“Estimating General Equilibrium Multipliers: With Application to Credit Markets”, with Atif Mian and Amir Sufi
Abstract: A general equilibrium multiplier measures the difference between the partial equilibrium effect of a shock and its total effect. We propose a methodology to estimate general equilibrium multipliers at different levels of aggregation using panel data without a structural model. The method puts special emphasis on short panels in which different cross-section units can be grouped into regions, for which the researcher has some source of exogenous variation. We apply the method to estimate multipliers with respect to credit supply shocks in a variety of setups. We start with a stylized Kiyotaki-Moore macrofinance model to illustrate the methodology and guide the empirical design. Then, we estimate credit multipliers during the early 2000s housing boom that led to the Great Recession. Our results imply that approximately 80% of the effects of the credit boom at the regional level are coming from GE effects. There is suggestive evidence that the housing net worth channel is responsible for these GE effects.
“The Impact of Technology and Trade on Migration: Evidence from the US”, with Marius Faber and Marco Tabellini
Abstract: Migration has long been considered one of the key mechanisms through which labor markets adjust to economic shocks. In this paper, we analyze the migration response of American workers to two of the most important shocks that have hit Western economies since the late 1990s – import competition from China and the introduction of industrial robots. Exploiting plausibly exogenous variation in exposure across US local labor markets over time, we first verify that both shocks led to a steep reduction in manufacturing employment. Next, we present our main results, and show that, on average, robots caused a sizable reduction in population size, whereas trade with China did not. The decline in population size due to robots resulted from reduced in-migration into rather than increased out-migration away from affected areas. In the second part of the paper, we explore the mechanisms behind these results. We show that the two labor market shocks differ in their propagation across industries within local labor markets: while robots caused negative spillovers to service industries, Chinese imports, if anything, favored employment growth outside of manufacturing. We provide suggestive evidence that these propagation patterns are responsible for the differential migration response.
"Recovering Macro Elasticities from Regional Data"
Abstract: I propose a new methodology to estimate macro elasticities in linear economies by exploiting regional data. The key identification assumption is that regions are heterogeneous in their sensitivities to aggregate macro shocks and policies. This assumption is satisfied if regions differ in their fundamentals, such as their technology or their intertemporal elasticity of substitution. First, I show that regardless of the heterogeneity assumption, the macro elasticity is a function of the micro-global elasticities, which measure how regions react to aggregate policies or shocks. Then, I combine typical structural VAR approaches with various panel data methods, such as asymptotic principal components, to show that heterogeneity makes it possible to recover the micro-global elasticities. These are then used to construct an estimate of the macro elasticity. Moreover, I show that the estimates are robust: they are consistent for a wide variety of data-generating processes, including models with incomplete and complete markets, sticky and flexible prices, and different market structures. Compared to existing approaches, I show that the methodology allows for weaker identification assumptions and greater robustness. Finally, I present an empirical application to fiscal multipliers in the U.S. Using state-level data for the period 1971 to 2008, I find a fiscal multiplier of total spending (federal, state and local) that falls in the range 0.7-1.2.
Work in progress:
“Financial Development, Cheap Credit and Growth”
Abstract: I study the relationship between government intervention in the banking sector and long-run growth for different levels of financial development. I use an endogenous growth model in which entrepreneurs invest in R&D and physical capital. They can lend or borrow from each other but only through a banking system and, in doing so, they face a collateral constraint. I show that for economies with a high degree of financial development, where collateral constraints are not so tight, there is an increase in subsidies to banks’ loans that always increases the economy’s long-run growth rate. For less financially developed economies, cheap credit can be harmful for the economy’s growth rate when entrepreneurs can’t use their technology as collateral: lower interest rates make them substitute away from technology in favor of physical capital in order to obtain more funds from banks. A sufficient condition for this to happen is derived.
“Connecting Micro Elasticities with Macro Elasticities in Non-Linear Economies”
Abstract: I provide identification results for macro elasticities in non-linear economies. I assume the econometrician observes data from a recursive competitive equilibrium but remain agnostic about many features of the economy, such as whether markets are complete or incomplete. This setup leads to outcomes with nonseparable unobservable errors and endogenous regressors. The starting point for the analysis is that the econometrician has identified what I call a micro-local elasticity, which measures the average regional response to a regional policy change, via a control variable approach. I first show that the micro-local elasticity holds the distribution of the aggregates fixed when analyzing the policy change, and thus it is not useful for approximating the macro elasticity. Then, I offer a set of extra assumptions under which the macro elasticity is identified, and show, by means of an example, that the extra assumptions might be very weak. Moreover, I show that the macro elasticity is a known function of the micro-global elasticities, which measure the average regional response to an aggregate policy shift, allowing the aggregates to adjust accordingly. Finally, I discuss the advantages of using regional variation in this setup, in comparison to using only aggregate time series variation. I also contrast the identification assumptions required for the results to those of linear economies in which aggregate macro shocks and policies have heterogeneous effects.