Giorgio Primiceri

English

Research Papers in Economics

Comments on
Financial Innovations and Macroeconomic 
Volatility
by Urban Jermann and Vincenzo Quadrini
Giorgio Primiceri
Northwestern University
November 17, 2006Standard deviation of US GDP growth
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3Standard deviation of US GDP (HP filter)
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
0.8
1
1.2
1.4
1.6
1.8
2
2.2
2.4
2.6This 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 dividendsMain result
 Model calibrated to US data pre and post-1984
 Explain the Great Moderation as a consequence 
of firms’ greater financial flexibilityOutline 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 frameworkWhy I think this is the right direction
 A look at the Great Moderation from a different 
perspectiveWhy 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 shocksWhy 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 
capitalWhy 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 directionOutline 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 motivationA closer look at the empirical motivation of JQ
 Decline in volatility of GDP in early 1980s is very sharpVolatility of US GDP
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
0.8
1
1.2
1.4
1.6
1.8
2
2.2
2.4
2.6A 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 attentionA 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 
JQTime varying SD of Debt Repurchase
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8Time varying SD of Equity Payout
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6Reduction 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 Investment
Non-durables 
and services
DurablesReduction in vol. of components of GDP
GDP
Consumption Investment
Non-durables 
and services
Durables Non-residential ResidentialTime varying SD of Non-Residential investment
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
4.2
4.4
4.6
4.8
5
5.2
5.4Time varying SD of Equipment & Software
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
4.6
4.8
5
5.2
5.4
5.6
5.8
6
6.2
6.4Time varying SD of Residential investment
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
2
4
6
8
10
12
14
16Reduction in vol. of components of GDP
GDP
Consumption Investment
Non-durables 
and services
Durables Non-residential ResidentialShare of residential assets owned by HH
1950 1960 1970 1980 1990 2000 2010
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1What do we learn?
 Household sector owns most of residential assets (85%)
 Business sector owns most of non-residential assetsWhat 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 non-
residential 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 non-
residential 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 keyOutline 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 frameworkTheoretical issues: a closer look at the model
Key elements
Limited commitment Quadratic cost of paying out 
dividendsTheoretical 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 
dividendsTheoretical 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 
dividendsTheoretical 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
 Crucial for the quantitative result!
 Non-standard
 Ad-hocTheoretical 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 equityOutline 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???

Financial innovations and macroeconomic volatility - comments

http://www.frbsf.org/economics/conferences/0611/Primiceri.pdf

Financial innovations and macroeconomic volatility - comments

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics