Macroeconomics & International Finance Seminars

Winter 2018

January 12
Brenda Samaniego de la Parra
"Formal Firms, Informal Workers, and Household Labor Supply in Mexico"
Host: Carl Walsh
I analyze the effects of labor regulation enforcement on firms and households in Mexico. I construct a new employer-employee-household matched panel dataset, and exploit exogenous variation caused by random worksite inspections between 2005 and 2016, to examine how formal firms respond to changes in the expected probability of getting caught hiring informal employees. I analyze firms' responses along different margins including formalization rates, separation rates, and wages. I find that inspections increase the quarterly probability that a worker will transition from an informal to a formal job within the same establishment from 14% to 20%. The quarterly probability of job separation also increases from 3.1% to 4%. There is no evidence of a change in after-tax wages for informal workers that remain employed after an inspection. This suggests the cost of registration is not levied on the newly formalized workers. Instead, wage growth for formal coworkers at inspected firms is lower, indicating that inspections induce some shifting of total compensation from already-formalized workers to newly formalized ones. I then analyze how households re-optimize their labor supply after one of their members receives the government mandated benefits that accompany a formal job. I find that unemployed spouses of workers that became formal after an inspection are more likely to remain unemployed, less likely to start a formal job, and receive higher starting wages conditional on transitioning to employment. 

January 22
David Argent
"Product Life Cycle, Learning, and Nominal Shocks"
Host: Carl Walsh
In this paper we study the role of product entry and exit in propagating nominal shocks to the real economy. Toward that goal, we show that product turnover has an extensive role in the aggregate economy and that the frequency and size of price adjustments are negatively related to a product's age. We exploit information from product-level characteristics and the timing of products' launches to provide empirical support that these stylized facts can be rationalized by an active learning motive: firms with new products are faced with demand uncertainty and can optimally obtain valuable information by varying their prices. Building on the empirical findings, we construct a menu cost model with active learning and quantify the importance of age-dependent pricing moments for the propagation of nominal shocks. In the calibrated version of our model, the cumulative response of output to a nominal shock more than doubles compared to the standard menu cost model and this response is higher during economic booms.

January 24
Ryan Kim
"The Effect of the Credit Crunch on Output Price Dynamics: The Corporate Inventory and Liquidity Management Channel"
Host: Carl Walsh
I study how a credit crunch affects output price dynamics. I build a unique micro-level dataset that combines scanner-level prices and quantities with producer information, including the producer's banking relationships, inventory, and cash holdings. I exploit the Lehman Brothers' failure as a quasi-experiment and find that firms facing a negative credit supply shock decrease their output prices approximately 15% relative to their unaffected counterparts. I hypothesize that such firms reduce prices to liquidate inventory and to generate additional cash flow from the product market. I find strong empirical support for this hypothesis: (i) firms facing a negative bank shock temporarily decrease their prices and inventory and increase their market share and cash holdings relative to their counterparts, and (ii) this effect is stronger for firms and sectors with high initial inventory or small initial cash holdings. To discuss the aggregate implications of these findings, I integrate this micro-level study into a business cycle model by explicitly allowing for two identical groups of producers facing different degrees of credit supply shock. The model predicts that a negative credit supply shock leads to a large temporary drop in aggregate inflationas a result of the aggressive liquidation of inventoryfollowed by an increase in inflation as producers eventually run out of inventory. This prediction for inflation and inventory dynamics is fully consistent with observations for the 2007-09 recession.

January 26
Nicholas Kozeniauskas
"What's Driving the Decline in Entrepreneurship?"
Host: Carl Walsh
Recent research shows that entrepreneurial activity has been declining in the US in recent decades. Given the role of entrepreneurship in theories of growth, job creation and economic mobility this has generated considerable concern. This paper investigates why entrepreneurship has declined. It documents that (1) the decline in entrepreneurship has been more pronounced for higher education levels, implying that at least part of the force driving the changes is not skill-neutral, and (2) the size distribution of entrepreneur businesses has been quite stable. Together with a decline in the entrepreneurship rate the second fact implies a shift of economic activity towards non-entrepreneur firms. Guided by this evidence I evaluate explanations for the decline in entrepreneurship based on skill-biased technical change, increases in the fixed costs of businesses which could be due to technological change or increases in regulations, and changes in technology that have benefited large non-entrepreneur firms. I do this using a general equilibrium model of occupational choice calibrated with a rich set of moments on occupations, income distributions and firm size distributions. I find that an increase in fixed costs explains most of the decline in the aggregate entrepreneurship rate and that skill-biased technical change can fully account for the larger decrease in entrepreneurship for more educated people when combined with the other forces.

February 2
Cynthia Balloch
"Inflows and Spillovers: Tracing the Impact of Bond Market Liberalization"
Host: Carl Walsh
As bond markets grow, this affects not only the financing decisions of firms, but also the lending behavior of banks, and the resulting equilibrium allocation of credit and capital. This paper makes three contributions to understand the impact of bond market liberalization. First, using evidence from reforms in Japan that gave borrowers selective access to bond markets during the 1980s, it shows that firms that obtained access to the bond market used bond issuance to pay back bank debt. More importantly, this large, positive funding shock led banks to increase lending to small and medium enterprises and real estate firms. Second, it proposes a model of financial frictions that is consistent with the empirical findings, and uses the model to derive general conditions under which bond liberalization has this effect on banks. The model predicts that bond liberalization can significantly worsen the quality of the pool of bank borrowers, and so lower bank profitability. These results suggest that Japan's bond market liberalization contributed to both the real estate bubble in the 1980s and bank problems in the 1990s. Third, the model implies that bond markets amplify the effects of shocks to the risk-free rate and firm borrowing, in addition to attenuating the effects of financial shocks.

February 27
Pablo Guerron-Quintana, Boston College
"Recurrent Bubbles, Economic Fluctuations, and Growth"
Host: Hikaru Saijo
We propose a model that generates permanent effects on economic growth following a recession (super hysteresis). Recurrent bubbles are introduced to an otherwise standard infinite-horizon business-cycle model with liquidity scarcity and endogenous productivity. In our setup, bubbles promote growth because they provide liquidity to constrained investors. Bubbles are sustained only when the financial system is under-developed. If the financial development is in an intermediate stage, recurrent bubbles can be harmful in the sense that they decrease the unconditional mean and increase the unconditional volatility of the growth rate relative to the fundamental equilibrium in the same economy. Through the lens of an estimated version of our model fitted to U.S. data, we argue that 1) there is evidence of recurrent bubbles; 2) the Great Moderation results from the collapse of the monetary bubble in the late 1970s; and 3) the burst of the housing bubble is partially responsible for the post-Great Recession dismal recovery of the U.S. economy.

March 2
Jing Zhang
"Structural Change and Global Trade"
Host: Ken Kletzer
Services, which are less traded than goods, rose from 50 percent of world expenditure in 1970 to 80 percent in 2015. Such structural change likely held back “openness”—global trade over GDP—over this period. To quantify this impact, we build a general equilibrium trade model with non-homothetic preferences and input-output linkages. Openness would have been 70 percent in 2015, 23 percentage points higher than the data, if expenditure patterns were unchanged from 1970. Structural change is critical for estimating the dynamics of trade barriers and welfare gains from trade. Ongoing structural change implies declining openness, even without rising protectionism.

March 5
Gianluca Benigno, LSE
"Stagnation Traps"
Host: Ken Kletzer
We provide a Keynesian growth theory in which pessimistic expectations can lead to very persistent, or even permanent, slumps characterized by unemployment and weak growth. We refer to these episodes as stagnation traps, because they consist in the joint occurrence of a liquidity and a growth trap. In a stagnation trap, the central bank is unable to restore full employment because weak growth depresses aggregate demand and pushes the interest rate against the zero lower bound, while growth is weak because low aggregate demand results in low profits, limiting firms' investment in innovation. Policies aiming at restoring growth can successfully lead the economy out of a stagnation trap, thus rationalizing the notion of job creating growth.

March 6
Oleg Itskhoki, Princeton
"Exchange Rate Disconnect in General Equilibrium"
Host: Chenyue Hu
We propose a dynamic general equilibrium model of exchange rate determination, which simultaneously accounts for all major puzzles associated with nominal and real exchange rates. This includes the Meese-Rogoff disconnect puzzle, the PPP puzzle, the terms-of-trade puzzle, the Backus-Smith puzzle, and the UIP puzzle. The model has two main building blocks — the driving force (or the exogenous shock process) and the transmission mechanism — both crucial for the quantitative success of the model. The transmission mechanism — which relies on strategic complementarities in price setting, weak substitutability between domestic and foreign goods, and home bias in consumption — is tightly disciplined by the micro-level empirical estimates in the recent international macroeconomics literature. The driving force is an exogenous small but persistent shock to international asset demand, which we prove is the only type of shock that can generate the exchange rate disconnect properties. We then show that a model with this financial shock alone is quantitatively consistent with the moments describing the dynamic comovement between exchange rates and macro variables. Nominal rigidities improve on the margin the quantitative performance of the model, but are not necessary for exchange rate disconnect, as the driving force does not rely on the monetary shocks. We extend the analysis to multiple shocks and an explicit model of the financial sector to address the additional Mussa puzzle and Engel’s risk premium puzzle.

March 12
Cynthia Wu, Chicago Booth
"A Shadow Rate New Keynesian Model"
Host: Ken Kletzer
We propose a tractable and coherent framework that captures both conventional and unconventional monetary policies with the shadow fed funds rate. Empirically, we document the shadow rate's resemblance to an overall financial conditions index, various private interest rates, the Fed's balance sheet, and the Taylor rule. Theoretically, we demonstrate the impact of unconventional policies, such as QE and lending facilities, on the economy is identical to that of a negative shadow rate, making the latter a useful summary statistic for these policies. Our model generates the data consistent result: a negative supply shock is always contractionary. It also salvages the New Keynesian model from the zero lower bound induced structural break.

March 13
Gisle James Natvik, BI Norwegian Business
"MPC Heterogeneity and Household Balance Sheets"
Host: Carl Walsh
ABSTRACT: With Norwegian administrative panel data we use sizable lottery prizes to explore the heterogeneity in households' marginal propensity to consume (MPC). Spending spikes in the year of winning, and typically falls back to the pre-prize level after 3 to 5 years. Controlling for all items on household's balance sheets and characteristics such as education, household size and income, MPCs primarily vary with the amount won and liquid assets held. Among the winners who are in both the least liquid and the lowest prize-size quartiles, nearly all is spent within the year of winning, whereas among winners in both the most liquid and the highest prize-size quartiles, on average one quarter is spent within the year of winning. Many households are wealthy, yet illiquid, and have high MPCs, consistent with 2-asset models of consumer choice.

Fall 2017

Tuesday 1:403:00 p.m.
499 Engineering II

October 3
Zheng Liu, SF Fed
"The Slow Job Recovery in a Macro Model of Search and Recruiting Intensity"
Host: Grace Gu & Chenyue Hu
An estimated model with labor search frictions and endogenous variations in search intensity and recruiting intensity does well in explaining the slow job recovery after the Great Recession. The model features a sunk cost of vacancy creation, under which firms rely on adjusting both the number of vacancies and recruiting intensity to respond to aggregate shocks. This stands in contrast to the textbook model with free entry, which implies constant recruiting intensity. Our estimation suggests that fluctuations in search and recruiting intensity help substantially bridge the gap between the actual and model-predicted job filling and finding rates.

October 10
Ben Hebert, Standford GSB
"Optimal Corporate Taxation Under Financial Frictions"
Host: Chenyue Hu
We study the optimal design of corporate taxation when firms are subject to financial constraints. We find that corporate taxes should be levied on unconstrained firms, since those firms value resources inside the firm less than financially constrained firms. When the government has complete information about which firms are and are not constrained, this principle is sufficient to characterize optimal corporate tax policy. When the government (and other outsiders) do not know which firms are and are not constrained, the government can use the payout policies of firms to elicit whether or not the firm is constrained, and assess taxes accordingly. Using this insight, we discuss conditions under which a tax on dividends paid is the optimal corporate tax. We then extend this result to a dynamic setting, showing that, if the government lacks commitment, the optimal sequence of tax mechanisms can be implemented with a dividend tax. With commitment, we reach a very different conclusion– a lump sum tax on firm entry is optimal. We argue that these two models demonstrate an underlying principle, that optimal corporate taxes should avoid exacerbating financial frictions, and demonstrate that the structure of the financial frictions can drastically change the optimal policy.

October 17
Michael Weber, Chicago Booth
"Price Rigidities and the Granular Origins of Aggregate Fluctuations"
Host: Chenyue Hu

October 31
Julio Garin, Claremont McKenna
"Repatriation Taxes"
Host: Grace Gu & Carl Walsh
We present a model of a multinational firm to quantify the effects of policy changes in repatriation taxes rates - taxes that firms pay on profits remitted from abroad. Our model captures the full dynamic response of the firm from the time they expect a policy change, through the enactment of the policy change, to the lasting effects of the policy. We find that a failure to account for the full dynamics surrounding a reduction in repatriation tax rates overstates the amount of profits repatriated from abroad and underestimates tax revenue losses. Additionally, since most multinational firms have access to external credit markets, policy changes have a relatively small impact on a firm's hiring and investment decisions, as access to credit makes these decisions relatively independent from changes in the flow of assets from abroad. 

November 7
Eric Swanson, UC Irvine
"Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets"
Host: Grace Gu
I extend the methods of G ̈urkaynak, Sack, and Swanson (2005) to separately identify the effects of Federal Reserve forward guidance and large-scale asset purchases (LSAPs) during the 2009–15 U.S. zero lower bound (ZLB) period. I find that both forward guidance and LSAPs had substantial and highly statistically significant effects on medium-term Treasury yields, stock prices, and exchange rates, comparable in magnitude to the effects of the federal funds rate before the ZLB. Forward guidance was more effective than LSAPs at moving short-term Treasury yields, while LSAPs were more effective than forward guidance and the federal funds rate at moving longer-term Treasury yields, corporate bond yields, and interest rate uncertainty. However, the effects of forward guidance were not very persistent, with a half-life of 1–4 months. The effects of LSAPs seem to be more persistent. I conclude that, overall in terms of these criteria, LSAPs were a more effective policy tool than forward guidance during the ZLB period.

November 14
Michael Magill, USC
"Unconventional Monetary Policy and the Safety of the Banking System"
Host: Carl Walsh & Hikaru Saijo
This paper presents a simple general equilibrium model which simultaneously incorporates the banking sector and the monetary and macro-prudential policy of the Central Bank. Banks are viewed  as intermediaries which channel  funds from  cash pools and depositors who insist on the complete safety of their funds, and investors who accept risks, to borrowers who invest in risky projects. Bank debt is  rendered safe by the explicit or implicit guarantee of the government. The presence of cash pools  which can either buy (short-term) government bills or lend to banks implies that the choice of an interest rate by the Central Bank determines the cost of funds for the banks. The government insurance of debt gives it an advantage over equity which implies that capital requirements are needed to limit bank leverage. The paper studies the possible monetary and prudential policies of the Central Bank and their effect on the banking equilibrium, for economies with a high demand for a safe asset---a notion precisely defined in the paper. We show that the conventional monetary and prudential tools, the interest rate and the capital requirements of banks, are not independent instruments, and that there is no choice of policy which can lead to a Pareto optimum. However enlarging the monetary policy toolkit by adding the payment of interest on bank reserves and QE policies can, in conjunction with appropriate capital requirements, restore the Pareto optimality of the banking equilibrium.

November 28
Toan Phan, UNC
"Self-enforcing Debt Limits and Costly Default in General Equilibrium"
Host: Grace Gu
We establish a novel determination of self-enforcing debt limits at the present value of default cost in a general competitive equilibrium. Agents can trade state-contingent debt but cannot commit to repay. If an agent defaults, she loses a fraction of her current and future endowments. Moreover, she is excluded from borrowing but is still allowed to save, as in Bulow and Rogoff (1989). Competition implies that debt limits are not-too-tight, as in Alvarez Jermann (2000). Under a mild condition that the endowment loss from default is bounded away from zero, we show that the equilibrium interest rates must be sufficiently high that the present value of aggregate endowments is finite. Not-too-tight debt limits are exactly equal to the present value of endowment loss due to default. The determination of competitive debt limits based on endowment loss is isomorphic to the determination of public debt sustainable by tax revenues. We also show that competitive equilibria with self-enforcingdebt and costly default are equivalent to Arrow-Debreu equilibria with limitedpledgeability, as defined by Gottardi and Kubler (2015).

December 5 - CANCELLED!
Saki Bigio, UCLA
"Optimal Debt-Maturity Management"
Host: Alonso Villacorta
We solve the problem of a government that wants to smooth financial expenses by choosing over a continuum of bonds of different maturity. The planner takes into account that adjusting debt too fast can affect prices. At the same time, it wants to insure against several sources of risk: (a) income risk, (b) interest rate (price) risk, (c) liquidity risk (prices can become more sensitive to issuance’s), and (d) the risks in the cost of default. We characterize this infinite dimensional control problem to aid the design of the debt-maturity profile in response to these forms of risk.