EF&G Research Meeting Winter 2021

vom Lehn and Winberry argue that the network of investment production and purchases across sectors is an important propagation mechanism for understanding business cycles. Empirically, they show that the majority of investment goods are produced by a few "investment hubs" which are more cyclical than other sectors. The researchers embed this network into a multisector business cycle model and show that sector-specific shocks to the investment hubs and their key suppliers have large effects on aggregate employment and drive down labor productivity. Quantitatively, vom Lehn and Winberry find that sector-specific shocks to hubs and their suppliers account for an increasing share of aggregate fluctuations over time, generating the declining cyclicality of labor productivity and other changes in business cycle patterns since the 1980s.

Outsourced workers experience large wage declines, yet domestic outsourcing may raise aggregate productivity. To study this equity-efficiency trade-off, Bilal and Lhuillier contribute a framework in which more productive firms either post higher wages along a job ladder to sustain a larger in-house workforce, comprised of many imperfectly substitutable worker types and subject to decreasing returns to scale, or rent labor services from contractors who hire in the same frictional labor markets. Three implications arise: more productive firms are more likely to outsource to save on higher wage premia; outsourcing raises output at the firm level; labor service providers endogenously locate at the bottom of the job ladder, implying that outsourced workers receive lower wages. Using firm-level instruments for outsourcing and revenue productivity, the researchers find empirical support for all three predictions in French administrative data. After structurally estimating the model, they find that the rise in outsourcing in France between 1997 and 2007 contributed to raise aggregate output
by 1% and reduce the labor share by 3 percentage points. A small minimum wage increase can make outsourcing Pareto-improving and stabilize the labor share.

The real price of recreation goods and services has fallen dramatically over the last century. At the same time, hours per worker have also been on a steady decline. As recreation goods make leisure time more enjoyable, Kopytov, Roussanov, and Taschereau-Dumouchel investigate if the fall in their price has contributed to the decline in work hours. Using aggregate data from OECD countries, as well as disaggregated data from the United States, the researchers provide evidence that the two are strongly related. To identify the effect of recreation prices on hours worked, Kopytov, Roussanov, and Taschereau-Dumouchel use variation in the bundle of recreational goods across demographic groups to instrument for the changing price of leisure faced by these groups over time. They then construct a macroeconomic model with general preferences that allows for trending relative prices and work hours along a balanced growth path. Kopytov, Roussanov, and Taschereau-Dumouchel estimate the model and find that the decline in recreation prices can explain a large fraction of the global decline in work hours.

Central banks sometimes evaluate their own policies. To assess the inherent conflict of interest, Fabo, Jančoková, Kempf, and Pastor compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). The researchers find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.

Since real interest rates have been well below the growth rate of the economy, but the marginal product of capital has remained above, modern economies are dynamically efficient, yet there is a bubble component in public debt. Thus, the present value of primary surpluses can be lower than the outstanding debt and governments can run perpetual deficits by collecting the bubble premia. Yet, there is an upper bound on the size of the deficits that depends on how safe and liquid government debt is and on financial development. Higher spending lowers the interest rate and increases inequality, while redistributive policies shrink the feasible amount of persistent public spending, income tax cuts pay for themselves, inflation volatility reduces fiscal space available for spending, and financial repression increases it.

Lewis, Melcangi, and Pilossoph estimate the distribution of marginal propensities to consume (MPCs) using a novel clustering approach, generalizing the fuzzy C-means algorithm to regression settings. The researchers find that households spent at least one fourth of their 2008 stimulus payments, with considerable MPC heterogeneity which varies by consumption good. They document observable determinants of this heterogeneity, without imposing ex ante assumptions on such relationships, and evaluate potential determinants jointly. MPCs correlate positively with income and the average propensity to consume, but much heterogeneity remains unexplained. The partial equilibrium response to the stimulus is twice the homogeneous estimate, highlighting the importance of heterogeneity.