Research
Publications
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Runs versus Lemons: Information Disclosure and Fiscal Capacity
Review of Economic Studies (October 2017)
With Miguel Faria-e-Castro and Thomas PhilipponWe study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model, governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the cost of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained.
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Endogenous Technology Adoption and R&D as Sources of Business Cycle Persistence
Online AppendixAmerican Economic Journal: Macroeconomics (July 2019)
With Diego Anzoategui, Diego Comin and Mark GertlerWe examine the hypothesis that the slowdown in productivity following the Great Recession was in significant part an endogenous response to the contraction in demand that induced the downturn. We first present panel data evidence that technology diffusion is highly cyclical. We then develop and estimate a macroeconomic model with an endogenous TFP mechanism that allows for both costly development and adoption of new technologies. We then show that the model’s implied cyclicality of technology diffusion is consistent with the panel data evidence. We next use the model to assess the sources of the productivity slowdown. We find that a significant fraction of the post-Great Recession fall in productivity was an endogenous phenomenon. The endogenous productivity mechanism also helps account for the slowdown in productivity prior to the Great Recession, though for this period shocks to the effectiveness of R&D expenditures are critical. Overall, the results are consistent with the view that demand factors have played a role in the slowdown of capacity growth since the onset of the recent crisis. More generally, they provide insight into why recoveries from financial crises may be so slow.
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Does a Currency Union Need a Capital Market Union?
Replication FilesJournal of International Economics (November 2022)
With Thomas Philippon and Markus Sihvonen
We compare risk sharing in response to demand and supply shocks in four types of currency unions: segmented markets; a money market union; a capital market union; and complete financial markets. We show that a money market union is efficient at sharing domestic demand shocks (deleveraging, fiscal consolidation), while a capital market union is necessary to share supply shocks (productivity and quality shocks). In a numerical exercise, we find that the welfare gain of moving from segmented markets to a money market union is of roughly similar magnitude to that of moving from a money market to a capital market union.
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Do Tax Increases Tame Inflation?
AEA Papers & Proceedings (May 2023)
With James Cloyne, Haroon Mumtaz and Paolo Surico
The answer is "yes" for personal income taxes but "no" for corporate income taxes. Using narrative-identified US federal tax changes post-World War II and disaggregated sectoral data on consumer and producer prices, we show that higher average personal income tax rates lower prices across a broad range of sectors, but higher average corporate tax rates do not. There is also significant sectoral heterogeneity in the size of the effects. Finally, only personal tax increases lower inflation expectations, while corporate tax increases lead to persistent declines in stock prices. Our results are consistent with personal taxes affecting aggregate demand and corporate taxes persistently affecting supply conditions.
Working Papers
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The Dynamic Effects of Income Tax Changes in a World of Ideas
With James Cloyne, Haroon Mumtaz and Paolo Surico
Using a narrative identification of US tax changes over the post-WWII period, we show that corporate income tax cuts foster R&D spending and innovation, leading to a persistent increase in aggregate productivity and output. In contrast, changes in the average personal income tax rate have mostly short-term effects. An estimated endogenous productivity model highlights the role of “applied research” - over and above formal R&D - as a main force behind these results, and suggests a social rate of return to investment in innovation between 20% and 75%
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Putty-Clay Automation
Online Appendix
CEPR DP16022Please note this paper supersedes Automation, Growth and Factor Shares
This paper develops a model of automation as embodied technological progress (putty-clay automation). The gradual discovery and obsolescence of technologies gives rise to a distribution of capital with varying degrees of automation. I derive conditions under which, aggregating over heterogeneous production units, output can be represented as a CES production function, the parameters of which are determined endogenously by the distribution of technology. Through the lens of the canonical model, I show how the distribution of automation technology determines its aggregate effects; in the long run, only the distribution of technology matters. The transition dynamics of the economy in response to an increase in frontier automation technology are consistent with notable micro and macro US stylized facts of recent decades: at firm level, increased concentration, a fall in the labor share driven by reallocation towards low labor share establishments, and a stable median labor share; at macro level, slowing total factor productivity growth and a fall in the real interest rate
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A Note on Information Disclosure and Adverse Selection
With Miguel Faria-e-Castro and Thomas Philippon
We analyze public disclosure in a financial market with private information as in Myers and Majluf (1984). Firms need outside financing to invest in valuable projects but they are privately informed about the quality of their assets. Adverse selection in credit markets can then lead to suboptimal investment. We characterize a set of policies that robustly increase investment.
Work in Progress
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The Evolution of Firm Heterogeneity in Europe: Facts and Explanations
With German Gutierrez, Sophie Piton and Thomas Philippon
Using firm-level data for a large cross section of European countries, we document facts about reallocation, productivity dispersion and factor shares. The data are consistent with documented facts in the US in two respects: (i) declines in industry-level labor shares are driven by a reallocation of value-added towards low labor share firms and not by a fall in the within-firm labor shares; (ii) increased reallocation of value-added goes hand-in-hand with increased dispersion in productivity between the most productive and less productive firms. However, in contrast to the US, these phenomena appear only in a subset of countries/industries; and are nowhere on the scale of the changes seen in US industries. We then explore a range of possible explanations with a focus on the interaction between technology and government policy.
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A Long Run Anatomy of Task Exposures to Technology
With Johan Moen-Vorum
We introduce a novel methodology to measure the invention and diffusion of task exposures to technology in the US economy. First, we measure the relevance of US patents introduced from 1920-2018 to work tasks performed by human workers using a natural language processing algorithm. After controlling for the confounding effects of the evolution of language, we obtain a measure that we call the task relevance of newly introduced technology. In a local projections framework, we estimate the impulse response of hours worked, industry labor share and productivity to technological innovations. We identify two technological factors that have opposing effects on workers and industries: a manual-biased factor, which decreases hours and the labor share and has no effect on productivity; and a cognitive-biased factor, which increases hours and productivity, and has no effect on the labor share.
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(In)efficient Credit Booms: the Role of Collateral
With Diego Anzoategui, Pau Rabanal and Filiz D. Unsal
Using data from different sources we find that credit booms are episodes where interest spreads are low, prices of assets typically used as collateral are high and collateral to credit ratios are low. We propose a model featuring search and information frictions in the credit market that can account for these empirical facts. In the model, banks use collateral to be able to separate good from bad entrepreneurs and the amount of collateral needed is a function of the aggregate shocks in the economy. When collateral needs are not satisfied, banks optimally decide to relax credit standards to be able to allocate more capital to good entrepreneurs. We provide necessary conditions that need to be met to observe booms with loose credit standards in equilibrium. We also use the model to analyze policy implications and show that credit booms can be constrained inefficient, opening room for welfare-improving macro-prudential policy. The optimal policy, which can be approximated by a state-contingent tax on new credit lines, dampens the increase in credit and the drop in spreads and collateralization during booms.