- "The Role of Inventories and
Speculative Trading in the Global
Market for Crude Oil" (with Lutz
of Applied Econometrics, 29(3), April 2014, 454-478. [
We develop a structural model of the global market for crude oil that for the first time explicitly allows for shocks to the speculative demand for oil as well as shocks to flow demand and flow supply. The speculative component of the real price of oil is identified with the help of data on oil inventories. The estimates rule out explanations of the 2003-08 oil price surge based on unexpectedly diminishing oil supplies and based on speculative trading. Instead, this surge was caused by unexpected increases in world oil consumption driven by the global business cycle. There is evidence, however, that speculative demand shifts played an important role during earlier oil price shock episodes including 1979, 1986, and 1990. Our analysis implies that additional regulation of oil markets would not have prevented the 2003-08 oil price surge. We also show that, even after accounting for the role of inventories in smoothing oil consumption, our estimate of the short-run price elasticity of oil demand is much higher than traditional estimates from dynamic models that do not account for price endogeneity.
- "Why Agnostic Sign Restrictions
Are Not Enough: Understanding the
Dynamics of Oil Market VAR Models"
(with Lutz Kilian), Journal
of the European Economic Association
(2012), 10(5): 1166-1188. [
Sign restrictions on the responses generated by structural vector autoregressive models have been proposed as an alternative approach to the use of exclusion restrictions on the impact multiplier matrix. In recent years such models have been increasingly used to identify demand and supply shocks in the market for crude oil. We demonstrate that sign restrictions alone are insufficient to infer the responses of the real price of oil to such shocks. Moreover, the conventional assumption that all admissible models are equally likely is routinely violated in oil market models, calling into question the use of posterior median responses to characterize the responses to structural shocks. When combining sign restrictions with additional empirically plausible bounds on the magnitude of the short-run oil supply elasticity and on the impact response of real activity, however, it is possible to reduce the set of admissible model solutions to a small number of qualitatively similar estimates. The resulting model estimates are broadly consistent with earlier results regarding the relative importance of demand and supply shocks for the real price of oil based on structural VAR models identified by exclusion restrictions, but imply very different dynamics from the posterior median responses in VAR models based on sign restrictions only.
- "Why Do Boomers Plan To Work Longer?" (with Gordon Mermin and Richard Johnson), Journal of Gerontology: Social Sciences (2007), 62B(5): S286-S294
Demand Complementarities and Cross-Country
This paper presents closed-economy and two-country models in which consumers’ utility from tradable goods depends on their consumption of complementary goods and services. The models are consistent with the stylized fact that consumption goods are more expensive in rich countries: In countries with more complementary goods and services consumer demand is less elastic, enabling monopolistically competitive firms to charge higher prices. The paper provides empirical evidence supporting the notion that demand complementarities leads to high prices in rich countries, conditional on alternative mechanisms associated with pricing to market. The paper explores additional implications for aggregate price indices and cross-country differences in real investment rates.
- "Welfare Consequences of Asymmetric
Standard models in macroeconomics and development economics imply that growth in the aggregate enhances welfare for everyone in the economy. I show that instead, if economic growth is biased towards the consumption bundle of the rich, the welfare of the poor may fall. I document the relevance of this mechanism during the latter part of the Twentieth Century by showing that new information technology disproportionately benefited sectors consumed by the rich.
- "How Can Government Spending
Stimulate Consumption?" [
"Recent empirical work finds that government spending shocks can cause aggregate consumption to increase. This paper builds on the framework of imperfect information in Lucas (1972) and Lorenzoni (2009) to show how government spending can stimulate consumption. Owners of firms targeted by an increase in government spending perceive an increase in their permanent income relative to their future tax liabilities, while owners of firms not targeted remain unaware of the implicit increase in future tax liabilities, causing aggregate consumption to increase. I show that a testable implication of this model—namely that the value of firms should increase in response to government spending shocks, implying all else equal an increase in aggregate stock returns—is consistent with empirical evidence.
- "Urban Density and the Substitution
of Market Purchases for Home Production"
"This paper proposes a new microfoundation for the existence of dense urban areas. Proximity between consumers and service providers in dense areas increases demand for market services due to a low time cost of purchasing services. Urban residents share the factor inputs used to produce services by purchasing on the market the services that their suburban counterparts produce at home. Production is efficient in dense areas because residents share the factor inputs, leaving them idle for less time. While intended to rationalize density, the model provides testable implications: dense areas feature high labor supply, high service expenditure shares, high land prices, and low home production. I test these predictions and show that residents who live near service establishments supply more time to the labor market, own fewer durables for home production, spend more on services, and pay higher land rents, even when conditioning on transportation time to work, proxies for productivity, and other covariates that have been associated with alternative explanations for agglomeration.
- "A Shopkeeper Economy" [
"This paper develops a theory of persistent economic slack based on firms that face only fixed costs over a range of output. In this setting, equilibrium output and income depend on consumer demand rather than available supply, even when prices are flexible and there are no other frictions. The “shopkeeper economy” is compared to a standard production-based economy in which income is a function only of factor inputs and technology. I explore implications for monetary and fiscal policy.
- "Excess Supply in the Spot Market
for Labor" [
"A distinguishing feature of labor services is that they are immediately perishable. This paper explores the implications of immediate perishability for the market for homogenous labor services that are sold in a centralized exchange. The analysis sheds light on the nature of unemployment and labor market participation. The paper also explores implications for the role of labor cartels and firms in providing workers an alternative to selling their labor services on the spot market. Cartels can be pareto superior to competition in the spot market because they organize labor to reduce excess supply.