Economic Fluctuations and Growth

Members of the NBER's Economic Fluctuations and Growth Program met July 13 in Cambridge. Research Associate Amir Sufi of University of Chicago and NBER and Silvana Tenreyro of London School of Economics organized the meeting. These researchers' papers were presented and discussed:

Masao Fukui, MIT, and Emi Nakamura and Jón Steinsson, University of California, Berkeley and NBER

Women, Wealth Effects, and Slow Recoveries (NBER Working Paper No. 25311)

Business cycle recoveries have slowed in recent decades. This slowdown comes entirely from female employment: as women's employment rates converged towards men's over the past half-century, the growth rate of female employment slowed. Fukui, Nakamura, and Steinsson ask whether this slowdown in female employment caused the slowdown in overall employment during recent business cycle recoveries. Standard macroeconomic models with "balanced growth preferences" imply that this cannot be the cause, since the entry of women "crowds out" men in the labor market almost one-for-one. The researchers estimate the extent of crowd out of men by women in the labor market using state-level panel data and find that it is small, contradicting the standard model. Fukui, Nakamura, and Steinsson show that a model with home production by women can match their low estimates of crowd out. This model--calibrated to match their cross-sectional estimate of crowd out--implies that 70% of the slowdown in recent business cycle recoveries can be explained by female convergence.

Julian Kozlowski, Federal Reserve Bank of St Louis; Laura Veldkamp, Columbia University and NBER; and Venky Venkateswaran, New York University and NBER

The Tail that Wags the Economy: Beliefs and Persistent Stagnation (NBER Working Paper No. 21719)

The Great Recession was a deep downturn with long-lasting effects on credit, employment and output. While narratives about its causes abound, the persistence of GDP below pre-crisis trends remains puzzling. Kozlowski, Veldkamp, and Venkateswaran propose a simple persistence mechanism that can be quantified and combined with existing models. Their key premise is that agents don't know the true distribution of shocks, but use data to estimate it non-parametrically. Then, transitory events, especially extreme ones, generate persistent changes in beliefs and macro outcomes. Embedding this mechanism in a neoclassical model, the researchers find that it endogenously generates persistent drops in economic activity after tail events.

Pascal Michaillat, Brown University and NBER, and Emmanuel Saez, University of California, Berkeley and NBER

Resolving New Keynesian Anomalies with Wealth in the Utility Function

The New Keynesian model suffers from several anomalies at the zero lower bound: explosive output and inflation, forward-guidance puzzle, and explosive government-spending multiplier. To resolve these anomalies, Michaillat and Saez introduce relative wealth into households' utility function; the justification is that relative wealth is a marker of social status, and people value high social status. Since people save not only for future consumption but also to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the equilibrium at the zero lower bound becomes a source instead of a saddle, which resolves all the anomalies.

Francesco Lippi, LUISS University & EIEF, and Fabrizio Perri, Federal Reserve Bank of Minneapolis

Unequal Growth (slides)

Lippi and Perri argue that changes in household income dynamics in the United States over the past 50 years can account, at the same time, for the increase in income inequality and for a significant portion of the US slowdown in aggregate growth. The researchers first apply, using US household panel data for the period 1967-2014, a simple statistical decomposition showing that aggregate growth is the sum of average growth across households plus the covariance between income growth income and levels. The data shows that, in a statistical sense, most of the growth slowdown is accounted by a fall in the covariance between income levels and income growth. It also shows that the fall in covariance is the result of income inequality increasing, coupled with a negative correlation between income growth and income levels. Second, the researchers develop a simple structural model of household income dynamics. Lippi and Perri introduce changes to income dynamics that are qualitatively consistent with globalization: in recent years it is harder for any household to experience sustained income growth, but, if it does so, it grows faster than in earlier years. These changes can generate patterns of inequality, aggregate growth and co-movement between growth and levels consistent with US micro and macro data.

Andreas Fagereng, Statistics Norway; Martin Blomhoff Holm, University of Oslo; Benjamin Moll, Princeton University and NBER; and Gisle Natvik, BI Norwegian Business School

Saving Behavior Across the Wealth Distribution: The Importance of Capital Gains

Do wealthier households save a larger share of their incomes than poorer ones? Fagereng, Holm, Moll, and Natvik use Norwegian administrative panel data on income and wealth to examine how saving rates vary across the wealth distribution. They compare their findings to the prediction of workhorse macro models that saving rates are either independent of or decreasing with wealth. The researchers find that the relation between saving rates and wealth depends on whether saving includes capital gains. Saving rates net of capital gains ("net saving rates") are approximately constant across the wealth distribution, seemingly consistent with workhorse models. However, saving rates including capital gains ("gross saving rates") increase markedly with wealth. Since the predictions of economic theories are about gross saving, Fagereng, Holm, Moll, and Natvik's findings challenge workhorse models with approximately constant saving rates. In contrast, the researcher's empirical findings are consistent with a theory featuring multiple assets and portfolio adjustment frictions.

Pablo Fajgelbaum, University of California, Los Angeles and NBER; Pinelopi K. Goldberg, Yale University and NBER; Amit Khandelwal, Columbia University and NBER; and Patrick Kennedy, University of California, Berkeley

The Return to Protectionism (NBER Working Paper No. 25638)

Fajgelbaum, Goldberg, Khandelwal, and Kennedy analyze the impacts of the 2018 trade war on the U.S. economy. They estimate import demand and export supply elasticities using changes in U.S. and retaliatory tariffs over time. Imports from targeted countries declined 31.5% within products, while targeted U.S. exports fell 11.0%. The researchers find complete pass-through of U.S. tariffs to variety-level import prices. Using a general equilibrium framework that matches these elasticities, they compute the aggregate and regional impacts. Annual consumer and producer losses from higher costs of imports were $68.8 billion (0.37% of GDP). After accounting for higher tariff revenue and gains to domestic producers from higher prices, the aggregate welfare loss was $7.8 billion (0.04% of GDP). U.S. tariffs favored sectors located in politically competitive counties, but retaliatory tariffs offset the benefits to these counties. Fajgelbaum, Goldberg, Khandelwal, and Kennedy find that tradeable-sector workers in heavily Republican counties were the most negatively affected by the trade war.

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