This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. Macro Finance
« Back to Results

Macro Finance

Paper Session

Sunday, Jan. 3, 2021 3:45 PM - 5:45 PM (EST)

Hosted By: American Finance Association
  • Chair: Andrea Eisfeldt, University of California-Los Angeles

Limited Household Risk Sharing: General Equilibrium Implications for the Term Structure of Interest Rates

Indrajit Mitra
,
Federal Reserve Bank of Atlanta
Yu Xu
,
University of Delaware

Abstract

We propose a theory of real interest rates in which non-diversiable idiosyncratic labor income risk is a key determinant of interest rate risk. Our production-based model relates the distribution of labor income risk in the cross-section of individuals to aggregate labor market conditions. Our model makes two key predictions. First, it predicts positive risk premia for long-term bonds while simultaneously matching key macroeconomic moments. Second, it predicts that a decline in labor market conditions, as reflected by low aggregate employment growth, job-finding rate, and labor market tightness, forecasts higher bond excess returns. These predictions are in line with empirical evidence.

Strategic Product Diversity

Nuno Clara
,
London Business School
Alexandre Corhay
,
University of Toronto
Howard Kung
,
London Business School

Abstract

We document a decreasing pattern in product concentration within multiproduct firms since the early 2000s. Larger firms are increasingly selecting a more diverse product range outside of their core competence. Expanding firm boundaries is closely intertwined with rising industry concentration as industry leaders are consolidating market power by growing horizontally through product creation. We build a general equilibrium model of multi-product firms featuring endogenously fluctuating firm and industry boundaries. External financing costs are quantitatively important for explaining the negative relation between product and industry concentration. The growing importance of the intra-firm extensive margin contributes to the aggregate productivity slowdown and declining trend in idiosyncratic volatility.

Why Does Oil Matter? Commuting and Aggregate Fluctuations

Robert Ready
,
University of Oregon
Nikolai Roussanov
,
University of Pennsylvania
Ewelina Zurowska
,
University of Pennsylvania

Abstract

Oil price shocks are known to have a sizable
macroeconomic impact, despite a relatively small fraction
of total expenditures that is devoted to energy. Using micro data we document a significant effect
of oil prices on labor supply and commuting distance, especially among low-skilled workers
who face large commuting costs, relative to their wages. In addition, equity returns of firms in less skill-intensive industries are more sensitive to oil price fluctuations. Motivated by this empirical evidence, we employ a two-sector endogenous growth model with an oil-dependent commuting
friction to examine the effect of oil shocks on employment, real wages, and growth, as well as equity prices. Negative oil supply shocks followed by oil price increases depress labor supply, especially in the less capital-intensive low-skill sector, where employment is most sensitive to the cost of commuting. As a result, output growth slows down in the medium run as innovation
and capital are reallocated towards the less affected high-skill sector, resulting in subsequent rise in the skill premium. The model also captures key elements of sector-specific demand-driven shocks to oil markets, such as the COVID-19 lockdowns in the spring of 2020.

Leasing as a Risk-Sharing Mechanism

Kai Li
,
Hong Kong University of Science and Technology
Chi-Yang Tsou
,
Hong Kong University of Science and Technology

Abstract

This paper argues leasing is a risk-sharing mechanism: risk-tolerant lessors (capital owners) provide insurance to financially constrained risk-averse lessees (capital borrowers) against systematic capital price fluctuations. We provide strong empirical evidence to support this novel risk premium channel. Among financially constrained stocks, firms with a high leased capital ratio earn average returns 7.35% lower than firms with a low leased capital ratio, which we call it the negative leased capital premium. We develop a general equilibrium model with heterogeneous firms and financial frictions to quantify this channel. Our study also provides a caveat to the recent leasing accounting change of IFRS 16: lease induced liability and financial debt should not be treated equally on firms' balance sheet, as their implications for firms' equity risks and cost of equity are opposite.
Discussant(s)
Carolin Pflueger
,
University of Chicago
Matthias Kehrig
,
Duke University
Bernard Herskovic
,
University of California-Los Angeles
Giorgia Piacentino
,
Columbia University
JEL Classifications
  • G0 - General