Research

Work in progress

Automation, Unemployment and Inequality

Published work

Design and Implementation of the Price Cap on Russian Oil Exports with Simon Johnson and Catherine Wolfram

Journal of Comparative Economics, July 2023

Basic economics teaches that price caps are bad – limiting the price of a good distorts demand and discourages producers from supplying the market. So why did the Biden Administration, led by Janet Yellen, the consummate economist, champion a price cap on oil from Russia after it invaded Ukraine in 2022? The answer is that this price cap, implemented for crude oil in December 2022 and oil products in February 2023, differs significantly from the standard cap discussed in introductory economics classes. This paper explains these differences and describes the first six months this policy has been in existence. We provide background on Russian oil trade and describe the goals, structure, enforcement and economics of the price cap. We review the main concerns and contrast them with the outcomes observed to date.

Uneven Growth: Automation's Impact on Wages and Wealth Inequality with Ben Moll and Pascual Restrepo

Econometrica, November 2022

Moll, B., Rachel, L. and Restrepo, P. (2022), Uneven Growth: Automation's Impact on Income and Wealth Inequality. Econometrica, 90: 2645-2683. https://doi.org/10.3982/ECTA19417

The benefits of new technologies accrue not only to high-skilled labor but also to owners of capital in the form of higher capital incomes. This increases inequality. To make this argument, we develop a tractable theory that links technology to the personal income and wealth distributions -- and not just that of wages -- and use it to study the distributional effects of automation. We isolate a new theoretical mechanism: automation increases inequality via returns to wealth. The flip side of such return movements is that automation is more likely to lead to stagnant wages and therefore stagnant incomes at the bottom of the distribution. We use a multi-asset model extension to confront differing empirical trends in returns to productive and safe assets and show that the relevant return measures have increased over time. Automation accounts for part of the observed trends in income and wealth inequality and macroeconomic aggregates.

On Secular Stagnation in the Industrialized World with Lawrence H. Summers,

Brookings Papers on Economic Activity, Spring 2019

We argue that the economy of the industrialized world, taken as a whole, is currently—and for the foreseeable future will remain—highly prone to secular stagnation. But for extraordinary fiscal policies, real interest rates would have fallen much more and be far below their current slightly negative level, current and prospective inflation would be further short of the 2 percent target levels, and past and future economic recoveries would be even more sluggish. We start by arguing that, contrary to current practice, neutral real interest rates are best estimated for the bloc of all industrial economies, given capital mobility between them and the relatively limited fluctuations in their aggregated current account. We show, using standard econometric procedures and looking at direct market indicators of prospective real rates, that neutral real interest rates have declined by at least 300 basis points over the last generation. We argue that these secular movements are in larger part a reflection of changes in saving and investment propensities rather than the safety and liquidity properties of Treasury instruments. We highlight the observation that, ceteris paribus, levels of government debt, the extent of pay-as-you-go old-age pensions, and the insurance value of government health care programs have all operated to raise neutral real rates. Using estimates drawn from the literature—as well as two general equilibrium models emphasizing, respectively, life-cycle heterogeneity and individual uncertainty— we suggest that the “private sector neutral real rate” may have declined by as much as 700 basis points since the 1970s. The extent of the substantial shifts in private saving and investment propensities over time has been obscured by the impact of this decline in real rates. Our diagnosis necessitates radical revisions in the conventional wisdom about monetary policy frameworks, the role of fiscal policy in macroeconomic stabilization, and the appropriate level of budget deficits, as well as social insurance and regulatory policies. To that end, much more of creative economic research is required on the causes, consequences, and policy implications of the pervasive private sector excess saving problem.

Are Low Real Interest Rates Here to Stay? with Thomas D Smith

International Journal of Central Banking, Vol 13, Number 3, September 2017

Abstract: Long-term real interest rates across the world are low, having fallen by about 450 basis points (bps) over the past thirty years. To understand whether low real rates are here to stay, we need to understand what has caused the decline. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptions we think we can account for around 400 bps of the 450 bps fall. Our quantitative analysis highlights slowing global growth expectations as one force that may have pushed down on real rates recently, but shifts in saving and investment preferences appear more important in explaining the long-term decline. We think the global saving schedule has shifted out in recent decades due to demographic forces, higher inequality, and, to a lesser extent, the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and an increase in the spread between risk-free and actual interest rates. Looking ahead, in the absence of sustained changes in policy, most of these forces look set to persist, and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at around 1 percent in the medium to long run. If true, this will have widespread implications for policymakers-not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.

Assessing vulnerabilities to financial shocks with Jack Fisher

Bank of England Staff Working Paper 636, 2016

Abstract: This paper describes a quantitative, data-driven method to assess vulnerabilities in a range of countries. We provide country-level vulnerability indices that can be used to gauge the level of fragility at any point in time. In particular, our results suggest that in the run-up to the global financial crisis, vulnerabilities rose to extremely high levels in the USA, but were only a little above average in Europe and had actually receded across much of Asia. The picture has changed dramatically during the recovery, however, with vulnerabilities close to record-highs by the end of 2015 in some of the Asian economies. We document numerous practical challenges that arise when developing such a toolkit, the main one being to know the trend — the ‘neutral’ level — of a financial variable (eg credit-to-GDP). In that context, one important contribution of this paper is to document the robustness of vulnerability measures to different judgements about the trend level of financial variables. We find that for most countries results are fairly robust to different views of the underlying trend, but importantly that this robustness is not universal. In particular, at the moment differing views of what ‘the new normal’ is suggest dramatically different assessments of the level of fragility in the USA and South Korea.

Secular drivers of the global real interest rate with Thomas D Smith

Bank of England Staff Working Paper 571, 2015

Abstract: Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptions we think we can account for around 400 of the 450bps fall. Our quantitative analysis highlights slowing global growth as one force that may have pushed down on real rates recently, but shifts in saving and investment preferences appear more important in explaining the long-term decline. We think the global saving schedule has shifted out in recent decades due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates. Moreover, most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers — not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.

Coverage:

James Hamilton in Econbrowser, Vice Chairman Stanley Fischer speech, Gavyn Davies' blog, Martin Wolf's blog, Larry Summers' blog (also in the FT and Washington Post), Brad Delong's blog, Niall Ferguson in The Sunday Times, David Smith in The Sunday Times , Brookings Hitchins Roundup, Stephen Williamson New Monetarist Economics, The Corner , Macrothoughts, Tyler Cowen's Marginal Revolution, Timothy Taylor's Conversable Economist, Nick Bunker - Washington Centre for Equitable Growth

Quick take:

VoxEU column , Bank Underground part 1, Bank Underground part 2, Centre for Macro Discussion Paper - executive summary

How have world shocks affected the UK economy? with Shiv Chowla and Lucia Quaglietti

Bank of England Quarterly Bulletin, Q2, 2014

Abstract: The UK economy is closely integrated into the wider global economy. These ties mean that global developments affect the economic fortunes of the United Kingdom. This article presents model-based estimates which suggest that world shocks have driven around two thirds of the weakness in UK output since 2007. Trade linkages are an important channel for the transmission of world shocks to the UK economy. But financial linkages and spillovers through uncertainty are significant, too — and together are likely to account for the majority of the impact of world shocks on the United Kingdom since 2007.

Coverage:

Ben Broadbent speech: the UK economy and the world economy

Quick take:

VoxEU column

Understanding the macroeconomic effects of working capital in the United Kingdom with Emilio Fernandez-Corugedo, Michael McMahon and Stephen Millard

Bank of England Working Paper no. 422, 2011

Abstract: In this paper we first document the behaviour of working capital over the business cycle stressing the large negative effect of the recent credit contraction on UK firms working capital positions. In order to understand the effects of working capital on macroeconomic variables, we solve and calibrate an otherwise standard flexible price DSGE model that introduces an explicit role for the components of working capital as well as a banking sector which intermediates credit. We find that financial intermediation shocks, similar to those experienced post-2007, have persistent negative effects on economic activity; these effects are reinforced by reductions in trade credit. Our model admits a crucial role for monetary policy to offset such shocks.

The impact of the financial crisis on supply with Andrew Benito, Katharine Neiss and Simon Price

Bank of England Quarterly Bulletin, Q2, 2010

Abstract: Output fell sharply in the United Kingdom during the recent global financial crisis, some of which is likely to have reflected a contraction in the economy’s supply capacity. This article considers the impact of financial crises on supply and the potential channels through which supply may have been affected during the recent recession. It is likely that the downturn has resulted in a fall in companies’ effective supply capacity although the magnitude of that impairment is difficult to gauge.x