Recovering Macro Elasticities from Regional Data (Job Market Paper)
Abstract: I propose a new methodology to estimate macro elasticities in linear economies by exploiting regional data. The key identification assumption is that regions are heterogeneous in their sensitivities to aggregate macro shocks and policies. This assumption is satisfied if regions differ in their fundamentals, such as their technology or their intertemporal elasticity of substitution. First, I show that regardless of the heterogeneity assumption, the macro elasticity is a function of the micro-global elasticities, which measure how regions react to aggregate policies or shocks. Then, I combine typical structural VAR approaches with various panel data methods, such as asymptotic principal components, to show that heterogeneity makes it possible to recover the micro-global elasticities. These are then used to construct an estimate of the macro elasticity. Moreover, I show that the estimates are robust: they are consistent for a wide variety of data-generating processes, including models with incomplete and complete markets, sticky and flexible prices, and different market structures. Compared to existing approaches, I show that the methodology allows for weaker identification assumptions and greater robustness. Finally, I present an empirical application to fiscal multipliers in the U.S. Using state-level data for the period 1971 to 2008, I find a fiscal multiplier of total spending (federal, state and local) that falls in the range 0.7-1.2.
Financial Development, Cheap Credit and Growth (PDF coming soon)
Abstract: I study the relationship between government intervention in the banking sector and long-run growth for different levels of financial development. I use an endogenous growth model in which entrepreneurs invest in R&D and physical capital. They can lend or borrow from each other but only through a banking system and, in doing so, they face a collateral constraint. I show that for economies with a high degree of financial development, where collateral constraints are not so tight, there is an increase in subsidies to banks’ loans that always increases the economy’s long-run growth rate. For less financially developed economies, cheap credit can be harmful for the economy’s growth rate when entrepreneurs can’t use their technology as collateral: lower interest rates make them substitute away from technology in favor of physical capital in order to obtain more funds from banks. A sufficient condition for this to happen is derived.
Research in Progress
Connecting Micro Elasticities with Macro Elasticities in Non-Linear Economies
Abstract: I provide identification results for macro elasticities in non-linear economies. I assume the econometrician observes data from a recursive competitive equilibrium but remain agnostic about many features of the economy, such as whether markets are complete or incomplete. This setup leads to outcomes with nonseparable unobservable errors and endogenous regressors. The starting point for the analysis is that the econometrician has identified what I call a micro-local elasticity, which measures the average regional response to a regional policy change, via a control variable approach. I first show that the micro-local elasticity holds the distribution of the aggregates fixed when analyzing the policy change, and thus it is not useful for approximating the macro elasticity. Then, I offer a set of extra assumptions under which the macro elasticity is identified, and show, by means of an example, that the extra assumptions might be very weak. Moreover, I show that the macro elasticity is a known function of the micro-global elasticities, which measure the average regional response to an aggregate policy shift, allowing the aggregates to adjust accordingly. Finally, I discuss the advantages of using regional variation in this setup, in comparison to using only aggregate time series variation. I also contrast the identification assumptions required for the results to those of linear economies in which aggregate macro shocks and policies have heterogeneous effects.