- "How Can Government Spending Stimulate Consumption?", forthcoming, Review of Economic Dynamics [
"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.
- "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 Shocks and Interest Rates" (with Kieran Walsh)
The elasticity of interest rates with respect to government spending is central to many policy debates including, for example, austerity in the European Union. Most macroeconomic models imply that increases in aggregate demand due to non-monetary forces cause real interest rates to rise, but empirical evidence from the US generally fails to support this prediction. We propose a novel explanation for how increases in aggregate demand (driven either by public or private shocks) can have a zero or negative effect on interest rates: when national income is demand-determined and cash is used to cover short-term needs, government or private spending shocks may generate an excess supply of loans. Our model has three key features: (1) demand-determined output, (2) portfolio heterogeneity (as we have both borrowers and lenders), and (3) asset market segmentation (different groups adjust using different asset classes). Data from the Treasury's General Account and the Survey of Consumer Finances support our premise that spending shocks are often financed with money-like assets. Evidence from the Consumer Expenditure Survey corroborates a key implication of our theory: demand shocks of rich savers decrease interest rates.
- "Demand Complementarities and Prices"
Empirical studies document a relationship between markups and income across countries and over time. This paper proposes a novel mechanism to explain the relationship between markups and income: Consumers’ utility from final goods and services depends on their consumption of complementary goods and services. I develop a two-country model to demonstrate the relevance of the demand complementarities mechanism for understanding real exchange rates. 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 documenting a dependence of prices on demand complementarities.
- "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.
- "Urban Density and the Substitution
of Market Purchases for Home Production"
"This paper proposes a new microfoundation for the benefits of urban density that offset the costs of land scarcity. Proximity between consumers and service establishments reduces the time cost of purchasing services. Market production of services is efficient because customers effectively share land and other factors of production, leaving them idle for less time. The paper develops a theory in which both of these benefits cause residents of dense areas to purchase services on the market that their suburban counterparts produce at home. While intended to rationalize the existence of dense residential areas, the model provides testable implications: dense areas feature high service expenditures, low home production, high labor supply, and high land prices. I test these predictions and show that residents of dense areas supply more time to the labor market, home produce less, 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.