Macroeconomics & International Finance Seminars

Tuesday 1:40–3:00 p.m.
Online via Zoom

Fall 2019

October 17 (Note different day)
Daniel Murphy, Darden School of Business, University of Virginia
"Saving-Constrained Households"
Host: Brenda Samaniego

October 22
Victor Ortego-Marti, UC Riverside
"Efficiency in the Housing Market with Search Frictions"
Host: Brenda Samaniego
Abstract:
This paper studies efficiency in the housing market with search and matching frictions and endogenous entry of buyers. Two externalities are present in the market. Search and matching frictions produce the usual congestion and thick market externalities. The endogenous entry of buyers leads to an additional externality. As more buyers enter the market, they raise costs for other buyers. Buyers' decision to enter the market does not internalize this externality and, therefore, the decentralized equilibrium is inefficient. We show that the inefficiency persist even when the Hosios-Mortensen-Pissarides condition holds or search is directed. Further, the paper explores the potential for housing market policies to restore the efficient allocation. Finally, in a quantitative exercise we analyze how far the decentralized equilibrium is from the optimal allocation.

October 29 - CANCELLED
Ina Simonovska, UC Davis
"The Risky Capital of Emerging Markets"
Host: Grace Gu
Abstract:
We use macroeconomic data to build a panel of international capital returns over a long horizon across both developed and developing countries. We document two facts: poor and emerging markets exhibit (1) high average returns to capital and (2) high betas on US returns. We quantitatively explore whether consumption-based risk faced by a US investor can reconcile these patterns. Long-run risks lead to return disparities at least 55% as large as those in the data. Fact (2), although not a sufficient statistic, is informative about the extent of long-run risk in foreign capital, and so about fact (1). 

November 5
Andres Drenik, Columbia University
"Devaluations, Inflation, and Labor Income Dynamics"
Host: Alonso Villacorta
Abstract:
We study labor income dynamics during large devaluations in Argentina, using a novel monthly administrative employer-employee matched dataset covering the universe of formal workers in the 1996-2017 period. First, we find that during the economic recovery after the 2002 devaluation, real income inequality decreases mainly due to the sluggish adjustment at the top of the distribution. That is, the recovery of real income is heterogeneous, can be predicted by workers’ characteristics, and has large effects on inequality. Second, we find that the main driver of employment is the on-impact drop in the separation rate. We decompose the decrease in the total cross-sectional variance in a between-sector, between-firm, and within-firm components. The contribution of each component is around one-third. We explore potential mechanisms for these facts, finding empirical support for mechanisms involving an increase in inflation, heterogeneous exposure to trade, and heterogeneous degrees of unionization across the income distribution.

November 12
Jean Paul L'Huilier, Brandeis University
"Raising the Ination Target: How Much Extra Room Does it Really Give?"
Host: Hikaru Saijo
Abstract:
Less than intended. Therefore, in order to get, say, 2 pp. of eective extra room for monetary policy, the target needs to be raised to more than 4%. In this paper, we investigate the constraints on a policy aimed at achieving more monetary policy room by raising the ination target. A theoretical analysis shows that the actual eective room gained when raising the target is always smaller than the intended room. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We derive a simple formula for the eective gain expressed in terms of the potency of monetary policy. We then quantitatively investigate this channel across dierent models, based on a calibration using micro data. We nd that, by raising the target to 4%, the monetary authority only gains between 0.51 and 1.60 percentage points (pp.) of policy room (not 2 pp. as intended). In order to achieve 2 pp. additional policy room, the target needs to be raised to approximately 5%. The quantitative models allow to derive the Bayesian distribution of the eective room under parameter uncertainty.

November 19
Hanno Lustig, Stanford University
"The Government Risk Premium Puzzle"
Host: Alonso Villacorta
Abstract: 
The market value of outstanding government debt reflects the expected present discounted value of current and future primary surpluses. When the discount rate is consistent with the term structure of interest rates and equity prices and government spending growth dynamics are estimated from the data, a government risk premium puzzle emerges. Since tax revenues are pro-cyclical while government spending is counter-cyclical, the tax revenue claim has a higher risk premium and a lower value than the spending claim. This makes the value of the surplus claim negative, and implies that the U.S. government should be a creditor rather than a debtor. We resolve this puzzle by postulating a small but persistent component in expected spending growth, and infer it from the market value of the outstanding government bond portfolio. This component offsets the pro-cyclical movements in current surpluses, reducing its risk and increasing its value. The resulting model is used to study the optimal maturity structure of government debt, and to quantify deviations of the observed portfolio from the optimal one.

November 26 - CANCELLED
Julian Begenau, Stanford GSB
"Financial Regulation in a Quantitative Model of the Modern Banking System"
Host: Grace Gu / Alonso Villacorta
Abstract: 
How does the shadow banking system respond to changes in capital regulation of commercial banks? We propose a tractable quantitative general equilibrium model with regulated and unregulated banks to study the unintended consequences of capital requirements. Tightening the capital requirement from the status quo leads to a safer banking system despite riskier shadow banking activity. A reduction in aggregate liquidity provision decreases the funding costs of all banks, raising profits and investment. Calibrating the model to data on financial institutions in the U.S., the optimal capital requirement is around 17%.

Winter 2020

January 7
Ezra Oberfeld, Princeton
"Plants in Space"
Host: Ajay Shenoy
Abstract:
Firms place establishments in many locations and do so in different ways. We study a model in which heterogeneous firms place multiple establishments in heterogeneous locations. In the model, each firm trades off the benefit of reaching customers more easily with more establishments (lower transportation costs) against both cannibalizing its own demand and a span of control cost that lowers the firm's productivity. Using insights from discrete geometry, we study a tractable limiting case of this economy in which these forces operate at a local level. The model delivers clear predictions about how the span of control cost leads to partial sorting across space, about how concerns about cannibalization affect they way firms grow their local footprints, and about how these patterns are shaped by transportation costs. We confront these predictions with comprehensive microdata and find empirical support.  

January 14 - CANCELLED
Arlene Wong, Princeton
"State Dependent Effects of Monetary Policy: The Refinancing Channel"
Host: Brenda Samaniego
Abstract:
This paper studies how the impact of monetary policy depends on the distribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic life-cycle model that accounts for our findings and use it to study how the response of consumption to a change in mortgage rates depends on the distribution of savings from refinancing. These effects are strongly state dependent. We also use the model to study the impact of a long period of low interest rates on the potency of monetary policy. We find that this potency is substantially reduced both during the period and for a substantial amount of time after interest rates renormalize.

January 21
Monika Piazzesi, Stanford
"Learning About Housing Costs: Survey Evidence from the German House Price Boom"
Host: Alonso Villacorta
Abstract:
This paper uses new household survey data to study expectation formation during the ongoing German housing boom. On average, households predict reversal to trend and, hence, underestimate actual price growth. In the cross section, housing tenure is a sufficient statistic for forecasts given standard household characteristics. Renters are more optimistic than owners and therefore make better forecasts. A model of learning about housing cost explains these facts: renters pay for housing services and consequently understand their value better than owners, who simply consume them. As a result, renters are more optimistic in booms driven by an increase in rents or a recovery from financial distress. The model is also consistent with survey data on  households’ plans and reported sources of information.

February 11
Erik Hurst, Chicago Booth School of Business
"Income Growth and the Distributional Effects of Urban Spatial Sorting"
Host: Brenda Samaniego
Abstract:
We explore the impact of rising incomes at the top of the distribution on spatial sorting patterns within large U.S. cities. We develop and quantify a spatial model of a city with het- erogeneous agents and non-homothetic preferences for neighborhoods with endogenous amenity quality. As the rich get richer, demand increases for the high quality amenities available in downtown neighborhoods. Rising demand drives up house prices and spurs the development of higher quality neighborhoods downtown. This gentrification of downtowns makes poor incumbents worse off, as they are either displaced to the suburbs or pay higher rents for amenities that they do not value as much. We quantify the corresponding impact on well-being inequality. Through the lens of the quantified model, the change in the income distribution between 1990 and 2014 led to neighborhood change and spatial resorting within urban areas that increased the welfare of richer households relative to that of poorer households, above and beyond rising nominal income inequality. 

February 18
Mauricio Ulate, SF Fed
"New-Keynesian Trade: Understanding the Employment and Welfare Effects of Sector-Level Shocks"
Abstract: 
There is a growing empirical consensus suggesting that sector-specific productivity increases in a foreign country can have important unemployment and nonemployment effects across the different regions of a domestic economy. Such employment changes cannot be explained by the workhorse quantitative trade model since it assumes full employment and a perfectly inelastic labor supply curve. In this paper we show how adding downward nominal wage rigidity and home employment allows the quantitative trade model to generate changes in unemployment and nonemployment that match those uncovered by the empirical literature studying the “China Shock.” We also compare the associated welfare effects predicted by this model with those in the model without unemployment. We find that the China Shock leads to welfare increases in most states of the U.S., including many that experience unemployment during the transition. On average across U.S. states, nominal rigidities reduce the gains from the China Shock from 36 to 26 basis points.

March 3
David Wiczer, Stony Brook
"Cyclical Earnings and Employment Transitions"
Host: Brenda Samaniego
Abstract:
Recessions increase unemployment risk and decrease flows across employers and occupations. This paper connects cyclical differences in the earnings change distribution with cyclical differences in workers flows. Because earnings changes are larger when workers change jobs and even larger when switching occupation the incidence of flows directly affects the tails of the distribution of earnings changes. However, the business cycle also affects earnings outcomes conditional on a job, employment status and/or occupation change. We statistically decompose cyclical movements in the earnings change distribution into worker-flow components and ``returns'' components. This highlights that the increase in non-employment duration is particularly important for explaining large earnings losses, while earnings gains are affected by more varied causes. Then, because job and occupation switching are endogenous, we introduce a business cycle model with on-the-job search and occupational mobility, which emphasizes that cyclical fluctuations in exogenous flows, rather then endogenous choices or returns, drive dynamics of the tails of earnings growth. 

March 10
Cynthia Doniger, San Francisco Fed
"Do Greasy Wheels Curb Inequality?"
Host: Brenda Samaniego
Abstract:
I document a disparity in the cyclically of the allocative wage across levels of educational attainment. Specifically, workers with college or more exhibit an allocative wage that is highly pro-cyclical and responsive to monetary policy shocks while high school dropouts exhibit no cyclical patterns. Meanwhile, the less educated respond to monetary policy shocks on the employment margin. Embedding these  findings in an otherwise standard New Keynesian model demonstrates that heterogeneous wage rigidity results in cyclical welfare losses that exceed those of the output-gap equivalent representative agent economy. The excess welfare loss is borne by the least educated. 

Spring 2020

April 21
Kevin Donovan, Yale
"Labor Market Dynamics and Development"
Host: Ajay Shenoy
Abstract: 
We build a dataset of harmonized rotating panel labor force surveys covering 42 countries across a wide range of development and document three new empirical findings on labor market dynamics. First, labor market flows (job finding rates, employment-exit rates, and job-to-job transition rates) are two to three times higher in the poorest as compared with the richest countries. Second, employment hazards in poorer countries decline more sharply with tenure; much of their high turnover can be attributed to high separation rates among workers with low tenure. Third, wage-tenure profiles are much steeper in poorer countries, despite the fact that wage-experience profiles are flatter. We show that these facts are consistent with theories with endogenous separation, particularly job ladder and learning models. We disaggregate our results and investigate possible driving forces that may explain why separation operates differently in rich and poor countries.

April 28
Nils Mattis Gornemann, Federal Reserve Board
"Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy"
Host" Grace Gu
Abstract: 
We build a New Keynesian business-cycle model with rich household heterogeneity. A central feature is that systematic monetary policy affects idiosyncratic risk. Matching frictions render labor-market risk countercyclical and endogenous to systematic monetary policy. The exposure to such risk differs across households. The direct gains from price stability, instead, mainly fall to owners of capital. Our main result is that a majority of households prefer substantial stabilization of unemployment even if this means deviations from price stability. A monetary policy focused on unemployment stabilization helps “Main Street” by providing consumption insurance. It hurts “Wall Street” by causing adjustment costs over the business cycle. Support for inflation-focused policy depends on the tax system.

May 5
Isha Agarwal, University of British Colombia
"Banks' Foreign Currency Exposure and the Real Effects of Exchange Rate Shocks"
Host: Grace Gu
Abstract: 
Using a large and unanticipated currency appreciation shock from Switzerland in 2015, I show that net foreign currency exposure of banks is an important channel through which exchange rate shocks get transmitted to the real economy. I construct a novel dataset on net foreign currency exposures of Swiss banks and show that the appreciation of the Swiss franc enabled banks with a net foreign currency liability exposure to expand credit supply. Non-financial firms that had a pre-shock relationship with positively affected banks were able to invest more, partially offsetting the negative effects of domestic currency appreciation on exports. At the firm-level, I compare this bank-lending channel with the trade channel and the corporate balance sheet channel and show how exchange rate shocks can have heterogeneous effects on the economy depending on the relative strengths of these channels. Extending my findings to historical currency devaluations over the 1950-2016 period, I provide suggestive evidence that foreign currency exposure of the banking sector can explain the differential response of economic activity to exchange rate shocks across countries. These results suggest that the bank-lending channel of exchange rates can explain why currency appreciations are not always contractionary and currency depreciations not always expansionary.

May 12
Emilien Gouin-Bonenfant, Colombia
"A Q-Theory of Inequality"
Host: Grace Gu
Abstract: 
We study the effect of interest rates on top wealth inequality. While lower rates decrease the average growth rate of existing fortunes, they increase the growth rate of new fortunes by making it cheaper to raise capital. We use a sufficient statistic approach to determine the overall effect of interest rates on the Pareto exponent of the wealth distribution. After mapping the model to U.S. data, we find that the secular decline in interest rates has played an important role in the rise in top wealth inequality.

May 19
Nicolas Caramp, UC Davis
"Bond Premium Cyclicality and Liquidity Traps"
Host: Alonso Villacorta
Abstract: 
Safe asset shortages can expose an economy to liquidity traps. The nature of these traps is determined by the cyclicality of the bond premium. A counter-cyclical bond premium opens the possibility of self-fulfilling liquidity traps. Small issuances of government debt crowd out private debt and exacerbate these pessimism-driven recessions. In contrast, government debt is expansionary in fundamental liquidity traps. In the data, we find evidence of a counter-cyclical bond premium. We propose robust policies that prevent the emergence of self-fulfilling traps and are expansionary in fundamental traps, but they require sufficient fiscal capacity. In a quantitative model calibrated to the Great Recession, a promise to increase the government debt-to-GDP ratio by 16 percentage points precludes the possibility of self-fulfilling traps.

May 26
Juliane Begenau, Stanford GSB
"A Q-Theory of Banks"
Host: Alonso Villacorta
Abstract: 
This paper presents five facts on the behavior of U.S. banks between 2007 and 2015 that impose useful restrictions on the formulation of bank models: (1) the market to book leverage ratio diverged significantly during the crisis, (2) market values contain information about future bank profitability and loan losses not contained in book, (3) neither market nor regulatory constraints seem to be strictly binding for most banks, (4) banks operate with a target market leverage ratio, but that target is reached slowly, (5) the leverage adjustment back to the target changed fundamentally after the crisis: before the crisis banks adjusted leverage by liquidating assets and liabilities, but post crisis, the relied more heavily on retained earnings and raising capital. We present and estimate a dynamic heterogeneous-bank model that rationalizes these facts. In addition to leverage, the difference between accounting and fair values of banks is an important state variable leading to interesting nonlinear dynamics. The estimation calls for higher asset-sales costs in the post-crisis.