Knowledge that Transforms

Are business cycles mainly a response to persistent exogenous shocks, or do they instead reflect a strong endogenous mechanism which produces recurrent boom-bust phenomena? In this paper we present evidence in favor of the second interpretation and we highlight the set of key elements that influence our answer. The elements that tend to favor this type of interpretation of business cycles are (i) slightly extending the frequency window one associates with business cycle phenomena, (ii) allowing for strategic complementarities across agents that arise due to financial frictions, and (iii) allowing for a locally unstable steady state in estimation. (JEL E22, E24, E23, E44)

We estimate the magnitudes of reduced earnings, work hours, and wage rates of workers displaced during the Great Recession using linked employer-employee panel data from Washington state. Displaced workers’ earnings losses occurred mainly because hourly wage rates dropped at the time of displacement and recovered sluggishly. Lost employer-specific premiums explain only 17 percent of these losses. Fully 70 percent of displaced workers moved to employers paying the same or higher wage premiums than the displacing employers, but these workers nevertheless suffered substantial wage rate losses. Loss of valuable specific worker-employer matches explains more than one-half of the wage losses. (JEL E32, J22, J31, J63, R23)

Studying job matching in a Kelso-Crawford framework, we consider arbitrary constraints imposed on sets of doctors that a hospital can hire. We characterize all constraints that preserve the substitutes condition (for all revenue functions that satisfy the substitutes condition), a critical condition on hospitals’ revenue functions for well-behaved competitive equilibria. A constraint preserves the substitutes condition if and only if it is a “generalized interval constraint,” which specifies the minimum and maximum numbers of hired doctors, forces some hires, and forbids others. Additionally, “generalized polyhedral constraints” are precisely those that preserve the substitutes condition for all “group separable” revenue functions. (JEL C78, D47, I11, J23, J41, J44)

A firm raises capital from multiple investors to fund a project. The project succeeds only if the capital raised exceeds a stochastic threshold, and the firm offers payments contingent on success. We study the firm’s optimal unique-implementation scheme, namely the scheme that guarantees the firm the maximum payoff. This scheme treats investors differently based on size. We show that if the distribution of the investment threshold is log-concave, larger investors receive higher net returns than smaller investors. Moreover, higher dispersion in investor size increases the firm’s payoff. Our analysis highlights strategic risk as an important potential driver of inequality. (JEL D21, D86, G24, G32)

We study housing markets with multiple segments searched by heterogeneous clienteles. In the San Francisco Bay Area, search activity and inventory covary negatively across cities, but positively across market segments within cities. A quantitative search model shows how the endogenous flow of broad searchers to high-inventory segments within their search ranges induces a positive relationship between inventory and search activity across segments with a large common clientele. The prevalence of broad searchers shapes the response of housing markets to localized supply and demand shocks. Broad searchers help spread shocks across many segments and reduce their effect on local market activity. (JEL D83, R21, R31)

Over the last 15 years, kidney exchange has become a mainstream paradigm to increase transplants. However, compatible pairs do not participate, and full benefits from exchange can be realized only if they do. We propose incentivizing compatible pairs to participate in exchange by insuring their patients against future renal failure via increased priority in deceased-donor queue. We analyze equity and welfare benefits of this scheme through a new dynamic continuum model. We calibrate the model with US data and quantify substantial gains from adopting incentivized exchange, both in terms of access to living-donor transplants and reduced competition for deceased-donor transplants. (JEL D47, I11, I12, I18)

We evaluate the medium-term impacts of treating maternal depression on women’s mental health, financial empowerment, and parenting decisions. We leverage variation induced by a cluster-randomized controlled trial that provided psychotherapy to 903 prenatally depressed mothers in rural Pakistan. It was one of the world’s largest psych otherapy interventions, and it dramatically reduced postpartum depression. Seven years after psychotherapy concluded, we returned to the study site to find that impacts on women’s mental health had persisted, with a 17 percent reduction in depression rates. The intervention also improved women’s financial empowerment and increased both time- and money-intensive parental investments by between 0.2 and 0.3 standard deviations. (JEL G51, I12, J16, O15)

I show that the nature of the Federal Open Market Committee’s (FOMC’s) forward guidance language shapes the private sector’s responses to monetary policy statements. From February 2000 to June 2003, the FOMC only gave forward guidance about economic outlook risks, and a decrease in the expected federal funds rate path caused stock prices to fall, GDP growth forecasts to fall, and the unemployment rate to rise. From August 2003 to May 2006, the FOMC added forward guidance about policy inclinations, and a decrease in the expected federal funds rate path had the opposite effects. These results suggest that forward guidance that emphasizes economic outlook risks causes stronger information effects than forward guidance that emphasizes policy inclinations. (JEL D83, E52, E58, E66)

We propose a “dominant currency paradigm” with three key features: dominant currency pricing, pricing complementarities, and imported inputs in production. We test this paradigm using a new dataset of bilateral price and volume indices for more than 2,500 country pairs that covers 91 percent of world trade, as well as detailed firm-product-country data for Colombian exports and imports. In strong support of the paradigm we find that (i) noncommodities terms-of-trade are uncorrelated with exchange rates; (ii) the dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions, and this effect is increasing in the share of imports invoiced in dollars; (iii) US import volumes are significantly less sensitive to bilateral exchange rates, compared to other countries’ imports; (iv) a 1 percent US dollar appreciation against all other currencies predicts a 0.6 percent decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. We characterize the transmission of, and spillovers from, monetary policy shocks in this environment. (JEL E52, F14, F31, F44)

This paper uses new confidential Census data to revisit the relationship between firm size, cyclicality, and financial frictions. First, we find that large firms (the top 1 percent by size) are less cyclically sensitive than the rest. Second, high and rising concentration implies that the higher cyclicality of the bottom 99 percent of firms only has a modest impact on aggregate fluctuations. Third, differences in cyclicality are not simply explained by financing, and in fact appear largely unrelated to proxies for financial strength. We instead provide evidence for an alternative mechanism based on the industry scope of the very largest firms. (JEL D22, E32, G32, L25)