NBER Reporter: Summer 2001

Sixteenth Annual Conference on Macroeconomics

The NBER's Sixteenth Annual Conference on Macroeconomics took place in Cambridge on April 20-21. Ben S. Bernanke of NBER and Princeton University and Kenneth Rogoff of NBER and Harvard University served as organizers and put together this agenda:

Ben S. Bernanke and Refet Gurkaynak, Princeton University, "Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously"

Discussants: David Romer, NBER and University of California, Berkeley, and Francesco Caselli, NBER and Harvard University

Philip Lane, Trinity College Dublin, and Gian Maria Milesi-Ferretti, International Monetary Fund, "Perspectives on International Borrowing and Lending"

Discussants: Kristin Forbes, NBER and MIT, and Jeffrey Frankel, NBER and Harvard University

Robert Barsky, NBER and University of Michigan, and Lutz Kilian, University of Michigan, "A Monetary Explanation of the Great Stagflation of the 1970s" (NBER Working Paper No. 7547)

Discussants: Oliver Blanchard, NBER and MIT, and Alan Blinder, NBER and Princeton University

Marvin J. Barth III, Federal Reserve Board, and Valerie Ramey, NBER and University of California, San Diego, "The Cost Channel of Monetary Transmission" (NBER Working Paper No. 7675)

Discussants: Charles Evans, Federal Reserve Bank of Chicago, and Simon Gilchrist, NBER and Boston University

Xavier Gabaix, MIT, and David Laibson, NBER and Harvard University, "The 6D Bias and the Equity Premium Puzzle"

Discussants: Anthony Lynch, New York University, and Monika Piazzesi, University of California, Los Angeles

Tim Cogley, Arizona State University, and Thomas Sargent, NBER and Stanford University, "Evolving Post-World War II Inflation Dynamics"

Discussants: Christopher Sims, NBER and Princeton University, and James Stock, NBER and Harvard University

Is long-run economic growth exogenous? To address this question, Bernanke and Gurkaynak show that the empirical framework of Mankiw, Romer, and Weil (1992) can be extended to test any growth model that admits a balanced growth path. Their broad conclusion, based on model estimation and growth accounting, is that long-run growth is significantly correlated with behavioral variables such as savings rates and population growth rates, and that this correlation is not explained easily by models (such as the Ramsey model) in which growth is treated as the exogenous variable. Hence, future research should focus on models that exhibit endogenous growth.

International financial integration allows countries to become net creditors or net debtors with respect to the rest of the world. In this paper, Lane and Milesi-Ferretti show that a small set of fundamentals --shifts in relative output levels, the stock of public debt, and demographic factors -- can do much to explain the evolution of net foreign asset positions. In addition, they highlight that "external wealth" plays a critical role in determining the behavior of the trade balance, through shifts in the desired net foreign asset position and the investment returns generated on the outstanding stock of net foreign assets. Finally, they provide some evidence that a "portfolio balance" effect exists: real interest rate differentials are related inversely to net foreign asset positions.

Barsky and Kilian argue that the major oil price increases of 1973-4 and 1979-80 were not nearly as essential a part of the causal mechanism generating stagflation as is often thought. They show that monetary expansions and contractions can explain stagflation without reference to supply shocks. Monetary fluctuations help to explain movements in the prices of oil and other commodities, including the surge in the prices of non-oil industrial commodities that preceded the 1973-4 oil price increase. These fluctuations also can account for the striking coincidence of major oil price increases and worsening stagflation. In contrast, there is no theoretical presumption that oil supply shocks are stagflationary. The authors show that oil supply shocks may quite plausibly lower the GDP deflator and that there is little independent evidence that oil supply shocks actually raised the deflator (as opposed to the CPI).

Barth and Ramey show that the "cost channel" may be an important part of the monetary transmission mechanism. First they highlight three puzzles that might be explained by a cost channel of monetary transmission. Then they provide evidence on the importance of working capital and argue why monetary contractions can affect output through a supply channel as well as the traditional demand-type channels. Next they investigate the effects across industries. Following a monetary contraction, many industries exhibit periods of falling output and rising price-wage ratios, consistent with a supply shock. These effects are noticeably more pronounced during the period before 1979.

If decision costs lead agents to update consumption every D periods, then high-frequency data will exhibit an anomalously low correlation between equity returns and consumption growth (Lynch 1996). Gabaix and Laibson analytically characterize the dynamic properties of an economy composed of consumers who have such delayed updating. In their setting, an econometrician using an Euler equation procedure would infer a coefficient of relative risk aversion biased up by a factor of 6D. Hence with quarterly data, if agents adjust their consumption every D = 4 quarters, the imputed coefficient of relative risk aversion will be 24 times greater than the true value. The neoclassical model with delayed adjustment explains the consumption behavior of shareholders. Once limited participation is taken into account, the model matches the high-frequency properties of aggregate consumption and equity returns.

These papers will be published by the MIT Press as NBER Macroeconomics Annual, Volume 16. They will also be available at Books in Progress.

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