labor earnings. They call this a factors-share shock. The third shock is a persistent but transitory innovation that accounts for the vast majority of quarterly fluctuations in asset values but has a negligible impact on consumption and labor earnings at all horizons. They call this an exogenous risk aversion shock. They show that the 2000-2 asset market crash and recession surrounding it was characterized by a negative transitory wealth (positive risk aversion) shock, predominantly affecting stock market wealth. By contrast, the 2007-9 crash and recession was characterized by a string of large negative productivity shocks, as well as positive risk aversion shocks.

Francesco Bianchi, Duke University, and Leonardo Melosi, Federal Reserve Bank of Chicago

Dormant Shocks and Fiscal Virtue

Bianchi and Melosi develop a theoretical framework to account for the observed instability of the link between inflation and fiscal imbalances across time and countries. Current policymakers' behavior influences agents' beliefs about the way that debt will be stabilized. The standard policy mix consists of a virtuous fiscal authority that moves taxes in response to debt and a central bank that has full control over inflation. When policymakers deviate from this Virtuous regime, agents conduct Bayesian learning to infer the likely duration of the deviation. As agents observe more and more deviations, they become increasingly pessimistic about a prompt return to the Virtuous regime and inflation starts drifting in response to a fiscal imbalance. Shocks that were dormant under the Virtuous regime now start manifesting themselves. These changes initially are imperceptible, they can unfold over decades, and they accelerate as agents' beliefs deteriorate. Dormant shocks explain the run-up of US inflation and uncertainty in the 1970s. The currently low long-term interest rates and inflation expectations might hide the true risk of inflation faced by the U.S. economy.

Kfir Eliaz, Brown University, and Rani Spiegler, Tel Aviv University

Reference Dependence and Labor-Market Fluctuations

Eliaz and Spiegler incorporate reference-dependent worker behavior into a search-matching model of the labor market, in which firms have all the bargaining power and productivity follows a log-linear AR(1) process. Motivated by Akerlof (1982) and Bewley (1999), they assume that existing workers' output falls stochastically from its normal level when their wages fall below a "reference point" which is equal to their lagged-expected wage. They formulate the model game-theoretically and show that it has a unique sub-game perfect equilibrium with the following properties: existing workers experience downward wage rigidity, as well as destruction of output following negative shocks due to layoffs or loss of morale; newly hired workers earn relatively flexible wages, but not as much as in the benchmark without reference dependence; and market tightness is more volatile than under this benchmark.

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us