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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Corporate Taxes, Innovation and Productivity
With James Cloyne, Haroon Mumtaz and Paolo Surico
Using a narrative identification of tax changes in the United States over the period 1950-2019, we document that a temporary cut in corporate income tax rates leads to a long-lasting increase in innovation and productivity. An estimated endogenous productivity model reveals that the long period of tax amortization for Intellectual Property (IP) purchases in the U.S. tax code over most of the sample is crucial to account for this finding. We provide direct evidence on the model mechanism by showing that a temporary cut in corporate taxes generates a persistent increase in R&D expenditure, non-R&D IPP investment, patents and trademark assignments as well as a more pronounced jump in the share prices of patent-rich firms.
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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 Green Transition in a Putty-Clay Model of Capital
With Simon Gilchrist and Natalie Rickard
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The Rise in US Non-tradeable Goods Prices: Facts and Explanations
With German Gutierrez, Sophie Piton and Thomas Philippon
We document a large increase in US non-tradeable goods prices relative to EU non-tradeable prices between 1992 and 2018. This divergence in prices (i) did not occur in tradeable goods; (ii) cannot be attributed to divergent trends in nontradeable industry labor productivity or wages, which followed very similar paths in the US and EU; and (iii) drives the divergent evolution in manufacturing labor shares in the US and EU. A decomposition of changes in prices into changes in productivity, wages, technology and mark-ups (net of returns to scale) suggests that rising markups explain the bulk of the divergence in US non-tradeable prices.
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The Technological Origins of Growth
With Johan Moen-Vorum
This paper investigates the link between technological progress and economic growth in the United States in post-World War II data. To do so, we employ a novel, technology field-specific measure of technological progress constructed using patent text and work task descriptions. Using a VAR framework, we estimate the effects of technology on GDP and other macro variables. The empirical model provides a technological explanation for three salient episodes in US GDP growth: the slowdown starting in the 1970s, the acceleration of the 1990s-2000s, and the post-2000 slowdown. Engineering technology is the main driver of growth overall, followed by IT, which took over as the main source of growth in the 1990s. We also show that engineering technologies disproportionately benefit the income of the bottom 90%, while IT technologies benefit the top 10%, explaining part of the post-1990 increase in US income inequality.
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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.