Previous articleNext article FreeEditorialMartin Eichenbaum and Jonathan A. ParkerMartin EichenbaumNorthwestern University and NBER Search for more articles by this author and Jonathan A. ParkerMIT and NBER Search for more articles by this author Northwestern University and NBERMIT and NBERPDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinked InRedditEmailQR Code SectionsMoreNBER’s 33rd Annual Conference on Macroeconomics brought together leading scholars to present, discuss, and debate six research papers on central issues in contemporary macroeconomics. In addition, Ragu Rajan, former governor of the Reserve Bank of India and former chief economist and director of research at the International Monetary Fund, delivered a thought-provoking after-dinner talk comparing the economic institutions in India and China and drawing out their implications for the economic growth potential of each country. Finally, we had a special panel session on the macroeconomic effects of the Tax Cuts and Jobs Act of 2017, moderated by NBER President James Poterba and featuring three leading experts in this area: Wendy Edelberg, associate director for economic analysis at the Congressional Budget Office; Kent Smetters, Boettner Chair Professor of Business Economics and Public Policy at the University of Pennsylvania’s Wharton School; and Mark Zandi, chief economist of Moody’s Analytics. Video recordings of the presentations of the papers, summaries of the papers by the authors, and the lunchtime panel discussion are all accessible on the web page of the NBER Annual Conference on Macroeconomics.1 These videos make a useful complement to this volume and make the content of the conference more widely accessible.This conference volume contains edited versions of the six papers presented at the conference, each followed by two written comments by leading scholars and a summary discussion of the debates that followed each paper.The first paper in this year’s volume takes an important step in understanding the implications of an assumption that is commonly used in mainstream macro models: people routinely solve extremely complicated, infinite-horizon planning problems. This assumption is clearly wrong. So a key question is, When does this assumption lead to misleading conclusions? Michael Woodford’s paper, “Monetary Policy Analysis When Planning Horizons Are Finite,” addresses this question with applications to monetary policy in the New Keynesian (NK) model. Woodford models the way people make decisions by analogy to the way artificial intelligence programs are designed to play complex games like chess or go. The idea is to transform agents’ infinite-horizon problems into a sequence of simpler, finite-horizon problems. Specifically, Woodford supposes that people work via backward induction over a finite set of periods given some value function that they assign to the terminal nodes. They then choose the optimal actions for their current control variables. Woodford extends his analytical framework to also consider how people learn value functions from experience. This extension is important because it allows people to change their behavior in response to very persistent changes in policy or fundamentals.Woodford uses his framework to assess the robustness of two key properties of the NK model. First, the standard NK model features a multiplicity of equilibria. Second, the simple NK model features the “forward guidance puzzle.” That is, the effects on output of monetary policy commitments about future actions are very large and increasing in the temporal distance between when actions are announced and implemented.Woodford shows that neither of these properties is robust in his alternative framework. Specifically, he shows that his variant of the NK model has a unique equilibrium. This equilibrium shares many of the properties emphasized in the NK literature. But Woodford’s version of the NK model does not give rise to the forward guidance puzzle. As a final application, Woodford examines the implications of a central bank commitment to maintain a fixed nominal interest rate for a lengthy period of time.The discussants focused on making clear the key mechanisms at work in Woodford’s framework. They also emphasized the similarity between the implications of his analysis and a growing literature that is bringing insights from behavioral economics and bounded rationality into macroeconomics. Woodford’s paper and that literature are helping us separate the wheat from the chaff of the NK model’s predictions.Our second paper is particularly ambitious and takes up one of the central questions in macrofinancial policy, which is whether the US financial sector is safer than it was prior to the 2007–8 financial crisis. At the time of the crisis, the US government provided significant support for banks and a wide range of financial institutions. Following the crisis, the government overhauled and reformed the regulation of the US financial system. Today, the banking sector is more profitable, more concentrated, and subject to more regulatory oversight than in the precrisis period. “Government Guarantees and the Valuation of American Banks,” by Andrew G. Atkeson, Adrien d’Avernas, Andrea L. Eisfeldt, and Pierre-Olivier Weill, takes up the question: Have US banks become more resilient or not? This question arises because, post crisis, banks have lower levels of book leverage, but they also have higher levels of market leverage and higher market prices of credit risk.To answer the central question, the paper studies the history of the ratio of the market values of banks to their book values, a ratio that the paper decomposes into the value of the franchise. Movements in this ratio capture changes in the profitability of the business arm of the banks and the value of the government guarantees of bank liabilities. So this ratio helps measure the extent to which regulatory reforms have or have not reduced the extent to which government support in crisis is an asset for the banking sector. The authors calculate that, relative to the precrisis period, there has been both a reduction in the franchise value of banks and a similar-sized reduction in the value of (uncertain) government guarantees. The authors conclude that, consistent with the observed market price of bank credit risk, banks have not become safer.The paper draws on existing models and assumptions about the economics of banking. The discussants consider the importance of two key assumptions. First, the authors’ analysis relies on a degree of noncompetitiveness. Subsidies to the cost of any business in a reasonably competitive industry should, through competition in the product market, ultimately lead to no change in the ratio of market value to book value. Second, banks may face substantial interest rate risk. This possibility does not change the conclusion that banks are not safer now than in the precrisis period, but it does lead one to question whether the value of government guarantees has or has not declined.One of the biggest current debates in macroeconomics is why the labor share of output has been declining, a phenomenon that is related both to the recent anemic growth in real wages and to the increasingly unequal distribution of income. Our third paper, “Accounting for Factorless Income,” by Loukas Karabarbounis and Brent Neiman, studies the three main possibilities for why the labor share of income has been declining while the measured capital share has not risen to offset it. The authors’ careful analysis demonstrates the plausibility of different ways to allocate the share of output that is not measured either as capital income (from the rental rate on capital times the capital stock) or as labor income (from total payments to workers). One possibility is that this “factorless income” could be due to an increase in pure profits of firms, reflecting, for example, a rise in markups. The other possibilities are that one is mismeasuring the capital share by either mismeasuring the capital stock or the rental rate on capital. The paper shows that these two possibilities—increases in pure profits or underestimation of the capital stock—are each unlikely to account for the rise in factorless income. Assuming either is the cause implies movements in other quantities that appear to be implausible based on the observable evidence. For example, the assumption that factorless income is pure profits would imply that profit rates were even higher in the 1960s and 1970s than they have been in recent decades, and would require highly volatile evolutions of factor-specific technology. The authors conclude that the most likely source of factorless income is mismeasurement of the rate of return, although the paper also cautions against monocausal explanations in general.Both the general discussion and discussants questioned whether the same theory need explain both the large fluctuations in the share of factorless income and its trend behavior. One discussant also thought that the rental rate of capital might be closely related to or influenced by the risk premium in the economy, which fluctuates substantially and without much correlation with the risk-free interest rate that lies at the heart of the measured capital rental rate.The fourth paper in this year’s volume explores the persistent decline in the risk-free interest rate after the 2008 financial crisis. “The Tail That Keeps the Riskless Rate Low” by Julian Kozlowski, Laura Veldkamp, and Venky Venkateswaran takes the view that the financial crisis was a very unusual event that caused people to reassess upward the probability of large adverse macro tail events. The rise in perceived tail risk led to a persistent increase in the demand for safe liquid assets.Such a reassessment would not occur in a world where people had rational expectations and, improbably, knew the true probability of rare events. In the framework of this paper, people do not have strict rational expectations. Instead they use aggregate data and statistical tools to estimate the distribution of the shocks affecting the economy. The authors embed their learning mechanism in a standard general equilibrium where people are subject to liquidity constraints. Critically, in their model, the occurrence of a rare event leads to a persistent rise in the demand for safe and liquid assets. The authors argue that this mechanism is quantitatively important and can account for various other features of asset prices, including the behavior of the equity premium after the crisis.The discussants focused on the quantitative implications of the authors’ model, raising interesting questions about the relative importance of the safety and liquidity characteristics of risk-free assets and whether the authors’ framework could in fact simultaneously explain the decline in the risk-free rate and the continued high returns to equity.This paper is part of a larger literature that tries to depart from the more heroic aspects of traditional rational expectations. Instead of endowing people with comprehensive information about their environment, the authors focus on the process by which information is accumulated. That process leads to a novel and potentially important source of propagation of large, rare shocks. This paper is interesting both from a methodological and a substantive point of view.The fifth paper in this volume, “The Transformation of Manufacturing and the Decline in US Employment,” by Kerwin Kofi Charles, Erik Hurst, and Mariel Schwartz, documents the dramatic changes in the manufacturing sector and the large decline in employment rates and hours worked among prime-age Americans since 2000. It is hard to overstate the importance of these twin phenomena.Charles et al. examine how much, and by what mechanisms, changes in manufacturing since 2000 affected the employment rates of prime-age men and women. The paper argues that the decline of the manufacturing sector played a major role in the declining participation rate of prime-age workers, particularly less educated prime-age men. The paper goes on to examine how the impact of Chinese import competition compares with the effects of other factors, like automation, on the decline in manufacturing employment. Significantly, the authors conclude that the China trade effect was small relative to other factors. This conclusion leads them to the view that policies aimed at mitigating the negative effects of trade on labor markets are unlikely to reverse the observed decline of employment in manufacturing.The fact that wages fell along with employment supports the view that the decline in manufacturing employment reflects a decline in the demand for labor rather than a negative shift in the supply of labor to the manufacturing sector. More surprisingly, the authors show that the fall in employment caused a decline in health among the affected population of workers, as evident by a rise in failed drug tests and the increased use of opioids. The overall picture that emerges from the paper is of a technologically driven decline in employment with a large, persistent negative impact on the welfare of a key segment of the population.Declining employment in the manufacturing sector is not a new phenomenon. But the post-2000 decline was associated with much larger and more persistent declines in overall employment than had been the case. The authors explore the importance of different forces that might explain this important change. Their analysis points to a large decline in the willingness of workers to move across regions in response to a local manufacturing shock. Why that should be so remains an unsolved and important mystery.Both discussants provided historical perspective on the post-2000 era. For example, the post-2000 decline in manufacturing employment as a percentage of overall employment is consistent with the trend behavior of that variable. But the decline in the level of employment in the manufacturing sector is unprecedented. This fact poses an interesting challenge for how to interpret some of the authors’ empirical findings. A broader question that remains unresolved is, What’s so special about manufacturing? After all, there have been many other large sectoral reallocations in US history. But none of those episodes seem to have had such a profound negative impact on labor, especially less-educated workers. Valerie Ramey offers one explanation. But “What’s so special about manufacturing?” remains an important and open question.Our final paper is perhaps the most topical paper in the volume and takes up the question of how economies respond to tax reforms that involve “border adjustment taxes” (BATs) and similar policies. BATs are credits against domestic taxes for exported goods or services and are central features of value-added tax systems. Recent discussions of US tax reform considered BATs as part of a plan to move the US tax system toward a system that was closer to a consumption-based and territorial-based system. Existing academic work on BATs has focused on the fact that they are neutral in the long run because exchange rate movements undo the changes in import and export costs (from Lerner symmetry). In “The Macroeconomics of Border Taxes,” Omar Barbiero, Emmanuel Farhi, Gita Gopinath, and Oleg Itskhoki show how changes in BATs can lead to business cycles in the short and medium term in an open-economy NK dynamic stochastic general equilibrium model in which nominal prices do not adjust immediately and fully to their long-run values.In the authors’ model, the introduction of a BAT is far from neutral. It reduces both exports and imports, yet has only a minor negative effect on output as the dollar appreciates by roughly the amount of the BAT. Neutrality fails because exporters fail to pass along the benefits of the BAT due to price stickiness so the BAT reduces overall trade. In the model, the BAT leads to an appreciation of the dollar, which would lead the United States to lose significant wealth due to its negative net asset position.An alternative approach to adding a BAT to the current US tax system would be to move to a value-added tax. The paper shows that although this would avoid significant movement in the exchange rate, it would cause a significant recession. The paper elucidates nicely how the specific implementation of tax policies interacts with the currency in which trade is denominated. As such, the United States and other countries might experience quite different cyclical responses to identical policies. Among other issues, the discussants and the ensuing debate considered whether the level of price stickiness that one might observe or estimate in usual times would apply to a situation in which a BAT was implemented.As in previous years, the editors posted and distributed a call for proposals in the spring and summer prior to the conference and some of the papers in this volume were selected from proposals submitted in response to this call. Other papers are commissioned on central and topical areas in macroeconomics. Both are done in consultation with the advisory board, which we thank for its input and support of both the conference and the published volume.The authors and the editors would like to take this opportunity to thank Jim Poterba and the National Bureau of Economic Research for their continued support of the NBER Macroeconomics Annual and the associated conference. We would also like to thank the NBER conference staff, particularly Rob Shannon, for his continued excellent organization and support. We would also like to thank the NBER Public Information staff and Charlie Radin in particular for producing the high-quality multimedia content. Financial assistance from the National Science Foundation is gratefully acknowledged. Gideon Bornstein and Nathan Zorzi provided invaluable help in preparing the summaries of the discussions. And last but far from least, we are grateful to Helena Fitz-Patrick for her invaluable assistance in editing and publishing the volume.EndnotesFor acknowledgments, sources of research support, and disclosure of the authors’ material financial relationships, if any, please see http://www.nber.org/chapters/c14068.ack.1. NBER Annual Conference on Macroeconomics, http://www.nber.org/macroannualconference2018/macroannual2018.html. Previous articleNext article DetailsFiguresReferencesCited by NBER Macroeconomics Annual Volume 332018 Sponsored by the National Bureau of Economic Research (NBER) Article DOIhttps://doi.org/10.1086/700891 © 2019 by the National Bureau of Economic Research. All rights reserved.PDF download Crossref reports no articles citing this article.
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