Macroeconomics & International Finance Seminars

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

Fall 2020

October 13
Eric Verhoogen, Columbia University
"Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments"
Host: Brenda Samaniego
Abstract: 
This paper develops a new method for estimating production-function parameters that can be applied in differentiated-product industries with endogenous quality and variety choice. We take advantage of data on physical quantities of outputs and inputs from the Colombian manufacturing census, focusing on producers of rubber and plastic products. Assuming constant elasticities of substitution of outputs and inputs within firms, we aggregate from the firm-product to the firm level and show how quality and variety choices may bias standard estimates. Using real exchange rates and the national minimum wage, we construct external instruments for materials and labor choices. In the spirit of established panel-data approaches, we implement a simple two-step instrumental-variables method, first estimating the materials and labor coefficients in a difference equation and then estimating the capital coefficient in a levels equation. Our estimates differ from those of existing methods and our preferred productivity estimate performs relatively well in predicting future export performance. 

October 20
Andrew Foerster, Federal Reserve Bank of San Francisco
"Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach"
Host: Hikaru Saijo
Abstract:
We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico’s business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt Crisis in the early-1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late-2000s. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by plausible combinations of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified.

October 27
Arlene Wong, Princeton University
"Debt, Human Capital Accumulation and the Allocation of Talent"
Host: Carl Walsh

November 3
Tomaz Cajner, Fed Board
"The U.S. Labor Market during the Beginning of the Pandemic Recession"
Host: Grace Gu
ABSTRACT: 
Using weekly administrative payroll data from the largest U.S. payroll processing company, we measure the evolution of the U.S. labor market during the first four months of the global COVID-19 pandemic. After aggregate employment fell by 21 percent through late-April, employment rebounded somewhat through late-June. The re-opening of temporarily shuttered businesses contributed significantly to the employment rebound, particularly for smaller businesses. We show that worker recall has been an important component of recent employment gains for both re-opening and continuing businesses. Employment losses have been concentrated disproportionately among lower wage workers; as of late June employment for workers in the lowest wage quintile was still 20 percent lower relative to mid-February levels. As a result, average base wages increased between February and June, though this increase arose entirely through a composition effect. Finally, we document that businesses have cut nominal wages for almost 7 million workers while forgoing regularly scheduled wage increases for many others.

November 10
Ricardo De La O, USC Marshall
"The Effect of Buybacks on Capital Allocation"
Host: Alonso Villacorta
ABSTRACT: 
This paper studies the macroeconomic effects of a 1982 SEC rule that made share buybacks a viable alternative to dividends for paying out funds to shareholders. I propose a quantitative model of heterogeneous firms with dividend adjustment costs and a manager-shareholder conflict, matched to micro data on US corporations’ cash flow statements. The flexibility of buybacks improves welfare by reducing the misallocation of capital. This is not only because investors can more easily shift resources to more productive firms, but also because stock prices become more responsive to productivity and thus help align incentives of managers and shareholders. This "stock price effect" allows the model to not only account for a decline in investment and increase in productivity, but also the increase in corporate cash holdings over the last decades.

November 17
Şebnem Kalemli-Özcan, University of Maryland
"International Spillovers and Local Credit Cycles"
Host: Chenyue Hu
ABSTRACT: 
This paper studies the transmission of the Global Financial Cycle (GFC) to domestic credit market conditions in a large emerging market, Turkey, over 2003-13. We use administrative data covering the universe of corporate credit transactions matched to bank balance sheets to document four facts: (1) an easing in global financial conditions leads to lower borrowing costs and an increase in local lending; (2) domestic banks more exposed to international capital markets transmit the GFC locally; (3) the fall in local currency borrowing costs is larger than foreign currency borrowing costs due to the comovement of the uncovered interest rate parity (UIP) premium with the GFC over time; (4) data on posted collateral for new loan issuances show that collateral constraints do not relax during the boom phase of the GFC.

November 24
Sophie Osotimehin, University Quebec
"Misallocation and Intersectoral Linkages"
Host: Galina Hale
ABSTRACT: 
We analytically characterize the aggregate productivity loss from distortions in the presence of sectoral production linkages. We find that accounting for low input substitutability reduces the productivity loss and the impact of intermediate-input suppliers. Moreover, with elasticities below one (i.e. below Cobb-Douglas), sectoral linkages do not systematically amplify the productivity loss. We quantify these effects in the context of the distortions caused by market power, using industry-level data for 35 countries. With our benchmark calibration, the median aggregate productivity loss from industry-level markups is 1.3%; assuming Cobb-Douglas elasticities would lead to overestimating the productivity loss by a factor of 1.8.

December 8
Peter Henry,NYU's Leonard N. Stern School of Business
"The Baker Hypothesis"
Host: Galina Hale
ABSTRACT: 
In 1985, James A. Baker III's “Program for Sustained Growth” proposed a set of economic policy reforms including, inflation stabilization, trade liberalization, greater openness to foreign investment, and privatization, that he believed would lead to faster growth in countries then known as the Third World, but now categorized as emerging and developing economies (EMDEs). A country-specific, time-series assessment of the reform process reveals three clear facts. First, in the 10-year-period after stabilizing high inflation, the average growth rate of real GDP in EMDEs is 2.2 percentage points higher than in the prior ten-year period. Second, the corresponding growth increase for trade liberalization episodes is 2.66 percentage points. Third, in the decade after opening their capital markets to foreign equity investment, the spread between EMDEs average cost of equity capital and that of the US declines by 240 basis points. The impact of privatization is less straightforward to assess, but taken together, the three central facts of reform provide empirical support for the Baker Hypothesis and suggest a simple neoclassical interpretation of the unprecedented increase in growth that has taken place in EMDEs since 1995.

Winter 2021

March 2
Lisa Kahn, University of Rochester
"Searching, Recalls, and Tightness: An Interim Report on the COVID Labor Market"
Host: Brenda Samaniego
Abstract:
We report on the state of the labor market midway through the COVID recession, focusing particularly on measuring market tightness. As we show using a simple model, tightness is crucial for understanding the relative importance of labor supply or demand side factors in job creation. In tight markets, worker search effort has a relatively larger impact on job creation, while employer profitability looms larger in slack markets. We measure tightness combining job seeker information from the CPS and vacancy postings from Burning Glass Technologies. To parse the former, we develop a taxonomy of the non-employed that identifies job seekers and excludes the large number of those on temporary layoff who are waiting to be recalled. With this taxonomy, we find that effective tightness has declined about 50% since the onset of the epidemic to levels last seen in 2016, when labor markets generally appeared to be tight. Disaggregating market tightness, we find mismatch has surprisingly declined in the COVID recession. Further, while markets still appear to be tight relative to other recessionary periods, this could change quickly if the large group of those who lost their jobs but are not currently searching for a range of COVID-related reasons reenter the search market.

Spring 2021

April 13
Leena Rudanko, Federal Reserve Bank of Philadelphia
"Firm Wages in a Frictional Labor Market"
Host: Brenda Samaniego
ABSTRACT: 
This paper studies wage setting in a directed search model of multi-worker firms facing within-firm equity constraints on wages. The constraints reduce wages, as firms exploit their monopsony power over their existing workers, rendering wages less responsive to productivity in doing so. They also give rise to a time-inconsistency in the dynamic firm problem, as firms face a less elastic labor supply in the short than the long run, making commitment to future wages valuable. Constrained firms find it profitable to fix wages, and doing so is good for worker welfare and resource allocation in equilibrium.

April 20
Andrej Sokol, Bank of England
"How does international capital flow?"
Host: Galina Hale
ABSTRACT: 
Understanding gross capital flows is crucial for both macroeconomic and financial stability policy. However, theory is lagging behind empirical work, as much of the literature continues to rely on net capital flow models developed many decades ago. Missing from these models is an explicit tracking of the financial records underlying all goods and asset purchases, namely gross balance sheet positions, which in turn requires modelling the principal medium of exchange, bank deposits. Our new model features gross capital flows and offers a fresh perspective on important policy debates, such as the role of current accounts as indicators of financial fragility, the nature of the global saving glut, Triffin’s current account dilemma, and the synchronisation of gross capital inflows and outflows.

April 27
Eric Van Wincoop, University of Virginia
"Can Sticky Portfolios Explain International Capital Flows and Asset Prices?"
Host: Chenyue Hu
ABSTRACT: 
Over the past decade portfolio choice has become an important element of many DSGE open economy models. However, there is a substantial body of micro and macro evidence that is inconsistent with standard frictionless portfolio choice models. In this paper we introduce a quadratic cost of changes in portfolio allocation into a two-country DSGE model, where investors hold claims on capital of both countries.  We investigate under what level of portfolio frictions the model performs best and what the impact is of portfolio frictions on asset prices and net capital flows. We find that portfolio frictions particularly enhance the impact of financial shocks (latent asset demand shocks) on asset prices and capital flows.

May 4
Tim Landviogt, The Wharton School, University of Pennsylvania
"Can Monetary Policy Create Fiscal Capacity?"
Host: Alonso Villacorta
ABSTRACT: 
Governments around the world have gone on a massive fiscal expansion in response to the Covid crisis, increasing government debt to levels not seen in 75 years. How will this debt be repaid? What role do conventional and unconventional monetary policy play? We investigate debt sustainability in a New Keynesian model with an intermediary sector and realistic fiscal and monetary policy. In the model, quantitative easing (QE) raises household wealth and stimulates aggregate demand. When conventional monetary policy is constrained by the ZLB during an economic crisis, increased transfer spending and lower tax revenue lead to a large rise in government debt and raise the risk of future tax increases. We find that QE, a higher inflation target, and an expansion in government discretionary spending all contribute to reducing this fiscal risk.

May 11
Horacio Sapriza, Federal Reserve Board
"What is the Impact of a Major Unconventional Monetary Policy Intervention?"
Host: Grace Steadmon
ABSTRACT: 
We analyze how unconventional monetary policy affects the lending standards of banks. We use a major, unconventional central bank intervention, the “whatever it takes” speech of European Central Bank President Mario Draghi, as a natural experiment. The announcement boosted the economic capital of banks, especially of those in the euro area. We avoid endogeneity concerns by comparing changes in lending standards of local versus foreign banks vis-à-vis the same borrower in a third country, Mexico. We show that the intervention reversed prior risk-taking––in volume, price, and risk ratings––of subsidiaries of euro area banks relative to other banks. Our findings provide strong evidence that unconventional monetary policy can reduce risk-taking, adding a new dimension to the bank capital channel.

May 18
David Lagakos, Boston University
"Labor Market Conflict and the Decline of the Rust Belt"
Host: Ajay Shenoy
ABSTRACT: 
No region of the United States fared worse over the postwar period than the “Rust Belt,” the heavy manufacturing region bordering the Great Lakes. This paper hypothesizes that the decline of the Rust Belt was due in large part to the persistent labor market conflict that was prevalent throughout the Rust Belt’s main industries. We formalize this thesis in a two-region dynamic general equilibrium model in which labor market conflict leads to a hold-up problem in the Rust Belt that reduces investment and productivity growth and leads employment to move from the Rust Belt to the rest of the country. Quantitatively, the model accounts for much of the large secular decline in the Rust Belt’s share of manufacturing employment. Consistent with our theory, data at the state-industry level show that labor conflict, proxied by rates of major work stoppages, is strongly negatively correlated with employment growth.

May 25
Peter McAdam, ECB
"Fiscal Habits and Sovereign Debt Default"
Host: Carl Walsh
ABSTRACT: 
We introduce a new perspective on sovereign debt default. We construct a two-period general equilibrium model: in period 0, the sovereign and lender interact, and between 0 and 1, the state of nature is revealed, and claims are resolved. The borrower is a country which exhibits “fiscal habit” formation with respect to its primary surpluses since actual surpluses systematically differ from planned ones. The presence of habits can modify the effect of fiscal shocks and impact the probability of default, the prevalence of partial default outcomes and movements in default premia. We also distinguish between ‘good’ and ‘bad’ fiscal habits.