2. Idiosyncratic Shocks and Investment Irreversibility: Capital Misallocation over the Business Cycle (with Tatsuro Senga)

Does micro-level investment irreversibility amplify or dampen business cycles? We show this depends on the source of aggregate risk. Investment irreversibility reduces fluctuations in both aggregate output and investment when firm-level idiosyncratic shocks aggregate up to economy-wide effects. This contrasts with models driven by aggregate productivity shocks, where irreversibility has little effect on volatility. The key is that idiosyncratic shocks are sufficiently volatile to cause the irreversibility con- straint to bind cyclically for a significant mass of firms. If so, investment irreversibility hampers productivity-enhancing capital reallocation and reduces business cycle volatil- ity. Moreover, household consumption smoothing is impeded when firms cannot adjust capital optimally, increasing real wage volatility. This labor market effect, combined with capital misallocation, reduces aggregate output volatility by 22 percent and invest- ment volatility by 60 percent. These results highlight the importance of considering the source of economic volatility when assessing investment frictions. We provide empirical support for these predictions using firm-level investment data from Compustat. (Submitted)

3. Heterogeneous Firms, Rational Inattention, and the Business Cycle (with Tatsuro Senga)

We study fluctuations of uncertainty at the aggregate and idiosyncratic level in an economy where firms are heterogeneous in their total factor productivities and they can choose how much to learn about the aggregate and idiosyncratic states, respectively. The choice how much to allocate resources between the aggregate and idiosyncratic states is constrained by information processing capacity constraints. This creates an endogenous interaction between uncertainty at the micro and macro level and we quantify the relative contribution of the micro and macro volatility in generating uncertainty around aggregate and idiosyncratic state in driving aggregate fluctuations. We consider uncertainty shocks whereby the volatility of aggregate TFP and idiosyncratic TFP vary over time. The model implies that an increase in idiosyncratic volatility leads to reallocation of capacity from learning about aggregate state to learning about firm-specific shocks, leading to higher macroeconomic uncertainty. The relative strength of the macro and micro volatility in generating business cycle fluctuation hinges on the distribution of firms over information capacity constraints and productivities. We discipline the model by using a UK national survey executed by the Office for National Statistics that collects information about both macro and micro uncertainty.

Draft coming soon.

4. Uncertainty varying VAR model (with Filippo Arigoni)

Draft coming soon.

PUBLICATIONS

Public Investment in a Production Network: Aggregate and Sectoral Implications (with Alessandro Peri and Omar Rachedi )

The Review of Economics and Statistics, 2023 

Aggregate and sectoral effects of public investment crucially depend on the interaction between the output elasticity to public capital and intermediate inputs. We uncover this fact through the lens of a New Keynesian production network. This setting doubles the socially optimal amount of public capital relative to the one-sector model without intermediate inputs, leading to a substantial amplification of the public-investment multiplier. We also document novel sectoral implications of public investment. Although public investment is concentrated in far fewer sectors than public consumption, its effects are relatively more evenly distributed across industries. We validate this model implication in the data.