Risk, Pricing, and Economic Dynamics
Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Thomas Winberry, University of Chicago
Risk Premium Shocks Can Create Inefficient Recessions
AbstractWe develop an equilibrium theory of business cycles driven by spikes in risk premiums that depress business demand for capital and labor. The economy is hit by aggregate shocks that increase firms’ uninsurable idiosyncratic risk and raise risk premiums. We show that risk shocks can create quantitatively realistic business cycles, with contractions in employment, consumption, and investment. Economic fluctuations are inefficient—output and employment fall too much during recessions, compared to the constrained-efficient allocation, and consumption should be countercyclical. The optimal allocation requires stimulating employment and consumption during recessions.
Technological Change and Occupations over the Long Run
AbstractWe construct occupation-specific indicators of technological change that span two centuries (1840-2010) using textual analysis of patent documents and occupation task descriptions. We build upon Kelly et al (2018) and identify breakthrough innovations based on textual similarity of the patent
to previous and subsequent work: breakthrough patents are highly distinct from previous work but most similar to subsequent innovations. For each patent, we identify the set of occupations it is most closely related to based on the similarity of the patent document to the occupation’s task description. Our occupation-level indices are significantly negatively correlated with future employment and wage growth. Comparing the recent IT revolution to the Second Industrial Revolution (1880s) and the technology wave of the 1920s and 1930s, we note an important difference: the first two waves consisted of innovations that were mainly related to occupations emphasizing (non-interpersonal) manual tasks, while the recent wave is composed of innovations that are significantly more related to cognitive tasks than the previous two waves.
Prudential Monetary Policy
AbstractShould monetary policy have a prudential dimension? That is, should policymakers raise interest rates to rein in financial excesses during a boom? We theoretically investigate this issue using an aggregate demand model with asset price booms and financial speculation. In our model, monetary policy affects financial stability through its impact on asset prices. Our main result shows that, when macroprudential policy is imperfect, small doses of prudential monetary policy (PMP) can provide financial stability benefits that are equivalent to tightening leverage limits. PMP reduces asset prices during the boom, which softens the asset price crash when the economy transitions into a recession. This mitigates the recession because higher asset prices support leveraged, high-valuation investors’ balance sheets. An alternative intuition is that PMP raises the interest rate to create room for monetary policy to react to negative asset price shocks. The policy is most effective when there is extensive speculation and leverage limits are neither too tight nor too slack.
- E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
- E3 - Prices, Business Fluctuations, and Cycles