Evolution of Modern Business Cycle Models: Accounting for the Great Recession

[Symposium: Macroeconomics a Decade after the Great Recession]

By Patrick J. Kehoe, Virgiliu Midrigan, and Elena Pastorino

Journal of Economic Perspectives, Summer 2018

Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium (DSGE) models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how these modern business cycle models have evolved...

How Do Firms Form Their Expectations? New Survey Evidence

By Olivier Coibion, Yuriy Gorodnichenko, and Saten Kumar

American Economic Review, September 2018

We survey New Zealand firms and document novel facts about their macroeconomic beliefs. There is widespread dispersion in beliefs about past and future macroeconomic conditions, especially inflation. This dispersion in beliefs is consistent with firms' in...

Investment Hangover and the Great Recession

By Matthew Rognlie, Andrei Shleifer, and Alp Simsek

American Economic Journal: Macroeconomics, April 2018

We present a model of investment hangover motivated by the Great Recession. Overbuilding of durable capital such as housing requires a reallocation of productive resources to other sectors, which is facilitated by a reduction in the interest rate. When mo...

Firms' Internal Networks and Local Economic Shocks

By Xavier Giroud and Holger M. Mueller

American Economic Review, October 2019

Using confidential establishment-level data from the US Census Bureau's Longitudinal Business Database, this paper documents how local shocks propagate across US regions through firms' internal networks of establishments. Consistent with a model of optima...

Endogenous Monitoring in a Partnership Game

By Anna Sanktjohanser

American Economic Review, March 2020

I consider a repeated game in which, due to imperfect monitoring, no collusion can be sustained. I add a self-interested monitor who commits to obtain private signals of firms' actions and sends a public message. The monitor makes an offer specifying the ...

The Productivity-Wage Premium: Does Size Still Matter in a Service Economy?

By Giuseppe Berlingieri, Sara Calligaris, and Chiara Criscuolo

AEA Papers and Proceedings, May 2018

The literature has established two robust stylized facts: (i) the existence of a firm size-wage premium and (ii) a positive relationship between firm size and productivity. However, the existing evidence is mainly based on manufacturing, which nowadays ac...

Report of the Editor: Journal of Economic Perspectives

By Enrico Moretti

AEA Papers and Proceedings, May 2018

Production and Welfare: Progress in Economic Measurement

By Dale W. Jorgenson

Journal of Economic Literature, September 2018

While the GDP was intended by its originators as a measure of production, the absence of a measure of welfare in the national accounts has led to widespread misuse of the GDP to proxy welfare. Measures of welfare are needed to appraise the outcomes of cha...

Large Firm Dynamics and the Business Cycle

By Vasco M. Carvalho and Basile Grassi

American Economic Review, April 2019

Do large firm dynamics drive the business cycle? We answer this question by developing a quantitative theory of aggregate fluctuations caused by firm-level disturbances alone. We show that a standard heterogeneous firm dynamics setup already contains in i...

Would Macroprudential Regulation Have Prevented the Last Crisis?

[Symposium: Financial Stability Regulation]

By David Aikman, Jonathan Bridges, Anil Kashyap, and Caspar Siegert

Journal of Economic Perspectives, Winter 2019

How well equipped are today's macroprudential regimes to deal with a rerun of the factors that led to the global financial crisis? To address the factors that made the last crisis so severe, a macroprudential regulator would need to implement policies t...

Empirical Work on Auctions of Multiple Objects

By Ali Hortaçsu and David McAdams

Journal of Economic Literature, March 2018

Abundant data has led to new opportunities for empirical auctions research in recent years, with much of the newest work on auctions of multiple objects, including: (1) auctions of ranked objects (such as sponsored search ads), (2) auctions of identical o...

Zone Pricing in Retail Oligopoly

By Brian Adams and Kevin R. Williams

American Economic Journal: Microeconomics, February 2019

We quantify the welfare effects of zone pricing, or setting common prices across distinct markets, in retail oligopoly. Although monopolists can only increase profits by price discriminating, this need not be true when firms face competition. With novel...

Strategic Patient Discharge: The Case of Long-Term Care Hospitals

By Paul J. Eliason, Paul L. E. Grieco, Ryan C. McDevitt, and James W. Roberts

American Economic Review, November 2018

Medicare's prospective payment system for long-term acute-care hospitals (LTCHs) provides modest reimbursements at the beginning of a patient's stay before jumping discontinuously to a large lump-sum payment after a prespecified number of days. We show th...

Does Simple Information Provision Lead to More Diverse Classrooms? Evidence from a Field Experiment on Undergraduate Economics

By Amanda Bayer, Syon P. Bhanot, and Fernando Lozano

AEA Papers and Proceedings, May 2019

This paper reports the results of a field experiment involving 2,710 students across nine US colleges, in which faculty provided incoming women and URM students with information about economics. We randomly assign students to one of three conditions: a co...

Rational Inattention in Hiring Decisions

By Sushant Acharya and Shu Lin Wee

American Economic Journal: Macroeconomics, January 2020

We provide an information-based theory of matching efficiency fluctuations. Rationally inattentive firms have limited capacity to process information and cannot perfectly identify suitable applicants. During recessions, higher losses from hiring unsuitabl...

Diffusing Coordination Risk

By Deepal Basak and Zhen Zhou

American Economic Review, January 2020

In a regime change game, privately informed agents sequentially decide whether to attack without observing others' previous actions. To dissuade them from attacking, a principal adopts a dynamic information disclosure policy, frequent viability tests. A v...

Peer Preferences, School Competition, and the Effects of Public School Choice

By Levon Barseghyan, Damon Clark, and Stephen Coate

American Economic Journal: Economic Policy, November 2019

This paper develops a new economic model of public school choice. The key innovation is to model competition between schools in an environment in which parents have peer preferences. The analysis yields three main findings. First, peer preferences dampen ...

Impressionable Voters

By Costel Andonie and Daniel Diermeier

American Economic Journal: Microeconomics, February 2019

We propose a model of impressionable voters. Impressionable voters vote based on impressions rather than maximizing expected utility. We apply our model to elections with multiple candidates and solve for the stationary distributions of the implied stocha...

The Risk of Failure: Trial and Error Learning and Long-Run Performance

By Steven Callander and Niko Matouschek

American Economic Journal: Microeconomics, February 2019

Innovation is often the key to sustained progress, yet innovation itself is difficult and highly risky. Success is not guaranteed as breakthroughs are mixed with setbacks and the path of learning is typically far from smooth. How decision makers learn by ...

Self-Fulfilling Debt Crises: A Quantitative Analysis

By Luigi Bocola and Alessandro Dovis

American Economic Review, December 2019

This paper investigates the role of self-fulfilling expectations in sovereign bond markets. We consider a model of sovereign borrowing featuring endogenous debt maturity, risk-averse lenders, and self-fulfilling crises à la Cole and Kehoe (2000). In this...