Business Cycles and Investment
Lightning Round SessionMonday, Jan. 5, 2026 10:15 AM - 12:15 PM (EST)
- Chair: Charles Swanson, Temple University
Which Idiosyncratic Risk Matters for Business Cycles?
Abstract
I estimate a medium-scale Heterogeneous-Agent New Keynesian model where the effects of household heterogeneity are encapsulated in a wedge within the Euler equation. Estimating the model enables the computation of this wedge over the past decades, facilitating an investigation into how individual risk and precautionary savings evolve throughout the business cycle. By comparing the estimated wedge with empirical measures of individual risk, I demonstrate that the model captures realistic dynamics of individual risk and precautionary savings. Notably, the estimated wedge shows a strong correlation with unemployment during normal times. Furthermore, incorporating this wedge into an otherwise standard macroeconomic model significantly enhances the fit of macroeconomic time series, underscoring the importance of idiosyncratic risk in shaping business cycles.The Redistributive Power of Business Cycle Fluctuations
Abstract
How do business cycle fluctuations redistribute welfare between cohorts? Is this redistributionquantitatively important? What are the channels through which it occurs and how are
they affected by monetary policy? To answer these (and other) questions, we construct a New
Keynesian life-cycle model and estimate it for the US. We find that cyclical fluctuations are
quantitatively important - for some cohorts and some years their impact on welfare can reach
even 40% of annual consumption. More importantly, these effects do not tend to net out over
a typical life cycle: some cohorts (e.g. born in the 1940s) have been historically substantially
more lucky than others. Shocks that drive the cycle can be split into two groups: those that
affect all cohorts’ welfare in the same direction and those that create both winners and losers.
Monetary policy shocks belong to the latter group and hence play an overproportional role in
driving intergenerational redistribution, even if they do not contribute much to the variance
of output. In contrast, more aggressive systematic monetary policy dampens the amount of
redistribution.
Endogenous Job Separation and the Nonlinear Nature of the Beveridge Curve
Abstract
We study the nonlinear and state-dependent dynamics of the Beveridge curve in a Diamond-Mortensen-Pissarides (DMP) model with endogenous job destruction solved globally and accurately. We distinguish between shifts of the Beveridge curve and movements along it. We show empirically that large shifts in the Beveridge curve feature a positive co-movements in matching efficiency and separation rates. Based on the global nonlinear solution in the sequence space, we demonstrate that both endogenous job destruction and matching efficiency variations are essential to replicating these observed dynamics in the DMP model. Furthermore, we show that the unemployment response strength is contingent on the state of matching efficiency, with the influence of matching efficiency reversing between models with endogenous versus exogenous job destruction. Through case studies of the COVID-19 pandemic and the Great Recession, we highlight the critical role of endogenous separations and state-dependent dynamics in shaping unemployment fluctuations. Our results also caution against relying on policy analysis based on models with exogenous job destruction, as it may lead to misleading conclusions. Using the accurately solved model with endogenous separations we then re-examine optimal policy, focusing specifically on hiring and firing tax policies through the lens of Hosios-implied efficient global unemployment dynamics. We show that the DMP model with endogenous job destruction features a trade-off between efficiency, minimizing mean unemployment, and minimizing the second moment of unemployment and output. All four plausible policy targets require a different tax rate. Our results provide new insights into the trade-offs of labor market fluctuations and policy interventions aimed at stabilizing unemployment and output volatility.Testing Business Cycle Theories: Evidence from the Great Recession
Abstract
Empirical business cycle studies using cross-country data usually cannot achieve causal relationships while within-country studies mostly focus on the bust period. We provide the first causal investigation into the boom period of the 1999-2010 U.S. cross-metropolitan business cycle. Using a novel research design, we show that credit expansion in private-label mortgages causes a differentially stronger boom (2000-2006) and bust (2007-2010) cycle in the house-related industries in the high net-export-growth areas. Thus, our results are consistent with the credit-driven household demand hypothesis. Most importantly, our unique research design enables us to perform a set of tests on other theories (hypotheses) of the business cycle. We show that the following theories (hypotheses) cannot explain the cause of the 1999-2010 U.S. business cycle: the speculative euphoria hypothesis, the real business cycle theory, the collateral-driven credit cycle theory, the business uncertainty theory, and the extrapolative expectation theory.Time to Build and Optimal Debt Maturity Choice
Abstract
This paper develops a dynamic stochastic general equilibrium (DSGE) model that integrates time-to-build technology with an endogenous choice of debt maturities. Building on Kydland and Prescott’s (1982) insight that capital projects require multiple periods to complete, the model allows firms to issue both short- and long-term debt while investment remains under construction. A key contribution is uncovering a maturity mismatch channel: when short-term liabilities mature before capital is productive, adverse shocks erode net worth, raise default risk, and widen credit spreads—further depressing investment. By linking two strands of the literature—delayed investment dynamics and corporate debt maturity—this framework offers new perspectives on how financing frictions and rollover risk can amplify or mitigate business cycle fluctuations.Macroeconomic Uncertainty and Investment Specific Technical Change
Abstract
The impact of macroeconomic uncertainty is related to the underlying rate of investment-specific technical change (ISTC). Empirically, we estimate a state-dependent local projection model and show that when ISTC is rapid, uncertainty shocks have a more significant negative impact on the aggregate economy. Additionally, firm-level evidence suggests that this ISTC-uncertainty nexus is largely driven by the response of investment. Finally, we develop a DSGE model that incorporates ISTC and uncertainty shocks, confirming that more rapid ISTC exacerbates the effect of uncertainty shocks on delaying investment. ISTC affects how much capital a unit of foregone consumption generates, so investors are more apprehensive in the face of uncertainty when ISTC is rapid due to their increased exposure.How Do Supply Chain Pressures Affect Monetary Policy Transmission?
Abstract
This paper investigates if monetary policy can influence how firms adapt to supply chain pressures. I construct a novel firm-level supply chain pressure index using large language models and natural language processing algorithms applied to firms' earnings call transcripts. The index is validated by identifying conversations about supply chain disruptions at the sentence level and showing that firms directly affected by well-documented supply chain disrupted events face increased pressures compared to unaffected firms. The aggregate index also correlates highly with traditional measures of supply chain disruptions. Using this index, I find that monetary policy has an active role in influencing the speed of firms adapting to these pressures via the investment channel. Firms experiencing unusual supply chain pressures exhibit significantly higher investments in inventories and physical capital in response to expansionary monetary policy shocks than firms not under such pressures. This differential investment behavior is asymmetric, predominantly driven by expansionary shocks. I construct a New Keynesian model to rationalize the empirical findings. In the model, ramping up production via inputs is costly because firms can't easily shift away from bottlenecked suppliers. As a result, firms invest more in capital to avoid reliance on constrained intermediate inputs.Value Chain Productivity and Intangible Investments
Abstract
Despite living in an era marked by rapid technological advancements and a surge in new digital tools, European productivity growth has been sluggish since the 2008 Global Financial Crisis. Several factors might explain this decline, but a significant reason is likely the slowdown of globalization.We combine data on global value chains from the new OECD Inter-Country Input-Output Tables and KLEMS data, and construct a measure of total factor productivity (TFP) of the total value chain for industries in the EU-15 countries. By using 675 value chain TFP series that span the period 1995-2017, we first examine how the value chain productivity has evolved in the value chains of the primary producer industries of the EU-15.
We find that the slowdown in productivity growth witnessed in the western world after the financial crisis is a result of both the retarded TFP growth of the primary producer industry and also the slightly negative TFP growth of the rest of the value chain. We then estimate dynamic panel regressions with system GMM to study the spillover effects of intangibles to value chain’s TFP. We show that the earlier documented positive spillover effects from business related intangibles to TFP growth are evident also when considering the productivity of the whole value chain.
Finally, we study how investment agreements with China have affected the productivity of the value chains of industries in the EU-15 countries with an event study analysis. We find that after an agreement enters into force, the value chain’s TFP increases. Furthermore, business related intangibles increase in the primary industry of the value chain. Together, these results suggest that the value chain’s TFP growth achieved by bilateral investment treaties with China is likely, at least to some extent, explained by the increases in business related intangibles in the primary industry.
JEL Classifications
- E3 - Prices, Business Fluctuations, and Cycles