When occasionally binding capacity constraints limit the production of heterogeneous firms, demand shocks can endogenously generate a number of important business cycle regularities: recessions are deeper than booms are high, firm-level volatility is countercyclical, the aggregate Solow residual is procyclical and the fiscal multiplier is countercyclical. A baseline calibration of a basic New Keynesian DSGE model with capacity constraints shows that this mechanism can explain more than a quarter of the empirically observed asymmetry in output, and matches the cyclicality of firm-level profitability dispersion and of the measured Solow residual. The model implies flucutations in the fiscal multiplier of around 0.12 between expansions and recessions.
Recent research has shown that higher uncertainty — measured as profitability risk across firms — may cause recessions. This paper explores how recessions can cause an endogenous rise in firm risk. If heterogeneous firms face real and financial frictions, then a shock to the mean of aggregate productivity endogenously leads to countercyclical profitability risk through firms' heterogeneous responses in price setting. Additionally, the mechanism endogenously generates countercyclical credit spreads and credit spread dispersion. The model explains a large share of the observed fluctuations in profitability dispersion (69%) and in credit spreads (40%) through fluctuations in aggregate TFP holding productivity risk constant. This suggests that the scope for uncertainty shocks to explain recessions may be smaller than previously thought.
Welfare effects of gas price fluctuations
A large literature examines the effects of oil price shocks on aggregate output through its role in production or its impact on monetary policy. Motivated by the fact that a large share of U.S. oil consumption occurs in the household sector in the form of gasoline, in this paper we follow Kehrig and Ziebarth (2009) by explicitly modeling household gasoline consumption. We structure household behavior to replicate two patterns found in household-level data (the CEX) which show that gasoline consumption increases with income, but it decreases with income as a share of the household’s budget along the intensive margin. The model includes gasoline consumption in household utility (e.g. taking road trips) on top of a fixed minimum level of gas consumption (e.g. commuting to work). This allows us to study the direct effect of an oil price shock on household welfare, as well as its distributional consequences. Calibrated to households’ gasoline expenditures, the model suggests that a shock to the gas price is almost twice as costly for households in the lower half of the income distribution than for high-income households.
Work in progress:
Labor market effects of hiring discrimination over the business cycle
Resume studies have found that certain demographic or social groups have lower callback rates for job interviews than others. Using a standard search-and-matching model of the labor market with an urn-ball matching technology, we then demonstrate that labor market discrimination in the form of differing hiring rates implies that in recessions discriminated groups’ job-finding rates fall by more and their unemployment rates increase by more compared to a non-discriminated group. This effect is due to the fact that increased competition for jobs in recessions hurts discriminated against workers the most. Consistent with this model we find that in the CPS African Americans have higher unemployment volatility over the business cycle than whites when controlling for observables visible to employers.
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