Program and working group meetings.

Three of the most important recent facts in global macroeconomics--the sustained rise in the U.S. current account deficit, the stubborn decline in long-run real rates, and the rise in the share of U.S. assets in global portfolios--appear as anomalies from the perspective of conventional wisdom and models. Caballero and his co-authors provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: 1) potential growth differentials among different regions of the world; and 2) heterogeneity in these regions' capacity to generate financial assets from real investments. In extensions of the basic model, they also generate exchange rate and FDI excess returns that are broadly consistent with the recent trends in these variables. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.

Heathcote and Perri show that a simple extension of one-good models can help to reconcile theory and data. In particular, they analytically solve for the equilibrium country portfolios in a two-country, two-goods model with non-diversifiable labor income and investment. In this set-up, consistent with the data, country portfolios contain a relatively small, but positive, share of foreign assets. International diversification is low because terms-of-trade movements provide considerable insurance against country-specific shocks and labor income risk (Cole and Obstfeld, 1991; Acemoglu and Ventura, 2002; Pavlova and Rigobon, 2003). International diversification is positive because foreign assets are crucial in sharing the financing of investment across countries. Finally, in the model a country's portfolio share of foreign assets should depend on its trade/ GDP ratio and on its capital income/ GDP ratio. The authors show how this relation is qualitatively and quantitatively consistent with country portfolios in the cross section of OECD countries in the 1990s.

Chetty and Szeidl characterize risk preferences in an expected utility model with commitments. They show that commitments affect risk preferences in two ways: 1) they amplify risk aversion with respect to moderate-stake shocks; and 2) they create a motive to take large-payoff gambles. The model thus helps to resolve two basic puzzles in expected utility theory: the discrepancy between moderate-stake and large-stake risk aversion and lottery playing by insurance buyers. The authors discuss applications of the model, such as the optimal design of social insurance and tax policies, added worker effects in labor supply, and portfolio choice. Using event studies of unemployment shocks, they document evidence consistent with the consumption adjustment patterns implied by the model.

Uncertainty appears to vary strongly over time, temporarily rising by up to 200 percent around major shocks like the Cuban Missile crisis, the assassination of JFK, and 9/11. Bloom offers the first structural framework for analyzing uncertainty shocks. He builds a model with a time varying second moment, which he numerically solves and estimates using firm-level data. The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in employment, investment, and productivity growth, and a moderate loss in GDP. This temporary impact of a second moment shock is different from the typically persistent impact of a first moment shock, highlighting the importance for policymakers of identifying their relative magnitudes in major shocks. The simulation of an uncertainty shock is then compared to actual 9/11 data, displaying a surprisingly good match.

Guvenen and Kuruscu present a tractable general equilibrium overlapping-generations model of human capital accumulation which is consistent with several features of the evolution of the U.S. wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. To highlight the working of the model, the authors abstract from all kinds of idiosyncratic uncertainty, and thus, wage inequality results only from differences in human capital accumulation. They examine the response of this model to skill-biased technical change (SBTC) both theoretically and quantitatively. First, they theoretically show that in response to SBTC, the model generates behavior consistent with the U.S. data including: a rise in total wage inequality; an initial fall in the education (skill) premium followed by a strong recovery, leading to a higher premium in the long-run; the fact that most of this fall and rise takes place among younger workers; a rise in within-group inequality; an increase in educational attainment; stagnation in median wage growth (and a slowdown in aggregate labor productivity); and a rise in consumption inequality that is much smaller than the rise in wage inequality. They then calibrate the model to the U.S. data before 1970 and find that the evolutions of these variables are quantitatively consistent with their empirical counterparts during SBTC (from 1970 on). These results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of SBTC and interpreting the transformation that the U.S. economy has gone through since the 1970s.

Buera and Kaboski present four facts and a model explaining the rise of the service economy. First, the rising share of services in output is a recent phenomenon, starting around the mid-twentieth century. Second, it reflects increases in both the relative price and relative quantity of services to commodities. Third, this rising share is entirely explained by the surge of skill-intensive services, and is contemporaneous with the increases in the relative quantity of skilled labor and the skill premium. Finally, individual services follow a distinct product cycle as an economy grows. They start being provided as market services, but are later produced at home with the purchase of manufactured intermediate inputs and durable goods. In this model, agents make decisions between the market and home provision over a continuum of wants that are satiated sequentially. The disutility of public consumption and economies of scale (in the use of specialized capital and skills) are the key elements explaining the rich dynamics of the service economy. If skilled labor has a comparative advantage in the production of newer services, the theory explains the late rise in the service economy characterized by rising relative prices and quantities of services, and growth in the relative quantity of skilled labor and the skill premium.

Iwamura, Shiratsuka, and Watanabe present a model with broad liquidity services to discuss the consequences of massive money injection in an economy with a zero interest rate bound. They incorporate Goodfriend's (2000) idea of broad liquidity services into the model by allowing the amounts of bonds with various maturities held by a household to enter its utility function. They show that the satiation of money (or the zero marginal utility of money) is not a necessary condition for the one-period interest rate to reach the zero lower bound; instead, they present a weaker necessary condition--that the marginal liquidity service provided by money coincides with the marginal liquidity service provided by the one-period bonds, neither of which is necessarily equal to zero. This implies that massive money injection would have some influence on an equilibrium of the economy even if it does not alter the private sector's expectations about future monetary policy. The results indicate that forward interest rates began to decline relative to the corresponding futures rates just after March 2001, when the Bank of Japan started a quantitative monetary easing policy, and that the forward and futures spread never closed until the policy ended in March 2006. The authors argue that these findings are not easy to explain in a model without broad liquidity services.

Eser and Peek provide the first detailed empirical evidence on the cooperative behavior of individual members of a functioning, real world network. In contrast to experimental evidence from limited settings, this study uses detailed annual data on the volume of loans given to individual firms from each individual bank that lends to them for a period spanning nearly twenty years. Using this detailed data, the authors are able to exploit substantial cross-sectional variation in the degree of reliance of the banks on the network as a whole and on other individual banks within the network. In addition...