Non-Convexities and Macroeconomic Complementarities

Russell W. Cooper

NBER

SBR-9876522

This project pursues two themes in macroeconomics. The first concerns the macroeconomic significance of non-convexities at the microeconomic level. In particular, the nature of adjustment costs for capital and labor as well as the implications of these adjustments for productivity are studied at the plant-level in joint work with John Haltiwanger. Further, the adjustment process for durables at the household level is investigated as well, in joint work with Jerome Adda. For both applications, optimization is modeled through the specification of a stochastic dynamic programming problem. Aggregation across heterogeneous households then generates macroeconomic implications. These models are structurally estimated using plant level data (for the capital and labor adjustment process) and both household and aggregate data for the durable goods purchases. Finally, in both of these projects, policy applications, such as investment tax credits, job creation measures and scrapping subsidies, are pursued.

The second part of the project continues ongoing research into the macroeconomic implications of strategic complementarities. Two paths are pursued. First, understanding the Great Depression continues to be a prime target within the coordination literature. Building on previous work with Dean Corbae on financial crises, the next stage of the research studies the dynamics of bank runs and the stabilizing role of monetary policy in an environment of financial fragility. Further, the project studies the interactions between exchange rate instability and financial fragility in an open economy. Finally, a continuation of research with Alok Johri on learning at the plant level is planned. In particular, the goal is to study the dynamic implications of learning by doing and learning from others. Again, this entails estimation of production functions at the plant level and the integration of the results into a dynamic macroeconomic model.