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Has Covid-19 been a “reallocation recession”?
To answer the question in the title: Thus far, not dramatically so. In this Chicago Fed Letter, I document three facts supporting this conclusion. First, although the Covid period has seen multiple months with high rates of worker movement (reallocation) across industry sectors (relative to previous recessions), net cumulative reallocation from the onset of the pandemic through December 2020 is only the third highest among post-1945 recessions over the same horizon (and is only modestly outside the confidence bound for the average across those recessions). Thus, much of the reallocation ...
Working Paper
Risk-Adjusted Capital Allocation and Misallocation
We develop a theory linking “misallocation,” i.e., dispersion in marginal products of capital (MPK), to macroeconomic risk. Dispersion in MPK depends on (i) heterogeneity in firm-level risk premia and (ii) the price of risk, and thus is countercyclical. We document strong empirical support for these predictions. Stock market-based measures of risk premia imply that risk considerations explain about 30% of observed MPK dispersion among US firms and rationalize a large persistent component in firm-level MPK. Risk-based MPK dispersion, although not prima facie inefficient, lowers long-run ...
Newsletter
The Rise of Intangible Investment and the Transmission of Monetary Policy
Monetary policy acts on the economy primarily through its effects on investment spending. But the nature of investment has evolved over time: “Intangible assets”—such as intellectual property or software—play an increasingly important role in the modern economy. In this Chicago Fed Letter, we study the implications of this change for the transmission of monetary policy. We show that investment in intangible assets is less sensitive to interest rates than investment in tangible assets. This suggests that the secular shift toward intangibles has reduced the responsiveness of aggregate ...
Working Paper
International Diversification, Reallocation, and the Labor Share
How does growing international financial diversification affect firm-level and aggregate labor shares? We study this question using a novel framework of firm labor choice in the face of aggregate risk. The theory implies a cross-section of labor risk premia and labor shares that appear as markups in firm-level data. International risk sharing leads to a reallocation of labor towards riskier/low labor share firms alongside a rise in within-firm labor shares, matching key micro-level facts. We use cross-country firm-level data to document a number of empirical patterns consistent with the ...
Working Paper
Risk-Taking, Capital Allocation and Optimal Monetary Policy
We study the role of firm heterogeneity in affecting business cycle dynamics and optimal stabilization policy. Firms differ in their degree of cyclicality, and hence, exposure to aggregate risk, leading to firm-specific risk premia that influence resource allocations. The heterogeneous firm economy can be recast in a representative firm formulation, but where total factor productivity (TFP) is endogenous and depends on the resource allocation. The model uncovers a novel tradeoff between the long-run level and volatility of TFP. Inefficiencies distort this tradeoff and result in either ...
Newsletter
Will the Covid-19 pandemic lead to job reallocation and persistent unemployment?
The Covid-19 pandemic has had an enormous impact on the U.S. economy. Nowhere are the effects more dramatic than in the labor market: In a span of just two months, the unemployment rate increased from 3.5% in February 2020—a low not seen since the late 1960s—to 14.7% in April—a high not seen since the Great Depression—before falling modestly in May and June. How persistent are these effects likely to be? Will the labor market recover quickly once pandemic-related restrictions are fully lifted, or will unemployment remain at elevated levels further into the future?