We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency Several types of evidence – including human readings of 12,000 newspaper articles – indicate that our index proxies for movements in policy-related economic uncertainty Our US index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt-ceiling dispute and other major battles over fiscal policy Using firm-level data, we find that policy uncertainty raises stock price volatility and reduces investment and employment in policy-sensitive sectors like defense, healthcare, and infrastructure construction At the macro level, policy uncertainty innovations foreshadow declines in investment, output, and employment in the United States and, in a panel VAR setting, for 12 major economies Extending our US index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upwards since the 1960s

/pdf/measuring-economic-policy-uncertainty-4nrg3ei76f.pdf

Measuring Economic Policy Uncertainty

This paper examines the macroeconomic dynamics of the 2007–09 recession in the United States and the subsequent slow recovery. Using a dynamic factor model with 200 variables, we reach three main conclusions. First, although many of the events of the 2007–09 collapse were unprecedented, their net effect was to produce macro shocks that were larger versions of shocks previously experienced, to which the economy responded in a historically predictable way. Second, the shocks that produced the recession were primarily associated with financial disruptions and heightened uncertainty, although oil shocks played a role in the initial slowdown, and subsequent drag was added by effectively tight conventional monetary policy arising from the zero lower bound. Third, although the slow nature of the recovery is partly due to the shocks of this recession, most of the slow recovery in employment, and nearly all of the slow recovery in output, is due to a secular slowdown in trend labor force growth.

/pdf/disentangling-the-channels-of-the-2007-09-recession-2ru8w954et.pdf

Disentangling the Channels of the 2007–09 Recession

A Very Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix

We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people’s decision to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths. These decisions exacerbate the size of the recession caused by the epidemic. The competitive equilibrium is not socially optimal because infected people do not fully internalize the effect of their economic decisions on the spread of the virus. In our benchmark model, the best simple containment policy increases the severity of the recession but saves roughly half a million lives in the U.S.

/pdf/the-macroeconomics-of-epidemics-47d82dapbs.pdf

The Macroeconomics of Epidemics

The dynamics of a linear (or linearized) dynamic stochastic economic model can be expressed in terms of matrices (A, B, C, D) that define a state space system for a vector of observables. An associated state space system (A,ˆB,C,ˆD) determines a vector autoregression for those same observables. We present a simple condition for checking when these two state space systems match up and when they do not when there are equal numbers of economic and VAR shocks. We illustrate our condition with a permanent income example. (JEL C32, E32)

/pdf/abcs-and-ds-of-understanding-vars-5334xt0du0.pdf

ABCs (and Ds) of Understanding VARs

We extend the baseline Susceptible-Exposed-Infectious-Recovered (SEIR) infectious disease epidemiology model to understand the role of testing and case-dependent quarantine. Our model nests the SEIR model. During a period of asymptomatic infection, testing can reveal infection that otherwise would only be revealed later when symptoms develop. Along with those displaying symptoms, such individuals are deemed known positive cases. Quarantine policy is case-dependent in that it can depend on whether a case is unknown, known positive, known negative, or recovered. Testing therefore makes possible the identification and quarantine of infected individuals and release of non-infected individuals. We fix a quarantine technology-a parameter determining the differential rate of transmission in quarantine-and compare simple testing and quarantine policies. We start with a baseline quarantine-only policy that replicates the rate at which individuals are entering quarantine in the US in March, 2020. We show that the total deaths that occur under this policy can occur under looser quarantine measures and a substantial increase in random testing of asymptomatic individuals. Testing at a higher rate in conjunction with targeted quarantine policies can (i) dampen the economic impact of the coronavirus and (ii) reduce peak symptomatic infections-relevant for hospital capacity constraints. Our model can be plugged into richer quantitative extensions of the SEIR model of the kind currently being used to forecast the effects of public health and economic policies.

/pdf/an-seir-infectious-disease-model-with-testing-and-4a3sbmve9w.pdf

An SEIR infectious disease model with testing and conditional quarantine

Recent empirical work shows large consumption responses to house price movements. This is at odds with a prominent theoretical view which, using the logic of the permanent income hypothesis, argues that consumption responses should be small. We show that, in contrast to this view, workhorse models of consumption with incomplete markets calibrated to rich cross-sectional micro facts actually predict large consumption responses, in line with the data. To explain this result, we show that consumption responses to permanent house price shocks can be approximated by a simple and robust rule-of-thumb formula: the marginal propensity to consume out of temporary income times the value of housing. In our model, consumption responses depend on a number of factors such as the level and distribution of debt, the size and history of house price shocks, and the level of credit supply. Each of these effects is naturally explained with our simple formula.

/pdf/house-prices-and-consumer-spending-11q02l8neh.pdf

House Prices and Consumer Spending

https://www.federalreserve.gov/pubs/ifdp/2005/830/ifdp830.pdf

Order flow and exchange rate dynamics in electronic brokerage system data

What are the welfare implications of labor market power? We provide an answer to this question in two steps: (1) we develop a tractable quantitative, general equilibrium, oligopsony model of the labor market, (2) we estimate key parameters using within-firm-state, across-market differences in wage and employment responses to state corporate tax changes in U.S. Census data. We validate the model against recent evidence on productivity-wage pass-through, and new measurements of the distribution of local market concentration. The model implies welfare losses from labor market power that range from 2.9 to 8.0 percent of lifetime consumption. However, despite large contemporaneous losses, labor market power has not contributed to the declining labor share. Finally, we show that minimum wages can deliver moderate, and limited, welfare gains by reallocating workers from smaller to larger, more productive firms.

Labor Market Power

We analyze the association between order flow and exchange rates using a new dataset representing a majority of global interdealer transactions in the two most-traded currency pairs. The data consist of six years (1999-2004) of order flow and exchange rate data for the euro-dollar and dollar-yen currency pairs at the one-minute frequency from EBS, the electronic broking system that now dominates interdealer spot trading in these currency pairs. This long span of high-frequency data allows us to gain new insights about the joint behavior of these series. We first confirm the presence of a substantial association between interdealer order flow and exchange rate returns at frequencies ranging from one minute to one week, but, using our long span of data, we find that the association is weaker at lower frequencies, with far less long-term association between cumulative order flow and long-term exchange rate movements. We study the linearity and time-variation of the association between high-frequency exchange rate returns and order flow, and document an intradaily pattern to the relationship: it is weakest at times when markets are most active. Overall, our study tends to support the view that, while order flow plays a crucial role in high-frequency exchange rate movements, its role in driving long-term fluctuations is much more limited.

David Berger

Papers

An SEIR infectious disease model with testing and conditional quarantine

House Prices and Consumer Spending

Order flow and exchange rate dynamics in electronic brokerage system data

Labor Market Power

Order Flow and Exchange Rate Dynamics in Electronic Brokerage System Data