Research
Working papers
Investing in the Batteries and Vehicles of the Future: A View Through the Stock Market
Abstract: A large number of companies operating in the EV and battery supply chain have listed on a U.S. stock exchange in recent years. I compile a unique data set of high-frequency stock returns for those companies and investigate the extent to which an ``industry'' factor specific to the EV and battery supply chain (an ``EV'' factor) can explain their returns. Those returns are decomposed into systematic and idiosyncratic components, with the former given by a set of latent factors extracted from a large panel of stock returns using high-frequency principal components. It is found that a market factor and a factor associated with tech stocks have good explanatory power for the stocks of interest. I identify an ``EV'' factor as the first principal component of the idiosyncratic returns and find it has relatively good explanatory power for EV and battery stocks, often exceeding that of the tech factor. There is also evidence for a lithium factor that plays an important role in the returns of lithium companies.
Estimating Macroeconomic News and Surprise Shocks
Joint with Lutz Kilian and Alexander Richter.
Abstract: The importance of understanding the economic effects of TFP news and surprise shocks is widely recognized in the literature. A common VAR approach is to identify responses to TFP news shocks by maximizing the variance share of TFP over a long horizon. Under suitable conditions, this approach also implies an estimate of the surprise shock. We find that these TFP max share estimators tend to be strongly biased when applied to data generated from DSGE models with shock processes that match the TFP moments in the data, both in the presence of TFP measurement error and in its absence. Incorporating a measure of TFP news into the VAR model and adapting the identification strategy substantially reduces the bias and RMSE of the impulse response estimates, even when there is sizable measurement error in the news variable. When applying this method to the data, we find that news shocks are slower to diffuse to TFP and have a smaller effect on real activity than implied by the TFP max share method.
Macroeconomic Responses to Uncertainty Shocks: The Perils of Recursive Orderings
Joint with Lutz Kilian and Alexander Richter.
Abstract: A common practice in empirical macroeconomics is to examine alternative recursive orderings of the variables in structural vector autogressive (VAR) models. When the implied impulse responses look similar, the estimates are considered trustworthy. When they do not, the estimates are used to bound the true response without directly addressing the identification challenge. A leading example of this practice is the literature on the effects of uncertainty shocks on economic activity. We prove by counterexample that this practice is invalid in general, whether the data generating process is a structural VAR model or a dynamic stochastic general equilibrium model.
Published papers
A Simple Explanation of Countercyclical Uncertainty
American Economic Journal: Macroeconomics, forthcoming.
Joint with Joshua Bernstein, Alexander Richter, and Nathaniel Throckmorton.
Abstract: This paper documents that labor search and matching frictions generate countercyclical uncertainty because the inherent nonlinearity in the flow of new matches makes employment uncertainty increasing in the number of people searching for work. Quantitatively, this mechanism is strong enough to explain uncertainty and real activity dynamics, including their correlation. Through this lens, uncertainty fluctuations are endogenous responses to changes in real activity that neither affect the severity of business cycles nor warrant policy intervention, in contrast with leading theories of the interaction between uncertainty and real activity dynamics.
Complementarity and Macroeconomic Uncertainty
Review of Economic Dynamics, 44, 225-243, 2022.
Joint with Tyler Atkinson, Alexander Richter, and Nathaniel Throckmorton.
Abstract: Macroeconomic uncertainty regularly fluctuates in the data. Theory suggests complementarity between capital and labor inputs in production can generate time-varying endogenous uncertainty because the concavity in the production function influences how output responds to productivity shocks in different states of the economy. This paper examines whether complementarity is a quantitatively significant source of time-varying endogenous uncertainty by estimating a nonlinear real business cycle model with a constant elasticity of substitution production function and exogenous volatility shocks. When matching labor share and uncertainty moments, we find at most 16% of the volatility of uncertainty is endogenous. An estimated model without exogenous volatility shocks can endogenously generate all of the empirical variation in uncertainty, but only at the expense of significantly overstating the volatility of the labor share.
Keywords: State-dependence, stochastic volatility, CES production, endogenous uncertainty
JEL Codes: C12, C12, D81, E32, E37
Resource Booms and the Macroeconomy: The Case of U.S. Shale Oil
Joint with Nida Cakir Melek and Mine Yucel.
Review of Economic Dynamics, 42, 307-332, 2021.
Abstract: We examine the implications of the U.S. shale oil boom for the U.S. economy, trade balances, and the global oil market. Using comprehensive data on different types of crude oil, and a two-country general equilibrium model with heterogenous oil and refined products, we show that the shale boom boosted U.S. real GDP by a little more than 1 percent and improved the oil trade balance as a share of GDP by about 1 percentage point from 2010 to 2015. The boom led to a decline in oil and fuel prices, and a dramatic fall in U.S. light oil imports. In addition, we find that the crude oil export ban, a policy in effect until the end of 2015, was a binding constraint, and would likely have remained a binding constraint thereafter had the policy not been removed.
Keywords: DSGE, trade, oil, shale, fuel prices, export ban
JEL Codes: F41, Q33, Q38, Q43
Closer to one great pool? Evidence from structural breaks in oil price differentials
Joint with Grant Strickler.
The Energy Journal, 42(2) 1-30, 2021.
Abstract: We show that the oil market has become closer to “one great pool,” in the sense that price differentials between crude oils of different qualities have generally become smaller over time. We document, in particular, that many of these quality-related differentials experienced a major structural break in or around 2008, after which there was a marked reduction in their means and, in many cases, volatilities. Several factors explain these shifts, including a growing ability of the global refinery sector to process lower-quality crude oil and the U.S. shale boom, which has unexpectedly boosted the supply of high-quality crude oil. Differentials between crude oils of similar quality in general did not experience breaks in or around 2008, although we do find evidence of breaks at other times. We also show that these structural breaks can affect tests of stationarity for many price differentials.
Keywords: crude oil price differentials, oil, structural breaks, refining
JEL Codes: Q40, C22
Older working paper version is here.
OPEC in the News
Energy Economics, 80, 163-172, May 2019.
Abstract: This paper introduces a newspaper article count index related to OPEC that rises in response to important OPEC meetings and events connected with OPEC production levels. I use this index to measure how interest in OPEC varies over time and investigate how oil price volatility behaves when the index unexpectedly changes. I find that unexpected increases in the newspaper index are strongly associated with higher levels of oil price volatility, both realized and implied. In some cases, these unexpected movements appear to be driven by an unpredictable OPEC event, such as the Iraq invasion of Kuwait. In other cases, such as the oil price collapses in late 2008 and late 2014, unforeseen developments in the oil market or broader economy seem to generate the unexpected movements in price volatility and interest in OPEC. The newspaper index is highly correlated with Google search volume data on OPEC, an alternative measure of the amount of attention paid to OPEC events.
The time series for the index used in the Energy Economics version can be found here.
An updated version of the index through August 2020 can be found here.
The Zero Lower Bound and Endogenous Uncertainty
Joint with Alexander Richter and Nathaniel Throckmorton.
Economic Journal, 128 (611): 1730-1757, 2018.
Abstract: This article examines the correlation between uncertainty and real GDP growth. We use the volatility of real GDP growth from a VAR, stock market volatility, survey-based forecast dispersion and macro uncertainty index as proxies for uncertainty. In each case, a stronger negative correlation emerged in 2008. We contend the zero lower bound (ZLB) on the federal funds rate contributed to our finding. To test our theory, we estimate a New Keynesian model with a ZLB constraint to generate a data-driven, forward-looking uncertainty measure. The correlations between that measure and real GDP growth are close to the values in the data.
Inventory Shocks and the Oil-Ethanol-Grain Price Nexus
Joint with Navi Dhaliwal.
Economics Letters 156 58-60, 2017.
Abstract: We analyze the effects of oil and grain inventory data releases on oil, ethanol, corn and soy futures prices. Oil and grain inventory shocks are identified as the percent difference between actual inventory levels and median predictions from a survey of forecasters. Ethanol futures prices alone are found to respond to both oil and grain inventory shocks. Other energy futures prices respond only to oil inventory shocks, while agricultural commodity futures prices respond only to grain inventory shocks.
Fuel Subsidies, the Oil Market, and the World Economy
Joint with Nathan Balke and Mine Yucel.
The Energy Journal 36(S) 99-127, 2016.
Abstract: This paper studies the effects of oil producing countries' fuel subsidies on the oil market and the world economy. We identify 24 oil-producing countries with fuel subsidies with retail fuel prices that are about 34 percent of the world price. We construct a two-country model where one country represents the oil-exporting subsidizers and the second the oil-importing bloc, and calibrate the model to match recent data. We find that the removal of subsidies would reduce the world price of oil by six percent. The removal of subsidies is unambiguously welfare enhancing for the oil-importing countries. Removal of subsidies is welfare improving for the oil-exporting countries as well, in the baseline calibration. However, the optimal subsidy from the point of view of oil exporters is not zero, in general.
The Long-run Macroeconomic Impacts of Fuel Subsidies
Journal of Development Economics 107C 129-143, 2014.
Abstract: Many developing and emerging market countries have subsidies on fuel products. Using a small open economy model with a non-traded sector, I show how these subsidies impact the steady state levels of macroeconomic aggregates such as consumption, labor supply, and aggregate welfare. These subsidies can lead to crowding out of non-oil consumption, inefficient inter-sectoral allocations of labor, and other distortions in macroeconomic variables. Across steady states, aggregate welfare is reduced by these subsidies. This result holds for a country with no oil production and for a net exporter of oil. The distortions in relative prices introduced by the subsidy create most of the welfare losses. How the subsidy is financed is of secondary importance. Aggregate welfare is significantly higher if the subsidies are replaced by lump-sum transfers of equal value.
Journal of Economic Dynamics and Control 44 1-19, 2014.
Abstract: This paper examines optimal monetary policy in a New Keynesian model where supply and demand shocks affect the price of oil. Optimal policy fully stabilizes core inflation when wages are flexible. The nominal rate rises (falls) in response to the demand (supply) shock. With sticky wages core inflation falls (rises) in response to the demand (supply) shock. Impulse response functions from a VAR estimated with post-1986 U.S. data show minimal movement in core inflation in response to both shocks. The federal funds rate rises (falls) in response to the demand (supply) shock, consistent with the predictions from the theoretical model for policy that stabilizes core inflation.
Dynamics of Fiscal Financing in the United States
Joint with Eric Leeper and Nora Traum.
Journal of Econometrics 156(2):304-231, 2010
Abstract: General equilibrium models that include policy rules for government spending, lump-sum transfers, and distortionary taxation on labor and capital income and on consumption expenditures are fit to US data under rich specifications of fiscal policy rules to obtain several results. First, the best-fitting model allows many fiscal instruments to respond to debt. Second, responses of aggregates to fiscal policy shocks under rich rules vary considerably from responses where only non-distortionary fiscal instruments finance debt. Third, in the short run, all fiscal instruments except labor taxes react strongly to debt, but long-run intertemporal financing comes from all components of the government’s budget constraint. Fourth, debt-financed fiscal shocks trigger long-lasting dynamics; short-run and long-run multipliers can differ markedly.
Book chapters
Oil Prices and the Macroeconomy
Joint with Lance Bachmeier.
Routledge Handbook of Energy Economics.
Routledge, U.K., September 2019.
The online appendix is here.
Code for the DSGE models is here.
Data used in the appendix is here.
The Impact of Changing Energy Prices on Texas
Joint with Amy Jordan, Nicole Lake and Mine Yucel.
Ten-Gallon Economy: Sizing up Economic Growth in Texas, pp. 139-158.
Palgrave Macmillan, U.S., September 2015.
Older working papers
"Time-varying Oil Price Volatility and Macroeconomic Aggregates.” Joint with Nora Traum.