My post introduces you to the 21 job market candidates in macroeconomics, whose papers I had the privilege to comment on their writing this fall. Below is my summary of their papers and links to their papers. Here is Macro_Candidates document with the full list. Enjoy their research. I did!
Hang out with us macro economists on #EconTwitter and you will see a curious ritual. Someone criticizes macro and BOOM … it’s batten down the hatches, circle the wagons, fire up the torpedoes, etc. Today’s post is NOT about the macro wars and NOT about the macro economist reactions. That conversation is bogged down. And I am in a good mood.
So let’s talk about the future. I want to share the research from 21 of our newest economists who are currently on the job market. Earlier this fall, I commented on their papers, across a wide range of macro topics. It’s the economics in their papers that stands out; our newest colleagues are the most cutting edge among us. In addition, these new scholars care about communicating their research well. They each asked me for feedback on their writing and then put in the effort to improve. Now we all can see their economic insights more clearly. Better communication—engaging, listening, thinking, responding—is valuable for EVERYONE.
I have grouped their research under five big-picture questions:
- How do differences across people affect the economy?
- How do differences across businesses affect the economy?
- How can we ensure that markets are dynamic and robust?
- How do individual decisions add up to market-level outcomes?
- How can we better understand our dynamic economy ?
- How can we improve economic policy and raise overall well-being?
Each researcher here addresses at least one of these important questions. Read paper by paper the progress at the frontier of economics may seem glacial. Taken as a whole, it is quite exciting. My goal is to provide a window into their scholarship. You can find much more in their papers. If the page count is daunting, their introductions give an overview of their contributions, technical approaches, and findings. I hope you enjoy their research, as much as I did. To give each the focus that they deserve, I will write this post in installments over the next week. Here we go.
PART ONE … Differences in our world matter
across people …
Economists have long pondered how differences across people affect the economy. Yet to study our complex world, macro models sometimes compress us into a single ‘representative agent.’ No one believes that we all make the same decisions, but it is an attempt—such as it is—to tie our understanding of the economy back to individuals.
These four new research papers widen the lens and help us to understand how specific differences across people shape their decisions and the economy.
Who Benefits from Innovations in Financial Technology? by Roxana Mihet
Mihet shows that the explosion of financial technologies for individual investors, such as e-trading platforms and online information about stock returns, does not guarantee broad increases in household wealth. Instead, the sophisticated investors who already have relatively high levels of wealth are most likely to benefit from many of the new technologies. She creates a theoretical model of asset managers and investors to show which types of new technologies can reinforce existing disparities in wealth. Empirically she finds that new technologies since the early 2000s that lowered the cost of information about asset managers and assets returns have contributed to increases in wealth inequality.
Liquidity Constraints and Healthcare Expenditure by Sümeyye Yildiz
Yildiz explores how being unable to spend as much as needed—referred to as liquidity constraints—today, as well as expected constraints in the future affect healthcare spending. Specifically, differences in wealth and income interact to create differences in out-of-pocket medical expenditures. She studies both medical and food expenses. In her model and empirical analysis, Yildiz shows that many low-wealth households cannot spend as much as they need on healthcare. In addition, this spending increases more if a low-wealth household has relatively high income. In contrast, among high-wealth households, most can spend as much as they need today, but those with relatively high income are more likely to expect constraints in the future. As a result, they lower their medical expenses today. Finally, Yildiz shows that food expenditures vary less with income across the wealth distribution and are higher among those with higher income.
Risky Business: The Choice of Entrepreneurial Risk under Incomplete Market by Baxter Robinson
Baxter unpacks an important barrier to starting a business—would-be entrepreneurs are unable to protect themselves against future declines their income or business failures. No market currently exists for individuals to buy such insurance. As a result, banks limit their lending to new entrepreneurs, so wealthy individuals are more likely to become entrepreneurs. They are also more likely to start high-risk, high-return businesses. Wealth begets more wealth. Baxter models the choice to become an entrepreneur and how risky a business to start. He uses survey data to ground the predictions of his model in reality. He shows that providing insurance for entrepreneurs would increase the number of business start-ups, raise their overall rate of return, and boost productivity in the overall economy.
Less is More Expensive: Income Differences in Buying Bulk by Mallick Hossain
Hossain examines a factor that increases the costs for low-income households when buying necessities, like groceries. Low-income households are less likely to buy items in bulk than high-income households. By buying less at one time, their total cost for the same amount of groceries is higher. Non-financial factors create barriers to bulk buying, as well as financial ones. As one of three examples in his paper, he finds that the rate of bulk buying across low- and high-income households is more similar in states where grocery stores are required to display unit costs along with the sales price. Unit costs make it easier for consumers to compare the total costs of buying in small or a large quantities. Using individuals’ purchases from grocery stores, Hossain finds that low-income households would lower their total grocery bills substantially if they bought in bulk as often as high-income households.
across businesses …
These next three papers explore differences across businesses. For example, together they show how local market shares or the macroeconomic environment can affect economic outcomes.
Multinationals, Monopsony and Local Development: Evidence from the United Fruit Company by Diana Van Patten (with Estéban Mendez-Chacón)
Van Patten addresses a question that has received renewed attention among economists and policymakers. How does a large employer in a labor market affect the outcomes of local workers? Economists refer to this form of employer-employee power as a monopsony. She studies the effect of the United Fruit Company, a large multinational corporation, on workers in the areas of Costa Rica where the company operated. Van Patton uses the geographic boundaries of the government land concessions to the company. Importantly, the government set these boundaries from 1889 to 1984 mostly in an arbitrary way. That quasi-random variation allows her to estimate the effects of the monoposony. Van Patten finds that the company substantially raised the living standard of workers in its labor markets. She argues that key mechanisms for this positive outcome are workers moving to the company and the company’s training its workers.
Downward Rigidity in the Wage for New Hires by Jonathan Hazell (with Bledi Taska)
Hazell studies the costliest part of recessions: the sharp rise in the unemployment rate. A long-standing explanation is that businesses are unable reduce wages of their workers. As a result, layoffs are their main way they can adjust to a fall in demand. Hazell uses detailed data on job vacancies from Burning Glass Technologies—a large online site for job postings. He documents changes in wages for new hires for the the same job. Wage offers for new hires reveal the market wage across changes in economic conditions. Hazell shows that wages do not fall in recessions but rise notably in expansions. Pairing data with a wage bargaining model, he finds that the unemployment rate is twice as sensitive to negative shocks to the economy as positive ones.
Employment Decline during the Great Recession: The Role of Firm Size Distribution by Wenjian Xu
Xu explores how concentration in local labor markets—as in the case of a monoposony—exacerbates job losses in a recession. Using experiences in the Great Recession, he shows empirically that communities in which a single firm dominated an industry lost more jobs than communities with less concentration. To explain this dynamic, Xu builds a model of the economy in which firms differ in their share of the labor market. He argues that when relatively large firms are hit with a reduction in demand, smaller nearby firms are unable to offset the negative effects. He rules out empirically other explanations in the Great Recession: hard hit industries, like durable goods manufacturing, or highly levered firms in the same area do not explain the unemployment patterns. In addition, displaced workers that switch from concentrated industries to less concentrated ones did not undo local employment losses. Xu shows that concentration in local labor markets leaves communities more vulnerable to negative economic shocks in a recession.
PART TWO … Learning from financial markets
The global financial crisis in 2008 and its ugly aftermath demand that economists understand the inner workings and macroeconomic effects of financial markets better. Conventional wisdom that markets are largely efficient and will ‘compete away’ mistaken views took a drubbing in the crisis. These three papers dive into details of financial markets. They use their models to explain real-world events and offer ways to make financial markets more sound.
Securitization and House Price Growth by Genevieve Nelson
Nelson studies the large increase in house prices and mortgage credit in the early to mid 2000s. The source of the bubble remains contested among economists. She argues that innovations in mortgage securitization increased credit supply and amplified the effects of other changes in demand and supply. Nelson models decisions of commercial banks that lend to households and shadow banks that securitize those mortgages. The shadow banks allow commercial backs to move mortgages off their balance sheet and they are subject to less regulatory oversight. Innovations that made securitization more profitable—even as mortgage rates fell—allowed shadow banks to expand their balance sheets and issue more securities. In a simulation of her model, Nelson finds that innovation in securitization can account for more than two thirds of the rise in house prices and about one third of the increase in non-conforming mortgages credit.
Fortifying Banks by Alison Oldham Luedtke (with Eric Young)
Luedtke explores the characteristics of bank-to-bank lending networks that can protect against cascading failures in a financial crisis. Such cascades caused extensive damage and threatened the entire financial system in 2008. Her goal is to identify how to fortify a network of banks with targeted government guarantees. Her model allows for various size and scope of lending between banks. Luedtke shows that networks in which banks are highly interconnected—in their lending and borrowing—and are not concentrated around a few large banks are easier to stabilize. In those cases, the government can guarantee the loans at a relatively smaller number of banks and still contain financial contagion. An analysis of inter-bank lending in 1867 shows that costs of containing a crisis are in line with her theoretical model. Finally, Luedtke argues it is more cost effective to fortify banking networks before a crisis than to bail out ‘too-big-to-fail’ banks in a crisis.
Yield Curve Volatility and Macroeconomic Risk by Anne Lundgaard Hansen
Hansen studies what the yield curve—interest rates at different maturity dates—for U.S. Treasury bonds tell us about macroeconomic risks. She unpacks the changes in the yield curve that forecasters often use to predict recessions. To do so, Hansen introduces time-varying volatility and variance risk premia in term structure model of interest rates. She then uses her flexible model to characterize how the yield curve relates to inflation and unemployment since the 1970s. She shows that the degree to which macroeconomic fluctuations have affected interest rates has differed over time. In an application of her model, she shows that macroeconomic shocks do not explain the yield curve inversion in 2019—when long-term yields were lower than short-term yields. The most recent inversion of the yield curve is not warning us of a recession.
PART THREE … Individual decisions add up to market outcomes
For decades, macroeconomists have tried to build their models up from the decisions of individuals—referred to as micro foundations. A challenge arises because in the economy the sum is often greater than its parts. Moreover, to study the world, our models must leave out many of the details. Choosing which details include in our models depend on the question we are trying to answer. In addition, our best models need to reflect the on-the-ground outcomes. These three papers bring empirical evidence to advance our understanding of how individual decisions affect market outcomes.
Networks of Monetary Flow at Native Resolutions by Carolina Mattsson
Mattsson studies how money flows through the economy. She documents the overall network as well as the individual transactions, which she refers to as money’s native resolution. In doing so, Mattsson estimates the velocity of money—the rate at which the same money is used to make purchases. This velocity parameter is at the core of macroeconomic models of money. She models network flows using a large data set of mobile money transactions in East Africa. She finds that the duration between cash-in and payment-out differs by purchase activities. The mobile money system exhibits considerable variety in the velocity of money. Macroeconomic models with a single value for velocity will not capture pattern in real-world flows of money.
House Price Expectations and Consumption— A Survey-based Experiment by Wei Qian
Qian uses a new approach to address a long-standing question in economics: when house prices rise, how much does consumer spending increase? Indeed, unrealistic expectations about house price growth may have contributed to the boom and bust in the housing markets during the Great Recession. To identify causal effects, she uses a survey experiment on expectations about house price growth. Specifically, Qian varies randomly whether individuals receive professional forecast of house prices. Individuals who received the forecasts had systematically different expectations than those who did not. She finds that higher house price expectations led to plans for higher spending. In addition, she provides evidence that the channel is a belief that higher household wealth will make it easier to borrow in the future. If households expect it be easier to borrow then they need to save less today.
Information Campaign on Water Quality and Marriage Market: The Case of Arsenic Exposure in Rural Bangladesh by Prachi Singh (with Shyamal Chowdhury)
Singh explores how marriage markets in Bangladesh are affected by public information campaigns about local water contamination. Her work exemplifies how international the field of economics has become and how markets take many forms. Drinking water contaminated with arsenic has a range of negative health effects from skin lesions to cancer. Singh shows how individuals of marrying age react to information about effects and sites of contamination. She compares marriage markets in areas with arsenic contamination to areas without it. She finds that men and women in contaminated areas marry at a younger ages—presumably to marry before signs of their worse health are evident. Likewise, the amount of money paid by the bride’s family to the groom’s falls substantially in areas with contamination.
PART FOUR … Think big about dynamics of our economy
For hundreds of years, economists have studied fluctuations in overall demand. Recession cause considerable hardship and expansions bring us back toward our full potential. The 20-trillion-dollar economy of the United States is a challenge to understand and, even more so, to support well with economic policy. The four papers here explore how polices to stabilize the economy affect participants in the economy differently and how their reactions then affect the economy. This research shows how economists are looking ‘under the hood’ of aggregate income and paying attention to the distribution of economic outcomes.
Redistributive Fiscal Policy and Marginal Propensities to Consume by Mariano Spector
Spector sheds light on a central debate about how to best stabilize the economy during a recession. Over the past several decades, economists and policymakers relied heavily on monetary policy to smooth out these ups and down in demand. In the Great Recession, monetary policies were not enough and the federal government stepped in with fiscal stimulus. To get the most bang for the buck, we need to send stimulus to households, businesses, and local governments that will spend a lot quickly. Spector builds a cutting-edge macro model that allows consumers to have different propensities to spend out of government transfers. His findings underscore why we need to think about who will spend most rapidly. Spector shows that those who largely save the transfers, build wealth, and then spend more over the long term. An important insight from his analysis is that policy efforts to fight recessions may also widen the differences in wealth and economic well being across households.
Investment Dynamics and Cyclical Redistribution by Nathan Zorzi
Zorzi explores a phenomena common in recessions: a sharp decline in spending on consumer durables, like autos, and residential investment, like new home construction. The inverse pattern occurs in expansions. These big purchases are less time sensitive than spending on necessities, like groceries, and are done sporadically. As a result, they can often be delayed until the economy improves. He uses a macroeconomic model—an extension of an important, new technique—in which individuals differ in whether they work in a one of these sectors or not. Zorzi demonstrates how negative economic shocks lead to larger income losses for durable-goods workers than other workers. On the flip side in expansions the incomes of those same workers rise more. He also shows that the propensity to spend on durables out of income increases with more income. Taken together, those working in durables goods sectors reduce their own spending on durable goods less in recessions than they increase it in expansions. This behavior dampens recessions and amplifies expansions. In his work, Zorzi brings attention to the feedback loop from aggregate shocks to individual shocks back to aggregate shocks.
Rational Inattention, Menu Costs, and Multi-Product Firms: Micro Evidence and Aggregate Implications by Choongryul Yang
Yang studies how differences across firms in the number products they sell affect their pricing decisions. The degree to and frequency at which firms change their prices due economic conditions has wide-ranging implications. It is costly for firms to gather information about the economy and then change their prices. Thus they tend to do so infrequently. This pattern, in turn, affects how much monetary policy can change overall output. With survey data from New Zealand, Yang documents that multiple-goods producers gather more information about economic conditions. As a result, they change their prices more often than single-goods producers. His macroeconomic models show how these different dynamics affect the the economy. Yang demonstrates how specifics at the firm-level shape the effectiveness of monetary policy.
Compositional Nature of Firm Growth and Aggregate Fluctuations by Vladimir Smirnyagin
Smirnyagin examines a key source of a dynamic economy: the start and rapid expansion of new businesses. Empirically, he shows with data from both the United Kingdom and the United States that more rapidly-growing businesses are started in an expansion than in a recession. This finding is important because new, rapidly-growing businesses contribute disproportionately to job creation and investment. These firms are hit hard in recessions, further weakening the economy. Smirnyagin documents that the ability to borrow more easily in an expansion is a likely reason why new managers are able expand their businesses more rapidly. With a model reflecting these empirical facts, he finds that changes in financial conditions can explain a large fraction of the variation in business expansion across booms and busts. Finally, Smirnyagin shows how government policies that lower start up costs for businesses can bolster the overall economy, but only if the government targets businesses with high growth potential.
PART FIVE: Improve economic policy
All the research … pages and pages, reams of data, complex models, and dueling results … expands our understanding of our world, our decisions, and our opportunities. Providing better advice to economic policy makers is one important outcome of this research. These last four papers make us think hard about economic policies, especially effects that may be unintended and not intuitive.
The Minimum Wage and Occupational Mobility by Andrew Yizhou Liu
Liu explores how minimum wage policies affect workers; a question of heated debate among economists and policy makers alike. Many researchers have studied how these policies may change the employment of lower-wage workers and wages paid even above the minimum. Liu pursues another angle: the ability of workers to move from one occupation to another. Technology, trade, and shifting demand mean that workers, and economy as a whole, often benefit from them switching to new jobs and new careers. He finds that minimum wages make those transitions harder. Empirically, he shows that minimum wages lead employers to post fewer new jobs and wage differences across occupations narrow. As a result, workers have less opportunity and less incentive to change occupations. With his model, Liu estimates that an increase in the minimum wage could decrease the economy’s output, even if total employment is unchanged. His research—true of any research on economic policies—does not tell politicians what to do; it does add evidence on the economic costs and benefits to those policy deliberations.
Industry Impacts of Unconventional Monetary Policy by Eiji Goto
Goto turns our attention to how monetary policies—used to stabilize the overall economy—tend to affect some market participants more than others. His topic is especially important now, because the Federal Reserve and central banks around the world used new policy tools during the Great Recession and its slow recovery. From quantitative easing (buying assets to lower interest rates) to forward guidance (communicating of future actions) to negative interest rates, these so-called “unconventional policies” deserve careful study. Goto focuses on the effect of unconventional policy on industry-level output in the United States, the United Kingdom, and Japan. He finds that these new tools increased output differently across industries in a country. The patterns are broadly similar in all three countries. Goto also shows that the differences in industry responses from the new tools are similar to the prior ones.
Marriage and Income Risk in the United Kingdom by Johanna Tiedemann
Tiedemann studies how individuals by marrying and combining their two incomes can reduce the financial strain from ups and downs in the own income. Single individuals, in contrast, must find a way to smooth out such income changes on their own. In some cases, however, the income risk in a couple could increase, not decrease, by marrying. She shows empirically that couples with differing socioeconomic backgrounds, for example, different levels of education, do not, on average, benefit from combining their incomes. The income risk and potential financial strain of these married couples would be higher than if each stayed single. Tiedemann’s findings speak to household finances, as well as broader economic outcomes. Policies that encourage marriage could, unintentionally, lower the well-being of some individuals. More broadly, challenges to family formation and an inability to deal with unexpected changes in income can have negative implications for the overall economy.
Uncertain Policy Implementation with Public Information by Mat Knudson
Knudson studies another dimension of the policy process—the incentives that politicians face when they choose policies to propose and to implement. A timely topic as a range of presidential hopefuls pitch new policies and the current administration implement their’s. Knowing the effect of information, especially whether it is public or private, can affect behavior is unintended ways. He argue that the public vetting of proposals, by think tanks, researchers, or advocacy groups, shapes voters’ views about the competence of the politician. In fact, simply having a proposal deemed to be good, can improve the politician’s reputation and electoral chances. This result can make it less likely that a politician wants to implement her good policy. She risks the bump to her reputation, if the public vetting was wrong and the policy fails. In contrast, a politician whose proposal was panned is more likely to implement his policy. If his policy succeeds, it could undo the damage from the vetting and increase his chances of being re-elected. Public vetting, in Knudson’s model, has the perverse effect that policies judged to be of lower quality are more likely to be implemented than those of high quality.
