Essays in Expectations-driven Business Cycles Open Access

Abstract

In the past decade or so, optimistic beliefs about the profitability of future technological innovations contributed immensely to economic activity. In this dissertation, I focus on the interplay between such beliefs, economic fluctuations, and technological innovations embodied in capital equipment. In Chapter 1, I identify the main source of fluctuations in the labor share of income in the United States. Using the Maximum Forecast Error Variance (MFEV) approach, I find that the shock that explains most of the unpredictable fluctuations in the labor share is news about future technological progress embodied in capital. The shock induces a negative and overshooting response of the labor share. A standard Real Business Cycle model with a production function that has an elasticity of substitution less than one is capable of replicating the qualitative dynamics of the labor share. In Chapter 2, my coauthor, Kaiji Chen, and I investigate the source of the fluctuations in aggregate variables and Total Factor Productivity (TFP). Using the MFEV approach, we sequentially identify two separate shocks --- a news shock to the inverse of the relative price of investment and a news shock to TFP --- and find that both shocks are highly correlated and account for over 50 percent of the Forecast Error Variance (FEV) of TFP. We use a standard two-sector business cycle model to argue that the close link between the two identified shocks is a consequence of spillover effect arising from diffusing innovations in investment-specific technology (IST) to TFP. In Chapter 3, I explore whether mood swings, captured by optimism shocks, are a viable source of macroeconomic fluctuations as suggested by several empirical studies. Using a combination of sign and zero restrictions to identify simultaneously an optimism shock and an anticipated investment shock, I find that the anticipated investment shock emerges as the most plausible source of fluctuations. I isolate sequentially a TFP news shock and an IST news shock. I find that there is close link between the IST news shock and the anticipated investment shock while the optimism shock is no longer associated with the TFP news shock documented by some empirical studies vanishes.

Table of Contents

1 THE CYCLICALITY OF THE LABOR INCOME SHARE AND THE IST NEWS SHOCK

1.1 Introduction

1.2 Empirical Methodology

1.2.1 MFEV: VAR Basics

1.3 Data and Specification

1.4 Results

1.4.1 What Moves the Labor Share?

1.4.2 Structural Interpretation

1.5 Theory

1.6 Implications

1.7 Robustness Check

1.7.1 Alternative Measure of the Relative Price of Investment

1.8 Conclusion

References

2 INVESTMENT-SPECIFIC TECHNICAL CHANGES: THE SOURCE OF ANTICIPATED TFP FLUCTUATIONS

2.1 Introduction

2.2 Empirical Approach

2.3 Mapping News Shocks into Primitive Shocks

2.3.1 IST Diffusion and Spillover

2.4 Data and Specification Issues

2.5 Results

2.5.1 Baseline Estimates

2.5.2 Robustness Check

2.5.3 Alternative Forecast Horizons

2.6 Conclusion

References

Appendix 2.A: A Generalized Two-sector Model

Appendix 2.B: Decomposition of Aggregate TFP

Appendix 2.C: Derivation of Theoretical FEV

Appendix 2.D: Spillover in Both Directions

Appendix 2.E: The Measure of IST Spillover Effects

3 EXPLAINING U.S. BUSINESS CYCLES: TFP NEWS SHOCK OR IST NEWS SHOCK

3.1 Introduction

3.2 Optimism Shock and Anticipated Investment Shock

3.2.1 Identification Approach: sign and zero restrictions

3.2.2 Data and Restrictions

3.2.3 Results: Dynamic Effects of the Optimism Shock and Anticipated Investment Shock

3.3 TFP News Shock and IST News Shock

3.3.1 Identification Approach: VAR Basics

3.4 Robustness Analysis

3.5 Conclusion

References

About this Dissertation

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School	Laney Graduate School
Department	Economics
Degree	PhD
Submission	Dissertation
Language	English
Research Field	Economics, Labor Economics, General
Keyword	Labor's share News shocks General purpose technology Business-cycles Investment-specific technology
Committee Chair / Thesis Advisor	Zha, Tao, Emory University
Committee Members	Jacho-Chavez, David, Emory University Waggoner, Daniel, Federal Reserve Bank of Atlanta Chen, Kaiji, Emory University

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