Several academics and practitioners have pointed out that inflation follows a seemingly exogenous statistical process, unrelated to the output gap, leading some to argue that the Phillips curve has weakened or disappeared. McLeay and Tenreyro explain why this seemingly exogenous process arises, or, in other words, why it is difficult to empirically identify a Phillips curve, a key building block of the policy framework used by central banks. They show why this result need not imply that the Phillips curve does not hold -- on the contrary, their conceptual framework is built under the assumption that the Phillips curve always holds. The reason is simple: If monetary policy is set with the goal of minimizing welfare losses (measured as the sum of deviations of inflation from its target and output from its potential), subject to a Phillips curve, a central bank will seek to increase inflation when output is below potential. This targeting rule will impart a negative correlation between inflation and the output gap, blurring the identification of the (positively sloped) Phillips curve. The researchers discuss different strategies to circumvent the identification problem and present evidence of a robust Phillips curve in U.S. data.
This paper was distributed as Working Paper 25892, where an updated version may be available.
Jaimovich, Rebelo, Wong, and Zhang study the role that increases in the quality of the goods consumed ("trading up") might have played in the rise of the skill premium that occurred in the last four decades. Their empirical work shows that high-quality goods are more intensive in skilled labor than low-quality goods and that household spending on high-quality goods rises with income. The researchers propose a model consistent with these facts and argue that it accounts for the observed rise in the skill premium with more plausible rates of skill-biased technical change than those required by the canonical model.
This paper was distributed as Working Paper 25931, where an updated version may be available.
White, non-college-educated Americans born in the 1960s face shorter life expectancies, higher medical expenses, and lower wages per unit of human capital compared with those born in the 1940s, and men's wages declined more than women's. After documenting these changes, Borella, De Nardi, and Yang use a life-cycle model of couples and singles to evaluate their effects. The drop in wages depressed the labor supply of men and increased that of women, especially in married couples. Their shorter life expectancy reduced their retirement savings but the increase in out-of-pocket medical expenses increased them by more. Welfare losses, measured a one-time asset compensation are 12.5%, 8%, and 7.2% of the present discounted value of earnings for single men, couples, and single women, respectively. Lower wages explain 47-58% of these losses, shorter life expectancies 25-34%, and higher medical expenses account for the rest.
The zero lower bound (ZLB) irrelevance hypothesis implies that the economy's performance is not affected by a binding ZLB constraint. Debortoli, Galí, and Gambetti evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). They focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, the researchers find little evidence against the irrelevance hypothesis, with their estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. The researchers can reconcile their empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule.
This paper was distributed as Working Paper 25820, where an updated version may be available.
Chinese local governments wield their enormous political power and administrative capacity to provide "special deals" for favored private firms. Bai, Hsieh, and Song argue that China's extraordinary economic growth comes from these special deals. Local political leaders do so because they derive personal benefits, either political or monetary, from providing special deals. Competition between local governments limits the predatory effects of special deals.
This paper was distributed as Working Paper 25839, where an updated version may be available.
Since the late 1990's, U.S. industries have become more concentrated and more profitable, while non residential business investment has been weak relative to fundamentals. The interpretation of these trends is controversial. Philippon and Gutiérrez develop a simple model to differentiate four prominent explanations: decreasing domestic competition (DDC), increases in the efficient scale of operation (EFS), the rise of intangible assets (INTAN), and globalization (GLOBAL). They use their model along with case studies for clear superstars (GAFAM) to assess the validity of common proxies for each hypothesis, including measures of concentration, profitability, mark-ups, investment and productivity divergence between laggard and frontier firms. The researchers highlight that some widely used measures of mark-ups and productivity divergence are prone to measurement error, and therefore provide misleading evidence on aggregate trends. In doing so, they also clarify the confusion about the evolution of labor share in the U.S. and in Europe.