- "The Role of Inventories and
Speculative Trading in the Global
Market for Crude Oil" (with Lutz
Kilian, forthcoming, Journal
of Applied Econometrics) [
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
- "Why are Goods and Services
more Expensive in Rich Countries?
Demand Complementarities and Cross-Country
Price Differences" (Job Market Paper)
Empirical studies show that tradable consumption goods are more expensive in rich countries. This paper proposes a simple yet novel explanation for this apparent failure of the law of one price: Consumers' utility from tradable goods depends on their consumption of complementary goods and services. Monopolistically competitive firms charge higher prices in countries with more complementary goods and services because consumer demand is less elastic there. The paper embeds this explanation within a static Krugman (1980)-style model of international trade featuring differentiated tradable goods. Extended versions of the model can account for the high prices of services in rich countries, as well as for several stylized facts regarding investment rates and relative prices of investment and consumption across countries. The paper provides direct evidence in support of this new explanation. Using free-alongside-ship prices of U.S. and Chinese exports, I demonstrate that prices of specific subsets of tradable goods are higher in countries with high consumption of relevant complementary goods, conditional on per capita income and other country-level determinants of consumer goods prices.
- "Does a Rising Tide Lift All
Boats? Welfare Consequences of Asymmetric
This paper documents an increase in hardship among Americans with low educational attainment between the 1990s and mid-2000s, consistent with public perception but contrary to a common presumption in macroeconomics and development economics that increased growth in the aggregate enhances welfare for everyone in the economy. I extend the standard model of skill-biased technological change to permit differences in the consumption bundles of the rich and the poor. I document that growth during this time period was biased toward the consumption bundle of the rich; and demonstrate in the context of the model that such asymmetric growth causes a fall in the welfare of the low-skilled poor.
- "How Does Government Spending
Stimulate Consumption?" [
"Recent empirical work finds that government spending shocks cause aggregate consumption to increase over the business cycle, contrary to the predictions of Neoclassical and New Keynesian models. This paper proposes a mechanism to account for the consumption increase that builds on the framework of imperfect information in Lucas (1972) and Lorenzoni (2009). In my model, owners of firms targeted by an increase in government spending perceive an increase in their permanent income relative to their future tax liabilities. Owners of firms not targeted remain unaware of the implicit increase in future tax liabilities, causing aggregate consumption to increase. A testable implication of the proposed model is that the value of firms targeted by government spending should increase, implying all else equal an increase in aggregate stock returns. This prediction of the model is shown to be consistent with empirical evidence.
- "Urban Density and the Substitution
of Market Purchases for Home Production"
"This paper offers a new microfoundation for urban agglomeration that is based on the margin between home and market production of services. Proximity between consumers and service providers in dense areas facilitates demand for market services due to a low time cost of purchasing services. Agglomeration economies arise out of the high demand for market services and corresponding low home production. The model predicts that economic areas of above-average density have above-average labor supply and above-average prices even if their firms have average market productivity. The paper presents evidence in support of this new explanation. Specifically, residents who live near service establishments supply more time to the labor market, own fewer durables for home production, and pay higher land rents, even conditional on income, transportation time to work, and other covariates.
- "A Shopkeeper Economy" [
"This paper investigates the properties of an economy populated by shopkeepers who monopolistically provide differentiated services at zero marginal cost but positive fixed costs. In this setting, equilibrium output and wealth depend on consumer demand rather than available supply. The “shopkeeper economy” is compared to a standard production-based economy in which wealth is a function only of labor supply and technology. I demonstrate that the existence of producers who face only fixed costs provides a counterexample to the notion that "supply creates its own demand".
- "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.