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Innovation, Reallocation and Growth
Daron Acemoglu, Massachusetts Institute of Technology and NBER
Ufuk Akcigit, University of Chicago and NBER
Nicholas Bloom, Stanford University and NBER
William R. Kerr, Harvard University and NBER

Acemoglu, Akcigit, Bloom, and Kerr build a model of firm-level innovation, productivity growth, and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. The authors estimate the parameters of the model using detailed U.S. Census micro data on firm-level output, research and development (R&D), and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. The authors find that industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. However, welfare increases of about 5% are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants.

Experience Matters: Human Capital and Development Accounting
David Lagakos, Boston University and NBER
Benjamin Moll, London School of Economics
Tommaso Porzio, Columbia University and NBER
Nancy Qian, Northwestern University and NBER

Using recently available large-sample micro data from 36 countries, Lagakos, Moll, Porzio, and Qian find that experience-earnings profiles are flatter in poor countries than in rich countries. Motivated by this fact, the authors conduct a development accounting exercise that allows the returns to experience to vary across countries, but which is otherwise standard. When the country-specific returns to experience are interpreted in such a development accounting framework--and are therefore accounted for as part of human capital--the authors find that human and physical capital differences can account for almost two-thirds of the variation in cross-country income differences, as compared to less than half in previous studies.

Recall and Unemployment
Shigeru Fujita, Federal Reserve Bank of Philadelphia
Giuseppe Moscarini, Yale University and NBER

Using data from the Survey of Income and Program Participation (SIPP) covering 1990−2011, Fujita and Moscarini find that recalls of former employees are surprisingly common and are associated with dramatically different unemployment and post-unemployment outcomes, compared to those who change employer after a jobless spell. More than 40% of all workers who become unemployed return to their previous employer after a jobless spell. One quarter of them are permanently separated workers who, unlike those laid off temporarily, did not expect to be recalled. Recalls are associated with much shorter unemployment duration and smaller wage changes after the jobless spell. Negative duration dependence of unemployment disappears once recalls are excluded: those who change their employer after a jobless spell leave unemployment at lower but roughly constant hazard. We also show that the probability of finding a new job is much more procyclical than the probability of being recalled. Taking this fact into account significantly alters the estimated elasticity of the matching function with respect to job market tightness and the time-series behavior of matching efficiency. In particular, labor market mismatch in 2008−2010 is considerably larger than the conventional measure indicates. To make sense of the empirical evidence, the authors develop a search-and-matching model in which the separation decision is accompanied by a recall option. While new matches require costly searches and are mediated by a matching function, recalls are free and are triggered both by aggregate shocks and job-specific shocks that continue to evolve even after separation. The recall option is lost when the unemployed worker accepts a new job. A quantitative version of the model captures well the cross-sectional and cyclical facts through selection of recalled matches.


This paper was distributed as Working Paper 19640, where an updated version may be available.

Financial Frictions in Production Networks
Saki Bigio, University of California, Los Angeles and NBER
Jennifer La'O, Columbia University and NBER

Bigio and La'O show that the input-output structure of an economy has significant qualitative and quantitative implications for the impact of financial frictions on aggregate economic activity. They first study a simple example of two different production networks: a horizontal and a vertical economy. The authors construct these economies so that in the absence of frictions, they are allocationally equivalent. However, when firms face collateral constraints, the two economies exhibit very different equilibrium properties. In particular, the vertical economy features a higher sensitivity of aggregate output, the aggregate labor wedge, and total factor productivity to tightened collateral constraints, relative to the horizontal economy. Bigio and La'O call the ratio of the drop in output in a network economy versus a representative agent economy the "network liquidity multiplier". They also show that in order to obtain any implementable allocation, the vertical economy requires more aggregate liquidity than the horizontal economy. Next, the authors solve a more general model for arbitrary input-output structures, and show that the centrality of sectors matters for how their collateral constraints affect aggregate output. They calibrate this model in order to match the input-output matrix of the U.S. economy, and use this to explore the extent to which these interrelationships among sectors can explain the drop in output during the latest recession. They find a network liquidity multiplier of around 3.8 for the U.S. economy. In order to generate the observed drop in output at the trough of the recession, their calibrated model would require a reduction in liquidity of less than one-sixth the drop in liquidity required in a representative firm model.

Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises
Mark A. Aguiar, Princeton University and NBER
Manuel Amador, University of Minnesota and NBER
Emmanuel Farhi, Harvard University
Gita Gopinath, Harvard University

Aguiar, Amador, Farhi, and Gopinath propose a continuous time model of nominal debt and investigate the role of inflation credibility in the potential for self-fulfilling debt crises. Inflation is costly, but it reduces the real value of outstanding debt without the full punishment of default. With high inflation credibility, which can be interpreted as joining a monetary union or issuing foreign currency debt, debt is effectively real. By contrast, with low inflation credibility, sovereign debt is nominal and in a debt crisis a government may opt to inflate away a fraction of the debt burden rather than default explicitly. This flexibility potentially reduces the country's exposure to self-fulfilling crises. On the other hand, in the absence of a crisis, the government lacks credibility to resist inflating. This latter channel raises the cost of debt in tranquil periods, and makes default more attractive in the event of a crisis, thus increasing the country's vulnerability. The authors characterize the interaction of these two forces, and show that there is an intermediate inflation credibility that minimizes the country's exposure to rollover risk. Low inflation credibility causes both high inflation in tranquil periods, and increased vulnerability in a crisis.


This paper was distributed as Working Paper 19516, where an updated version may be available.

High Discounts and High Unemployment
Robert E. Hall, Stanford University and NBER

In recessions, the stock market falls more than in proportion to corporate profit. The discount rate implicit in the stock market rises. All types of investment fall, including employers' investment in job creation. According to the leading view of unemployment--the Diamond-Mortensen-Pissarides model--when the incentive for job creation rises, the labor market tightens and unemployment falls. Employers recover their investments in job creation by collecting a share of the surplus from the employment relationship. The value of that flow falls when the discount rate rises. Thus, high discount rates imply high unemployment. In this paper, Hall does not explain why the discount rate rises so much in recessions. Rather, he shows that the rise in unemployment makes perfect economic sense in an economy where the stock market falls substantially in recessions, because the discount rises.



Michelle Alexopoulos, University of Toronto
Sumru Altug, American University of Beirut
Alina Arefeva, Wisconsin School of Business, UW Madison
Debasis Bandyopadhyay, University of Auckland
Zsofia Barany, Sciences Po
Mark Bognanni, Federal Reserve Bank of Cleveland
Marco Bonomo, Insper Institute of Education and Research
Hector F. Calvo-Pardo, University of Southampton
Carlos Carvalho, PUC-Rio
Edouard Challe, Ecole Polytechnique
Rupert De Vincent-Humphreys, Bank of England
Kevin Donovan, Yale University
Susanne Forstner, Stockholm University
Juan Angel García, European Central Bank
Lutz Hendricks, University of North Carolina, Chapel Hill
Joonyoung Hur, California State University - Northridge
Andrew John, Melbourne Business School
Takushi Kurozumi, Bank of Japan
Chang Joo Lee, University of Illinois at Chicago
Jagannath Mallick, University of Pardubice
Sephorah J. Mangin, Australian National University
John McDermott, University of South Carolina
Elmar Mertens, Deutsche Bundesbank
Dubravko Mihaljek, Bank for International Settlements
James Nason, North Carolina State University
Xavier Ragot, Sciences Po
Alberto G. Rossi, Georgetown University
Roberto Samaniego, George Washington University
Pablo Selaya, University of Copenhagen
Tara Sinclair, George Washington University
Yosuke Takeda, Sophia University
Argyrios Tsiaras, Cambridge University
Yikai Wang, University of Oslo
Eran Yashiv, Tel Aviv University
Marios Zachariadis, University of Cyprus

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