Accounting for Macro-Finance Trends: Market power ...
Transcript of Accounting for Macro-Finance Trends: Market power ...
![Page 1: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/1.jpg)
Accounting for Macro-Finance Trends:Market power, Intangibles, and Risk premia
E. Farhi and F. Gourio
Harvard & NBER � Chicago Fed
Disclaimer: this paper does not necessarily represent the viewsof the FRB of Chicago or the Federal Reserve System.
2019
![Page 2: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/2.jpg)
Real interest rates on safe assets trend down...5
05
10%
1985 1995 2005 2015
Treasury 1 year Treasury 10yearMoody's AAA
Yields minus SPF inflation expectations
![Page 3: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/3.jpg)
... but return on capital (MPK) stable...5
05
10%
1985 1995 2005 2015
Treasury 1 year SPF MPK (Gomme et al.)
Returns
![Page 4: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/4.jpg)
... and stocks�valuation ratios rise moderately...0
2040
6080
100
1985 1995 2005 2015
PriceDividend ratio
![Page 5: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/5.jpg)
... while investment remains lackluster12
16%
1985 1995 2005 2015
InvestmentGDP ratio
![Page 6: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/6.jpg)
Potential explanations
� Savings glutBernanke (2005), Caballero et al. (2008), Carvalho et al. (2016), ...
� Lower productivity growthFernald (2015), Gordon (2012), Hamilton et al. (2015)...
� Rising market power (and monoposony)Barkai (2016), De Loecker & Eeckhout (2016), Eggertsson et al. (2018),
Gutierrez & Philippon (2016), CEA (2016), Furman (2015), ...
� Technical changeAcemoglu & Restreppo (2017), Autor et al. (2017), Karabarbounis &
Neiman (2013), Kehrig & Vincent (2017), Van Reenen (2018), ...
� Intangibles / mismeasurementBhandari & McGrattan (2018), Caggese & Perez (2017), Corrado et al.
(2018), Crouzet & Eberly (2018), Rognlie (2015), ...
� Rising liquidity or risk premiaCaballero et al. (2017), Del Negro et al. (2017), Marx et al. (2017), ...
![Page 7: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/7.jpg)
What we do
1. Document macro-�nance trends
2. Neoclassical growth model as accounting framework
3. Baseline results and counterfactuals
4. Adding intangibles
5. Comparison with macro estimation
In paper: robustness, transitional dynamics, relatedevidence
![Page 8: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/8.jpg)
1. Macro-�nance trends
![Page 9: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/9.jpg)
Macro-�nance trends
Average Change1984-2000 2001-2016
1. Interest rate (real 1Y) 2.79 -.35 -3.14***2. Gross Pro�tability 14.01 14.9 .883. Price-dividend 42.3 50.1 7.784. Investment-capital 8.10 7.23 -.88**5. Labor share (non�n corps.) 70.1 66.0 -4.1***6. TFP growth 1.10 .76 -.347. Investment price growth -1.77 -1.13 .64**8. Population growth 1.17 1.10 -.079. Employment-population 62.34 60.84 -1.51
![Page 10: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/10.jpg)
2. Model
![Page 11: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/11.jpg)
Accounting framework
� Neoclassical growth model extended for� Monopolistic competition� Risk: productivity + capital quality shocks
� Can characterize in closed form� big �ratios�of macro & asset prices
![Page 12: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/12.jpg)
Model 1/2
� Utility:
Vt =�(1� β)Ltc1�σ
t + βEt�V 1�θt+1
� 1�σ1�θ
� 11�σ
� Lt population; ct per capita consumption� Inelastic labor supply Nt = NLt� Production: di¤erentiated goods, elasticity ε
� CRS production function, no frictions:
yit = Ztkαit(Stnit)
1�α
St+1 = Steχt+1
� Can aggregate:
Yt = ZtKαt (StNt)
1�α
![Page 13: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/13.jpg)
Model 2/2
� Capital accumulation:
Kt+1 = ((1� δ)Kt +QtXt) eχt+1 .
� Qt investment-speci�c technical progress� Euler equation
EthMt+1RKt+1
i= 1
RKt+1 =�
α
µ
Yt+1Kt+1
+1� δ
Qt+1
�Qteχt+1
� Resource constraint
Ltct + Xt = Yt
![Page 14: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/14.jpg)
Big ratios 1/3
� De�ne composite parameter r�:
r� = ρ+ σgPC + σ1� 1/σ
1� θlogE(e(1�θ)χt+1)
� User cost of capital (Euler equation):
αYtµKt/Qt
= r� + δ+ gQ
� Spread between measured pro�tability and risk-free rate:
Πt
Kt/Qt� rf = δ+ gQ| {z }
depreciation
+µ� 1
α(r� + δ+ gQ )| {z }rents
+ r� � rf| {z }risk
.
![Page 15: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/15.jpg)
Big ratios 2/3
� Price-dividend ratio:
PtDt� 1r� � gT
� Equity premium:
ERP = r� � rf = logE�e�θχt+1
�� logE
�e(1�θ)χt+1
�� Risk-free rate:
rf = r� + logE
�e(1�θ)χt+1
�� logE
�e�θχt+1
�
![Page 16: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/16.jpg)
Big ratios 3/3
� Labor, capital and pro�t shares:
sL =1� α
µ, sC =
α
µ, sπ =
µ� 1µ
� Investment-output ratio:
XtYt=
α
µ
gT + δ+ gQr� + δ+ gQ
� Tobin�s Q :
PtEt (Kt+1/Qt+1)
� 1+ µ� 1α
r� + δ+ gQr� � gT
![Page 17: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/17.jpg)
3. Empirical implementation,baseline results, and counterfactuals
![Page 18: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/18.jpg)
Moment-matching
� Fit model to each subsample� Parameters to estimate
parameter interpretationβ discount factor savings supplyσ 1/IES �θ risk aversion risk premiaχ risk "µ markup market powergZ TFP growth technology slowdowngQ invt-speci�c technical change "gN population growth demographicsN labor supply "α Cobb-Douglas technical changeδ depreciation "
![Page 19: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/19.jpg)
Identi�cation is (almost) recursive
1. Match growth rates of pop, invt prices, TFP ,and emp-pop ratio, & infer δ from I/K
2. Infer r� from P/D ratio using Gordon formula:
r� = gT +D/P
3. Infer α, µ from labor share LS and measured MPK :
µ =MPK
sLMPK + (1� sL)uc,
α =uc(1� sL)
sLMPK + (1� sL)uc.
4. Infer ERP from rf :
ERP = r� � rf = logE�e�θχt+1
�� logE
�e(1�θ)χt+1
�
![Page 20: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/20.jpg)
Identi�cation
� How to go from r�and ERP to structural β, θ, σ,χ?� σ not identi�ed� Need additional assumptions:
r� = ρ+ σgPC + σ1� 1/σ
1� θlogE(e(1�θ)χt+1)
ERP = logE�e�θχt+1
�� logE
�e(1�θ)χt+1
�� Baseline assumes rare disaster for χ and recovers β, pgiven
risk aversion θ 12IES 1/σ 2macro shock size b 0.15
![Page 21: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/21.jpg)
Estimated parameters
Parameter name Symbol Estimates1984-2000 2001-2016 Di¤erence
Discount factor β 0.961 0.972 0.012Markup µ 1.079 1.146 0.067Disaster prob. p 0.034 0.065 0.031Depreciation δ 2.778 3.243 0.465Cobb-Douglas α 0.244 0.243 -0.000Population growth gN 1.171 1.101 -0.069TFP growth gZ 1.298 1.012 -0.286Invt technical growth gQ 1.769 1.127 -0.643Labor supply N 0.623 0.608 -0.015
![Page 22: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/22.jpg)
Estimated parameters
Parameter name Symbol Estimates1984-2000 2001-2016 Di¤erence
Discount factor β 0.961 0.972 0.012Markup µ 1.079 1.146 0.067Disaster prob. p 0.034 0.065 0.031Depreciation δ 2.778 3.243 0.465Cobb-Douglas α 0.244 0.243 -0.000Population growth gN 1.171 1.101 -0.069TFP growth gZ 1.298 1.012 -0.286Invt technical growth gQ 1.769 1.127 -0.643Labor supply N 0.623 0.608 -0.015
![Page 23: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/23.jpg)
Estimated parameters
Parameter name Symbol Estimates1984-2000 2001-2016 Di¤erence
Discount factor β 0.961 0.972 0.012Markup µ 1.079 1.146 0.067Disaster prob. p 0.034 0.065 0.031Depreciation δ 2.778 3.243 0.465Cobb-Douglas α 0.244 0.243 -0.000Population growth gN 1.171 1.101 -0.069TFP growth gZ 1.298 1.012 -0.286Invt technical growth gQ 1.769 1.127 -0.643Labor supply N 0.623 0.608 -0.015
![Page 24: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/24.jpg)
Estimated parameters
Parameter name Symbol Estimates1984-2000 2001-2016 Di¤erence
Discount factor β 0.961 0.972 0.012Markup µ 1.079 1.146 0.067Disaster prob. p 0.034 0.065 0.031Depreciation δ 2.778 3.243 0.465Cobb-Douglas α 0.244 0.243 -0.000Population growth gN 1.171 1.101 -0.069TFP growth gZ 1.298 1.012 -0.286Invt technical growth gQ 1.769 1.127 -0.643Labor supply N 0.623 0.608 -0.015
![Page 25: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/25.jpg)
Estimated parameters
Parameter name Symbol Estimates1984-2000 2001-2016 Di¤erence
Discount factor β 0.961 0.972 0.012Markup µ 1.079 1.146 0.067Disaster prob. p 0.034 0.065 0.031Depreciation δ 2.778 3.243 0.465Cobb-Douglas α 0.244 0.243 -0.000Population growth gN 1.171 1.101 -0.069TFP growth gZ 1.298 1.012 -0.286Invt technical growth gQ 1.769 1.127 -0.643Labor supply N 0.623 0.608 -0.015
![Page 26: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/26.jpg)
Decomposing the MPK-RF spread
� Spread between MPK and risk-free rate:
MPK � rf = δ+ gQ| {z }depreciation
+µ� 1
α(r� + δ+ gQ )| {z }rents
+ r� � rf| {z }risk
.
1984�2000 2001-2016 ChangeTotal spread MPK � RF 11.22 15.24 4.02rents 3.39 5.55 2.17risk premium 3.15 5.23 2.08depreciation 4.55 4.37 -0.18
![Page 27: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/27.jpg)
Decomposing the MPK-RF spread
� Spread between MPK and risk-free rate:
MPK � rf = δ+ gQ| {z }depreciation
+µ� 1
α(r� + δ+ gQ )| {z }rents
+ r� � rf| {z }risk
.
1984�2000 2001-2016 ChangeTotal spread MPK � RF 11.22 15.24 4.02rents 3.39 5.55 2.17risk premium 3.15 5.23 2.08depreciation 4.55 4.37 -0.18
![Page 28: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/28.jpg)
Decomposing the MPK-RF spread
� Spread between MPK and risk-free rate:
MPK � rf = δ+ gQ| {z }depreciation
+µ� 1
α(r� + δ+ gQ )| {z }rents
+ r� � rf| {z }risk
.
1984�2000 2001-2016 ChangeTotal spread MPK � RF 11.22 15.24 4.02rents 3.39 5.55 2.17risk premium 3.15 5.23 2.08depreciation 4.55 4.37 -0.18
![Page 29: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/29.jpg)
Decomposing the MPK-RF spread
� Spread between MPK and risk-free rate:
MPK � rf = δ+ gQ| {z }depreciation
+µ� 1
α(r� + δ+ gQ )| {z }rents
+ r� � rf| {z }risk
.
1984�2000 2001-2016 ChangeTotal spread MPK � RF 11.22 15.24 4.02rents 3.39 5.55 2.17risk premium 3.15 5.23 2.08depreciation 4.55 4.37 -0.18
![Page 30: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/30.jpg)
Decomposing the MPK-RF spread
� Spread between MPK and risk-free rate:
MPK � rf = δ+ gQ| {z }depreciation
+µ� 1
α(r� + δ+ gQ )| {z }rents
+ r� � rf| {z }risk
.
1984�2000 2001-2016 ChangeTotal spread MPK � RF 11.22 15.24 4.02rents 3.39 5.55 2.17risk premium 3.15 5.23 2.08depreciation 4.55 4.37 -0.18
![Page 31: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/31.jpg)
Income distribution
1984�2000 2001-2016 ChangeLabor share 70.11 66.01 -4.10True capital share 22.59 21.24 -1.35Pure pro�ts share 7.30 12.76 5.46
![Page 32: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/32.jpg)
Decomposing the MPK-RF spread
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
2
4
6
8
10
12
14
16Decomposition of Spread MPKRF
TotalDepreciationRiskRents
![Page 33: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/33.jpg)
Income Distribution
1965 1970 1975 1980 1985 1990 1995 2000 2005 20100
5
10
15
20
25
30
35Decomposition of income
capital+rentscapitalrents
![Page 34: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/34.jpg)
Expected returns
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
0
1
2
3
4
5
6
7
8Returns
ERPRFER
![Page 35: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/35.jpg)
Counterfactuals
Total Contributionchange β µ p others
Output (%) -0.30 4.30 -1.95 -1.70 -0.95Investment (%) -4.95 17.67 -8.02 -6.98 -7.62
Equity premium 2.18 0.00 0.00 2.18 0.00Risk-free rate -3.14 -1.25 0.00 -1.62 -0.27Equity return -0.96 -1.25 0.00 0.56 -0.27
Π/K 0.88 -1.94 2.76 0.76 -0.70Tobin�s Q 1.34 1.09 1.35 -0.48 -0.62P/D 7.78 31.89 0.00 -13.34 -10.77
![Page 36: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/36.jpg)
Counterfactuals
Total Contributionchange β µ p others
Output (%) -0.30 4.30 -1.95 -1.70 -0.95Investment (%) -4.95 17.67 -8.02 -6.98 -7.62
Equity premium 2.18 0.00 0.00 2.18 0.00Risk-free rate -3.14 -1.25 0.00 -1.62 -0.27Equity return -0.96 -1.25 0.00 0.56 -0.27
Π/K 0.88 -1.94 2.76 0.76 -0.70Tobin�s Q 1.34 1.09 1.35 -0.48 -0.62P/D 7.78 31.89 0.00 -13.34 -10.77
![Page 37: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/37.jpg)
Counterfactuals
Total Contributionchange β µ p others
Output (%) -0.30 4.30 -1.95 -1.70 -0.95Investment (%) -4.95 17.67 -8.02 -6.98 -7.62Equity premium 2.18 0.00 0.00 2.18 0.00Risk-free rate -3.14 -1.25 0.00 -1.62 -0.27Equity return -0.96 -1.25 0.00 0.56 -0.27
Π/K 0.88 -1.94 2.76 0.76 -0.70Tobin�s Q 1.34 1.09 1.35 -0.48 -0.62P/D 7.78 31.89 0.00 -13.34 -10.77
![Page 38: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/38.jpg)
Counterfactuals
Total Contributionchange β µ p others
Output (%) -0.30 4.30 -1.95 -1.70 -0.95Investment (%) -4.95 17.67 -8.02 -6.98 -7.62
Equity premium 2.18 0.00 0.00 2.18 0.00Risk-free rate -3.14 -1.25 0.00 -1.62 -0.27Equity return -0.96 -1.25 0.00 0.56 -0.27
Π/K 0.88 -1.94 2.76 0.76 -0.70Tobin�s Q 1.34 1.09 1.35 -0.48 -0.62P/D 7.78 31.89 0.00 -13.34 -10.77
![Page 39: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/39.jpg)
Counterfactuals
Total Contributionchange β µ p others
Output (%) -0.30 4.30 -1.95 -1.70 -0.95Investment (%) -4.95 17.67 -8.02 -6.98 -7.62
Equity premium 2.18 0.00 0.00 2.18 0.00Risk-free rate -3.14 -1.25 0.00 -1.62 -0.27Equity return -0.96 -1.25 0.00 0.56 -0.27
Π/K 0.88 -1.94 2.76 0.76 -0.70Tobin�s Q 1.34 1.09 1.35 -0.48 -0.62P/D 7.78 31.89 0.00 -13.34 -10.77
![Page 40: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/40.jpg)
Counterfactuals
Total Contributionchange β µ p others
Output (%) -0.30 4.30 -1.95 -1.70 -0.95Investment (%) -4.95 17.67 -8.02 -6.98 -7.62
Equity premium 2.18 0.00 0.00 2.18 0.00Risk-free rate -3.14 -1.25 0.00 -1.62 -0.27Equity return -0.96 -1.25 0.00 0.56 -0.27
Π/K 0.88 -1.94 2.76 0.76 -0.70Tobin�s Q 1.34 1.09 1.35 -0.48 -0.62P/D 7.78 31.89 0.00 -13.34 -10.77
![Page 41: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/41.jpg)
Counterfactuals
Total Contributionchange β µ p others
Output (%) -0.30 4.30 -1.95 -1.70 -0.95Investment (%) -4.95 17.67 -8.02 -6.98 -7.62
Equity premium 2.18 0.00 0.00 2.18 0.00Risk-free rate -3.14 -1.25 0.00 -1.62 -0.27Equity return -0.96 -1.25 0.00 0.56 -0.27
Π/K 0.88 -1.94 2.76 0.76 -0.70Tobin�s Q 1.34 1.09 1.35 -0.48 -0.62P/D 7.78 31.89 0.00 -13.34 -10.77
![Page 42: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/42.jpg)
5. Adding intangibles
![Page 43: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/43.jpg)
Intangibles
� Basic idea: rising undermeasurement of Kleads to rising overestimate of MPK = Π/K
� Suppose BEA measures a share 0 � λ � 1of investment and capital:
� measured investment xm = λx� measured cap km = λk� measured GDP: ym = y � (1� λ)x� measured pro�ts πm = π � (1� λ)x
� Wedge MPK-RF:
MPK � rf = δ+ gQ +µ� 1
α(r� + δ+ gQ ) + r
� � rf
+1� λ
λ
π � xk
![Page 44: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/44.jpg)
A quantitative illustration
� Suppose unmeasured K grows from 10% to 20% of K.
� Note: measured IPP K is 6% of total K today
1984�00 2001-16 Change No Intang.Total spread: 11.22 15.24 4.02 4.02components:depreciation 4.55 4.37 -0.18 -0.18rents 2.80 4.03 1.23 2.17risk premium 3.15 5.23 2.08 2.08mismeasurement 0.72 1.61 0.89 0
![Page 45: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/45.jpg)
A quantitative illustration
� Suppose unmeasured K grows from 10% to 20% of K.� Magnitude: measured IPP capital is 6% of total capitaltoday
1984�00 2001-16 Change No Intang.Total spread 11.22 15.24 4.02 4.02components:depreciation 4.55 4.37 -0.18 -0.18rents 2.80 4.03 1.23 2.17risk premium 3.15 5.23 2.08 2.08mismeasurement 0.72 1.61 0.89 0
![Page 46: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/46.jpg)
A quantitative illustration
� Suppose unmeasured K grows from 10% to 20% of K.� Magnitude: measured IPP capital is 6% of total capitaltoday
1984�00 2001-16 Change No Intang.Total spread 11.22 15.24 4.02 4.02components:depreciation 4.55 4.37 -0.18 -0.18rents 2.80 4.03 1.23 2.17risk premium 3.15 5.23 2.08 2.08mismeasurement 0.72 1.61 0.89 0
![Page 47: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/47.jpg)
A quantitative illustration
� Suppose unmeasured K grows from 10% to 20% of K.� Magnitude: measured IPP capital is 6% of total capitaltoday
1984�00 2001-16 Change No Intang.Total spread 11.22 15.24 4.02 4.02components:depreciation 4.55 4.37 -0.18 -0.18rents 2.80 4.03 1.23 2.17risk premium 3.15 5.23 2.08 2.08mismeasurement 0.72 1.61 0.89 0
![Page 48: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/48.jpg)
A quantitative illustration
� Suppose unmeasured K grows from 10% to 20% of K.� Magnitude: measured IPP capital is 6% of total capitaltoday
1984�00 2001-16 Change No Intang.Total spread 11.22 15.24 4.02 4.02components:depreciation 4.55 4.37 -0.18 -0.18rents 2.80 4.03 1.23 2.17risk premium 3.15 5.23 2.08 2.08mismeasurement 0.72 1.61 0.89 0
![Page 49: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/49.jpg)
6. Comparison with macro estimation
![Page 50: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/50.jpg)
Comparison with macro-estimation
� Most macro estimations abstract from risk premia� What if we do the same?
Macro approach Baseline1984-00 2001-2016 Di¤. Di¤.
β 0.984 1.012 0.028 0.012µ 1.165 1.330 0.166 0.067p 0 0 0 0.031δ 2.778 3.243 0.465 0.465α 0.183 0.122 -0.061 -0.000gP 1.171 1.101 -0.069 -0.069gZ 1.544 1.358 -0.187 -0.286gQ 1.769 1.127 -0.643 -0.643N 0.623 0.608 -0.015 -0.015
![Page 51: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/51.jpg)
Comparison with macro-estimation
� Most macro estimations abstract from risk premia� What if we do the same?
Macro approach Baseline1984-00 2001-2016 Di¤. Di¤.
β 0.984 1.012 0.028 0.012µ 1.165 1.330 0.166 0.067p 0 0 0 0.031δ 2.778 3.243 0.465 0.465α 0.183 0.122 -0.061 -0.000gP 1.171 1.101 -0.069 -0.069gZ 1.544 1.358 -0.187 -0.286gQ 1.769 1.127 -0.643 -0.643N 0.623 0.608 -0.015 -0.015
![Page 52: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/52.jpg)
Comparison with macro-estimation
� Most macro estimations abstract from risk premia� What if we do the same?
Macro approach Baseline1984-00 2001-2016 Di¤. Di¤.
β 0.984 1.012 0.028 0.012µ 1.165 1.330 0.166 0.067p 0 0 0 0.031δ 2.778 3.243 0.465 0.465α 0.183 0.122 -0.061 -0.000gP 1.171 1.101 -0.069 -0.069gZ 1.544 1.358 -0.187 -0.286gQ 1.769 1.127 -0.643 -0.643N 0.623 0.608 -0.015 -0.015
![Page 53: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/53.jpg)
Comparison with macro-estimation
� Most macro estimations abstract from risk premia� What if we do the same?
Macro approach Baseline1984-00 2001-2016 Di¤. Di¤.
β 0.984 1.012 0.028 0.012µ 1.165 1.330 0.166 0.067p 0 0 0 0.031δ 2.778 3.243 0.465 0.465α 0.183 0.122 -0.061 -0.000gP 1.171 1.101 -0.069 -0.069gZ 1.544 1.358 -0.187 -0.286gQ 1.769 1.127 -0.643 -0.643N 0.623 0.608 -0.015 -0.015
![Page 54: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/54.jpg)
Macro estimation: unstable parameters?
1950 1960 1970 1980 1990 2000 2010 20200.94
0.96
0.98
1
1.02
1.04
1950 1960 1970 1980 1990 2000 2010 20201
1.1
1.2
1.3
1.4
![Page 55: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/55.jpg)
7. Related Empirical Evidence
![Page 56: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/56.jpg)
Other estimates of equity risk premium2
02
46
8%
per
yea
r
1990 1995 2000 2005 2010
Gordon
10
010
2030
% p
er y
ear
1990 1995 2000 2005 2010
FFEarnings
02
46
8%
per
yea
r
1990 1995 2000 2005 2010
CampbellThompson
Empirical estimates of ERP
Figure:
![Page 57: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/57.jpg)
Other estimates of equity risk premium
1984��00 2001-�16 Change1. Arithmetic1a. Gordon .87 5.56 4.691b. Fama-French Earnings 2.43 4.78 2.351c. Campbell-Thompson 1.47 4.11 2.642. Geometric2a. Gordon 1.91 9.16 7.252b.Fama-French Earnings 4.61 8.66 4.052c. Campbell-Thompson 1.84 3.65 1.813. Geometric: w. variance ajd3a. Gordon 2.43 8.26 5.833b. Fama-French Earnings 4.81 10.3 5.493c. Campbell-Thompson 2.31 5.56 3.25
![Page 58: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/58.jpg)
Other estimates of risk
Mean Change1984-00 2001-16
w GFC wo GFC w GFC wo GFC(1) (2) (3) (2)-(1) (2)-(1)
spread GZ 1.5 2.54 2.31 1.04 .81spread BAA 1.94 2.74 2.61 .80 .67spread AAA 1.01 1.64 1.61 .63 .60VIX 18.92 20.22 18.62 1.3 -.3Realized vol 13.36 17.43 15.34 4.07 1.98
![Page 59: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/59.jpg)
Other estimates of risk
Mean Change1984-00 2001-16
w GFC wo GFC w GFC wo GFC(1) (2) (3) (2)-(1) (2)-(1)
spread GZ 1.5 2.54 2.31 1.04 .81spread BAA 1.94 2.74 2.61 .80 .67spread AAA 1.01 1.64 1.61 .63 .60VIX 18.92 20.22 18.62 1.3 -.3Realized vol 13.36 17.43 15.34 4.07 1.98
![Page 60: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/60.jpg)
Other estimates of risk
Mean Change1984-00 2001-16
w GFC wo GFC w GFC wo GFC(1) (2) (3) (2)-(1) (2)-(1)
spread GZ 1.5 2.54 2.31 1.04 .81spread BAA 1.94 2.74 2.61 .80 .67spread AAA 1.01 1.64 1.61 .63 .60VIX 18.92 20.22 18.62 1.3 -.3Realized vol 13.36 17.43 15.34 4.07 1.98
![Page 61: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/61.jpg)
Conclusion
� An accounting exercise...� Disciplined by standard neoclassical framework� To study jointly key trends� Substantive conclusion: rising macro risk
� plays a role as important as market power� market power overestimated by macro approaches� market power smaller if we account for intangibles
� Can extend to incorporate other explanations & target� taxes, corporate governance, idiosyncratic risk, etc.
![Page 62: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/62.jpg)
BACKUP
![Page 63: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/63.jpg)
Transitional Dynamics
![Page 64: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/64.jpg)
Transitional Dynamics
� Changes in parameter induce some transitional dynamics� Does this a¤ect our estimation?� Suppose we calculate transition as parameters evolvelinearly from value estimated in 1st sample to a �nal value
� Choose �nal value such that moments calculated duringtransition path match data
� Do we get similar parameters?� Important: we assume �myopic�expectations(Otherwise cannot match data)
![Page 65: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/65.jpg)
Transitional Dynamics
0 10 20 30 40 5014
14.5
15
15.5pi/k
0 10 20 30 40 5030
32
34
pi/y
0 10 20 30 40 50
0
1
2
rf
shortlong
0 10 20 30 40 50
44
4648
50
p/d
0 10 20 30 4018
20
22
24
26p/e
0 10 20 30 40 507
7.5
8
i/k
![Page 66: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/66.jpg)
Transitional Dynamics
0 20 40 603.3
3.4
3.5
3.6
3.7
3.8
0 20 40 600.2425
0.243
0.2435
0.244
0.2445
0 20 40 601.08
1.1
1.12
1.14
1.16
0 20 40 600.02
0.03
0.04
0.05
0.06
0.07p
0 20 40 600.955
0.96
0.965
0.97
![Page 67: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/67.jpg)
Long rolling estimation
![Page 68: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/68.jpg)
Rolling estimation
1960 1980 2000
0.95
0.96
0.97
1960 1980 2000
1.05
1.1
1.15
1960 1980 20000.020.040.060.08
0.10.120.14
p
1960 1980 20002
4
6
8
1960 1980 2000
0.24
0.26
0.28
1960 1980 2000
1
1.5
2gP
1960 1980 20000.5
1
1.5
2
gZ
1960 1980 2000
1
0
1
2gQ
1960 1980 2000
50
55
60
Nbar
![Page 69: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/69.jpg)
Evolution of MPK-RF spread since 1950
1960 1970 1980 1990 2000 2010
2
4
6
8
10
12
14
16Decomposition of Spread MPKRF
TotalDepreciationRiskRents
![Page 70: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/70.jpg)
Expected returns since 1950
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
0
1
2
3
4
5
6
7
8Returns
ERPRFER
![Page 71: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/71.jpg)
Income distribution since 1950
1960 1970 1980 1990 2000 20100
5
10
15
20
25
30
35Decomposition of income
capital+rentscapitalrents
![Page 72: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/72.jpg)
Robustness
![Page 73: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/73.jpg)
Financial leverage
� Calculation assumes an all-equity �nanced �rm� But we use P/D only� OK if yield on stocks = yield on debt� Not quite true of course� Feed leverage from data and assumeinterest rate = RF (for now) to correct PD
![Page 74: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/74.jpg)
Financial leverage
Leverage Baseline1984-00 2001-16 Di¤. Di¤.
β 1.002 0.995 -0.006 0.012µ 1.106 1.191 0.084 0.067p 0.021 0.044 0.023 0.031δ 2.778 3.243 0.465 0.465α 0.224 0.214 -0.010 -0.000gP 1.171 1.101 -0.069 -0.069gZ 1.378 1.096 -0.282 -0.286gQ 1.769 1.127 -0.643 -0.643N 0.623 0.608 -0.015 -0.015
![Page 75: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/75.jpg)
Financial Leverage
Leverage1984-00 2001-16 Di¤. Di¤.
A. MPK-RF spreadTotal spread 11.22 15.24 4.02 4.02�Depreciation 4.55 4.37 -0.18 -0.18�Market power 4.47 6.99 2.52 2.17�Risk premium 2.08 3.81 1.73 2.08
B. Rate of returnsEquity return 5.77 4.84 -0.93 -0.96Equity premium 2.99 5.19 2.20 2.18Risk-free rate 2.79 -0.35 -3.14 -3.14
![Page 76: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/76.jpg)
IES=0.5
IES=0.5 Baseline1984-00 2001-16 Di¤. Di¤.
β 0.987 0.976 -0.012 0.012µ 1.079 1.146 0.067 0.067p 0.034 0.065 0.031 0.031δ 2.778 3.243 0.465 0.465α 0.244 0.243 -0.000 -0.000gP 1.171 1.101 -0.069 -0.069gZ 1.298 1.012 -0.286 -0.286gQ 1.769 1.127 -0.643 -0.643N 0.623 0.608 -0.015 -0.015
![Page 77: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/77.jpg)
IES=0.5
IES=0.5 Baseline1984-00 2001-16 Di¤. Di¤.
A. MPK-RF spreadTotal spread 11.22 15.24 4.02 4.02�Depreciation 4.55 4.37 -0.18 -0.18�Market power 3.39 5.55 2.17 2.17�Risk premium 3.15 5.23 2.08 2.08
B. Rate of returnsEquity return 5.85 4.90 -0.96 -0.96Equity premium 3.07 5.25 2.18 2.18Risk-free rate 2.79 -0.35 -3.14 -3.14
![Page 78: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/78.jpg)
Liquidity
AA rate as RF Baseline1984-00 2001-16 Di¤. Di¤.
β 0.995 0.982 -0.013 0.012µ 1.079 1.146 0.067 0.067p 0.012 0.043 0.031 0.031δ 2.778 3.243 0.465 0.465α 0.244 0.243 -0.000 -0.000gP 1.171 1.101 -0.069 -0.069gZ 1.298 1.012 -0.286 -0.286gQ 1.769 1.127 -0.643 -0.643N 0.623 0.608 -0.015 -0.015
![Page 79: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/79.jpg)
Liquidity
AA rate as RF Baseline1984-00 2001-16 Di¤. Di¤.
A. MPK-RF spreadTotal spread 9.32 13.80 4.48 4.02�Depreciation 4.55 4.37 -0.18 -0.18�Market power 3.39 5.55 2.17 2.17�Risk premium 1.25 3.79 2.54 2.08
B. Rate of returnsEquity return 5.88 4.84 -1.05 -0.96Equity premium 1.19 3.75 2.56 2.18Risk-free rate 4.69 1.09 -3.60 -3.14
![Page 80: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/80.jpg)
Macro-�nance trends: graphs
![Page 81: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/81.jpg)
Interest rate and MPK2
02
46
1985 1995 2005 2015
Shortterm real interest rate
02
46
8
1985 1995 2005 2015
Longterm real interest rate
24
68
10
1985 1995 2005 2015
Return to all capital (GRR)
1314
1516
17
1985 1995 2005 2015
Gross Profitability (our measure)
![Page 82: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/82.jpg)
Valuation ratios and investment20
4060
8010
0
1985 1995 2005 2015
Pricedividend (CRSP)
1015
2025
30
1985 1995 2005 2015
SP 500 Priceoperating earnings
1416
1820
1985 1995 2005 2015
InvestmentGDP ratio
67
89
10
1985 1995 2005 2015
Investmentcapital ratio
![Page 83: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/83.jpg)
Labor share, Demographics, Productivity64
6668
7072
1985 1995 2005 2015
Business sector gross labor share
5860
6264
1985 1995 2005 2015
EmploymentPopulation
20
24
1985 1995 2005 2015
TFP growth
43
21
01
1985 1995 2005 2015
Growth rate of investment price
![Page 84: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/84.jpg)
Risky balanced growth 1/2
� Assume Zt , Lt ,Qt grow at constant rates:� Zt+1/Zt = 1+ gZ , etc.
� Then equilibrium is a �risky balanced growth�:
Yt = TtSty�,
Xt = TtStx�, etc.
� St stochastic trend, St+1 = Steχt+1
� Tt = LtZ11�αt Q
α1�αt deterministic trend (of GDP)
� Uncertainty a¤ects x�, y�
� Realizations of shocks a¤ect Xt ,Yt , but not Xt/Yt
![Page 85: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/85.jpg)
Risky balanced growth 2/2
0 20 40 60 802
0
2lo
gycx
0 20 40 60 80Time
0.1
0
0.1
%
RRF
![Page 86: Accounting for Macro-Finance Trends: Market power ...](https://reader034.fdocuments.us/reader034/viewer/2022042415/625f2195ad401a45a725f750/html5/thumbnails/86.jpg)
Counterfactuals
� What is the e¤ect of these changes on the level of GDPor investment?
� E¤ect of markup on GDP:
∂ logGDP∂ log µ
= � α
1� α
� E¤ect of r� on GDP:
∂ logGDP∂r�
= � α
1� α
1r� + gQ + δ