Abstract: When 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, economic volatility is countercyclical, the aggregate Solow residual is procyclical and the fiscal multiplier is countercyclical. The model’s main mechanism is that the share of firms at their production limit is strongly procyclical. A baseline calibration of a basic New Keynesian DSGE model with capacity constraints delivers more than 25% of the empirically observed asymmetry in output, 18% of the additional cross-sectional dispersion in recessions and around 25% of the additional aggregate volatility, and more than 50% of the fluctuations in the Solow residual. The model implies fluctuations in the fiscal multiplier of around 0.12 between expansions and recessions.
Abstract: Recent research has shown that higher uncertainty — which increases profitability dispersion across firms — may cause recessions. This paper explores how recessions can cause an endogenous rise in uncertainty about profitability. If heterogeneous firms face real and financial frictions, then a first moment shock leads to countercyclical profitability dispersion through firms’ heterogeneous responses in price setting. Additionally, the mechanism endogenously generates countercyclical credit spreads and credit spread dispersion. The model explains two-thirds (69%) of the observed increase in profitability dispersion by fluctuations in aggregate levels holding productivity risk constant. This suggests that small uncertainty shocks may still be needed to explain the remaining volatility in profitability risk.
Abstract: 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.
Abstract: Resume studies have found that certain demographic or social groups have lower callback rates for job interviews than others. We show that in the CPS two such groups, women and African Americans, have higher unemployment volatility over the business cycle than white males, when controlling for observables visible to employers. 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 not discriminated group. This effect is due to the fact that increased competition for jobs hurts discriminated against workers the most.
Work in Progress: