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Nick Bloom Micro-heterogeneity & Macro, partial equilibrium. Do micro distributions matter for macro outcomes. Probably the greatest unanswered question in macro is how to get a tractable micro-to-macro model. Macro is right now caught between: - PowerPoint PPT Presentation
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Nick Bloom, Macro Topics, Spring 2008
Nick Bloom
Micro-heterogeneity & Macro, partial equilibrium
Nick Bloom, Macro Topics, Spring 2008
Do micro distributions matter for macro outcomes
Probably the greatest unanswered question in macro is how to get a tractable micro-to-macro model.
Macro is right now caught between:•Non-structural macro models that work empirically (VARs)•Structural single-agent models that – if tractable - are not
great empirically
The challenge is to come up with something that:•Has theoretical micro foundations•Is simple enough to understand (at least in intuition)•Empirically fits the micro and macro data
Nick Bloom, Macro Topics, Spring 2008
The first micro-macro investment and employment models were partial equilibrium
Early studies looked at partial equilibrium models, showing:
• These induce dynamics across time, i.e.•Consumption (Bertola and Caballero, 1990, NBER MA)•Investment (Bertola and Caballero, 1994, RESTUD)
• These induce time varying marginal responsiveness to stimulus as we shall see now….
Nick Bloom, Macro Topics, Spring 2008
Ricardo Caballero, Eduardo Engel and John Haltiwanger (1995)
“Plant-level adjustment and aggregate investment dynamics”
Brookings Papers on Economic Activity
Nick Bloom, Macro Topics, Spring 2008
OverviewRuns a micro-macro estimate of investment behavior
The fundamental idea was to:•Use establishment-level investment data from the LRD•Build a micro-level investment hazard•Build a micro cross-sectional distribution•Combine these to describe macro outcomes over time
An important paper:(i) First to do micro to macro investment with large samples(ii) Well executed (take data seriously, think carefully about empirics…)(iii) Well written
Nick Bloom, Macro Topics, Spring 2008
Many cites - the rewards for being first and clear…
I
Nick Bloom, Macro Topics, Spring 2008
Combining micro hazards and distributions to describe macro investment
Aggregate investment
Adjustment hazard
Distribution of plants
Mandated (desired) investment Year
(1)
Nick Bloom, Macro Topics, Spring 2008
This is what the hazard (left) and distribution (right peaked plot) look like on average
Nick Bloom, Macro Topics, Spring 2008
An impressive empirical (especially for 1995)
Nick Bloom, Macro Topics, Spring 2008
They argue that these non-convexities and cross-sectional variations matter
They approximate the adjustment function with a polynomial
Nick Bloom, Macro Topics, Spring 2008
This polynomial and changing moments of the distribution generates variation in responsiveness
Nick Bloom, Macro Topics, Spring 2008
Message is micro-distributions matter
Good paper – how could you build on this:
•Theory/Simulation – Take a General equilibrium approach, as helpful for persuading cross-spectrum of all macro types
•Modeling – could add in labor market rigidities
•Identification – ideally would have some great natural experiment during this period (changing 1st, 2nd, 3rd… moments), but nothing obvious in US, maybe other countries?
Nick Bloom, Macro Topics, Spring 2008
Ricardo Caballero, Eduardo Engel and John Haltiwanger (1997)
“Aggregate Employment Dynamics: Building from Microeconomic Evidence”
American Economic Review
Nick Bloom, Macro Topics, Spring 2008
Overview
Paper also estimates the effect of micro-to-macro effects on aggregate employment dynamics
Contribution is:•Extended investment idea to employment•Used a nice measure of desired employment – hours•Use a more structural framework and provided other
results
Good paper, although I personally prefer their Brookings paper which was simpler but with the same excellent intuition
Nick Bloom, Macro Topics, Spring 2008
Well cited (but a bit less than their Brookings paper
I
Nick Bloom, Macro Topics, Spring 2008
Again combine micro hazards and distributions to describe macro outcomes (employment)
Aggregate employment change
Adjustment hazard
Distribution of plants
Mandated (desired) employment growth
Year
Nick Bloom, Macro Topics, Spring 2008
Again find the adjustment rate increasing in the desired change (so implying employment “jumps”)
Nick Bloom, Macro Topics, Spring 2008
And show a time varying response of employment dynamics to aggregate shocks
Nick Bloom, Macro Topics, Spring 2008
Message is micro-distributions matter
Good paper – how could you build on this – very similar to earlier:
•Theory/Simulation – Take a General equilibrium approach, as helpful for persuading cross-spectrum of all macro types
•Modeling – combine labor and capital
•Identification – ideally would have some great natural experiment during this period (changing 1st or 2nd moment), but nothing obvious in US, maybe other countries?
Nick Bloom, Macro Topics, Spring 2008
Ricardo Caballero and Eduardo Engel (1999)
“Explaining Investment Dynamics in US Manufacturing: A Generalized (S,s) Approach”
Econometrica
Nick Bloom, Macro Topics, Spring 2008
Overview
Paper also estimates the effect of micro-to-macro effects on industry and aggregate investment dynamics
Contribution is:•Explicit micro-macro empirical structure (no
approximations)•Uses aggregate industry data to estimate (good because
easily available – so new technique)•Provides some new technical ideas
Great paper (critical reading for my PhD), although very tough to read as it is highly technical
Nick Bloom, Macro Topics, Spring 2008
Well cited, with impact more important than this suggests as these readers will be well trained…
Nick Bloom, Macro Topics, Spring 2008
Similar set up to last papers except one neat trick is to assume adjustment costs are stochastic
Assume adjustment costs drawn from an i.i.d. Gamma distribution
Adj
ustm
ent
cost
dra
w
Log(Actual/Optimal) capital stock (i..e. log(K/K*))
Adjust(above the line)
Do not adjust(below the line)
Nick Bloom, Macro Topics, Spring 2008
Again combine micro hazards and distributions to describe industry and macro investment
Aggregate (or Industry) investment rate
Adjustment hazard
Distribution of plants
Log (actual/desired) capital Year
Nick Bloom, Macro Topics, Spring 2008
The structural approach allows them to estimate deep adjustment cost parameters
Nick Bloom, Macro Topics, Spring 2008
Also show time varying responsiveness, and show a structural mode outperforms simple AR(2) model
Nick Bloom, Macro Topics, Spring 2008
Message is can generate structural micro-macro model in a fully structural way with good empirical fit
Good paper – how could you build on this – very similar to earlier:
•Implications – Impressive modelling, now want to find some experiment/shock to push this further (like time varying uncertainty….)
•Modeling – again combine labor and capital, or in fact R&D, ICT or any other factor, GE or some other worthwhile extension
•Identification – ideally would have some great natural experiment during this period (changing 1st or 2nd moment), but nothing obvious in US, maybe other countries?
Nick Bloom, Macro Topics, Spring 2008
Russell Cooper, John Haltiwanger and Laura Power (1999)
“Machine replacment and the business cycle: Lumps and bumps”
American Economic Review
Nick Bloom, Macro Topics, Spring 2008
Overview
This paper also estimates the effects of micro-macro aggregation on investment…you can tell this was popular in the late 1990s
There are two interesting additional results in this paper:
Nick Bloom, Macro Topics, Spring 2008
Investment “spikes” explain a large fraction of investment variation
Aggregate investment rate (total)
Aggregate investment rate accounted for by spikes (>20%)
Percentage of plants with an investment spike
Nick Bloom, Macro Topics, Spring 2008
Accounting for micro rigidities matters most around turning points
Aggregate investment (solid line)
Investment holding cross-section constant (dotted line)
Investment holding hazard fixed (long dashed)