Twenty-fifth Annual Conference on Macroeconomics

Rong Qian, University of Maryland; Carmen Reinhart, University of Maryland and NBER; and Kenneth Rogoff, Harvard University and NBER
On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion?

Qian, Reinhart, and Rogoff use a dataset of over two hundred years of sovereign debt, banking, and inflation crises to explore the question of how long it takes a country to "graduate" from the typical pattern of serial crisis that most emerging markets experience. They find that for default and inflation crises, twenty years is a significant market, but the distribution of recidivism has extremely fat tails. In the case of banking crises, it is unclear whether countries ever graduate. These researchers also examine the more recent phenomenon of IMF programs, which sometimes result in "near misses" but sometimes end in default, even after a program is instituted. Their paper raises the important theoretical question of why countries experience serial default, and how they might graduate.

Gauti Eggertsson, Federal Reserve Bank of New York
What Fiscal Policy is Effective at Zero Interest Rates

Eggertsson notes that tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. One example of a contractionary tax cut is a reduction in taxes on wages, which deepens a recession by increasing deflationary pressures. Another example is a cut in capital taxes, which deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand therefore are more effective. These policies include: a temporary increase in government spending; and temporary tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, for example an investment tax credit or a cut in sales taxes. These results apply only in an environment in which the interest rate is close to zero, as observed in large parts of the world today.

Adam Ashcraft, Federal Reserve Bank of New York; Nicolae Garleanu, UC, Berkeley and NBER; and Lasse Heje Pedersen, New York University and NBER
Two Monetary Tools: Interest Rates and Haircuts

Ashcraft, Garleanu, and Pedersen study a production economy with multiple sectors that are financed by issuing securities to agents who face capital constraints. Binding capital constraints propagate business cycles, and a reduction in the interest rate can increase the required return on high-haircut assets because it can increase the shadow cost of capital for constrained agents. The required return can be lowered by easing funding constraints through lowering haircuts. To empirically assess the power of this haircut tool, the researchers study a natural experiment: the introduction of the legacy Term Asset-Backed Securities Loan Facility (TALF). Using a triple difference-in-differences regression, they estimate that the TALF program reduced required returns by more than 0.7 percent. Unique survey evidence further suggests that the reduction in required returns could be more than 3 percent, and it provides broader evidence on the demand sensitivity to haircuts.

Diego A. Comin, Harvard University and NBER, and Bart Hobijn, Federal Reserve Bank of San Francisco
Technology Diffusion and Postwar Growth

In the aftermath of World War II, the world' economies exhibited very different rates of economic recovery. These differences are mainly atttributable to varying paths of total factor productivity growth rather than to Neoclassical convergence. Comin and Hobijn estimate that two- thirds of the residual variation in postwar economic recoveries not driven by convergence can be attributed to differences in the technology adoption patterns across countries. They obtain this estimate by combining the implications of a theoretical model on technology adoption and growth with an instrumental variables analysis to estimate the causal effect of technology adoption on economic growth. The instrument they use is the extent of postwar U.S. technical assistance received by a country.

The closed and open economy literatures work on estimating real rigidities, but in parallel. Gopinath and Itskhoki bring the two literatures together to shed light on this question. Using international price data and exchange rate shocks to evaluate the importance of real rigidities in price setting, they show that -- consistent with the presence of real rigidities -- the response of reset-price inflation to exchange rate shocks displays significant persistence. Conditional on changing, individual import prices respond to exchange rate shocks prior to the last price change. At the same time, aggregate reset-price inflation for imports, like that for consumer prices, exhibits little persistence. Competitors' prices affect firm pricing, and exchange rate pass-through into import prices is greater in response to trade-weighted as opposed to bilateral exchange rate changes. The researchers quantitatively evaluate sticky price models (Calvo and menu cost) with variable markups at the wholesale level and constant markups at the retail level, consistent with empirical evidence. Variable markups alone generate sluggishness in price adjustment and increase the size of the contract multiplier, but their effects are modest.

Valerie A. Ramey, UC, San Diego and NBER, and Daniel Vine, Federal Reserve Board
Oil, Automobiles, and the US Economy: How Much Have Things Really Changed?

Ramey and Vine re-examine whether the impact of oil shocks on the aggregate economy, and on the motor vehicle industry in particular, has changed over time. They find remarkable stability in the response of aggregate real variables to oil shocks once they account for the additional cost of shortages and rationing during the 1970s. To understand why the response of aggregate real variables has not changed, they focus on the motor vehicle industry, because it is considered to be the most important channel through which oil shocks affect the economy. They find that, contrary to common perceptions, the share of motor vehicles in the goods-producing sector of the economy has shown little decline over time. Moreover, within the motor vehicle industry, the recent oil shocks had similar effects on segment shifts and capacity utilization as the shocks during the 1970s.