Current Unpublished Working Papers
New Evidence on Cyclical and Structural Sources of Unemployment
2011-17 | With Chen, Kannan, and Loungani | May 2011
We provide cross-country evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of the forecast error variance of unemployment is accounted for by cyclical factors–real GDP changes (Okun’s law), monetary and fiscal policies, and the uncertainty effects emphasized by Bloom (2009). Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25%. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.
The Wage Premium Puzzle and the Quality of Human Capital
2011-06 | With Marquis and Tantivong | February 2011
The wage premium for high-skilled workers in the United States, measured as the ratio of the 90th-to-10th percentiles from the wage distribution, increased by 20 percent from the 1970s to the late 1980s. A large literature has emerged to explain this phenomenon. A leading explanation is that skill-biased technolog-
ical change (SBTC) increased the demand for skilled labor relative to unskilled labor. In a calibrated vintage capital model with heterogenous labor, this paper examines whether SBTC is likely to have been a major factor in driving up the wage premium. Our results suggest that the contribution of SBTC is very small, accounting for about 1/20th of the observed increase. By contrast,
a gradual and very modest shift in the distribution of human capital across workers can easily account for the large observed increase in wage inequality.
The Role of Capital Service-Life in a Model with Heterogenous Labor and Vintage Capital
2009-24 | With Marquis and Tantivongy | October 2009
We examine how the economy responds to both disembodied and embodied technology shocks in a model with vintage capital. We focus on what happens when there is a change in the number of vintages of capital that are in use at any one time and on what happens when there is a change in the persistence of the shocks hitting the economy. The data suggest that these kinds of changes took place in the U.S. economy in the 1990s, when the pace of embodied technical progress appears to have accelerated. We find that embodied technology shocks lead to greater variability (of
output, investment and labor allocations) than disembodied shocks of the same size. On the other hand, a decrease in the number of vintages in use at any time (such as is likely to occur when the pace of technical progress accelerates) tends to reduce the volatility of output and also to differentiate the initial response of the economy
to the two shocks.
Productivity Shocks in a Model with Vintage Capital and Heterogeneous Labor
2007-06 | With Marquis | January 2007
We construct a vintage capital model in which worker skills lie along a continuum and workers can be paired with different vintages (as technology
evolves) under a matching rule of “best worker with the best machine.”
Labor reallocation in response to technology shocks has two key implications for the wage premium. First, it limits both the magnitude and duration of change in the wage premium following a (permanent) embodied technology shock, so empirically plausible shocks do not lead to the kind of increases in the wage premium observed in the U.S. during the 1980s and early 1990s (though an increase in labor force heterogeneity does). Second, positive disembodied technology shocks tend to push up the wage premium as well, and while this effect is small, it does mean that a higher premium does not provide unambiguous information about the underlying shock.
Labor reallocation also means that if embodied technology comes to play
a larger role in long-run growth, investment and savings tend to fall in steady state, with little effect on output and employment, enabling the household to increase consumption without sacrificing leisure. The short run effects are more conventional: permanent shocks to disembodied technology induce a strong wealth effect that reduces savings and induces a consumption boom while permanent shocks to embodied technology induce dominant substitution effects and an expansion characterized by an investment boom.
Common Shocks and Currency Crises
2000-05 | With Moreno | April 2000
Published Articles (Refereed Journals and Volumes)
Cyclical or Structural? Evidence on the Sources of U.S. Unemployment
Forthcoming in Globalization: Strategies and Effects, ed. by Carsten, Kowalczyk and Bent Jesper Christensen. Springer Verlag | With Chen, Kannan, and Loungani
We provide evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of the forecast error variance of unemployment is accounted for by cyclical factors—real GDP changes (“Okun’s Law”) and monetary and fiscal policies. Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 percent. For long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.
The Wage Premium Puzzle and the Quality of Human Capital
Forthcoming in International Review of Economics and Finance | With Marquis
The wage premium for high-skilled workers in the United States, measured as the ratio of the 90th-to-10th percentiles from the wage distribution, increased by 20 percent from the 1970s to the late 1980s. A large literature has emerged to explain this phenomenon. A leading explanation is that skill-biased technological change (SBTC) increased the demand for skilled labor relative to unskilled labor. In a calibrated vintage capital model with heterogeneous labor, this paper examines whether SBTC is likely to have been a major factor in driving up the wage premium. Our results suggest that the contribution of SBTC is very small, accounting for about 1/20th of the observed increase. By contrast, a gradual and very modest shift in the distribution of human capital across workers can easily account for the large observed increase in wage inequality.
Survey Measures of Expected Inflation and the Inflation Process
Forthcoming in Journal of Money, Credit and Banking
This paper uses data from surveys of expected inflation to learn how expectations processes have changed following recent changes in the behavior of inflation. Households do not appear to have recognized the change in the process, and are placing substantially more weight than appears warranted on recent inflation data when forming expectations about inflation over the next year. At first glance, professional forecasters do appear to have changed how they predict inflation. But a closer look at the data reveals that professionals are relying on core rather than headline inflation, and are placing too much weight on recent core inflation data. These errors show up in a noticeable (absolute and relative) deterioration in the forecast accuracy of both households and professionals.
Relative Productivity Growth and the Secular “Decline” of U.S. Manufacturing
Quarterly Review of Economics and Finance 50(1), February 2010, 67-74 | With Marquis
There has been considerable debate about the causes of the “decline” of U.S. manufacturing over the postwar period. We show that the behavior of employment, prices and output in manufacturing relative to services over this period can be explained by a two-sector growth model in which productivity shocks are the only driving forces. Household preferences turn out to play a key role in our model. The data are consistent with a specification where households are unwilling to substitute goods for services (the estimated elasticity of substitution is statistically indistinguishable from zero), so the economy adjusts to differential productivity growth entirely by reallocating labor across sectors.
On Using Relative Prices to Measure Capital Specific Technological Progress
Journal of Macroeconomics 30(4), December 2008, 1390-1406 | With Marquis
Recently, Greenwood, Hercowitz, and Krusell (GHK) have identified the relative price of (new) capital with capital-specific technological progress. In a two-sector growth model, however, the relative price of capital equals the ratio of the productivity processes in the two sectors. Restrictions from this model are used with data on wages and prices to construct measures of productivity growth and test the GHK identification, which is easily rejected by the data. This raises questions
about various measures of the contribution that capital-specific technological progress might make to the economy. This identification also induces a negative correlation between the resulting measures of capital-specific and economy-wide technological change, which potentially explains why papers employing this identification find that capital-specific technological change accelerated in the mid-1970s. We impose structure on the productivity measures based on their long-run
behavior and find evidence of a slowdown in productivity in the 1970s that is common to both sectors and an acceleration in the mid-1990s that is exclusive to the capital sector.
Time-Varying Equilibrium Real Rates and Monetary Policy Analysis
Journal of Economic Dynamics and Control 31(5), May 2007, 1584-1609 | With Wu
Although it is generally recognized that the equilibrium real interest rate (ERR) varies over time, most recent work on policy analysis has been carried out under the assumption that this rate is constant. We show how this assumption can affect inferences about the conduct of policy in two different areas. First, if the ERR moves in the same direction as the trend growth rate (as is suggested by theory), the probability that an unperceived change in trend growth will lead to a substantial change in inflation is noticeably lower than is suggested by recent analyses (of inflation in the 1970s, for example) that assume a constant ERR. Second, if the monetary authority targets a time varying ERR but the econometrician assumes otherwise, estimated policy rules will tend to exaggerate the degree of interest rate smoothing as well as the weight that the monetary authority places upon inflation.
Forward-Looking Behavior and Optimal Discretionary Monetary Policy
Economics Letters 81(2), November 2003, 249-256 | With Lansing
This paper derives a closed-form solution for the optimal discretionary monetary policy in a small macroeconomic model that allows for varying degrees of forward-looking behavior. We show that a more forward-looking
aggregate demand equation serves to attenuate the response to inflation and the output gap in the optimal interest rate rule. In contrast, a more forward-looking real interest rate equation serves to magnify the response to both variables. A more forward-looking Phillips curve serves to attenuate the response to inflation but magnify the response to the output gap. The results have implications for studies that attempt to reconcile estimated versions of the central bank’s policy rule with optimal discretionary monetary policy. In particular, a successful reconciliation is likely to require a different degree of forward-looking behavior in each part of the model economy.
The Cyclical Behavior of Prices: Interpreting the Evidence
Journal of Money, Credit, and Banking, August 1995, 789-797 | With Judd
Consumer Inflation Views in Three Countries
Economic Letter 2013-35 | November 25, 2013 | With Lynch
The Financial Crisis and Inflation Expectations
Economic Letter 2012-29 | September 24, 2012 | With Zorrilla
Household Inflation Expectations and the Price of Oil: It’s Deja Vu All Over Again
Economic Letter 2011-16 | May 23, 2011
Stock-Market-Based Measures of Sectoral Shocks and the Unemployment Rate
Economic Letter 2010-23 | August 2, 2010 | With Chehal and Loungani
Talking about Tomorrow’s Monetary Policy Today
Economic Letter 2009-35 | November 9, 2009 | With Chehal
Predicting Crises, Part I: Do Coming Crises Cast Their Shadows Before?
Economic Letter 2009-29 | September 21, 2009
Unanchored Expectations? Interpreting the Evidence from Inflation Surveys
Economic Letter 2008-23 | July 25, 2008 | With Huang
Changing Productivity Trends
Economic Letter 2007-25 | August 31, 2007
Will Fast Productivity Growth Persist?
Economic Letter 2007-09 | April 6, 2007 | With Fernald and Thipphavong
Is a Recession Imminent?
Economic Letter 2006-32 | November 24, 2006 | With Fernald
Inflation Targets and Inflation Expectations: Some Evidence from the Recent Oil Shocks
Economic Letter 2006-22 | September 1, 2006 | With Tjosvold
Why Hasn’t the Jump in Oil Prices Led to a Recession?
Economic Letter 2005-31 | November 18, 2005 | With Fernald
Oil Price Shocks and Inflation
Economic Letter 2005-28 | October 28, 2005
Why Has Output Become Less Volatile?
Economic Letter 2005-24 | September 16, 2005
Economic Letter 2003-08 | March 21, 2003
Productivity Shocks and the Unemployment Rate
Economic Review | 2003
Technical Change and the Dispersion of Wages
Economic Letter 2002-23 | August 9, 2002
Predicting When the Economy Will Turn
Economic Letter 2002-07 | March 15, 2002 | With Loungani
Unemployment and Productivity
Economic Letter 2001-28 | October 12, 2001
Recent Research on Sticky Prices
Economic Letter 2001-24 | August 24, 2001
Information Technology and Productivity
Economic Letter 2000-34 | November 10, 2000 | With Cornwell
Evaluating the Stock Market
Economic Letter 2000-20 | June 23, 2000
» View FRBSF Publications prior to 2000
Financial Change and the Design of Monetary Policy: Lessons from the U.S. Experience
In Structural Change and Economic Modeling, Seventh Pacific Basin Central Bank Conference on Economic Modeling, ed. by Rankin | Sydney, Australia, 1986. 153-178 | With Judd and Motley