Research
Working Papers
Abstract
We adapt factor-pricing methods to state-level municipal bond portfolios and decompose risk premia into persistent, aggregate, and relative components. In normal times a national market factor dominates time-series variation, while style exposures influence the return cross-section. Treasury factors add no pricing power, consistent with segmentation from asymmetric federal taxation, and we detect a convenience premium that suppresses returns in high-tax states. During COVID the baseline structure breaks down: returns are priced on the cross-state distribution of pandemic outcomes in place of baseline factors, indicating a shift in risk transmission. Municipal risk structures are thus tractable but regime dependent.
Abstract
A single recurring event, the arrival of a new general purpose technology (GPT), accounts jointly for facts that macroeconomics and finance have studied separately: bull markets that coincide with diffusion and carry rising price-earnings ratios, a sizeable equity premium and low risk-free rate alongside smooth aggregate consumption, a wide range of capitalization-to-output ratios, and measured productivity slowdowns at arrival. The model departs from the textbook growth model in three places only: GPT shocks recur, diffusion proceeds through technology-specific capital, and stock market participation is limited. This parsimony delivers transparent mechanisms and a constructive proof of existence and uniqueness of a stationary equilibrium with heterogeneous households. Calibrated to U.S. data, the model generates an equity premium of about 5.5 percent.
Abstract
Disappointing productivity gains in recent decades have raised concerns that the trend rate of TFP improvement may have declined, and this paper examines that possibility. As a framework for analysis, we construct an aggregative model with randomly timed punctuated technology advances. In the model’s equilibrium, momentary growth rates continuously vary, though their mean is stationary. Due to the wide spacing of fundamental technology shocks, shifts in the mean are inherently difficult to identify from direct observations, so we propose an indirect approach for studying them. Applying the new method to data, we do not find evidence of a reduction in trend growth in the recent past.
Work in Progress
Publications
Abstract
Long-term interest rates have been falling globally since the early 1980s and have reached historically low levels. Past forecasts largely missed this secular decline. This paper reviews methodologies for making long-term interest rate projections. We synthesize results from studies that use long historical series and cross-country data to estimate the trend and decompose it into components. We then construct a set of economic indicators that are potentially useful in interest rate forecasting. We add international forward-looking economic indicators as explanatory variables in a standard macrofinance forecasting model. We find that the model with international variables can outperform the other models by better tracking the falling trajectory of U.S. interest rates in the post-2008 period, a trend that is missed by domestic variables.
Abstract
This paper develops a tractable model of post-retirement behavior with health status uncertainty and state-verification difficulties. The model distinguishes between annuitized and non-annuitized wealth and features means-tested Medicaid assistance with nursing home care. We show how to solve the potentially complex dynamic problem analytically, making it possible to characterize optimal behavior with phase diagrams. The analysis provides an integrated treatment of portfolio composition and consumption/wealth accumulation choices. We show the model can explain both the “retirement-saving puzzle” and the “annuity puzzle.”
Abstract
We study a model with a durable good subject to periodic obsolescence and analytically characterize the optimal purchasing policy. The key result is that consumers optimally synchronize new purchases with the innovation cycle. The model simultaneously explains coordinated adoption without invoking network effects and provides a theoretical underpinning for a diffusion curve that features a temporary adoption slowdown.
Abstract
We build a general equilibrium model where growth is driven by two invention types: fundamental ideas that cause creative destruction, and derivative ideas that enhance the value of existing inventions. The model provides a new mapping from microeconomic patent data to aggregate total factor productivity growth and the aggregate value of privately owned knowledge. We show how to measure the frequency of derivative ideas and the rate of creative destruction. We estimate that derivative ideas account for 70–80% of all patents and their presence more than doubles the value of knowledge capital relative to what the measured innovation rate might otherwise imply.
Abstract
We construct key household and individual economic variables using a panel micro data set from the Russia Longitudinal Monitoring Survey (RLMS) for 1994–2005. We analyze cross-sectional income and consumption inequality trends and find that inequality decreased during the 2000–2005 economic recovery. The decrease appears to be driven by falling volatility of transitory income shocks. The response of consumption to permanent and transitory income shocks becomes weaker later in the sample, consistent with greater self-insurance against permanent shocks and greater smoothing of transitory shocks. Finally, expenditure and income inequality in Russia are not far apart.
Abstract
Using a life-cycle model in which women divide their time between home and market work, we establish a link between retirement wealth and the value of forgone home production. We use data from the Health and Retirement Study to estimate the model’s parameters and adjust the growth rate of GDP to reflect reductions in nonmarket output. We find that the value of forgone home production is modest—about 25% of women’s measured earnings.
Abstract
We develop a new general equilibrium growth accounting framework that features increasing returns to scale, imperfect competition and incorporates technological revolutions into the description of technical progress. We propose a way to tell apart revolutionary changes in technology and incremental innovations using stock market data. We use our framework to jointly estimate the overall embodied TFP change during 1953–1995 and the aggregate output elasticity. We find that the IT revolution raised the aggregate TFP level by about 20%. We suggest a 1.09–1.11 range for the aggregate returns to scale.
Abstract
Tobin’s average q has usually been well above 1, but fell below 1 during 1974–1984. Our model explains this pattern and reconciles it with unchanging aggregate investment. The stock market value in the numerator of q reflects ownership of physical capital and knowledge, but the denominator measures just physical capital. Therefore, q is usually above 1. Periodic arrivals of important new technologies, such as the microprocessor in the 1970s, suddenly render old knowledge and capital obsolete, causing the stock market to drop. National accounts measures of physical capital miss this rapid obsolescence. Then q appears to drop below 1.
Abstract
This paper develops a dynamic model with transaction costs to determine the equilibrium resale pattern in a market for a durable good. The key result is that the probability of resale is nonmonotonic in the age of the good. Trade volume is relatively low in the very beginning and in the middle of a good’s life. This result helps explain observed variations of resale rates across vintages for the U.S. market of used cars.
Abstract
When a production process requires two extremely complementary inputs, conventional wisdom holds that a firm would always upgrade them simultaneously. We show, however, that if upgrading each input involves a fixed cost, the firm may upgrade them at different dates, “asynchronously.” This insight helps us understand why productivity rises with the age of a plant, why investment in structures is more spiked than equipment investment, and why plants have spare capacity. The bigger point of the paper is that complementarity does not necessarily imply comovement—not even for a single decision maker.
Older Working Papers
Abstract
This paper develops a new measure of after-tax rate of return on aggregate wealth and uses it in estimating the structural relationship between the long-run interest rate and productivity growth rate. The structural approach allows use of parameter estimates in constructing projections for the interest rate on U.S. Treasury securities. Results indicate that the long-run interest rate rises slightly more than one for one with productivity growth rate. The projected real interest rate on 10-year US government bonds is in the 1.5–2.0 percent range under intermediate assumptions on future productivity growth and trends in the world interest rate.
Abstract
We analyze lifetime earnings histories of white males during 1960–2010 and categorize the labor force status of every worker as either working full-time, partially retired or fully retired. We find that the fraction of partially retired workers has risen dramatically (from virtually 0 to 15 percent for 60–62 year olds), and that the duration of partial retirement spells has been steadily increasing. We estimate the response of retirement timing to variations in unemployment rate, inflation and housing prices. Flows into both full and partial retirement increase significantly when the unemployment rate rises. Workers around normal retirement age are especially sensitive to variations in the unemployment rate.