Working Papers

September 2020
Abstract: Between 1990 and 2008, the cost to construct a lane mile of interstate increased five-fold while the cost of resurfacing doubled. We consider four explanations for these increases: composition, changes in pavement durability, the institutional and regulatory environment, and input prices. Only changes in input prices explain the increase in resurfacing costs. None of the explanations is clearly responsible for the increase in the cost of new construction, but the data suggest hard to observe changes in how highways are built. This suggests that a cost disease affects at most 34% of the interstate highway budget devoted to construction. A calibrated model of optimal highway capital accumulation does not suggest a dramatic increase in the user cost of interstate capital per vehicle mile travelled.

September 2020
Abstract: Conditions of secular stagnation - low growth g and low real interest rates r - have counteracting effects on the cost of servicing the public debt, r - gUsing data for advanced economies, we document that r is often less than g, but r - g exhibits substantial variability over the medium-term. We build a continuous-time model in which the debt-to-GDP ratio is stochastic and r < g on average. We analytically characterize the distribution of the debt-to-GDP ratio, showing how two candidate explanations for low interest rates, slower trend growth and higher output risk, can lower the debt-to-GDP ratio. When the primary surplus is bounded above, we characterize a fiscal limit, above which default occurs, and a debt tipping point, above which the public debt is on an unsustainable path, but default does not occur immediately. Slower trend growth and higher output risk can paradoxically improve debt sustainability. A conservative calibration suggests a fiscal limit for the US of 184 percent of GDP and a tipping point of 115 percent of GDP.

Related (prepared for the Peterson Institute of International Economics):
Abstract: Advanced economies have emerged from the Great Recession with high levels of public debt and weak productivity growth, raising concerns over debt sustainability. However, interest rates have remained historically low, keeping debt servicing costs manageable. Using data for 17 advanced economies, interest rates on government debt are often less than GDP growth as in the current period, but r − g exhibits substantial variability with moderate probabilities of reversion to conditions of r > g over a 5 to 10 year horizon. Additionally, interest rates across countries are driven by a common component suggesting that, for faster-growing small open economies, slow global growth may be beneficial for debt sustainability by depressing global rates. Real interest rate projections for the G7 suggest that debt servicing costs will remain low for non-Eurozone economies, though uncertainty bands are large. 

Sectoral Shocks, The Beveridge Curve and Monetary Policy (with Dmitriy Sergeyev)
December 2013
Abstract: The slow recovery of the US labor market and the observed shift in the Beveridge curve has prompted speculation that sector-specific shocks may be responsible for the current recession. We document a significant correlation between shifts in the US Beveridge curve in postwar data and periods of elevated sectoral shocks, relying on a factor analysis of sectoral employment to derive our sectoral shock index. We provide conditions under which sector-specific shocks in a multisector model augmented with labor market search generate outward shifts in the Beveridge curve and raise the natural rate of unemployment. Consistent with empirical evidence, our model also generates cyclical movements in aggregate matching function efficiency and mismatch across sectors. We calibrate a two-sector version of our model and demonstrate that a negative shock to construction employment calibrated to match employment shares can fully account for the outward shift in the Beveridge curve. We augment our standard multisector model with financial frictions to demonstrate that financial shocks or a binding zero lower bound can act like sectoral productivity shocks, generating a shift in the Beveridge curve that may be counteracted by expansionary monetary policy.

Related:

Press Coverage:
Providence Journal (April 21, 2015)
Brown Daily Herald (April 9, 2015)
Providence Business News (March 23, 2015)

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