Economic Fluctuations and Growth

The NBER's Program on Economic Fluctuations and Growth, which is directed by Robert E. Hall of Stanford University, met on February 3 at the Federal Reserve Bank of San Francisco. Ricardo Caballero, NBER and MIT, and John Cochrane, NBER and University of Chicago, organized the meeting and chose these papers for discussion:

Kraay, Loayza, Serven, and Ventura ask how countries hold their financial wealth. They construct a database of 68 countries' claims on foreign and domestic capital and international borrowing and lending from 1966 to 1997. The authors find that a small amount of capital will flow from rich countries to poor countries. Further, countries' foreign asset positions are remarkably persistent and generally take the form of foreign loans rather than foreign equity. In the presence of reasonable diminishing returns and production risk, the authors show that the probability that international crises will occur twice a century is enough to generate a set of country portfolios that are roughly consistent with the data.

Diamond and Rajan examine the effects of shortages of liquid assets on a banking system. They characterize the kinds of problems that can arise and the types of interventions that might be appropriate. They also point out the dangers of the wrong kind of intervention, such as infusing capital when the need is for liquidity, as well as the practical difficulty of telling what is needed in some situations.

Greenwood, Yorukoglu, and Seshadri examine the impact of the consumer durable goods revolution that began at the dawn of the last century. They argue that this revolution liberated women from the home. After developing a model of household production in which households must decide whether to adopt the new technologies and whether a married woman should work, they conclude that this model explains the rise in married female labor-force participation that occurred in the last century.

Moskowitz and Vissing-Jorgensen document that investment in private equity is extremely concentrated. Yet despite the very poor diversification of entrepreneurs' portfolios, the authors find that the returns to private equity are similar to the returns on public equity. Given the large premium required by investors in public equity, why do households willingly invest substantial amounts in a single privately-held firm with a worse risk-return tradeoff? The authors conclude that private nonpecuniary benefits of control must be large or entrepreneurs must greatly overestimate their probability of success.

There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak and real wages in several sectors rose significantly above trend. Cole and Ohanian evaluate whether New Deal cartelization policies designed to limit competition among firms and increase labor bargaining power can explain the persistence of the Depression. They develop a model of the intra-industry bargaining process between labor and firms that occurred with these policies. They conclude that New Deal cartelization policies are an important factor in accounting for the post-1933 Depression. Further, the key depressing element of New Deal policies was not collusion per se, but rather the link between paying high wages and collusion.

U.S. stock prices have risen much faster than GNP during the postwar period. Between 1960 and 2000, the value of equity relative to GNP more than doubled. McGrattan and Prescott use a standard growth model to show that economic theory predicts this rise in equity prices. Changes in taxes, primarily in taxes on dividends, account for the large change in equity prices. Theory also can account for the fact that stock returns have been much higher than bond returns over the postwar period.