Working Paper

EMPCT Working Paper Series No. 2024-07
41 pages | PDF Download | PDF in Browser

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Citation:
Bonadio,Barthélémy, Zhen Huo, Elliot Kang, Andrei A. Levchenko, Nitya Pandalai-Nayar, Hiroshi Toma, and Petia Topalova, “Playing with blocs: Quantifying decoupling” October, 2024

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Abstract
We adopt a data-driven approach to measure trade fragmentation over the period 2015-2023. We assign countries to the US bloc, the China bloc, or to an unaligned group based on whether their trade costs with the US and China increased or decreased over this period. We find that the US bloc and the China bloc each contain roughly a quarter of the countries in the world, with about half the countries remaining unaligned. However, we also find that as cross-bloc trade costs increased, within-bloc trade costs fell. We use a quantitative model to compute the real income effects of this reconfiguration of the global trade costs. The median country in the world, and the median country within each bloc, has 0.4-0.6% higher real income as a result of the observed decoupling, contrary to the widespread belief that fragmentation has been welfare-reducing. Finally, we find a modest amount of bloc misalignment: the median country in the US bloc would actually be better off in the China bloc, and vice versa. These results suggest that trade decoupling does not always follow trade-driven economic interests.

EMPCT Working Paper Series No. 2024-09
36 pages | PDF Download | PDF in Browser

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Citation:
Boehm, Christoph E., Andrei A. Levchenko, Nitya Pandalai-Nayar, and Hiroshi Toma, ” Dynamic Models, New Gains from Trade?” October, 2024

Hiroshi Toma
University of Michigan

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Abstract
Yes. We state closed-form expressions for steady state gains from trade that apply in a class of dynamic trade models that includes dynamic versions of the Krugman (1980), Melitz (2003), and customer capital (e.g., Arkolakis, 2010) models. The gains are a function of the domestic trade share and the long-run elasticity of trade with respect to iceberg trade costs, similar to Arkolakis, Costinot, and Rodríguez-Clare (2012). In contrast to static settings, in a dynamic world this long-run elasticity cannot be estimated in one step by relying on tariff variation as shifters of trade costs. We show, instead, that this object can be recovered by combining two tariff elasticity estimates: the long- and the short-run. Thus, the short-run tariff elasticity indirectly enters the formula for the steady state gains from trade. Our main substantive finding is that the gains from trade are large. They depend crucially on the short-run tariff elasticity, and can be arbitrarily large even if the long-run tariff elasticity is high. Accounting for the transition path has a minor impact on the magnitude of the gains from trade, relative to simply comparing steady states.

EMPCT Working Paper Series No. 2024-06
99 pages | PDF Download | PDF in Browser

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Citation:
Afrouzi, Hassan, Andres Drenik, and Ryan Kim, “Concentration, Market Power, and Misallocation: The Role of Endogenous Customer Acquisition” October, 2024

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Abstract
This paper explores how different margins of market share are related to markups. Using merged microdata on producers and consumers, we document that a firm’s market share is mainly related to its number of customers, while its price-cost markup is associated only with its average sales per customer. We develop a new model that reflects this empirical evidence and the endogenous nature of customer acquisition. When calibrated, this model predicts a higher degree of markup dispersion, which suggests greater efficiency losses due to customer misallocation. An analysis of the efficient allocation in this model reveals that compared with the equilibrium, aggregate TFP and output are 10.8% and 14% higher, respectively.

EMPCT Working Paper Series No. 2024-05
79 pages | PDF Download | PDF in Browser

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Citation:
Boehm, Christoph E, and T. Niklas Kroner, “Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock” September, 2024

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Abstract
Existing high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non announcement times. We use a heteroskedasticity-based procedure to estimate a “Fed non-yield shock”, which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. A positive non-yield shock raises stock prices in the U.S. and around the globe, and depreciates the dollar against all major currencies. The non-yield shock is essentially uncorrelated with previous monetary policy shocks and its effects are large in comparison. Its strong effects on the VIX and other risk-related measures point towards a dominant risk premium channel. We show that the non-yield shock can be related to Fed communications and that its existence has implications for the identification of structural monetary policy shocks.

EMPCT Working Paper Series No. 2024-04
56 pages | PDF Download | PDF in Browser

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Citation:
Afrouzi, Hassan, Saroj Bhattarai, and Edson Wu, “Relative-Price Changes as Aggregate Supply Shocks Revisited: Theory and Evidence” October, 2024

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Abstract
We provide theory and evidence that relative price shocks can cause aggregate inflation and act as aggregate supply shocks. Empirically, we show that exogenous positive energy price shocks have a positive impact not only on headline but also on U.S. core inflation while depressing U.S. real activity. In a two-sector monetary model with upstream and downstream sectors and heterogeneous price stickiness, we analytically characterize how upstream shocks propagate to prices. Using panel IV local projections, we show that the responsiveness of sectoral PCE prices to energy price shocks is in line with model predictions. Motivated by post-COVID inflation in the U.S., a model experiment shows that a one-time relative price shock generates persistent movements in headline and core inflation similar to those observed in the data, even in the absence of aggregate slack. The model also emphasizes that monetary policy stance plays an important role in propagation of such shocks.

EMPCT Working Paper Series No. 2024-03
106 pages | PDF Download | PDF in Browser

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Citation:
Bierdel, Aimé, Andres Drenik, Juan Herreño, and Pablo Ottonello, “Illiquid Lemon Markets and the Macroeconomy” October, 2024

Pablo Ottonello
University of Maryland and NBER

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Abstract
We study the macroeconomic implications of asymmetric information in capital markets. We build a quantitative capital-accumulation model in which capital is traded in illiquid markets, with sellers having more information about capital quality than buyers. Asymmetric information distorts the terms of trade for sellers of high-quality capital, who list higher prices and are willing to accept lower trading probabilities to signal their type. Led by the model’s predictions, we measure the distortions from asymmetric information by studying the relationship between listed prices and trading probabilities in a unique dataset of individual capital units listed for trade. By combining the empirical measurement with the model, we show that information asymmetries can play a quantitatively large role during economic crises when the degree of asymmetric information deteriorates.

EMPCT Working Paper Series No. 2024-02
72 pages | PDF Download | PDF in Browser

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Citation:
Pfäuti, Oliver, “The Inflation Attention Threshold and Inflation Surges” October, 2024.

Oliver Pfäuti
The University of Texas at Austin

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Abstract
At the outbreak of the recent inflation surge, the public’s attention to inflation was low but increased quickly once inflation started to rise. In this paper, I quantify when and by how much the public’s attention to inflation changes, and derive the macroeconomic implications of these attention changes. I estimate an attention threshold at an inflation rate of about 4%,and that attention doubles when inflation exceeds this threshold. Adverse supply shocks become more inflationary in times of high attention, and the increase in people’s attention to inflation in 2021 accounts for half of the subsequent supply-driven inflation. I develop a model accounting for the attention threshold and show that shocks that are usually short lived lead to a persistent surge in inflation if they induce an increase in people’s attention. The attention threshold further lengthens the last mile of disinflation after an inflation surge, and leads to an asymmetry in the dynamics of inflation.