Brookings Papers on Economic Activity

Steven M. Fazzari, R. Glenn Hubbard, Bruce C. Petersen, Alan S. Blinder, James M. Poterba, Financing Constraints and Corporate Investment, Brookings Papers on Economic Activity, Vol. 1988, No. 1 (1988), pp. 141-206

Jeffrey D. Sachs, Andrew Warner, , Stanley Fischer, Economic Reform and the Process of Global Integration, Brookings Papers on Economic Activity, Vol. 1995, No. 1, 25th Anniversary Issue (1995), pp. 1-118

Richard C. Levin, Alvin K. Klevorick, Richard R. Nelson, Sidney G. Winter, Richard Gilbert, Zvi Griliches, Appropriating the Returns from Industrial Research and Development, Brookings Papers on Economic Activity, Vol. 1987, No. 3, Special Issue On Microeconomics (1987), pp. 783-831

macroeconomics, convergence, states, regions, productivity, capital, labor

I show that undervaluation of the currency (a high real exchange rate) stimulates economic growth. This is true particularly for developing countries. This finding is robust to using different measures of the real exchange rate and different estimation techniques. I also provide some evidence that the operative channel is the size of the tradable sector (especially industry). These results suggest that tradables suffer disproportionately from the government or market failures that keep poor countries from converging toward countries with higher incomes. I present two categories of explanations for why this may be so, the first focusing on institutional weaknesses, and the second on product-market failures. A formal model elucidates the linkages between the real exchange rate and the rate of economic growth.

The consequences for the proper conduct of monetary policy of the existence of a lower bound of zero for overnight nominal interest rates has recently become a topic of lively interest.In Japan the call rate (the overnight cash rate analogous to the federal funds rate in the United States) has been within 50 basis points of zero since October 1995, and it has been essentially equal to zero for most of the past four years (figure 1).Thus the Bank of Japan has had little room to further reduce shortterm nominal interest rates in all that time.Meanwhile Japan's growth has remained anemic, and prices have continued to fall, suggesting a need for monetary stimulus.Yet the usual remedy-lower short-term nominal interest rates-is plainly unavailable.Vigorous expansion of the monetary base has also seemed to do little to stimulate demand under these circumstances: as figure 1 also shows, the monetary base is now more than twice as large, relative to GDP, as it was in the early 1990s.In the United States, meanwhile, the federal funds rate has now been reduced to only 1 percent, and signs of recovery remain exceedingly fragile.This has led many to wonder if this country might not also soon find itself in a situation where interest rate policy is no longer available as a 139

macroeconomics, regional evolutions, unemployment, Massachusetts, boom, slump, employment, wages, growth

THE LIQUIDITY TRAP-that awkward condition in which monetary policy loses its grip because the nominal interest rate is essentially zero, in which the quantity of money becomes irrelevant because money and bonds are essentially perfect substitutes-played a central role in the early years of macroeconomics as a discipline. John Hicks, in introducing both the IS-LM model and the liquidity trap, identified the assumption that monetary policy is ineffective, rather than the assumed downward inflexibility of prices, as the central difference between Mr. Keynes and the classics. ' It has often been pointed out that the Alice in Wonderland character of early Keynesianism-with its paradoxes of thrift, widows ' cruses, and so on-depended on the explicit or implicit assumption of an accommodative monetary policy; it has less often been pointed out that in the late 1930s and early 1940s it seemed quite natural to assume that money was irrelevant at the margin. After all, at the end of the 1930s interest rates were hard up against the zero constraint; the average rate on U.S. Treasury bills during 1940 was 0.014 percent. Since then, however, the liquidity trap has steadily receded both as a memory and as a subject of economic research. In part, this is because in the generally inflationary decades after World War II nominal interest rates have stayed comfortably above zero, and therefore central banks have no longer found themselves "pushing on a string." Also, the experience of the 1930s itself has been reinterpreted, most notably by

The empirical evidence that is widely interpreted as supporting the efficient markets theory in finance actually does not rule out the possibility that changing fashions or fads among investors have an important influence on prices in financial markets. A model of the impact of such fashions on prices is proposed and used in an exploratory data analysis of the aggregate United States Stock Market in the 20th century.

Ben S. Bernanke, Mark Gertler, Mark Watson, Christopher A. Sims, Benjamin M. Friedman, Systematic Monetary Policy and the Effects of Oil Price Shocks, Brookings Papers on Economic Activity, Vol. 1997, No. 1 (1997), pp. 91-157

ABSTRACT: We develop a general equilibrium model in which the safety of a country's currency and the choice of its exchange rate regime arise endogenously. Calibrated to pre-2025 data, the model replicates the US dollar's safety premium, low Treasury yields, and its status as the world's anchor currency. Introducing a trade war that isolates US goods markets from the world erodes the US dollar's safety premium, raises US interest rates, and lowers the world market value of US firms. For sufficiently high tariffs, small economies optimally repeg to the euro, precipitating a phase shift to a euro-centric international monetary system and a global welfare loss. The analysis implies that persistent trade wars may threaten the financial privileges that the United States derives from the dollar's international role.

ABSTRACT: We use recent advances in natural language processing and large language models to construct novel measures of technology exposure for workers that span almost two centuries. Combining our measures with census data on occupation employment, we show that technological progress over the twentieth century has led to economically meaningful shifts in labor demand across occupations: It has consistently increased demand for occupations with higher education requirements, occupations that pay higher wages, and occupations with a greater fraction of female workers. Using these insights and a calibrated model, we then explore different scenarios for how advances in artificial intelligence (AI) are likely to affect employment trends in the medium run. The model predicts a reversal of past trends, with AI favoring occupations that are lower-educated, lower-paid, and more male-dominated.

ABSTRACT: Climate change is already increasing temperatures and raising the frequency of natural disasters in the United States. In this paper, we examine several major vectors through which climate change affects US households, including cost increases associated with home insurance claims and increased cooling, as well as sources of increased mortality. Although we consider only a subset of climate costs over recent decades, we find an aggregate annual cost averaging between $400 and $900 per household; in 10 percent of counties, costs exceed $1,300 per household. Costs vary significantly by geography, with the largest costs occurring in some western regions of the United States, the Gulf Coast, and Florida. Climate costs also typically disproportionately burden lower-income households. Our work suggests the importance of research that looks beyond rising temperatures to extreme weather events; so far, natural disasters account for the bulk of the burden of climate change in the United States.

ABSTRACT: The CHIPS and Science Act, enacted in August 2022, is a key element of the revival of US industrial policy. We examine the short-term employment effects of the act. Drawing on quarterly industry-by-county data from the Quarterly Census of Employment and Wages (QCEW), we implement two county-level difference-in-differences designs, the first comparing counties with preexisting semiconductor facilities to other counties with high-tech industries and the second comparing counties with semiconductor fabrication facilities (which were targeted for the bulk of the CHIPS funding) to counties with non-fabrication semiconductor facilities. Using both approaches, we find robust, positive employment impacts in affected counties. The effects began at the time of the passage in the Senate of a precursor bill, in anticipation of the signing of the CHIPS Act. Our preferred estimates suggest an increase of 110 jobs per affected county in the first design and 180 jobs per affected county in the second design. We also find robust positive impacts on local construction employment. Evidence on total employment and GDP at the county level, as well as on employment in upstream input sectors, is mixed. Simple back-of-the-envelope calculations (which come with caveats) suggest national direct employment effects of approximately 15,000–16,000 jobs in the core semiconductor sector and indirect effects of 15,000–30,000 jobs in related sectors.

ABSTRACT: The global fertility rate has reached a record low, with nearly half of all countries now below replacement level. This has sparked renewed interest among policymakers and researchers alike. In this paper, we explore a novel explanation for low birth rates based on comparison motives. We show theoretically that strong comparison motives lead to high parental investments—both in time and money—and low fertility. We further show that comparison motives can amplify fertility declines driven by other forces. We provide suggestive empirical support for the role of comparison motives in explaining cross-country and within-US regional variation in fertility. The resulting policy implications are different from those usually considered. Specifically, reliance on high-stakes testing and precise rankings in the education system may heighten comparison motives and thereby contribute to fertility decline. Taxing or regulating certain types of private education institutions or reforming college admission could reduce excessive parental investments and thereby stimulate fertility.

ABSTRACT: The natural rate of interest ( r *) is a central benchmark for monetary and fiscal policy, shaping decisions by firms and households across the economy. In advanced economies, r * declined steadily for half a century, but the recent sharp increases in market-based real rates have raised the prospect of a turnaround. This paper revisits the long-run decline in real rates through a structural model in which r * equilibrates the supply and demand in the capital market. I show that advanced economies have undergone profound shifts in both capital demand and—especially—capital supply, driving a fall in r * of about 5 percentage points and nearly doubling the wealth-to-GDP ratio since 1970, despite weak investment and low saving. To trace the dynamics, I construct a limited foresight transition in which agents notice and understand the shocks hitting the economy only as they arrive. I argue this is a more plausible alternative to the usual perfect foresight assumption. The model's business-asusual scenario computed this way implies r * of around 0–1.2 percent today and points to a small gentle decline over the years to come. But r * could instead rise, due to new forces such as artificial intelligence, deglobalization, or a persistent fall in the safety premium following the recent inflation episode. The model is capable of generating a sharp turnaround in the path for the natural rate, but for r * to return to pre-2008 levels, several upside risks to r * likely need to crystallize all at once.