Working papers

Refining Set-Identification in VARs through Independence (with Jonathan Wright)
R & R, Journal of Econometrics

Identification in VARs has traditionally mainly relied on second moments. Some researchers have considered using higher moments as well, but there are concerns about the strength of the identification obtained in this way. In this paper, we propose refining existing identification schemes by augmenting sign restrictions with a requirement that rules out shocks whose higher moments significantly depart from independence. This approach does not assume that higher moments help with identification; it is robust to weak identification. In simulations we show that it controls coverage well, in contrast to approaches that assume that the higher moments deliver point-identification. However, it requires large sample sizes and/or considerable non-normality to reduce the width of confidence intervals by much. We consider some empirical applications. We find that it can reject many possible rotations. The resulting confidence sets for impulse responses may be non-convex, corresponding to disjoint parts of the space of rotation matrices. We show that in this case, augmenting sign and magnitude restrictions with an independence requirement can yield bigger gains.

NBER working paper, Philadelphia Fed Working paper.

Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States (with Jerry Carlino, Bob Inman, and Nick Zarra)
R & R, American Economic Review

Partisanship of state-level politicians affects the impact of federal fiscal policy in the U.S. Using data from close elections, we find partisan differences in the marginal propensity to spend federal transfers since the early 1980s: Republican governors spend less than Democratic governors. This leads to lower debt, (delayed) lower taxes, and initially lower economic activity. A New Keynesian model of partisan states in a monetary union implies sizable aggregate income effects of these partisan differences: The transfer multiplier would rise by 0.58 on impact if Republican governors spent as much as Democratic governor, but falls in the long-run.

Paper (updated: February 2022), NBER working paper, Philadelphia Fed Working Paper (older version), VoxEU column.

Alternative Strategies: How Do They Work? How Might They Help? (with Jonas Arias, Martin Bodenstein, Hess Chung, and Andrea Raffo)

Several structural developments in the U.S. economy—including lower neutral interest rates and a flatter Phillips curve—have challenged the ability of the current monetary policy framework to deliver on the Federal Open Market Committee’s (FOMC) dual-mandate goals. This paper explores whether makeup strategies, in which policymakers seek to stabilize average inflation around the inflation target over some horizon, could strengthen the FOMC’s ability to fulfill its dual mandate. The quantitative analysis discussed here suggests that credible makeup strategies may provide some moderate stabilization gains. The practical implementation of these strategies, however, faces a number of challenges that would have to be surmounted for the full benefit of these strategies to be realized.

FEDS Working Paper


Bargaining Power and Aggregate Fluctuations (with Jesus Fernandez-Villaverde and Pablo Guerron-Quintana)

Journal of Economic Dynamics & Control (2021)

We argue that social and political risk causes significant aggregate fluctuations by changing bargaining power. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output and unemployment. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate business sector and we back out the evolution of the bargaining power of workers over time using a new methodological approach, the partial .filter. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 28% of aggregate fluctuations and have a welfare cost of 2.4% in consumption units.

Last working paper version, NBER working paper (older version) (supersedes "Political Distribution Risk and Aggregate Fluctuations")

Identification And Inference With Ranking Restrictions (with Pooyan Amir-Ahmadi)

Quantitative Economics (2021)

We propose ranking restrictions on impulse-responses to sharpen set identification with sign restrictions in Bayesian vector autoregressions (VARs) and develop tools for inference with tight restrictions. Ranking restrictions come from micro data on heterogeneous industries in VARs, bounds on elasticities, or restrictions on dynamics. We characterize analytically when ranking restrictions sharpen the identified set in small VARs, including for variables not subject to ranking restrictions. Our tools for inference are of independent interest: (1) A simple algorithm testing whether the identified set is nonempty, (2) a fully Bayesian algorithm that directly samples from the identified set, and (3) a prior-robust algorithm to sample the posterior bounds of the identified set. Using our tools, we analyze productivity news shocks. Both heterogeneity and slope restrictions, but not sign restrictions alone, imply that news shocks raise output temporarily, but significantly. With ranking restrictions the output contribution of news shocks drops by 20-40pp.

Last working paper version, FRB Philadelphia working paper (older "Identification Through Heterogeneity" version), code.

The Role of Startups for Local Labor Markets (with Jerry Carlino)

Journal of Applied Econometrics (2020)

There are substantial differences in startup activity across U.S. local labor markets. We study the causes and consequences of these differences. Startup productivity shocks are found to drive much of these cross-city differences in startup activity. Examples of such shocks include breakthroughs in biotech that spurred startup formation in San Diego and Philadelphia. Overall, these shocks explain half of the forecast error variance of startup job creation, accounting for 40% of population growth and long-run changes in employment. Shocks to barriers to firm entry have economy-wide effects similar to those of startup productivity shocks but operate largely through the number of startups, rather than their size. We use a novel spatial panel VAR, identifying shocks using shift-share external instruments.

Paper, FRB Philadelphia working paper (2019 version), code.

A Narrative Approach to a Fiscal DSGE Model

Quantitative Economics (2020)

Structural DSGE models are used for analyzing both policy and the sources of business cycles. Conclusions based on full structural models are, however, potentially affected by misspecification. A competing method is to use partially identified SVARs based on narrative shocks. This paper asks whether both approaches agree. Specifically, I use narrative data in a DSGE-SVAR that partially identify policy shocks in the VAR and assess the fit of the DSGE model relative to this narrative benchmark. In developing this narrative DSGE-SVAR, I develop a tractable Bayesian approach to proxy VARs and show that such an approach is valid for models with a certain class of Taylor rules. Estimating a DSGE-SVAR based on a standard DSGE model with fiscal rules and narrative data, I find that the DSGE model identification is at odds with the narrative information as measured by the marginal likelihood. I trace this discrepancy to differences in impulse responses, identified historical shocks, and policy rules. The results indicate monetary accommodation of fiscal shocks.

Last working paper version, Appendix, FRB Philadelphia working paper (2016 version), Code.

Entrepreneurial Tail Risk: Implications for Employment Dynamics

Journal of Monetary Economics (2019)

New businesses are important for job creation and have contributed more than proportionally to the recent economic fluctuations. Given the risk exposure of entrepreneurs, this paper asks whether changing risk can explain the dynamics of new businesses. It makes two contributions. First, it provides a tractable, quantitative framework for analyzing business creation when entrants are exposed to idiosyncratic risk. Second, it provides conditions under which data on the size distribution of new businesses and their exit rates identifies entrepreneurial risk. According to the structural estimates, fluctuations in such risk explain around 40% of the employment fluctuations at new U.S. businesses.

Last working paper version, web appendix, code.

Accounting for the Sources of Macroeconomic Tail Risks (with Enghin Atalay and Zhenting Wang)

Economics Letters (2018)

Using a multi-industry real business cycle model, we empirically investigate the microeconomic origins of aggregate tail risks. Our model, estimated using industry-level data from 1972 to 2016, indicates that industry-specific shocks account for most of the third and fourth moments of GDP growth.

FRB Philadelphia working paper.

Fiscal Stimulus and Distortionary Taxation (with Harald Uhlig)

Review of Economic Dynamics (2015)

We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (Smets and Wouters, 2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially.

FRB Philadelphia working paper, Column on