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Working Paper
The Tradeoffs in Leaning Against the Wind
Credit booms sometimes lead to financial crises which are accompanied with severe and persistent economic slumps. Does this imply that monetary policy should ?lean against the wind? and counteract excess credit growth, even at the cost of higher output and inflation volatility? We study this issue quantitatively in a standard small New Keynesian dynamic stochastic general equilibrium model which includes a risk of financial crisis that depends on ?excess credit?. We compare monetary policy rules that respond to the output gap with rules that respond to excess credit. We find that leaning ...
Working Paper
Credit risk and disaster risk
Credit spreads are large, volatile and countercyclical, and recent empirical work suggests that risk premia, not expected credit losses, are responsible for these features. Building on the idea that corporate debt, while safe in ordinary recessions, is exposed to economic depressions, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small, exogenously time-varying risk of economic disaster. The model replicates the level, volatility and cyclicality of credit spreads, and variation in the corporate bond risk premium amplifies macroeconomic ...
Working Paper
The Cross-Section of Labor Leverage and Equity Returns
Using a standard production model, we demonstrate theoretically that, even if labor is fully flexible, it generates a form of operating leverage if (a) wages are smoother than productivity and (b) the capital-labor elasticity of substitution is strictly less than one. Our model supports using labor share?the ratio of labor expenses to value added?as a proxy for labor leverage. We show evidence for conditions (a) and (b), and we demonstrate the economic significance of labor leverage: High labor-share firms have operating profits that are more sensitive to shocks, and they have higher expected ...
Working Paper
Firm Entry and Macroeconomic Dynamics: A State-level Analysis
Using an annual panel of U.S. states over the period 1982-2014, we estimate the response of macroeconomic variables to a shock to the number of new firms (startups). We find that these shocks have significant effects that persist for many years on real gross domestic product, productivity and population. This is consistent with simple models of firm dynamics where a ?missing generation? of firms affects productivity persistently.
Working Paper
Can Intangible Capital Explain Cyclical Movements in the Labor Wedge?
Intangible capital is an important factor of production in modern economies that is generally neglected in business cycle analyses. We demonstrate that intangible capital can have a substantial impact on business cycle dynamics, especially if the intangible is complementary with production capacity. We focus on customer capital: the capital embodied in the relationships a firm has with its customers. Introducing customer capital into a standard real business cycle model generates a volatile and countercyclical labor wedge, due to a mismeasured marginal product of labor. We also provide new ...
Working Paper
Size-dependent regulations, firm size distribution, and reallocation
In France, firms with 50 employees or more face substantially more regulation than firms with less than 50. As a result, the size distribution of firms is visibly distorted: there are many firms with exactly 49 employees. We model the regulation as the combination of a sunk cost that must be paid the first time the firm reaches 50 employees, and a payroll tax that is paid each period thereafter when the firm operates with more than 50 employees. We estimate the model using indirect inference by fitting the discontinuity of the size distribution. The key finding is that the regulation is ...
Working Paper
Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia
Real risk-free interest rates have trended down over the past 30 years. Puzzlingly in light of this decline, (1) the return on private capital has remained stable or even increased, creating an increasing wedge with safe interest rates; (2) stock market valuation ratios have increased only moderately; (3) investment has been lackluster. We use a simple extension of the neoclassical growth model to diagnose the nexus of forces that jointly accounts for these developments. We find that rising market power, rising unmeasured intangibles, and rising risk premia, play a crucial role, over and ...
Working Paper
Risk Management for Monetary Policy Near the Zero Lower Bound
As projections have inflation heading back toward target and the labor market continuing to improve, the Federal Reserve has begun to contemplate an increase in the federal funds rate. There is however substantial uncertainty around these projections. How should this uncertainty affect monetary policy? In many standard models uncertainty has no effect. In this paper, we demonstrate that the zero lower bound on nominal interest rates implies that the central bank should adopt a looser policy when there is uncertainty. In the current context this result implies that a delayed liftoff is ...
Working Paper
Risk Premia at the ZLB: A Macroeconomic Interpretation
Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing ...
Working Paper
Adaptation and the Cost of Rising Temperature for the U.S. Economy
How costly will rising temperature due to climate change be for the U.S. economy? Recent research has used the well-identified response of output to weather to estimate this cost. But agents may adapt to the new climate. We propose a methodology to infer adaptation technology from the heterogeneous responses of output to weather observed currently across the U.S. Our model estimates how much each region has adapted already, and can predict how much each will adapt further after climate change. The size and distribution of losses from climate change vary substantially once adaptation is taken ...