Economic Fluctuations and Growth Research

Members of the NBER's Economic Fluctuations and Growth Research Program met on July 14, 2018 in Cambridge. Research Associates Virgiliu Midrigan of New York University and Hélène Rey of London Business School organized the meeting. These researchers' papers were presented and discussed:

Alessandra Fogli, Federal Reserve Bank of Minneapolis, and Veronica Guerrieri, University of Chicago and NBER

The End of the American Dream? Inequality and Segregation in US Cities

Since the '80s, the U.S. has experienced not only a steady increase in income inequality, but also a contemporaneous increase in residential segregation by income. Using U.S. Census data, Fogli and Guerrieri document a positive correlation between income inequality and residential segregation between 1980 and 2010, both across time and across space, at the MSA level. They then develop a general equilibrium overlapping generations model where parents choose the neighborhood where to raise their children and invest in their children's human capital. In the model, segregation and inequality amplify each other because of a local spillover that affects the returns to education. The researchers calibrate the model to 1980 using Census data and the micro estimates of the local spillover effect derived by Chetty and Hendren (2018b). Fogli and Guerrieri then hit the economy with a skill premium shock and show that 20% of the increase in inequality in the short run, and 29% in the long run can be attributed to the feedback effect of the local spillover.

Gauti B. Eggertsson, Brown University and NBER, and Jacob Robbins and Ella Wold, Brown University

Kaldor and Piketty's Facts: The Rise of Monopoly Power in the United States (NBER Working Paper No. 24287)

The macroeconomic data of the last thirty years has overturned at least two of Kaldor's famous stylized growth facts: constant interest rates, and a constant labor share. At the same time, the research of Piketty and others has introduced several new and surprising facts: an increase in the financial wealth-to-output ratio in the U.S., an increase in measured Tobin's Q, and a divergence between the marginal and the average return on capital. Eggertsson, Robbins, and Wold argue that these trends can be explained by an increase in market power and pure profits in the U.S. economy, i.e., the emergence of a non-zero-rent economy, along with forces that have led to a persistent long term decline in real interest rates. The researchers make three parsimonious modifications to the standard neoclassical model to explain these trends. Using recent estimates of the increase in markups and the decrease in real interest rates, they show that their model can quantitatively match these new stylized macroeconomic facts.

Gita Gopinath and Jeremy C. Stein, Harvard University and NBER, "Banking, Trade and the Making of a Dominant Currency" (NBER Working Paper No. 24485)

Gopinath and Stein explore the interplay between trade invoicing patterns and the pricing of safe assets in different currencies. Their theory highlights the following points: 1) a currency's role as a unit of account for invoicing decisions is complementary to its role as a safe store of value, 2) this complementarity can lead to the emergence of a single dominant currency in trade invoicing and global banking, even when multiple large candidate countries share similar economic fundamentals, 3) firms in emerging-market countries endogenously take on currency mismatches by borrowing in the dominant currency, 4) the expected return on dominant currency safe assets is lower than that on similarly safe assets denominated in other currencies, thereby bestowing an "exorbitant privilege" on the dominant currency. The theory thus provides a unified explanation for why a dominant currency is so heavily used in both trade invoicing and in global finance.

Anmol P. Bhandari and Ellen McGrattan, University of Minnesota and NBER, "Sweat Equity in U.S. Private Business" (NBER Working Paper No. 24520)

Bhandari and McGrattan first provide evidence that existing measures of business incomes and valuations based on widely-used surveys such as the Survey of Consumer Finances are mismeasured. They then develop a theory disciplined by U.S. national accounts and business census data to measure net incomes and private business sweat equity -- which is the value of time to build customer bases, client lists, and other intangible assets. The researchers estimate an aggregate sweat equity value of 0.65 times GDP, with little cross-sectional dispersion in valuations when compared to business net incomes and large cross-sectional dispersion in rates of return. The estimate of sweat equity is close to the estimate of marketable fixed assets used in production by private businesses, implying a high ratio of intangible to total assets. The researchers use the model to evaluate the impact of greater tax compliance of private businesses and lower tax rates on the net income of both privately held and publicly traded businesses. They find larger sectoral and aggregate effects from the tax policy experiments relative to studies that abstract from private business and, in particular, the accumulation of sweat capital. Finally, Bhandari and McGrattan show that their results are robust to including non-pecuniary benefits of business ownership.

Davide Debortoli, Universitat Pompeu Fabra, and Jordi Galí, CREI and NBER

Monetary Policy with Heterogeneous Agents: Insights from TANK models

Heterogeneous agents New Keynesian (HANK) models are shown to differ from their representative agent (RANK) counterparts along two dimensions: differences in average consumption at any point in time between constrained and unconstrained households, and consumption heterogeneity within the subset of unconstrained households. These two factors are captured in a simple way by two "wedges" that appear in an aggregate Euler equation, and whose behavior can be traced in response to any aggregate shock, allowing Debortoli and Galí to assess their quantitative significance. A simple two-agent New Keynesian (TANK) model abstracts completely from heterogeneity within unconstrained agents, but is shown to capture reasonably well the implications of a baseline HANK model regarding the effects of aggregate shocks on aggregate variables. The researchers discuss the implications of our findings for the design of optimal monetary policy.

Fatih Karahan and Ayşegül Şahin, Federal Reserve Bank of New York, and Benjamin Pugsley, University of Notre Dame

Demographic Origins of the Startup Deficit

Karahan, Pugsley, and Sahin study the causes of the declining startup rate over the past three decades. The stability of firms' lifecycle dynamics throughout this period along with the widespread nature of the declining startup rate place strong restrictions on potential explanations. They show that declines in the growth rate of the labor force explain an important share of the startup rate decline while leaving incumbent dynamics unaffected in a Hopenhayn-style firm dynamics model. Moreover, using cross-sectional demographic variation the researchers estimate a quantitatively and statistically significant labor supply growth elasticity of the startup rate, which is robust to alternative specifications. The findings suggest that the decline in the growth rate of the working age population through its general equilibrium effects on firm dynamics are an important driver of the decline in firm entry.

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