International Seminar on Macroeconomics

An NBER International Seminar on Macroeconomics took place on June 27-28 in London. Research Associates Kristin Forbes of MIT and Pierre-Olivier Gourinchas of University of California, Berkeley organized the meeting. These researchers' papers were presented and discussed:

Francois Fontaine, Paris School of Economics; Julien Martin, UQAM; and Isabelle Mejean, Ecole Polytechnique

Price Discrimination Within and Across EMU Markets: Evidence from French Exporters

Fontaine, Martin, and Mejean study the cross-sectional dispersion of prices paid by EMU importers for French products. A third of the dispersion observed within a narrow product category is attributable to price discrepancies within a seller, i.e. exporting firms charging different prices to individual partners in their export portfolio. While lower than in the rest of the European Union, the level of such price discrimination is substantial within the euro area, with a median coefficient of variation of prices of 30%. This mostly originates from firms charging different prices to buyers within a given destination country. The researchers document the heterogeneity across French exporters in their propensity to price discriminate. Large multiproduct exporters tend to adopt more discriminatory pricing strategies. Retailers and small exporters instead charge less dispersed and sometimes nearly uniform prices. Fontaine, Martin, and Mejean also find that price discrimination is stronger for more differentiated and more durable products. This heterogeneity in firms' propensity to price discriminate has important consequences in the aggregate since price dispersion at the top of the distribution of exports is more than twice larger than the magnitude of price discrepancies within small exporters.

Shang-Jin Wei, Columbia University and NBER, and Yinxi Xie, Columbia University

Monetary Policy in a World of Global Supply Chains

Wei and Xie study the implications of global supply chains for the design of monetary policy. They build a small-open economy New Keynesian model with multiple stages of production. Within the family of simple monetary policy rules, a rule that allows for targeting production-stage-specific producer price inflation outperforms alternative policy rules. The optimal weights on different stages of production are in general not proportional to the sales volume of the stages. If the price is less sticky in upstream production, the relative weight on upstream would be smaller. If the researchers have to choose among aggregate price indicators, targeting PPI inflation is significantly better than targeting CPI inflation alone. As the production chain becomes larger, the weight on PPI inflation should also rise since PPI index occupies a larger proportion in the welfare loss function in contrast to CPI index. Finally, trade frictions such as tariff war also affect the optimal monetary policy rule by altering the weights on the prices in different stages of production.

Olivier Coibion, University of Texas at Austin and NBER; Yuriy Gorodnichenko, University of California, Berkeley and NBER; Saten Kumar, AUT University; and Mathieu Pedemonte, University of California, Berkeley

Inflation Expectations as a Policy Tool? (NBER Working Paper 24788)

Coibion, Gorodnichenko, Kumar, and Pedemonte assess whether central banks should use inflation expectations as a policy tool for stabilization purposes. They review recent work on how expectations of agents are formed and how they affect their economic decisions. Empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear, especially for firms. Two additional limitations prevent policy-makers from being able to actively manage inflation expectations. First, available surveys of firms' expectations are systematically deficient, which can only be addressed through the creation of large, nationally representative surveys of firms. Second, neither households' nor firms' expectations respond much to monetary policy announcements in low-inflation environments. The researchers provide suggestions for how monetary policy-makers can pierce this veil of inattention through new communication strategies. At this stage, the answer to the question of whether inflation expectations should be used as an active policy tool is "not yet".

Sergio de Ferra, Stockholm University; Kurt Mitman, Institute for International Economic Studies; and Federica Romei, Stockholm School of Economics

Household Heterogeneity and the Transmission of Foreign Shocks

De Ferra, Mitman, and Romei study the role of heterogeneity in the transmission of foreign shocks. They consider a small open economy with household heterogeneity and nominal rigidities that experiences a current account reversal. The researchers find that the households' portfolio composition is a key determinant of the magnitude of the contraction associated with sudden stop in capital inflows. The contraction is more severe when households are leveraged and owe debt in foreign currency ("Original sin"). In addition, de Ferra, Mitman, and Romei find that in this setting a large exchange rate devaluation that eliminates achieves full employment may be detrimental due to the foreign debt revaluation it entails ("Fear of floating").

Chris Redl, Bank of England

Uncertainty Matters: Evidence from Close Elections

Redl uses a data rich environment to produce direct econometric estimates of macroeconomic and financial uncertainty for 11 advanced nations. These indices exhibit significant independent variation from popular proxies and provide a refinement of the influential work of Jurado et al. (2015) that results in improved real-time performance. Redl uses this new data in combination with narrative evidence to jointly identify macro uncertainty and financial shocks. Macro uncertainty shocks are identified with close elections and financial shocks with financial stress during financial crises. He finds that macro uncertainty shocks matter for the majority of countries and that the real effects of macro uncertainty shocks are generally larger conditioning on close elections. Redl finds that macro uncertainty shocks are more important, on average over our sample, in explaining business cycle fluctuations in real variables than financial shocks. These results are robust to controlling for news shocks and global uncertainty as well as a variety of shocks considered to be important drivers of the business cycle.

Ulrike Malmendier, University of California, Berkeley and NBER; Demian Pouzo, University of California, Berkeley; and Victoria Vanasco, CREI

Investor Experiences, Capital Flows and Debt Pricing (NBER Working Paper 24697)

How do macro-financial shocks affect investor behavior and market dynamics? Recent evidence suggests long-lasting effects of personally experienced outcomes on investor beliefs and investment but also significant differences across older and younger generations. Malmendier, Pouzo, and Vanasco formalize experience-based learning in an OLG model, where different cross-cohort experiences generate persistent heterogeneity in beliefs, portfolio choices, and trade. The model allows them to characterize a novel link between investor demographics and the dependence of prices on past dividends, while also generating known features of asset prices, such as excess volatility and return predictability. The model produces new implications for the cross-section of asset holdings, trade volume, and investors' heterogeneous responses to recent financial crises, which the researchers show to be in line with the data.

Nuno T. Coimbra, Paris School of Economics

Sovereigns at Risk: A Dynamic Model of Sovereign Debt and Banking Leverage

Coimbra develops a dynamic model with heterogeneous investors and sovereign default to analyze the dynamic link between banking sector capitalization and sovereign bond yields. The banking sector is modelled as operating under a Value-at-Risk (VaR) constraint, which can bind occasionally. As default risk rises, the constraint may bind, generating a fall in demand for sovereign bonds that can be accompanied by a rise in the risk premium if other agents are more risk averse. In turn, the rise in risk premium leads to a feedback effect through debt accumulation dynamics and the probability of government default.

Julia Bevilaqua, Galina Hale, and Eric Tallman, Federal Reserve Bank of San Francisco

Corporate Spreads, Sovereign Spreads, and Crises

Bevilaqua, Hale, and Tallman document that positive correlation between corporate and sovereign cost of funds borrowed on global capital markets weakens during periods of unusually high sovereign spreads, when corporate borrowers are able to issue debt that is priced at lower rates than sovereign debt. This state-dependent correlation between sovereign and corporate cost of funds has not been previously documented in the literature. The researchers demonstrate that this stylized fact is not explained by a different composition of borrowers issuing debt during periods of high sovereign spreads or by the relationship between corporate and sovereign credit ratings. The decline in the correlation between corporate yields and sovereign yields is observed across countries and industries as well as for a given borrower over time. Bevilaqua, Hale, and Tallman propose a simple information model that rationalizes their empirical observations: when sovereign spreads are high and more volatile, spreads on corporate debt are less correlated with spreads on sovereign debt. The calibrated model matches well the empirical correlation between sovereign and corporate cost of funds during normal and crisis times and is able to explain the heterogeneity in the estimates across market segments.

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