skip to main content


Title: Micro Propagation and Macro Aggregation

This article reviews a framework for studying the aggregation and propagation of microeconomic shocks in general equilibrium. We discuss the determinants of aggregate measures of real economic activity, like real GDP, real domestic absorption, and aggregate productivity in both efficient and inefficient environments. We also discuss how shocks from one set of producers are transmitted to other producers through prices and quantities. The framework we provide is amenable to generalization and can be used to study any collection of producers ranging from one isolated producer to an industry consisting of heterogeneous producers to an entire economy. We conclude with a brief survey of some of the applied questions that can be addressed using the analytical tools presented in this review and avenues for future work.

 
more » « less
Award ID(s):
1947611
PAR ID:
10512121
Author(s) / Creator(s):
;
Publisher / Repository:
Annual Review of Economics
Date Published:
Journal Name:
Annual Review of Economics
Volume:
15
Issue:
1
ISSN:
1941-1383
Page Range / eLocation ID:
91 to 123
Format(s):
Medium: X
Sponsoring Org:
National Science Foundation
More Like this
  1. We study supply and demand shocks in a disaggregated model with multiple sectors, multiple factors, input-output linkages, downward nominal wage rigidities, credit-constraints, and a zero lower bound. We use the model to understand how the COVID-19 crisis, an omnibus supply and demand shock, affects output, unemployment, and inflation, and leads to the coexistence of tight and slack labor markets. We show that negative sectoral supply shocks are stagflationary, whereas negative demand shocks are deflationary, even though both can cause Keynesian unemployment. Furthermore, complementarities in production amplify Keynesian spillovers from supply shocks but mitigate them for demand shocks. This means that complementarities reduce the effectiveness of aggregate demand stimulus. In a stylized quantitative model of the United States, we find supply and demand shocks each explain about one-half of the reduction in real GDP from February to May 2020. Although there was as much as 6 percent Keynesian unemployment, this was concentrated in certain markets. Hence, aggregate demand stimulus is one quarter as effective as in a typical recession where all labor markets are slack. (JEL E12, E23, E24, E31, E32, E62, I12)

     
    more » « less
  2. We develop a framework to quantify the vulnerability of mutual funds to fire-sale spillover losses. We account for the first-mover incentive that results from the mismatch between the liquidity offered to redeeming investors and the liquidity of assets held by the funds. In our framework, the negative feedback loop between investors' redemptions and price impact from asset sales leads to an aggregate change in funds' NAV, which is determined as a fixed point of a nonlinear mapping. We show that a higher concentration of first movers increases the aggregate vulnerability of the system, as measured by the ratio between endogenous losses due to fund redemptions and exogenous losses due to initial price shocks only. When calibrated to U.S. mutual funds, our model shows that, in stressed market scenarios, spillover losses are significantly amplified through a nonlinear response to initial shocks that results from the first-mover incentive. Higher spillover losses provide a stronger incentive to redeem early, further increasing fire-sale losses and the transmission of shocks through overlapping portfolio holdings. 
    more » « less
  3. Abstract

    We present a unified treatment of how welfare responds to changes in budget sets or technologies with taste shocks and nonhomothetic preferences. We propose a welfare metric that ranks production possibility frontiers that differs from one that ranks budget sets and characterize it using a general equilibrium generalization of Hicksian demand. This extends Hulten’s theorem, the basis for constructing aggregate quantity indices, to environments with nonhomothetic and unstable preferences. We illustrate our results using both long- and short-run applications. In the long run, we show that if structural transformation is caused by income effects or changes in tastes, rather than substitution effects, then Baumol’s cost disease is twice as important for our preferred measure of welfare. In the short run, we show that standard chain-weighted deflators understate welfare-relevant inflation for current tastes. Finally, using the COVID-19 recession, we illustrate that chain-weighted real consumption and real GDP are unreliable metrics for measuring welfare or production when there are taste shocks.

     
    more » « less
  4. Specifying the objective function that an AI system should pursue can be challenging. Especially when the decisions to be made by the system have a moral component, input from multiple stakeholders is often required. We consider approaches that query them about their judgments in individual examples, and then aggregate these judgments into a general policy. We propose a formal learning-theoretic framework for this setting. We then give general results on how to translate classical results from PAC learning into results in our framework. Subsequently, we show that in some settings, better results can be obtained by working directly in our framework. Finally, we discuss how our model can be extended in a variety of ways for future research. 
    more » « less
  5. Abstract

    We show that in a broad class of menu cost models, the first-order dynamics of aggregate inflation in response to arbitrary shocks to aggregate costs are nearly the same as in Calvo models with suitably chosen Calvo adjustment frequencies. We first prove that the canonical menu cost model is first-order equivalent to a mixture of two time-dependent models, which reflect the extensive and intensive margins of price adjustment. We then show numerically that in any plausible parameterization, this mixture is well approximated by a single Calvo model. This close numerical fit carries over to other standard specifications of menu cost models. Thus, for shocks that are not too large, the Phillips curve for a menu cost model looks like the New Keynesian Phillips curve, but with a higher slope.

     
    more » « less