E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
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Persistent Debt and Business Cycles in an Economy with Production Heterogeneity
We examine the role of debt in amplifying and propagating recessions. Firms’ debt adjustment makes recessions deeper but makes expansions gradual. In particular, when the aggregate business leverage is ten percentage points above average, the half-life of the recovery doubles. -
The Canadian Neutral Rate of Interest through the Lens of an Overlapping-Generations Model
We use a small open economy model with overlapping generations to evaluate secular dynamics of the neutral rate in Canada from 1980 to 2018. We find that changes in both foreign and domestic factors resulted in a protracted decline in the neutral rate. -
Fiscal Stimulus and Skill Accumulation over the Life Cycle
Using micro data from the U.S. Consumer Expenditure Survey and Current Population Survey, I document that government spending shocks affect individuals differently over the life cycle. -
Gazing at r-star: A Hysteresis Perspective
Many explanations for the decline in real interest rates over the last 30 years point to the role that population aging or rising income inequality plays in increasing the long-run aggregate demand for assets. Notwithstanding the importance of such factors, the starting point of this paper is to show that the major change driving household asset demand over this period is instead an increased desire—for a given age and income level—to hold assets. -
Macroeconomic Disasters and Consumption Smoothing: International Evidence from Historical Data
Does consumption smoothing fundamentally decrease during macroeconomic disasters? This paper uses a large historical dataset (1870–2016) for 16 industrial economies to show that during macroeconomic disasters (e.g., wars, pandemics, depressions) aggregate consumption and income are significantly less decoupled than during normal times. -
Financial Constraints and Corporate Investment in China
Financial constraints deter firms from pursuing optimal investment plans. In China, we find privately owned firms face greater financial constraints than state-owned enterprises (SOEs). This can be explained by our finding that lenders appear less concerned about the credit risk of SOEs, which causes distortions in the allocation of credit. -
Monetary Policy, Credit Constraints and SME Employment
We revisit an old question: how do financial constraints affect the transmission of monetary policy to the real economy? To answer this question, we propose a simple empirical strategy that combines firm-level employment and balance sheet data, identified monetary policy shocks and survey data on financing activities. -
Are Working Hours Complements in Production?
Using Canadian matched employer-employee data, we show that working hours of different workers are gross complements in production rather than perfect substitutes, as is typically assumed by macroeconomic models of production. -
Harnessing the benefit of state-contingent forward guidance
A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework.