DOCSLIB.ORG

Intangible-Investment-Specific Technical Change, Concentration and Labor Share ∗

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Intangible-Investment-Specific Technical Change, Concentration and Labor Share ∗ Intangible-Investment-Specific Technical Change, Concentration and Labor Share ∗ Lichen Zhang† Oct. 18, 2019 JOB MAKET PAPER CLICK HERE FOR THE LATEST VERSION Abstract In the past three decades, measured investment in factors such as software and R&D, collectively known as "intangible capital" has risen relative to the total business income. Together with this trend, the U.S. business sector has also been characterized by increased concentration and declined measured labor share. This paper develops a quantitative GE model of firm dynamics, consistent with important aspects of firms’ behavior at micro level, to explore the connection between the three major trends of the U.S. business sector. Individual firms operate at Cobb-Douglas technology, but they aggregate as if the elasticity of substitution among factors in production is above unity, triggered by an intangible-investment-specific technical change (IISTC). The IISTC shifts the firm distribution towards large, intangible-intensive firms with low labor share. I show that an IISTC, targeted to match the decline in the relative price of intangible investment goods, accounts for more than 2/3 of the rise of concentration and around half of the decline in measured labor share. Keywords: Intangible Investment, Concentration, Labor Share, Technical Change JEL Classification: E13, E22, E23, E25, D21, D25, D33 ∗I’m deeply indebted to my advisors Tim Kehoe, Manuel Amador, Loukas Karabarbounis, and Jonathan Heathcote for their invaluable guidance and continuous support. I’m particularly grateful to Ellen McGrattan for her detailed comments and discussions on this project. I also want to thank Hengjie Ai, David Argente, Anmol Bhandari, Jarda Borovicka, Zhifeng Cai, Doirrean Fitzgerald, Tom Holmes as well as participants in the International Macro/Trade Workshop and Quantitative Macro workshop at the University of Minnesota, and the UMN-UW Macro/International graduate workshop for their useful suggestions and comments. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. All errors are my own. †Affiliation: University of Minnesota and Federal Reserve Bank of Minneapolis. 1925 Fourth Street South, Minneapolis, MN 55455 (email: [email protected]). 1 Introduction In the past three decades, measured investment in factors such as software and R&D, collec- tively known as “intangible capital” has risen relative to the total business income. Together with this trend, the U.S. business sector has been characterized by increased concentration in terms of employment and sales in large firms at the national level as well as declined measured labor share. This paper proposes a theory to explore the connection between the three major trends of the U.S. business sector quantitatively. I show that an intangible-investment specific technical change (IISTC) that drives the intangible investment relative to the total business income can account for the rise of concentration and the declined measured labor share jointly. I highlight the role of intangibles in shaping factor income shares, concentration, and business dynamism at both the micro and aggregate levels. In my model, firms start with zero intangible capital and the same level of wealth in terms of tangible assets, but differ in productivities on producing consumption/physical investment goods and intangible investment goods1. The varied productivity on intangible investment goods leads to heterogeneous factor shares of income across firms in the long run. Firms with high productivity on producing intangibles are large and intangible-capital intensive, and more intangible-capital intensive firms are also less labor-intensive. Hence, my model features a positive correlation between firm size and intangible-intensity, and a negative relationship between firm size and firm-level labor share, which are consistent with the micro evidence2. The IISTC in my model is manifested as a permanent increase in the aggregate productivity on producing intangible investment goods relative to that on producing consumption/physical investment goods, which captures the declined relative price of intangibles, particularly, soft- ware, from the data. Although firms operate at Cobb-Douglas technology, they aggregate as if the elasticity of substitution among factors in production is above one, triggered by the IISTC3. Firms with high productivity on producing intangibles are large and intangible- 1Since firms start with the same endogenous conditions and non-exiting firms can eventually grow to their optimal levels, only the exogenous heterogeneity matters in steady states. 2See Autor et al.(2017) and Crouzet and Eberly(2019) for United States and Lashkari, Bauer, and Boussard (2019) for very similar patterns in France. 3Consider a simple example where there are two perfectly competitive firms in each sector: one labor- intensive firm with production technology Y1 = L and the other is a capital-intensive firm with production technology Y2 = AK. There are constant labor shares within each firm. Suppose there is capital-specific technical change such that A increases. Under certain conditions, as capital becomes relatively cheaper, it is 1 intensive, which benefit disproportionately from this intangible-specific technology advances, thus becoming even larger and more intangible-intensive. More specifically, the IISTC pushes up the equilibrium wage rate. Due to this GE effect together with the negative correlation between firm size and firm-level labor share, output and labor are reallocated from small firms with low productivity on producing intangibles to large firms with high productivity on pro- ducing intangibles. This leads to the increased concentration. The declined aggregate labor share is the consequence of both a within-firm effect and an across-firm effect. Within each firm, the IISTC makes all the firms in the economy become more intangible-capital-intensive, thus being less labor intensive. Across firms, the IISTC shifts the firm distribution towards large firms with low labor share. My approach is to develop a quantitative GE model of firm dynamics for understanding the aggregate long-run impact of an intangible-investment-specific technical change (IISTC) on concentration and measured labor share. I enrich the model with three key features. First, I explicitly incorporate intangible investment and intangible capital into the model. More specifically, I differentiate between two types capital - tangible and intangible, which are both production inputs but intangible capital is accumulated within each firm through costly production for intangible investment goods given the firm’s production ability4. The goal of doing this is to enable this model to explore the role of intangible investment in shaping factor income shares and concentration at both the micro and macro levels. Second, I introduce financial frictions: incumbent firms cannot issue equity, and they face borrowing constraints that restrict leverage to a multiple of collateralizable assets, as in Evans and Jovanovic(1989). Adding such a financial friction contribute to a more realistic firm life cycle since it hinders the births of start-ups and slows the expansion of young firms. Otherwise, firms jump to their optimal level almost immediately after their births. This implies that statistics related to firm dynamics such as entry and concentration generated from a model without financial friction are going to be very sensitive to technology parameters. Since a main goal of this paper is to study the impact of a technical change on firm dynamics, having a model that features realistic firm distribution and life cycle of firms are very important. Third, I allow for endogenous entry and exit of firms. This helps to understand the effects substituted for labor on the aggregate-level. For more details, see Karabarbounis(2018) 4This differentiates with the existing literature on explaining declined measured labor share such as Aghion et al.(2019) that target "intangible share" without explicitly incorporating both tangible and intangible capital. 2 of an IISTC on how heterogenous firms’ behavior shape the aggregates. In the model, firms with high productivity on intangible investment goods account for a disproportionately large fraction of the total employment and total final output. Moreover, endogenous exit, interacting with financial frictions, makes larger firms harder to exit, which makes firm size and firm age distribution in the model closer to the data. I calibrate the model to the U.S. business sector as if it was at the steady state in early 1980s to match a rich set of both macro and micro moments. In particular, I discipline firms’ production technology to target the BEA-measured income shares and their productivity pro- cesses on both consumption/physical investment and intangible investment goods to capture the empirical fact that a small proportion of highly productive firms account for a very large share of total employment and total final output. I then show that the calibrated model can produce firm-level cross-sectional predictions consistent with the micro evidence. The most important one is the negative correlation be- tween firm size and firm-level labor share documented by Autor, Dorn, Katz, Patterson, and Reenen(2017) using census data. As I mentioned above, this relationship is key to generating the declined labor share and the rise of concentration driven by the IISTC. I finally use the calibrated model to quantify the aggregate long-term impact
Load more

Recommended publications
  • Business Cycle Accounting
    NBER WORKING PAPER SERIES BUSINESS CYCLE ACCOUNTING V.V. Chari Patrick J. Kehoe Ellen McGrattan Working Paper 10351 http://www.nber.org/papers/w10351 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2004 We thank the co-editor and three referees for useful comments. We also thank Kathy Rolfe for excellent editorial assistance and the National Science Foundation for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the National Bureau of Economic Research. © 2004 by V.V. Chari, Patrick J. Kehoe, and Ellen McGrattan. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Business Cycle Accounting V.V. Chari, Patrick J. Kehoe, and Ellen McGrattan NBER Working Paper No. 10351 March 2004, Revised December 2006 JEL No. E1,E12 ABSTRACT We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with time-varying wedges which resemble productivity, labor and investment taxes, and government consumption. Wedges corresponding to these variables -- effciency, labor, investment, and government consumption wedges -- are measured and then fed back into the model in order to assess the fraction of various fluctuations they account for. Applying this method to U.S. data for the Great Depression and the 1982 recession reveals that the effciency and labor wedges together account for essentially all of the fluctuations; the investment wedge plays a decidedly tertiary role, and the government consumption wedge, none.
    [Show full text]
  • Why Did US Market Hours Boom in the 1990S?
    NBER WORKING PAPER SERIES WHY DID U.S. MARKET HOURS BOOM IN THE 1990s? Ellen McGrattan Edward Prescott Working Paper 12046 http://www.nber.org/papers/w12046 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2006 An earlier version of this paper circulated under the title “Expensed and Sweat Equity.” The authors thank the National Science Foundation for financial support and seminar participants at the SED conference, NYU, the Federal Reserve Banks of Minneapolis and Dallas, UT Austin, UCSD, UWO, UQAM, the Bank of Canada, and the University of Miami. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research, the Federal Reserve Bank of Minneapolis, or the Federal Reserve System. ©2006 by Ellen McGrattan and Edward Prescott. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Why Did U.S. Market Hours Boom in the 1990s? Ellen McGrattan and Edward Prescott NBER Working Paper No. 12046 February 2006 JEL No. E3, O4 ABSTRACT During the 1990s, market hours in the United States rose dramatically. The rise in hours occurred as gross domestic product (GDP) per hour was declining relative to its historical trend, an occurrence that makes this boom unique, at least for the postwar U.S. economy. We find that expensed plus sweat investment was large during this period and critical for understanding the movements in hours and productivity. Expensed investments are expenditures that increase future profits but, by national accounting rules, are treated as operating expenses rather than capital expenditures.
    [Show full text]
  • Putting Home Economics Into Macroeconomics (P
    Federal Reserve Bank of Minneapolis Putting Home Economics Into Macroeconomics (p. 2) Jeremy Greenwood Richard Rogerson Randall Wright The Macroeconomic Effects of World Trade in Financial Assets (p. 12) Harold L. Cole Federal Reserve Bank of Minneapolis Quarterly Review Vol. 17, No. 3 ISSN 0271-5287 This publication primarily presents economic research aimed at improving policymaking by the Federal Reserve System and other governmental authorities. Any views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Editor: Arthur J. Rolnick Associate Editors: S. Rao Aiyagari, John H. Boyd, Warren E. Weber Economic Advisory Board: Edward J. Green, Ellen R. McGrattan, Neil Wallace Managing Editor: Kathleen S. Rolfe Article Editor/Writers: Kathleen S. Rolfe, Martha L. Starr Designer: Phil Swenson Associate Designer: Beth Leigh Grorud Typesetters: Jody Fahland, Correan M. Hanover Circulation Assistant: Cheryl Vukelich The Quarterly Review is published by the Research Department Direct all comments and questions to of the Federal Reserve Bank of Minneapolis. Subscriptions are Quarterly Review available free of charge. Research Department Articles may be reprinted if the reprint fully credits the source— Federal Reserve Bank of Minneapolis the Minneapolis Federal Reserve Bank as well as the Quarterly P.O. Box 291 Review. Please include with the reprinted article some version of Minneapolis, Minnesota 55480-0291 the standard Federal Reserve disclaimer and send the Minneapo- (612-340-2341 / FAX 612-340-2366). lis Fed Research Department a copy of the reprint. Federal Reserve Bank of Minneapolis Quarterly Review Summer 1993 Putting Home Economics Into Macroeconomics* Jeremy Greenwood Richard Rogerson Randall Wright Professor of Economics Visitor Consultant University of Rochester Research Department Research Department Federal Reserve Bank of Minneapolis Federal Reserve Bank of Minneapolis and Associate Professor of Economics and Associate Professor and University of Minnesota Joseph M.
    [Show full text]
  • The Transformation of Macroeconomic Policy and Research
    K4_40319_Prescott_358-395 05-08-18 11.41 Sida 370 THE TRANSFORMATION OF MACROECONOMIC POLICY AND RESEARCH Prize Lecture, December 8, 2004 by Edward C. Prescott* Arizona State University, Tempe, and Federal Reserve Bank of Minneapolis, Minnesota, USA. 1. INTRODUCTION What I am going to describe for you is a revolution in macroeconomics, a transformation in methodology that has reshaped how we conduct our science. Prior to the transformation, macroeconomics was largely separate from the rest of economics. Indeed, some considered the study of macroeconomics fundamentally different and thought there was no hope of integrating macroeconomics with the rest of economics, that is, with neoclassical economics. Others held the view that neoclassical foundations for the empirically deter- mined macro relations would in time be developed. Neither view proved correct. Finn Kydland and I have been lucky to be a part of this revolution, and my address will focus heavily on our role in advancing this transformation. Now, all stories about transformation have three essential parts: the time prior to the key change, the transformative era, and the new period that has been impacted by the change. And that is the story I am going to tell: how macro- economic policy and research changed as the result of the transformation of macroeconomics from constructing a system of equations of the national accounts to an investigation of dynamic stochastic economies. Macroeconomics has progressed beyond the stage of searching for a theory to the stage of deriving the implications of theory. In this way, macroeconomics has become like the natural sciences. Unlike the natural sciences, though, macroeconomics involves people making decisions based upon what they think will happen, and what will happen depends upon what decisions they make.
    [Show full text]
  • Edward C. Prescott [Ideological Profiles of the Economics Laureates] Daniel B
    Edward C. Prescott [Ideological Profiles of the Economics Laureates] Daniel B. Klein, Ryan Daza, and Hannah Mead Econ Journal Watch 10(3), September 2013: 556-559 Abstract Edward C. Prescott is among the 71 individuals who were awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel between 1969 and 2012. This ideological profile is part of the project called “The Ideological Migration of the Economics Laureates,” which fills the September 2013 issue of Econ Journal Watch. Keywords Classical liberalism, economists, Nobel Prize in economics, ideology, ideological migration, intellectual biography. JEL classification A11, A13, B2, B3 Link to this document http://econjwatch.org/file_download/761/PrescottIPEL.pdf ECON JOURNAL WATCH Pissarides, Christopher A. 2011b. Plan B: Cut the VAT Back to 17.5 Per Cent. New Statesman, October 11. Link Pissarides, Christopher A. 2011c. Europe Is Losing Out in Both Employment and Productivity by Not Making It Easier to Set Up and Operate Business Services. British Politics and Policy at LSE, November 3. Link Pissarides, Christopher A. 2012. Obama’s Election Should Be Good News for Us in Europe. EUROPP (London School of Economics), November 7. Link Pissarides, Christopher A. 2013a. A Cypriot Nobelist Is “Appalled” by the Proposed Bailout Bank Tax. Bloomberg Businessweek, March 19. Link Pissarides, Christopher A. 2013b. EU Bailouts: A Vehicle to Kick the Weak? CNN, March 21. Link Pissarides, Christopher A. 2013c. Unemployment in the Great Recession. Economica 80(319): 385-403. Pissarides, Christopher A., and Ian McMaster. 1990. Regional Migration, Wages and Unemployment: Empirical Evidence and Implications for Policy. Oxford Economic Papers 42(4): 812-831.
    [Show full text]
  • The New Neoclassical Synthesis and the Role of Monetary Policy
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: NBER Macroeconomics Annual 1997, Volume 12 Volume Author/Editor: Ben S. Bernanke and Julio Rotemberg Volume Publisher: MIT Press Volume ISBN: 0-262-02435-7 Volume URL: http://www.nber.org/books/bern97-1 Publication Date: January 1997 Chapter Title: The New Neoclassical Synthesis and the Role of Monetary Policy Chapter Author: Marvin Goodfriend, Robert King Chapter URL: http://www.nber.org/chapters/c11040 Chapter pages in book: (p. 231 - 296) Marvin Goodfriendand RobertG. King FEDERAL RESERVEBANK OF RICHMOND AND UNIVERSITY OF VIRGINIA; AND UNIVERSITY OF VIRGINIA, NBER, AND FEDERAL RESERVEBANK OF RICHMOND The New Neoclassical Synthesis and the Role of Monetary Policy 1. Introduction It is common for macroeconomics to be portrayed as a field in intellectual disarray, with major and persistent disagreements about methodology and substance between competing camps of researchers. One frequently discussed measure of disarray is the distance between the flexible price models of the new classical macroeconomics and real-business-cycle (RBC) analysis, in which monetary policy is essentially unimportant for real activity, and the sticky-price models of the New Keynesian econom- ics, in which monetary policy is viewed as central to the evolution of real activity. For policymakers and the economists that advise them, this perceived intellectual disarray makes it difficult to employ recent and ongoing developments in macroeconomics. The intellectual currents of the last ten years are, however, subject to a very different interpretation: macroeconomics is moving toward a New NeoclassicalSynthesis. In the 1960s, the original synthesis involved a com- mitment to three-sometimes conflicting-principles: a desire to pro- vide practical macroeconomic policy advice, a belief that short-run price stickiness was at the root of economic fluctuations, and a commitment to modeling macroeconomic behavior using the same optimization ap- proach commonly employed in microeconomics.
    [Show full text]
  • An Interview with Thomas J. Sargent
    Macroeconomic Dynamics, 9, 2005, 561–583. Printed in the United States of America. DOI: 10.1017.S1365100505050042 MD INTERVIEW AN INTERVIEW WITH THOMAS J. SARGENT Interviewed by George W. Evans Department of Economics, University of Oregon and Seppo Honkapohja Faculty of Economics, University of Cambridge January 11, 2005 Keywords: Rational Expectations, Cross-Equation Restrictions, Learning, Model Misspecification, Adaptation, Robustness The rational expectations hypothesis swept through macroeconomics during the 1970s and permanently altered the landscape. It remains the prevailing paradigm in macroeconomics, and rational expectations is routinely used as the stan- dard solution concept in both theoretical and applied macroeconomic mod- elling. The rational expectations hypothesis was initially formulated by John F. Muth Jr. in the early 1960s. Together with Robert Lucas Jr., Thomas (Tom) Sargent pioneered the rational expectations revolution in macroeconomics in the 1970s. Possibly Sargent’s most important work in the early 1970s focused on the implications of rational expectations for empirical and econometric research. His short 1971 paper “A Note on the Accelerationist Controversy” provided a dra- matic illustration of the implications of rational expectations by demonstrating that the standard econometric test of the natural rate hypothesis was invalid. This work was followed in short order by key papers that showed how to conduct valid tests of central macroeconomic relationships under the rational expecta- tions hypothesis. Imposing rational expectations led to new forms of restric- tions, called “cross-equation restrictions,” which in turn required the development of new econometric techniques for the study of macroeconomic relations and models. Correspondence to: Professor George W. Evans, Department of Economics, 1285 University of Oregon, Eugene, OR 97403-1285, USA; e-mail: [email protected].
    [Show full text]
  • Evolution of Modern Business Cycles: Accounting for the Great Recession
    Evolution of Modern Business Cycle Models: Accounting for the Great Recession Patrick J. Kehoe Stanford University, University College London, and Federal Reserve Bank of Minneapolis Virgiliu Midrigan New York University Elena Pastorino Stanford University, Hoover Institution, and Federal Reserve Bank of Minneapolis Staff Report 566 June 2018 DOI: https://doi.org/10.21034/sr.566 Keywords: New Keynesian models; Financial frictions; External validation JEL classification: E13, E32, E52, E61 The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. __________________________________________________________________________________________ Federal Reserve Bank of Minneapolis • 90 Hennepin Avenue • Minneapolis, MN 55480-0291 https://www.minneapolisfed.org/research/ Evolution of Modern Business Cycle Models: Accounting for the Great Recession Patrick J. Kehoey Virgiliu Midriganz Elena Pastorinox June 2018 Abstract Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real business cycle models can account, respectively, for the aggregate and the cross-regional fluctuations observed in the Great Recession in the United States. We thank Adrien Auclert, Mark Gertler, Robert Hall, Gordon Hanson, Robert Lucas, Ellen McGrattan, Juan Pablo Nicolini, John Taylor, and Timothy Taylor for their comments, and are especially thankful to John Cochrane for his detailed feedback.
    [Show full text]
  • A Reassessment of Real Business Cycle Theory by Ellen
    A Reassessment of Real Business Cycle Theory By Ellen R. McGrattan and Edward C. Prescott* *Corresponding author: Ellen McGrattan. Session: Theory and Measurement of Intangible capital. Session chair: Ellen McGrattan. Discussants: Dirk Krueger, Lukasz Drozd, and Andrew Atkeson. McGrattan: University of Minnesota, 4-101 Hanson Hall, 1925 Fourth Street South, Minneapolis, MN, 55455, 612-625-6714, [email protected], Federal Reserve Bank of Minneapolis, and NBER; Prescott: Arizona State University, W. P. Carey School of Busi- ness, P. O. Box 879801, Tempe, AZ, 85287, 480-727-7977, [email protected], Federal Reserve Bank of Minneapolis, and NBER. We thank Dirk Krueger for helpful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. During the downturn of 2008–2009, output and hours fell significantly, but labor pro- ductivity rose. These observations have led many economists to conclude that this recession was not typical and certainly not consistent with the predictions of current macrotheories that assume business cycles are driven by fluctuations in total factor productivities of firms. With credit spreads rising and asset prices plummeting, many looked to what seemed like an obvious alternative explanation, namely, that disruptions in financial markets were the source of declines in real activity. While this alternative theory sounds plausible, we question the original premise that the 2008–2009 episode is inherently different. We are motivated by the fact that this recession has many of the same features of the 1990s technology boom, only in reverse. (See McGrattan and Prescott 2010, 2012.) To this end, we show that one small modification of the business cycle models dating back to those developed by Kydland and Prescott (1982) and Long and Plosser (1983) yields predictions that are consistent with the facts.
    [Show full text]
  • Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data?
    WP/04/234 Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data? Jordi Galí and Pau Rabanal © 2004 International Monetary Fund WP/04/234 IMF Working Paper Western Hemisphere Department Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data? Prepared by Jordi Galí and Pau Rabanal1 Authorized for distribution by Tamim Bayoumi December 2004 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Our answer: Not so well. We reached that conclusion after reviewing recent research on the role of technology as a source of economic fluctuations. The bulk of the evidence suggests a limited role for aggregate technology shocks, pointing instead to demand factors as the main force behind the strong positive comovement between output and labor input measures. JEL Classification Numbers: E32 Keywords: Real Business Cycles, Technology Shocks, Nominal Rigidities, Real Frictions Author(s) E-Mail Address: [email protected], [email protected] 1 Prepared for the 19th NBER Annual Conference on Macroeconomics. We are thankful to Susanto Basu, Olivier Blanchard, Yongsung Chang, John Fernald, Albert Marcet, Barbara Rossi, Julio Rotemberg, Juan Rubio-Ramirez, Robert Solow, Jaume Ventura, Lutz Weinke, as well as the editors, Mark Gertler and Ken Rogoff, and discussants, Ellen McGrattan and Valerie Ramey, for useful comments.
    [Show full text]
  • Accounting for the Great Depression
    Federal Reserve Bank of Minneapolis Research Department Accounting for the Great Depression V. V. Chari, Patrick J. Kehoe, and Ellen R. McGrattan* Working Paper 619 February 2002 *Chari, University of Minnesota and Federal Reserve Bank of Minneapolis; Kehoe and McGrattan, Federal Reserve Bank of Minneapolis and University of Minnesota. We thank the NSF for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The Great Depression is not yet well understood. Economists have offered many theories for both the massive decline and the slow recovery of output during 1929—39, but no consensus has formed on the main forces behind this major economic event. Here we describe and demonstrate a simple methodology for determining which types of theories are the most promising. Several prominent theories blame the Great Depression on frictions in labor and capital markets. The sticky wage theory is that wage stickiness together with a monetary contrac- tion produces a downturn in output. (See Michael Bordo, Christopher Erceg, and Charles Evans 2001.) The cartelization theory is that an increase in cartelization and unionization leads to a slow recovery. (See Harold Cole and Lee Ohanian 2001.) The investment fric- tion theory is that monetary contractions increase frictions in capital markets that produce investment-driven downturns in output. (See Ben Bernanke and Mark Gertler 1989 and Charles Carlstrom and Timothy Fuerst 1997.) We think the critical feature of both the sticky wage and cartelization theories is that their frictions lead to a wedge between the marginal rate of substitution between leisure and consumption and the marginal product of labor.
    [Show full text]
  • Real Business Cycle Models: Past, Present, and Future*
    Real Business Cycle Models: Past, Present, and Future∗ Sergio Rebelo† March 2005 Abstract In this paper I review the contribution of real business cycles models to our understanding of economic fluctuations, and discuss open issues in business cycle research. ∗I thank Martin Eichenbaum, Nir Jaimovich, Bob King, and Per Krusell for their comments, Lyndon Moore and Yuliya Meshcheryakova for research assistance, and the National Science Foundation for financial support. †Northwestern University, NBER, and CEPR. 1. Introduction Finn Kydland and Edward Prescott introduced not one, but three, revolutionary ideas in their 1982 paper, “Time to Build and Aggregate Fluctuations.” The first idea, which builds on prior work by Lucas and Prescott (1971), is that business cycles can be studied using dynamic general equilibrium models. These models feature atomistic agents who operate in competitive markets and form rational expectations about the future. The second idea is that it is possible to unify business cycle and growth theory by insisting that business cycle models must be consistent with the empirical regularities of long-run growth. The third idea is that we can go way beyond the qualitative comparison of model properties with stylized facts that dominated theoretical work on macroeconomics until 1982. We can calibrate models with parameters drawn, to the extent possible, from microeconomic studies and long-run properties of the economy, and we can use these calibrated models to generate artificial data that we can compare with actual data. It is not surprising that a paper with so many new ideas has shaped the macroeconomics research agenda of the last two decades.
    [Show full text]