{"title":"Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier","authors":"Florin O. Bilbiie, Marc J. Melitz","doi":"10.3386/w28258","DOIUrl":"https://doi.org/10.3386/w28258","url":null,"abstract":"The response of entry and exit to adverse supply shocks, such as COVID-19, is amplified by nominal rigidities. This leads to further amplification in the response of aggregate demand. Firms' inability to adjust their prices induces further changes in profitability that engender additional entry-exit dynamics. These changes in net entry, in turn, amplify the initial response to the shock by generating additional curvature in the relationship between the shock and aggregate demand. Even in our baseline model with efficient equilibrium entry, this entry-exit multiplier triggers a substantial magnification of the welfare losses due to a negative shock through these second-order effects. Nominal rigidities may also induce a first-order effect when entry is no longer efficient. Our model highlights how the addition of endogenous entry to a benchmark New Keynesian model radically changes the consequences of nominal rigidities. We focus on the amplification of aggregate demand to supply shocks, but also highlight other key divergences that can potentially resolve some empirical discrepancies associated with the workhorse New-Keynesian model.","PeriodicalId":330048,"journal":{"name":"Macroeconomics: Aggregative Models eJournal","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125583580","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Bank Influence at a Discount","authors":"H. Gersbach, S. Papageorgiou","doi":"10.2139/ssrn.3316775","DOIUrl":"https://doi.org/10.2139/ssrn.3316775","url":null,"abstract":"We study how bankers can elicit lower capital requirements via lobbying: Bankers pledge to politicians a lobbying rate as a fraction of bank revenues, thus relating politicians' welfare to the size of banks. This induces politicians to lower capital requirements, which causes high leverage andexcessive investments in risky technologies. We establish a non-monotonic relationship between the lobbying rate and the likelihood that a crisis occurs. We also predict that the lobbying rate increases monotonically as political participation rises and/or government guarantees expand. Finally, we suggest that a lobbying tax or shareholder-welfare maximization can alleviate the inefficiencies created by lobbying.","PeriodicalId":330048,"journal":{"name":"Macroeconomics: Aggregative Models eJournal","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123207538","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Demand Disagreement","authors":"C. Heyerdahl-Larsen, P. Illeditsch","doi":"10.2139/ssrn.3092366","DOIUrl":"https://doi.org/10.2139/ssrn.3092366","url":null,"abstract":"There is a weak correlation between economic fundamentals and asset returns and disagreement about future asset prices is not spanned by disagreement about economic fundamentals. Both facts are inconsistent with leading asset pricing models. To address these puzzles, we develop an overlapping generations model with disagreement about the cross-sectional distribution of investors’ preferences and beliefs. This disagreement implies different beliefs about future asset demand even if economic fundamentals are known. Demand disagreement leads to a low correlation between asset returns and economic fundamentals (no “correlation puzzle“) and disagreement about returns that is not spanned by beliefs about economic fundamentals (no “disagreement correlation puzzle“). Demand disagreement explains important asset pricing facts such as excess stock market volatility, low means and volatilities of interest rates, valuation ratios predicting returns, Black’s leverage effect, and high trading volume unrelated to economic fundamentals, even in a setting with i.i.d. consumption growth and without hedging demands, recursive preferences, habit formation, or disaster risk.","PeriodicalId":330048,"journal":{"name":"Macroeconomics: Aggregative Models eJournal","volume":"65 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132711444","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Can Capital Adjustment Costs Explain the Decline in Investment-Cash Flow Sensitivity?","authors":"Shushu Liao, Ingmar Nolte, G. Pawlina","doi":"10.2139/ssrn.3746210","DOIUrl":"https://doi.org/10.2139/ssrn.3746210","url":null,"abstract":"It is well documented that since at least the 1970s investment-cash flow (I-CF) sensitivity has been decreasing over time to disappear almost completely by the late 2000s. Based on a neoclassical investment model with costly external financing, we show that this pattern can be explained by the gradual increase of capital adjustment costs. The result is corroborated in the supplementary analysis that exploits the cross-country and cross-industry variation of capital adjustment costs, as proxied by the level of technological advancement. More generally, our findings demonstrate that I-CF sensitivity should only be interpreted as a joint measure of financial and real frictions.","PeriodicalId":330048,"journal":{"name":"Macroeconomics: Aggregative Models eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130787689","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Mean Reverting Debt/GDP Dynamics in a General Equilibrium Model","authors":"Rosella Levaggi, F. Menoncin","doi":"10.2139/ssrn.3729193","DOIUrl":"https://doi.org/10.2139/ssrn.3729193","url":null,"abstract":"The choice of financing public expenditure with taxes or debt (or both) have been widely investigated by the literature, without finding an ultimate solution. In this article, we take a different point of view and compute the dynamics of the optimal debt/GDP ratio to study under which conditions it converges towards a finite equilibrium that is endogenous to the model. We show that the convergence exists if the capital growth rate is higher than the (constant) interest rate paid on the public debt. When the interest rate is allowed to depend on the debt itself, the convergence exists if the deficit/GDP is sufficiently small. Thus, a policy of deficit control/reduction is needed in order to prevent the debt from exploding and this justify some super-national policies implemented, for instance, at the EU level.","PeriodicalId":330048,"journal":{"name":"Macroeconomics: Aggregative Models eJournal","volume":"37 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126300548","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The Effects of Structural Reforms: Evidence from Italy","authors":"S. Mocetti, Emanuela Ciapanna, A. Notarpietro","doi":"10.2139/ssrn.3746156","DOIUrl":"https://doi.org/10.2139/ssrn.3746156","url":null,"abstract":"This paper quantifies the macroeconomic effects of three major structural reforms (i.e., service sector liberalizations, incentives to innovation and civil justice reforms) undertaken in Italy in the last decade. We employ a novel approach that estimates the impact of each reform on total factor productivity and markups in an empirical micro setting and that uses these estimates in a structural general equilibrium model to simulate the macroeconomic impact of the reforms. Our results indicate that, accounting for estimation uncertainty, the increase in the level of GDP as of 2019 due to the sole effect of these reforms (ignoring all the other shocks that the Italian economy suffered in the same period) would be between 3% and 6%. The long-run increase in Italy's potential output would lie between 4% and 8%, with non-negligible effects on the labor market.","PeriodicalId":330048,"journal":{"name":"Macroeconomics: Aggregative Models eJournal","volume":"227 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130310703","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"A History of Aggregate Demand and Supply Shocks for the United Kingdom, 1900 to 2016","authors":"R. Jump, Karsten Kohler","doi":"10.2139/ssrn.3725609","DOIUrl":"https://doi.org/10.2139/ssrn.3725609","url":null,"abstract":"While economic theory has been applied to numerous topics in economic history, there are very few attempts to interpret major macroeconomic shocks from the perspective of standard Keynesian theory. This paper presents a history of aggregate demand and supply shocks spanning 1900 - 2016 for the United Kingdom, whose signs are identified using economic theory. We utilise sign restrictions derived from an AD-AS framework consistent with the workhorse New Keynesian model, and demonstrate how they can be used to identify the signs of structural shocks. The existence of 33 large shocks is inferred from estimated vector autoregressions, comprising 21 demand shocks and 12 supply shocks. We find that aggregate supply shocks were important in the late 1920s and early 1970s, which we attribute to changes in the bargaining power of labour. We also identify positive aggregate demand shocks in the mid-1970s, which we attribute to fiscal policy and suggest that these shocks will have exacerbated the inflationary effects of the 1973 oil price crisis, while mitigating its unemployment effects.","PeriodicalId":330048,"journal":{"name":"Macroeconomics: Aggregative Models eJournal","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125098230","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Aggregate and Intergenerational Implications of School Closures: A Quantitative Assessment","authors":"Youngsoo Jang, Minchul Yum","doi":"10.2139/ssrn.3857687","DOIUrl":"https://doi.org/10.2139/ssrn.3857687","url":null,"abstract":"A majority of governments around the world unprecedentedly closed schools in response to the COVID-19 pandemic. This paper quantitatively investigates the macroeconomic and distributional consequences of school closures through intergenerational channels in the medium- and long-term. The model economy is a dynastic overlapping generations general equilibrium model in which schools, in the form of public education investments, complement parental investments in producing children's human capital. We calibrate the stationary equilibrium of the model to the U.S. economy and compute the equilibrium responses following unexpected school closure shocks. We find that school closures have moderate long-lasting adverse effects on macroeconomic aggregates such as output. In addition, we find that school closures reduce intergenerational mobility, especially among older children. Finally, we find that lower substitutability between public and parental investments induces larger damages in the aggregate economy and overall lifetime incomes of the affected children, while mitigating negative impacts on intergenerational mobility. In all findings, heterogeneous parental responses to school closures play a key role. Our results provide a quantitatively relevant dimension to consider for policymakers assessing potential costs of school closures.","PeriodicalId":330048,"journal":{"name":"Macroeconomics: Aggregative Models eJournal","volume":"64 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134285446","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Parental Time Investment and Intergenerational Mobility","authors":"Minchul Yum","doi":"10.2139/ssrn.3862378","DOIUrl":"https://doi.org/10.2139/ssrn.3862378","url":null,"abstract":"This paper investigates parental time investment in children prior to formal schooling as a source of intergenerational income persistence in the U.S. I develop a dynamic general equilibrium model where lifetime income endogenously persists across generations through multiple channels. My model replicates a series of important untargeted aspects of the data including the \u0000U.S. income quintile transition matrix. I find that the parental time investment channel accounts for nearly 40 percent of the observed intergenerational income persistence. Policy experiments suggest that e¤ective ways of improving mobility should focus on narrowing discrepancies in the quantity and quality of parental time investments.","PeriodicalId":330048,"journal":{"name":"Macroeconomics: Aggregative Models eJournal","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125401236","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Inter-Platform Competition in a Regulated Ride-Hail Market With Pooling","authors":"Kenan Zhang, Marco Nie","doi":"10.2139/ssrn.3721402","DOIUrl":"https://doi.org/10.2139/ssrn.3721402","url":null,"abstract":"Abstract This paper studies an aggregate ride-hail market in which two platforms compete with each other, as well as with transit, under different supply and regulatory conditions. The duopoly is built on a general market equilibrium model that explicitly characterizes the physical matching process, including pairing two passengers for a pooling ride. Depending on whether drivers’ work affiliation with a platform is exclusive or not, the duopoly is said to have a single- or multi-homing supply mode. We describe the outcome of the duopoly pricing game as a Nash Equilibrium (NE) and solve it by transforming it into a variational inequality problem (VIP). When a regulatory constraint is imposed, the duopoly equilibrium becomes a generalized NE, which corresponds to a quasi VIP. We show that multi-homing may lead to disastrous outcomes in an unregulated duopoly and demonstrate it through numerical experiments constructed using data from Chicago. Specifically, passenger and driver surplus, as well as platform profits, are all significantly lower in a multi-homing duopoly than in a single-homing counterpart. This disaster arises because (i) the multi-homing duopoly is locked in a self-destructive pricing war analogous to the tragedy of the commons; and (ii) the competition among passengers limits economy of scale in trip production. We show that the negative consequences of this tragedy can be mitigated by (i) discouraging multi-homing behavior; (ii) imposing a minimum wage on both platforms; and (iii) encouraging the platforms to specialize in different services. The results also show the efficiency in matching passengers and drivers is a crucial asset for a platform’s competitiveness, more so in a multi-homing duopoly. In general, the platform with a higher matching efficiency ends up making more money and providing a better level of service.","PeriodicalId":330048,"journal":{"name":"Macroeconomics: Aggregative Models eJournal","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133809886","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}