The Economic Fluctuations and Growth

October 27, 2017
Mark A. Aguiar of Princeton University and John V. Leahy of the University of Michigan, Organizers

Matthew Smith, Department of Treasury; Danny Yagan, the University of California at Berkeley and NBER; and Owen M. Zidar and Eric Zwick, the University of Chicago and NBER

Capitalists in the Twenty-First Century

Have passive rentiers replaced the working rich at the top of the U.S. income distribution? Using administrative data linking 10 million firms to their owners, Smith, Yagan, Zidar, and Zwick show that private business owners who actively manage their firms are key for top income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top earners receive private business income--most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries. Profit falls substantially after premature owner deaths. Top-owned firms are twice as profitable per worker as other firms despite similar risk, and rising profitability without rising scale explains most of their profit growth. Together, these facts indicate that the working rich remain central to rising top incomes in the twenty-first century.

Ricardo J Caballero and Alp Simsek, MIT and NBER

A Risk-centric Model of Demand Recessions and Macroprudential Policy (NBER Working Paper No. 23614)

A productive capacity generates output and risks, both of which need to be absorbed by economic agents. If they are unable to do so, output and risk gaps emerge. Risk gaps close quickly: A decline in the interest rate increases the Sharpe ratio of the risky assets and equilibrates the risk markets. If the interest rate is constrained from below (or the policy response is slow), the risk markets are instead equilibrated via a decline in asset prices. However, the drop in asset prices also drags down aggregate demand and generates a recession, which further drags prices down, and so on. If economic agents are optimistic about the speed of recovery, a decline in asset prices leads to a large increase in the Sharpe ratio that stabilizes the drop. If they are pessimistic, the economy becomes highly susceptible to downward spirals due to the feedback between asset prices and aggregate demand. The fear of a recession with a downward price spiral also reduces the interest rate during the boom. When beliefs are heterogenous, optimists take too much risk from a social point of view since they do not internalize their positive effect on asset prices and aggregate demand during recessions. Macroprudential policy can improve outcomes, and is procyclical as the negative aggregate demand effect of prudential tightening is more easily offset by interest rate policy during booms than during recessions. Forward guidance policies are also effective, but their robustness weakens as agents become more pessimistic. Caballero and Simsek's model also illustrates that interest rate rigidities and speculation generate endogenous price volatility that exacerbates demand recessions.

Jason Faberman, Federal Reserve Bank of Chicago; Andreas I. Mueller, Columbia University and NBER; and Ayşegül Şahin and Giorgio Topa, Federal Reserve Bank of New York

Job Search Behavior among the Employed and Non-Employed (NBER Working Paper No. 23731)

Using a unique new survey, we study the relationship between search effort and outcomes for employed and non-employed workers. Faberman, Mueller, Şahin, and Topa find that the employed fare better than the non-employed in job search: they receive more offers per application and are offered higher pay even after controlling for observable characteristics. Researchers use an on-the-job search model with endogenous search effort and find that unobserved heterogeneity explains less than a third of the residual wage offer differential. The model calibrated using various moments from our survey provides a good fit to the data and implies a reasonable flow value of unemployment.

Germán Gutiérrez, New York University, and Thomas Philippon, New York University and NBER

Declining Competition and Investment in the U.S. (NBER Working Paper No. 23583)

The U.S. business sector has under-invested relative to Tobin's Q since the early 2000's. Gutiérrez and Philippon argue that declining competition is partly responsible for this phenomenon. They use a combination of natural experiments and instrumental variables to establish a causal relationship between competition and investment. Within manufacturing, Researchers show that industry leaders invest and innovate more in response to exogenous changes in Chinese competition. Beyond manufacturing they show that excess entry in the late 1990's, which is orthogonal to demand shocks in the 2000's, predicts higher industry investment given Q. Finally, Gutiérrez and Philippon provide some evidence that the increase in concentration can be explained by increasing regulations.

Stefania Albanesi, the University of Pittsburgh and NBER; Giacomo De Giorgi, GSEM-University of Geneva; and Jaromir Nosal, Boston College

Credit Growth and the Financial Crisis: A New Narrative (NBER Working Paper No. 23740)

A broadly accepted view contends that the 2007-09 financial crisis in the U.S. was caused by an expansion in the supply of credit to subprime borrowers during the 2001- 2006 credit boom, leading to the spike in defaults and foreclosures that sparked the crisis. Albanesi, De Giorgi, and Nosal use a large administrative panel of credit file data to examine the evolution of household debt and defaults between 1999 and 2013. Their findings suggest an alternative narrative that challenges the large role of subprime credit in the crisis. Researchers show that credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high risk borrowers was virtually constant for all debt categories during this period. The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors. Albanesi, De Giorgi, and Nosal argue that previous analyses confounded life cycle debt demand of borrowers who were young at the start of the boom with an expansion in credit supply over that period.

Anmol P. Bhandari, the University of Minnesota; David Evans, the University of Oregon; Mikhail Golosov, Princeton University and NBER; and Thomas J. Sargent, New York University and NBER

Inequality, Business Cycles and Monetary-Fiscal Policy

Bhandari, Evans, Golosov, and Sargent study monetary and fiscal policy in a heterogeneous agents model with incomplete markets and sticky nominal prices. They develop numerical techniques that allow us to approximate Ramsey plans in economies with substantial heterogeneity. In a calibrated model that captures features of income inequality in the US, researchers study optimal responses of nominal interest rates and labor tax rates to productivity and cost push shocks. Optimal policy responses are an order of magnitude larger than in a representative agent economy, and for cost push shocks are of opposite signs. Taylor rules poorly approximate optimal nominal interest rates.

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