Research

Abstract. Standard business cycle models cannot account for the magnitude and persistence of the cyclical fluctuations in the labor share of output in the United States. A model with search frictions in the labor market and a technology choice can resolve this shortcoming. The technology choice allows for general patterns of capital- and labor-augmenting technical change in the short run while being consistent with Hicks-neutral technical change in the long run when adjustment costs vanish. Production is CES in the short run and Cobb-Douglas in the long run, consistent with a balanced growth path under standard restrictions on preferences. We calibrate the model to U.S. data and quantify that the technology choice with adjustment costs enhances propagation relative to the model with fixed Cobb-Douglas technology. The model also reproduces the labor share overshooting property in the data.

Abstract. We develop a framework for the analysis of the economic effects of an epidemic that incorporates firm-specific innovation and endogenous entry. Transition dynamics is characterized by two differential equations describing the evolution of the mass of susceptible in the population and the ratio of the population to the mass of firms. An epidemic propagates through the economy via changes in market size that reduce incentives to enter the market and to undertake innovative activity. We evaluate state-dependent interventions involving policy rules based on tracking susceptible or infected. Simple policy rules are announced at the time of the outbreak and anchors private sector's expectations about the time path of the intervention, including the end date. Welfare gains/losses relative to the do-nothing scenario are computed accounting for transition dynamics.

Abstract. This letter presents new empirical evidence on the economic impact of tariffs on the US economy using structural vector autoregressions (SVARs). A persistent increase in tariffs on imports from the rest of the world reduces real GDP growth, permanently lowering real GDP relative to the trend before the tariff increase. The magnitudes are broadly consistent with available estimates of the negative impact of increases in average personal income tax rates. The contraction in economic activity is associated with a decrease in stock market capitalization. The federal deficit in percent of GDP worsens. Inflation increases initially, but then falls below average for a few years, implying a negligible effect on the price level.

Abstract. In the United States, market hours worked are approximately flat across the wealth distribution. Accounting for this phenomenon is a standing challenge for standard heterogeneous-agent macro models. In these models, wealthier households consume more, enjoy more leisure, and work less. We propose a theory that generates the cross-sectional wealth-hours relation as in the data. We quantify this theory in the context of a new general-equilibrium heterogeneous-agent incomplete-markets model with three key features: a quality choice in consumption, non-homothetic preferences, and a multi-sector production structure. As external validation, we show that the model produces expenditure patterns that are consistent with the data, as well as realistic "quality Engel curves."

Abstract. How do changes in labor taxes affect innovation and aggregate productivity growth? To answer this question, we propose a quantitative, general equilibrium growth model featuring product and quality innovation with endogenous market structure, estimate its parameters, and provide empirical validation for the propagation mechanism of labor tax changes. We find that a temporary cut in flat-rate labor taxes produces a growth acceleration in aggregate productivity, permanently increasing the path of real GDP per capita. Moreover, such permanent gains are sizable even without long-run growth effects. 

Abstract. We develop a business cycle model with search frictions in the labor market and a labor supply decision along the extensive margin that yields cyclical asymmetry between peaks and troughs of the unemployment rate and symmetric fluctuations of the labor force participation rate as in the U.S. data. We calibrate the model and find that cyclical changes in the extent of search frictions are solely responsible for the peak-trough asymmetry. Participation decisions do not generate asymmetry but contribute to the fluctuations in search frictions by changing the size and composition of the pool of job seekers, which in turn affects the tightness ratio and thereby slack in the labor market. The participation rate would be counterfactually asymmetric absent labor supply responses to shocks.

Abstract.  We study the non-linear propagation mechanism of tax policy in the context of a heterogeneous-agent equilibrium business cycle model with search frictions in the labor market and an extensive margin of employment adjustment. The model exhibits endogenous job destruction and endogenous hiring standards in the form of occasionally-binding zero-surplus constraints. We parametrize the model using U.S. data, including narratively-identified impulse response functions from proxy structural vector autoregressions, or SVARs. We find that the dynamic response of the employment rate to a temporary change in the flat-rate tax on labor income is highly non-linear, displaying sizable asymmetries and state-dependence. Notably, the response to a tax rate cut is at least twice as large in a recession as in an expansion.

Abstract. We examine the quantitative implications of income taxation for innovation and aggregate productivity growth within the context of a dynamic stochastic general equilibrium model of innovation-led growth. In the model, innovation comes from entrants creating new products and incumbents improving own existing products. The model embodies key features of the U.S. government sector: (i) an individual income tax with differential treatment of labor income, dividends, and capital gains; (ii) a corporate tax; (iii) a consumption tax; (iv) government purchases. The model is restricted to fit observations for the post-war U.S. economy. Our results suggest that endogenous movements in aggregate productivity and endogenous market structure play a quantitatively important role in the propagation of tax shocks. 

Abstract. This paper argues that the canonical search-and-matching model cannot generate the observed cyclical asymmetry of the unemployment rate. In the United States, the unemployment rate rises quickly and abruptly at the onset of contractions and declines slowly and gradually during expansions. This pattern produces positive skewness in the distribution of unemployment rate changes, while the model produces a counterfactually negative skewness. The key feature of the model responsible for this counterfactual prediction is the convexity of hiring costs in aggregate employment, which leads to excessive responsiveness of job vacancies to positive shocks in periods of high unemployment. I argue that the inability of the model to replicate the cyclical asymmetry in the data stands regardless of its ability to generate realistic fluctuations in unemployment. Furthermore, high replacement rates and real wage rigidity (both fixed and downward rigid wages) - commonly used to enhance amplification of shocks - do not resolve the puzzle, rather they make it worse.

Abstract. We study the effects of large reductions in government budget deficits (labeled ``fiscal consolidations'') on firms' entry, innovative investments, productivity and per capita output growth in a model of endogenous technological change. Due to the absence of lump-sum taxes, temporary budget deficits set government debt-output ratios on unsustainable paths. An equilibrium then requires the specification of a date at which the debt-output ratio is stabilized at a constant finite value. We discipline parameters using post-war observations for the U.S. economy. We find that fiscal consolidations produce persistent growth slowdowns, permanently lowering the path of per capita output relative to a benchmark economy in which the fiscal consolidation is achieved with lump-sum taxes. These output losses are sizable. In this sense, government debt is a burden on the economy. Tax-based consolidations produce output losses that are twice as large as those from spending-based consolidations.

Abstract. We study how the changing demographic composition of the U.S. labor force has affected the response of the unemployment rate to marginal tax rate shocks. Using narratively identified tax changes as proxies for structural shocks, we establish that the responsiveness of unemployment rates to tax changes varies significantly across age groups: the unemployment rate response of the young is nearly twice as large as that of the old. This heterogeneity is the channel through which shifts in the age composition of the labor force impact the response of the unemployment rate to tax cuts. We find that the aging of the baby boomers considerably reduces the effects of tax cuts on aggregate unemployment.

Abstract. The employment rate in the United States fluctuates asymmetrically over the business cycle: it contracts deeply and sharply during recessions, but it recovers slowly and gradually during expansions. By contrast, output features nearly symmetric fluctuations about trend. I explain these facts using a search-and-matching model with worker heterogeneity in skill/productivity featuring endogenous job destruction and fluctuations in labor composition. The model predicts that the responsiveness of the employment rate to shocks greatly varies over the business cycle; it rises in recessions and declines in expansions.

Abstract. In this paper we propose an endogenous growth model of commodity-rich economies in which: (i) long-run (steady-state) growth is endogenous and yet independent of commodity prices; (ii) commodity prices affect short-run growth through transitional dynamics; and (iii) the status of net commodity importer/exporter is endogenous. We argue that these predictions are consistent with historical evidence from the 19th to the 21st century.

Abstract. I study the effects of uncertainty on technology adoption and thereby on volatility and growth. I present an analytically-tractable model in which: (i) uncertainty about the returns to adoption delays technology diffusion; and (ii) the mean and volatility of output growth are jointly determined in equilibrium. I then test the key predictions of the model by studying the introduction of three major information and communication technologies (ICT)---computers, internet, and cell phones. I find that countries with more volatile growth rates of real GDP per capita have higher time adoption lags and lower average growth, as predicted by the model.

Abstract. We show the existence of a very short-term relationship at the daily frequency between changes in the price of a country's major commodity export and changes in its nominal exchange rate. The relationship appears to be robust and to hold when we use contemporaneous (realized) commodity price changes in our regression. However, when we use lagged commodity price changes, the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account.

Abstract. How has the internet affected search and hiring, and what are the implications for aggregate unemployment? Answering these questions empirically has proven difficult due to selection in internet use and difficulty in measuring the search activities of both sides of the labor market. This paper overcomes these challenges by combining a plausibly exogenous variation in the availability of high-speed internet in Norway with large-scale survey and administrative data on hiring firms, job seekers, and vacancies. Our empirical analysis shows that the internet expansion led more firms to recruit online, and caused 9% shorter vacancy durations and 13% fewer failed recruitment attempts. While the expansion increased job finding rates by 2.4% and starting wages by 6% among unemployed, we find no evidence of changes in job-to-job mobility or wage growth for employees. To interpret these findings, we develop and calibrate an equilibrium search model with endogenous job creation and destruction where workers decide how much search effort to exert on and off the job. Through the lens of the calibrated model, we find that better search technology is the main driving force behind our quasi-experimental evidence. Our calculations indicate that the steady-state unemployment rate fell by as much as 14% due to the broadband internet expansion. 

Abstract. Searching for a job requires time, which unemployed individuals typically can spare, and monetary resources, which they often lack. To study the implications of pecuniary search costs, which mostly affect search decisions of liquidity-constrained unemployed individuals, we embed such costs in a model of incomplete-insurance markets with search-and-matching frictions where heterogeneous-agents make endogenous job search decisions. To quantitatively discipline the model, we use administrative data from random job-search audits  of unemployed individuals claiming UI benefits. We use the model to study the aggregate economic impact of several government policies aimed at increasing the fraction of unemployed searching for a job.

Abstract. We develop an equilibrium business cycle model of multi-plant firms with perfectly competitive product and labor markets. Plant-level production features a minimum labor requirement, leading to occasionally binding capacity constraints at the firm level. The aggregate production function is kinked, displaying constant returns to scale when the economy is below capacity and decreasing returns when at capacity. We calibrate the model to U.S. data and show that the effects of distorting taxes are highly nonlinear and state-dependent, varying systematically with the state of the business cycle. The aggregate hours elasticity is higher in recessions and decreases with the size of the labor tax cut. Moreover, it differs from the structural preference parameter determining the individual-level labor supply elasticity.

Abstract. This paper studies the mechanisms and the extent to which parental wage risk passes through to children’s skill development. Through a quantitative dynamic labor supply model in which two parents choose whether to work short or long hours or not work at all, time spent with children, and child-related expenditures, we find that income risk impacts skill accumulation, permanently lowering children’s skill levels. To the extent that making up for cognitive skill losses during childhood is hard—as available evidence suggests—uninsurable income risk can negatively impact the labor market prospects of future generations.

Abstract. We develop a dynamic general equilibrium model in which the choice of whether, when, and how many managers to employ is dictated by the organizational form that yields the higher rate of return to innovative investment. We model the corporate governance conflict between owners and managers as a principal-agent problem: the owner must offer an incentive contract that makes managers exert effort, trading off the benefit from improved efficiency with the cost of forgoing a share of the gross cash flows as managerial compensation. Delegation occurs when the market size is sufficiently large to guarantee the viability of the incentive contract. Complementarity between management and innovative investment acts as an amplification mechanism of policy and fundamentals, which can generate multiple equilibria. After calibrating the model to the US, we find that country-specific factors limiting managerial input are quantitatively important drivers of cross-country growth differences, comparable to policy distortions raising the costs of setting up and running a firm. For instance, going from the US averages for the number of managers per firm and employment share of managers to their respective considerably lower values for Italy leads to a ``growth disaster'' where innovation shuts down altogether.

Abstract. Per capita hours worked in the United States have shown virtually no secular trend in the postwar period. This absence of trend masks two offsetting forces: hours per worker steadily decrease throughout the period, whereas the employment-to-population ratio increases. Using data and quantitative theory, we attribute these patterns to a slowdown in the rate of technical progress.

Abstract. In the United States, total factor productivity growth has a hump-shaped pattern since the mid-1970s, peaking in the early 2000s and declining thereafter. In the same period, research and development (R&D) expenditures per firm and as a share of firm sales have steadily increased, together with increasing gross profit ratios. Motivated by these trends, we develop an endogenous growth model in which dominant firms face a competitive fringe and charge variable markups. We assess the model’s ability to reproduce the trends and use it to simulate counterfactual scenarios based on different technologies for goods and knowledge production. The model identifies increasing fixed costs associated with knowledge production and growing market concentration as key factors in explaining the data. Furthermore, the model aligns with firm-level data on the decline in research productivity.