Brookings Papers Research Articles

Has the real rate of return “depreciated”?

AbstractThe average depreciation rate in the United States has increased since the 1970s, a pattern most likely matched in other advanced economies. We argue that a higher depreciation rate has reduced the risk-free interest rate. We do so in a quantitative overlapping-generations model which allows for risk-premia and market power. We show that the importance of the rate of depreciation on the risk-free interest rate depends crucially on the elasticity of intertemporal substitution as well as the size of market power. Our calibrated model shows that higher depreciation plausibly reduced the risk-free rate by 30 basis points over the past half century. We contrast our results with models using a representative-agent framework (Farhi and Gourio in Accounting for macro-finance trends: market power, intangibles, and risk premia. Brookings papers on economic activity, 147, 2019) which typically do not find a role for the rate of depreciation.

Economic Convergence Among Asia-Pacific Economic Cooperation Members. A Comparative Analysis, 1960–2020

The process of global economic integration is justified by the primary goal of inclusive and balanced growth for all economies, so it is relevant to identify the extent to which this goal has been achieved. This research evaluates whether the member economies of the Asia-Pacific Economic Cooperation (APEC) have experienced economic convergence during the 1960–1990 (pre-APEC) and 1990–2020 (post-APEC) periods. For this purpose, beta, sigma and gamma convergence are estimated, which are methodological approaches proposed by Barro and Sala-i-Martin (1991, Brookings Papers on Economic Activity, 1991(1), 170–182) and Marchante et al. (2006, Fundación de Estudios de Economía Aplicada Working Papers No. 2006-05), for APEC as a region and for the high- and middle-income economies that conform it. The results show that the process of economic convergence among APEC members intensified after its formation in 1989 and that the region can be categorized as an ‘economic convergence club’. As well as that, the high- and middle-income groups are converging towards their respective stationary state.

A sectoral approach to measuring output gap: Evidence from 20 US Sectors over 1948−2020

AbstractThe existing output gap measures for the US economy rely on aggregate data and assume a constant output gap over sectors (see Coibion et al. [(2018) Brookings Papers on Economic Activity, 333–441] and Owyang et al. [(2018) Federal Reserve Bank of St. Louis Review, 297–316]); however, each sector has its cycle, which does not necessarily match the business cycle (Burns and Mitchell [(1946) National Bureau of Economic Research]). By modeling sectoral cycles based on their investment cycles with a nonparametric method, I estimate output gaps of 20 US sectors over 1948–2020. The weighted mean output gap indicates a persistent spare capacity in the last business cycle, pointing to insufficient stabilization policies behind secular stagnation. Phillips curve estimations with the weighted quartiles of sectoral output gaps show that the output gap of bottleneck sectors (weighted Q3) is correlated strongly with inflation over 1950–2020. Policymakers can track bottleneck sectors to mitigate inflationary pressures while supporting the sectors with negative output gaps to stabilize the output at its potential. My findings show that it is possible to produce more output by sector-level demand supporting policies without generating inflation.

Exploring the Factors Associated with Unemployment Rate

Exploring the Factors Associated with Unemployment Rate

What's Up with the Phillips Curve?

U.S. inflation used to rise during economic booms, as businesses charged higher prices to cope with increases in wages and other costs. When the economy cooled and joblessness rose, inflation declined. This pattern changed around 1990. Since then, U.S. inflation has been remarkably stable, even though economic activity and unemployment have continued to fluctuate. For example, during the Great Recession unemployment reached 10 percent, but inflation barely dipped below 1 percent. More recently, even with unemployment as low as 3.5 percent, inflation remained stuck under 2 percent. What explains the emergence of this disconnect between inflation and unemployment? This is the question we address in “What’s Up with the Phillips Curve?,” published recently in Brookings Papers on Economic Activity.

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Exchange Rate Policy and Macroeconomic Stability in Vietnam

Exchange Rate Policy and Macroeconomic Stability in Vietnam

The Contribution of Educated Workers to Firms’ Efficiency Gains: The Key Role of Proximity to the ‘Local’ Frontier

Vandenbussche et al. (J Econ Growth 11(2):97–127, 2006) and Aghion et al. (in: Romer, Wolfers (eds) Brookings papers on economic activity: conference draft, Brookings, Washington, 2009) show that when economies operate close to the technological frontier, their ability to generate efficiency gains rests on the contribution of workers with advanced forms of education (i.e. tertiary). The contribution of this empirical paper is to revisit and improve the analysis of that assumption, in the context of firms located in advanced economics, assuming that what holds for OECD countries or US states should also be observed also at a more disaggregated level. To that end, we analyse a rich panel of Belgian firm-level data, covering the 2008–14 period. In the first step, we estimate each firm’s proximity to frontier using stochastic frontier methods. Step 2 consists in regressing each firm’s efficiency growth rate on (1) the share of workers by education attainment (2) its (initial) distance/proximity to the frontier and (3) (the main variable of interest) the interaction between (1) and (2), whose sign provides a direct test of the Vandenbussche/Aghion assumption. The main result of the paper supports the idea that the closer the firms are to what amounts to a local frontier; the more educated workers—in particular those with a master’s degree—matter for efficiency gains. The paper also shows that many of them are currently employed in firms that are distant from the efficiency frontier. Reallocating them would have a positive impact on overall efficiency.

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Thoughts on Dynamic Scoring of Fiscal Policies

Former CBO director Doug Elmendorf recently argued that Congress should account for macroeconomic feedback when scoring major tax and spending policies. In this brief, Donald Marron agrees, arguing that CBO and JCT can implement such dynamic scoring in an objective, nonpartisan manner. Dynamic scoring will neither live up to the hopes of it proponents nor down to the fears of its detractors. Instead, Marron argues, it will modestly improve the budget estimates that inform policymakers and the public. This brief originally appeared as a comment on Elmendorf’s paper in the Fall 2015 Brookings Papers on Economic Activity.

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Estimating Brazilian Monthly GDP: a State-Space Approach

This paper has several original contributions. The …rst is to employ a superior interpolation method that enables to estimate, nowcast and forecast monthly Brazilian GDP for 1980-2012 in an integrated way; see Bernanke, Gertler and Watson (1997, Brookings Papers on Economic Activity). Second, along the spirit of Mariano and Murasawa (2003, Journal of Applied Econometrics), we propose and test a myriad of interpolation models and interpolation auxiliary series –all coincident with GDP from a business-cycle dating point of view. Based on these results, we …nally choose the most appropriate monthly indicator for Brazilian GDP. Third, this monthly GDP estimate is compared to an economic activity indicator widely used by practitioners in Brazil - the Brazilian Economic Activity Index - (IBC-Br). We found that the our monthly GDP tracks economic activity better than IBC-Br. This happens by construction, since our state-space approach imposes the restriction (discipline) that our monthly estimate must add up to the quarterly observed series in any given quarter, which may not hold regarding IBC-Br. Moreover, our method has the advantage to be easily implemented: it only requires conditioning on two observed series for estimation, while estimating IBC-Br requires the availability of hundreds of monthly series. Third, in a nowcasting and forecasting exercise, we illustrate the advantages of our integrated approach. Finally, we compare the chronology of recessions of our monthly estimate with those done elsewhere. JEL codes: C32,E32, E37

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It Takes a Regime Shift: Recent Developments in Japanese Monetary Policy through the Lens of the Great Depression

Last week, we witnessed one of the most exciting developments in monetary policymaking since the 1930s. The Japanese central bank staged an honest-to-goodness regime shift. The Bank of Japan went beyond vague promises and cheap talk. As I will describe in more detail later, it took dramatic actions and pledged convincingly to do whatever it takes to end deflation in Japan. The theoretical reasons why this regime shift may be important are well understood by economists. Persistent deflation and anemic growth suggest that Japan continues to suffer from a shortfall of demand. But their policy interest rate is already at the zero lower bound. Furthermore, riskier, long-term rates are also very low— suggesting that unconventional policies such as large-scale asset purchases are unlikely to do much to further reduce nominal rates. As discussed by Paul Krugman, Gauti Eggertsson and Michael Woodford, and others, if unconventional monetary policy can raise expected inflation, this can push down real interest rates even though nominal rates cannot fall. 1 This, in turn, can raise aggregate demand by stimulating interest

Exploring reallocation’s apparent weak contribution to growth

Two recent meta-analyses use variants of the Baily et al. (Brookings Papers Econ Act Microecon 1:187–267, 1992) (BHC) decompositions to ask whether recent robust growth in aggregate labor productivity (ALP) across 25 countries is due to lower barriers to input reallocation. They find weak gains from measured reallocation and strong within-plant productivity gains. We show these findings may be because BHC indices decompose ALP growth using plant-level output-per-labor (OL) as a proxy for the marginal product of labor and changes in OL as a proxy for changes in plant-level productivity. We provide simple examples to show that (1) reallocation growth from labor should track marginal changes in labor weighted by the marginal product of labor, (2) BHC reallocation growth can be positively correlated, negatively correlated, or uncorrelated with actual growth arising from the reallocation of inputs, and that (3) BHC indices can mistake growth from reallocation as growth from productivity, principally because OL is neither a perfect index of marginal products nor plant-level productivity. We then turn to micro-level data from Chile, Colombia, and Slovenia, and we find for the first two that BHC indices report weak or negative growth from labor reallocation. Using the reallocation definition based on marginal products we find a positive and robust role for labor reallocation in all three countries and a reduced role of plant-level technical efficiency in growth. We close by exploring potential corrections to the BHC decompositions but here we have limited success.

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Will Ageing Lead to a Higher Real Exchange Rate for the Netherlands?

Long term projections for the Netherlands indicate that demand for nontradables—e.g. health care services—will increase relative to supply due to population ageing. If this leads to higher future real exchanges rates this will erode the return of the savings currently made to prepare for ageing. This paper explores the magnitude of potential price effects using a modified version of the two country, four commodity framework developed by Obstfeld and Rogoff (Brookings Papers Econ Activity 1:67–146, 2005) to explore the exchange rate effects of the balance of payments reversal in the US. When these price effects are substantial this may have serious consequences for policies to enhance national saving in the Netherlands.