2023 Thomas Laubach Research Conference, Session 2

TL;DR

This paper proposes an alternative explanation for the pro-cyclical nature of total factor productivity (TFP) based on firm heterogeneity in markups and cost pass-through. It presents a new Keynesian model that incorporates these features and provides empirical evidence to support its alternative explanation.

Transcript

and welcome back to the rest of our program before we kick it off I did want to just take one moment to acknowledge the passing of another of our dear colleagues Dave small Dave small sadly passed away a couple of weeks ago following the completion of a tremendous 40-year career at the Federal Reserve he was also one of the founding members of mone... Read More

Key Insights

• 😊 Firm heterogeneity in markups and cost pass-through can offer an alternative explanation for the pro-cyclical nature of TFP, challenging the traditional view of mismeasurement.
• 😊 The new Keynesian model incorporating these features highlights the role of allocative efficiency in driving pro-cyclical TFP and provides insights into the responses of output and inflation to monetary shocks.
• 😊 The evidence on the effects of industrial concentration on the transmission mechanism of monetary policy and its relation to pro-cyclical TFP is nuanced and requires further investigation.
• 👨‍🔬 The empirical support for the proposed alternative explanation is limited due to data limitations and the challenge of disentangling the effects of mismeasurement from firm heterogeneity. Further research is needed to establish causality.

Questions & Answers

Q: How does the proposed alternative explanation for pro-cyclical TFP differ from the traditional view of mismeasurement?

The traditional view suggests that pro-cyclical TFP is due to mismeasurement of inputs, such as labor and capital. However, this paper argues that the differential markups and cost pass-through across firms, along with their negative relationship, can produce pro-cyclical TFP, challenging the mismeasurement explanation.

Q: What is the main insight from the developed new Keynesian model?

The new Keynesian model shows how the heterogeneity in markups and cost pass-through influences the responses of output and inflation to monetary shocks. It emphasizes the role of allocative efficiency in driving pro-cyclical TFP.

Q: How does industrial concentration affect the transmission mechanism of monetary policy?

The paper suggests that industrial concentration can affect the strength of monetary non-neutrality, but it distinguishes between the effects on the slope of the Phillips curve and the cost-push shocks that impact productivity. The evidence on how concentration has changed over time is inconclusive, making it difficult to draw definitive conclusions about its impact on monetary policy transmission.

Q: What empirical evidence supports the proposed alternative explanation?

The paper provides macro-level evidence showing the flattening of the Phillips curve, indicating reduced monetary non-neutrality. It also presents cross-sectional evidence demonstrating the reallocation effects of monetary shocks on firms with different markups. However, the paper acknowledges that more research is needed to fully establish the causal relationship between the alternative explanation and pro-cyclical TFP.

Summary & Key Takeaways

• The paper introduces an alternative explanation for pro-cyclical TFP, challenging the traditional view that it reflects mismeasurement. It suggests that differential markups and cost pass-through across firms, along with their negative relationship, can generate pro-cyclical TFP.

• A new Keynesian model is developed to incorporate these features and show how they impact output and inflation responses to monetary shocks. The model highlights the role of allocative efficiency in driving pro-cyclical TFP.

• Empirical evidence is provided to support the alternative explanation. It includes macro-level evidence showing the flattening of the Phillips curve and cross-sectional evidence demonstrating the reallocation effects of monetary shocks on high and low markup firms.