Andrew Foerster

We study the growth properties of an economy where different sectors are linked by way of intermediates and potentially grow at different rates. We characterize the economy’s equilibrium balanced growth path, and derive an analytical expression that summarizes how TFP growth in a given sector affects value added growth in every other sector and, therefore, aggregate GDP growth. We show in a special case that a version of Hulten’s (1978) theorem, whereby the effects of changes in sector-specific productivity on GDP are entirely captured by that sector’s share in GDP, also holds in growth rates along a balanced growth path. In that case, changes in TFP growth specific to that sector do not directly affect value added in other sectors regardless of its linkages in the economy. In the more general case, changes in sectors that are more capital intensive, and central as intermediate goods suppliers, have larger effects on value added growth in other sectors and aggregate GDP. In a calibrated version of our benchmark case, we find substantive quantitative differences in the effects of sectoral TFP growth changes on GDP relative to the case where these effects are given by sectoral value added shares only.

Investment growth slowed from 2014 to 2016, a period when the overall economy was expanding. Using a statistical model, I find clear evidence that investment growth fluctuates between high and low growth regimes that usually correspond to expansions and recessions. However, during 2014–16, the investment sector experienced an isolated recession within an overall expansion, which is unusual by historical standards.

The U.S. economy is a collection of varied industries linked by the goods and services they exchange with one another during production. In this way, industries form a network of input-output relationships with potentially important implications for economic activity. For example, supply disruptions to one industry might spill over to industries that receive inputs from the affected industry. The magnitude of these spillover effects depends crucially on both the affected industry’s links to other industries as well as its importance within the network. Andrew Foerster and Jason Choi document the input-output network structure of the U.S. economy and examine how the connectivity and centrality of industries have changed over time. They find that the number of connections between industries has varied, with a decrease in industry interconnection more recently. In addition, they find that certain services-based industries have become more important in the network over time.

The financial crisis and recession of 2007–09 hit household balance sheets hard. Even as the economy began to recover, diminished income, a stagnant labor market, and tight credit conditions made it difficult for households to increase their consumption as rapidly as they had a few years earlier. Indeed, consumption has grown more slowly after the Great Recession than in recoveries from previous recessions, suggesting a fundamental shift in the economy. Andrew Foerster and Jason Choi compare consumption growth’s historical behavior with its behavior during the most recent recovery. The authors find that the recent period of slow consumption growth was due not to new or transitory factors but rather the persistent influence of factors unusual to see outside recessions. They find that durables and nondurables consumption behaved much as they did during precious recoveries; total and services consumption, however, grew more slowly than usual throughout the expansion.

When uncertainty about the future increases, economic activity tends to decrease as firms delay hiring and consumers defer purchases. When a bout of uncertainty subsides, however, firms may only cautiously increase the pace of hiring and investment. As a result, short-lived spikes in uncertainty, such as those experienced during the current recovery, may have persistent effects on employment growth, thus lowering the total level of employment.

Recovery from the recent financial crisis has been sluggish by historical standards, and employment growth has been similarly disappointing. Three periods of heightened economic uncertainty—the European sovereign debt crisis, the U.S. debt ceiling crisis, and, to a lesser extent, 2013’s brief “taper tantrum”—may have contributed to this lackluster response. Foerster introduces a statistical model to analyze spikes in stock market volatility during these periods and thus quantify uncertainty’s influence. He finds that uncertainty has asymmetric effects, with large increases in uncertainty affecting growth more than large decreases. The results suggest that temporary spikes in uncertainty following the financial crisis may have had persistent economic effects, leading to an anemic recovery and substantial cumulative employment losses across industries.

During and after the recent financial crisis, the Federal Reserve turned to a number of unconventional tools to bolster the economy. The effectiveness of one such tool, large-scale asset purchases (LSAPs)—often referred to as quantitative easing—has been hard to measure. ; Efforts to estimate LSAP impact have often relied on an “event study” approach, focusing on short time intervals around the announcements of new LSAP programs. But these studies typically ignore the fact that financial market participants sometimes expect a given LSAP announcement in advance—and such expectations can affect interest rates prior to the time interval considered. ; Authors Foerster and Cao present evidence that LSAP announcements were often at least partially expected in advance, and they argue that event studies, by ignoring the effects of prior expectations, likely misestimate the impact of LSAPs.

In modern corporations, ownership is typically separate from control. Given that employees are motivated by self interest, incentive problems arise. Employees are disciplined, in part, by their career concerns. Employees’ compensation depends on their reputations—the labor market’s beliefs about their future productivity. The labor market learns about the employees’ future productivity by observing their performance. Therefore, when the employees decide their actions, they care about their performance (and the performance of the firms they work for) because their performance influences their reputation. However, career concerns do not necessarily eliminate the inefficiencies created by the separation of ownership and control.