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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 ...
Working Paper
Federal Reserve Balance-Sheet Policy in an Ample Reserves Framework: An Inventory Approach
I apply techniques from stochastic inventory theory to calibrate the optimal balance-sheet buffer needed to implement monetary policy in an ample reserves regime. I quantify the size of the buffer to be about $60 billion. This is small relative to the reserves needed for an ample reserves regime, even though the FOMC appears to act as if the cost of too few reserves is over 20 times as high as the cost of too many.
Working Paper
Spread Too Thin: The Impact of Lean Inventories
Widespread adoption of just-in-time (JIT) production has reduced inventory holdings. This paper finds that JIT creates a trade-off between firm profitability and vulnerability to large shocks. Empirically, JIT adopters experience higher sales and less volatility while also exhibiting heightened cyclicality and sensitivity to natural disasters. I explain these facts in a structurally estimated general equilibrium model where firms can adopt JIT. Relative to a no-JIT economy, the estimated model implies a 1.3% increase in firm value. At the same time, an unanticipated shock results in a roughly ...
Discussion Paper
Market Failures and Official Sector Interventions
In the United States and other free market economies, the official sector typically has minimal involvement in market activities absent a clear rationale to justify intervention, such as a market failure. In this post, we consider arguments for official sector intervention, focusing on the market failure arising from externalities related to business closures. These externalities are likely to be particularly high for closures arising from pandemic-related economic disruptions. We discuss how the official sector, including institutions such as Congress and the Treasury, can increase social ...