NBER Reporter: Winter 2000/2001

Economic Fluctuations and Growth

The fall research meeting of the NBER's Program on Economic Fluctuations and Growth took place in Chicago on October 27. Steven J. Davis, NBER and University of Chicago, and Peter J. Klenow, Federal Reserve Bank of Minneapolis, organized the program and chose the following papers for discussion:

George-Marios Angeletos, Jeremy Tobacman, and Stephen Weinberg, Harvard University; David I. Laibson, NBER and Harvard University; and Andrea Repetto, University of Chile, "The Hyperbolic Buffer Stock Model: Calibration, Simulation, and Empirical Evaluation"

Discussants: Jonathan A. Parker, Princeton University, and David E. Altig, Federal Reserve Bank of Cleveland

Francesco Caselli, NBER and Harvard University, and Wilbur J. Colemann II, Duke University, "The World Technology Frontier" (NBER Working Paper No. 7904)

Discussants: Per Krusell, University of Rochester, and Jaume Ventura, NBER and MIT

K. Daron Acemoglu, NBER and MIT; Simon Johnson, MIT; and James A. Robinson, University of California, Berkeley, "The Colonial Origins of Comparative Development: An Empirical Investigation" (NBER Working Paper No. 7771)

Discussants: Kenneth K. Sokoloff, NBER and University of California, Los Angeles, and Robert E. Hall, NBER and Stanford University

Jeffrey R. Campbell, NBER and University of Chicago, and Jonas D. M. Fisher, Federal Reserve Bank of Chicago, "Idiosyncratic Risk and Aggregate Employment Dynamics" (NBER Working Paper No. 7936)

Discussants: John C. Haltiwanger, NBER and University of Maryland, and Richard Rogerson, NBER and University of Pennsylvania

Andrew G. Atkeson and Patrick J. Kehoe, Federal Reserve Bank of Minneapolis, "The Transition to a New Economy"

Discussants: Peter Howitt, Brown University, and Robert J. Gordon, NBER and Northwestern University

Judith A. Chevalier and Anil K Kashyap, NBER and University of Chicago, and Peter E. Rossi, University of Chicago, "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data" (NBER Working Paper No. 7981)

Discussants: Julio J. Rotemberg, NBER and Harvard University, and Valerie A. Ramey, NBER and University of California, San Diego

Laboratory and field studies of time preference find that discount rates are much greater in the short run than in the long run. Hyperbolic discount functions capture this property. In their paper, Angeletos, Tobacman, Weinberg, Laibson, and Repetto present simulations of the savings and asset allocation choices of households with hyperbolic preferences. They compare the behavior of the "hyperbolic households" to that of "exponential households." The authors find that the hyperbolic households hold relatively more illiquid wealth and relatively less liquid wealth. The hyperbolic households also exhibit greater comovement between consumption and income and experience a greater drop in consumption around retirement. The hyperbolic simulations match observed consumption and balance sheet data much better than the exponential simulations do.

Caselli and Colemann define a country's technology as a trio of efficiencies: one for unskilled labor, one for skilled labor, and one for capital. The authors then find that the efficiency of unskilled labor and the efficiencies of skilled labor and capital are negatively correlated across countries. They interpret this as evidence of a "world technology frontier." On this frontier, increases in the efficiency of unskilled labor come at the cost of declines in the efficiency of skilled labor and capital. Caselli and Colemann estimate a model in which firms in each country optimally choose their technology subject to a technology frontier. The optimal choice of technology depends on the country's endowment of skilled and unskilled labor, so that the model is one of appropriate technology. The estimation allows for country-specific technology frontiers, attributable to barriers to technology adoption. The authors find that poor countries disproportionately tend to be inside the world technology frontier.

Acemoglu, Johnson, and Robinson argue that Europeans adopted very different policies on colonization with distinct associated institutions in their various colonies. The choice of colonization strategy was determined, at least in part, by whether Europeans could settle in the colony. In places where Europeans faced high mortality rates, they could not settle, and they were thus more likely to set up extractive institutions. These early institutions have persisted to this day. By exploiting differences in mortality rates faced by soldiers, bishops, and sailors in the seventeenth, eighteenth, and nineteenth century colonies as an instrument for current institutions, the authors estimate that these institutions have large effects on per capita income. The estimates imply that differences in institutions explain approximately three-quarters of the per capita income differences across former colonies. After controlling for the effect of institutions, the authors find that countries in Africa, or closer to the equator, do not have lower incomes.

Campbell and Fisher study how producers' idiosyncratic risks affect an industry's aggregate dynamics in an environment in which certainty equivalence fails. In the model, producers can place workers in two types of jobs, organized and temporary. Workers are less productive in temporary jobs, but creating organized jobs requires the irreversible investment of managerial resources. Increasing productivity risk raises the value of an unexercised option to create an organized job. Losing this option is one cost of immediate organized job creation, so an increase in its value induces substitution toward cheaper temporary jobs. Because these jobs are costless to create and destroy, a producer using temporary jobs can be more flexible, responding more to both idiosyncratic and aggregate shocks. If all of an industry's producers adapt to heightened idiosyncratic risk in this way, then the industry as a whole can respond more to a given aggregate shock. This insight helps to explain the observation from the U.S. manufacturing sector that groups of plants displaying high idiosyncratic variability also have large aggregate fluctuations.

During the Second Industrial Revolution, from 1860-1900, a large number of new technologies, including electricity, were invented. These inventions launched a transition to a new economy: 70 years of ongoing rapid technical change. However, following this revolution, there was a delay of several decades before growth in both output and productivity rose to new levels. Historians hypothesize that this delay was caused by the slow diffusion of the new technologies that were embodied in the design of new plants, combined with the ongoing learning in plants after they had adopted the new technologies. Motivated by these hypotheses, Atkeson and Kehoe build a quantitative model of this transition and show that it implies both slow diffusion and a delay in growth similar to that in the data.

Chevalier, Kashyap, and Rossi examine the retail and wholesale prices of a large supermarket chain in Chicago over seven and a half years. They show that prices tend to fall during the seasonal demand peak for a product and that changes in retail margins account for most of those price changes. This research adds to the growing body of evidence that markups are countercyclical. The pattern of margin changes is consistent with "loss leader" models, such as the Lal and Matutes (1994) model of retailer pricing and advertising competition. Other models of imperfect competition are less consistent with retailer behavior. The authors find that manufacturer behavior plays only a limited role in the countercyclicality of prices.

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