Download Financial Innovations and Macroeconomic Volatility

Comments on
Financial Innovations and Macroeconomic
Volatility
by Urban Jermann and Vincenzo Quadrini
Giorgio Primiceri
Northwestern University
November 17, 2006
Standard deviation of US GDP growth
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
0.5
0.4
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Standard deviation of US GDP (HP filter)
2.6
2.4
2.2
2
1.8
1.6
1.4
1.2
1
0.8
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
This paper…
„
Financial structure of firms has become more volatile
after 1984
„
Model in which financial factors are key to generate
fluctuations
„
Two financial frictions:
„
„
Endogenous borrowing limit (limited commitment)
Exogenous cost of paying out dividends
Main result
„
Model calibrated to US data pre and post-1984
„
Explain the Great Moderation as a consequence
of firms’ greater financial flexibility
Outline of my Comments
1. Will tell you why this is a very nice paper
2. Comments on the empirical motivation
3. Comments on the theoretical framework
Why I think this is the right direction
„
A look at the Great Moderation from a different
perspective
Why I think this is the right direction
„
A look at the Great Moderation from a different
perspective
„
Justiniano and Primiceri (2005):
Large scale DSGE model with time varying volatility
of structural shocks
Why I think this is the right direction
„
A look at the Great Moderation from a different
perspective
„
Justiniano and Primiceri (2005):
Large scale DSGE model with time varying volatility
of structural shocks
„
Reduction in volatility of GDP explained by a
reduction in volatility of a shock to the real return on
capital
Why I think this is the right direction
„
This shock is a “wedge” in the Euler Equation pricing the
capital stock
„
Might proxy for un-modeled financial frictions (CKM, 2006)
Why I think this is the right direction
„
This shock is a “wedge” in the Euler Equation pricing the
capital stock
„
Might proxy for un-modeled financial frictions (CKM, 2006)
„
Interpretation: Great Moderation comes from a reduction in
financial frictions
„
Bingo!
Outline of my Comments
1. Will tell you why this is a very nice paper
„
Larger scale models indicate this as a promising direction
Outline of my Comments
1. Will tell you why this is a very nice paper
„
Larger scale models indicate this as a promising direction
2. Comments on the empirical motivation
A closer look at the empirical motivation of JQ
„
Decline in volatility of GDP in early 1980s is very sharp
Volatility of US GDP
2.6
2.4
2.2
2
1.8
1.6
1.4
1.2
1
0.8
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
A closer look at the empirical motivation of JQ
„
Decline in volatility of GDP in early 1980s is very sharp
„
This is the real puzzle
„
This is why the Monetary Policy hypothesis has received
so much attention
A closer look at the empirical motivation of JQ
„
Decline in volatility of GDP in early 1980s is very sharp
„
This is the real puzzle
„
This is why the Monetary Policy hypothesis has received
so much attention
„
Let’s have a look at the financial variables examined in
JQ
Time varying SD of Debt Repurchase
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Time varying SD of Equity Payout
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
0.7
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Reduction in vol. of components of GDP
„
Which component of GDP has experienced the
sharpest and most dramatic reduction in volatility?
Reduction in vol. of components of GDP
GDP
Consumption
Non-durables
and services
Durables
Investment
Reduction in vol. of components of GDP
GDP
Consumption
Non-durables
and services
Durables
Investment
Non-residential
Residential
Time varying SD of Non-Residential investment
5.4
5.2
5
4.8
4.6
4.4
4.2
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Time varying SD of Equipment & Software
6.4
6.2
6
5.8
5.6
5.4
5.2
5
4.8
4.6
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Time varying SD of Residential investment
16
14
12
10
8
6
4
2
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Reduction in vol. of components of GDP
GDP
Consumption
Non-durables
and services
Durables
Investment
Non-residential
Residential
Share of residential assets owned by HH
1
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
0.55
0.5
1950
1960
1970
1980
1990
2000
2010
What do we learn?
„
Household sector owns most of residential assets (85%)
„
Business sector owns most of non-residential assets
What do we learn?
„
Household sector owns most of residential assets (85%)
„
Business sector owns most of non-residential assets
„
Smooth change in volatility of firms’ financial structure is
consistent with smooth change in volatility of nonresidential investment!
What do we learn?
„
Household sector owns most of residential assets (85%)
„
Business sector owns most of non-residential assets
„
Smooth change in volatility of firms’ financial structure is
consistent with smooth change in volatility of nonresidential investment!
„
Shouldn’t we pay more attention to the household sector
to explain the Great Moderation?
„
„
„
Campbell and Hercowitz (2006)
Mertens (2006)
Guerron (2006)
Outline of my Comments
1. Will tell you why this is a very nice paper
„
Larger scale models indicate this as a promising direction
2. Comments on the empirical motivation
„
„
Change in volatility of financial structure is too smooth
Household sector seems to be key
Outline of my Comments
1. Will tell you why this is a very nice paper
„
Larger scale models indicate this as a promising direction
2. Comments on the empirical motivation
„
„
Change in volatility of financial structure is too smooth
Household sector seems to be key
3. Comments on the theoretical framework
Theoretical issues: a closer look at the model
Key elements
Limited commitment
Quadratic cost of paying out
dividends
Theoretical issues: a closer look at the model
Key elements
Limited commitment
„
Strong micro-foundation
„
No role in the Great Moderation
Quadratic cost of paying out
dividends
Theoretical issues: a closer look at the model
Key elements
Limited commitment
„
Strong micro-foundation
„
No role in the Great Moderation
„
Natural questions:
Why do we need it?
Can’t we write a simpler model?
Quadratic cost of paying out
dividends
Theoretical issues: a closer look at the model
Key elements
Limited commitment
Quadratic cost of paying out
dividends
„
Strong micro-foundation
„
No role in the Great Moderation
„
Crucial for the quantitative result!
„
Natural questions:
Why do we need it?
Can’t we write a simpler model?
„
Non-standard
„
Ad-hoc
Theoretical issues: a closer look at the model
„
Ad-hoc quadratic costs of paying out dividends
„
Shouldn’t we think of structural interpretations?
„
„
„
„
Signaling problem
Progressive taxation
Risk adverse entrepreneurs
Either non-symmetric cost or more appropriate
interpretation for private equity
Outline of my Comments
1. Will tell you why this is a very nice paper
„
Larger scale models indicates this as a promising direction
2. Comments on the empirical motivation
„
„
Increase in volatility of financial structure is too smooth
Household sector seems to be important!
3. Comments on the theoretical framework
„
„
What is the role of limited commitment?
Quadratic adjustment costs of paying out dividends???