Research at Chicago GSB is known for being interdisciplinary, applied, and practical. The papers by the GSB�s macroeconomists that are featured in this issue of Capital Ideas illustrate these hallmarks well. The applied nature of the papers is rather obvious in that each draws its conclusions from the analysis of new data sets.
While using microeconomic data to address macroeconomic problems is increasingly common among economists, it has been the norm at the GSB for many years. For instance, in 1970 George Stigler, the first business school professor to win a Nobel Prize in Economics, and James Kindahl (AB �51, MBA �53, PhD �58) compiled one of the most detailed data sets on prices that had ever been assembled. Although Stigler and Kindahl were primarily interested in antitrust issues, years later Dennis Carlton, professor of economics, used the same data to do pathbreaking work on price rigidity�why prices change infrequently.
In the first article, �The Price of Time,� Erik Hurst and coauthor Mark Aguiar follow in this tradition by studying how shopping patterns of different types of households affect the prices that they pay. Prior to this study, little was known about how intensively different types of households hunt for bargains. Hurst and Aguiar find that as households age, and especially right after retirement, they devote increasing time to shopping in order to save money. While this in itself is not surprising, and the theory predicting such behavior is long established, it had yet to be tested due to a lack of data. By merging several data sets, they were able to confirm the theory and shed new light on the spending habits of the elderly. Their finding that spending declines are not due to fewer purchases or purchases of lower quality goods, but instead driven by better bargain hunting, changes the way the consumption of the elderly is viewed.
In the second article, �Buying Strawberries in Winter,� Christian Broda and coauthor David Weinstein tackle another commonly held myth, namely that international trade only benefits a country by delivering lower priced goods. This presumption has led some to argue (mistakenly) that trade liberalization invites a race to the bottom where the cheapest goods drive out everything else and pull down wages. Broda and Weinstein show that this is not the case.
Much of U.S. trade delivers more varieties to consumers, not just cheaper goods. Their list of examples, from produce to automobiles, is familiar to all of us. The remarkable finding is the scale on which this phenomenon has occurred�a threefold increase in the number of imported varieties over the last 30 years. They find that U.S. consumers substantially value the new and better goods that international trade provides.
My paper with Ricardo Caballero and Takeo Hoshi, covered in the third article, �Zombie Lending in Japan,� focuses on the world�s second largest economy. In the early 1990s, Japan�s growth abruptly decelerated and the economy entered a long period of stagnation that now finally appears to have ended. Our paper asks why Japan�s economy remained depressed for so long.
During its so-called �lost decade,� Japan became the first modern industrial country since the Great Depression to experience deflation (where prices throughout the economy were falling). The Bank of Japan had cut interest rates to zero and the government was running huge budget deficits. If this was not enough to rescue the Japanese economy, what would be?
We found that the problems were coming from subsidized companies. After identifying subsidized companies, which we dubbed �zombies,� we compared various performance measures for industries that had different percentages of zombies present. Most importantly, we find that the healthy firms in zombie-infested industries are investing and hiring fewer people than in comparable healthy firms in zombiefree industries. The lesson is that suppressing the reallocation that normally takes place in a modern capitalist economy can be quite costly.
In the final article, �Trends in the Volatility of Business Growth Rates,� Steven Davis and coauthors John Haltiwanger, Ron Jarmin, and Javier Miranda explore the volatility of business growth rates in the United States since the mid-1970s. Their study is partly motivated by the widespread view that the risk of job loss has risen for American workers. Previous research on publicly traded (listed) companies appears to support this view, but listed firms account for less than onethird of total business employment. Notably, listing requirements have become less and less onerous over time, and newly listed firms in the 1980s and 1990s are riskier than newly listed firms in previous decades.
Davis and his coauthors explore new census data and find that most of the volatility rise among publicly traded firms reflects the increasingly risky character of newly listed companies in the 1980s and 1990s. Among privately held firms, however, there has been a strong decline in the volatility of business growth rates. Much of the volatility decline among unlisted firms reflects a shift of employment toward older and larger businesses, which tend to be more stable. The decline in volatility among unlisted firms is large enough to swamp the volatility rise among publicly traded firms, lowering employment risk for the economy as a whole compared to the early 1980s. These findings are changing the way that economists model the macroeconomy.
In addition to the teaching and research, the macroeconomists and international economists at the GSB are engaged in a number of external activities. Much of this involves advising governments around the world on public policy matters, be they statistical agencies, finance ministries, or central banks. If you visit the Web pages of the faculty whose research is profiled here, you also will find some of this advice is codified in editorials that we have published in the leading newspapers around the world. Randall Kroszner has gone a step further and has taken a leave of absence to serve as one of the seven governors of U.S. Federal Reserve System. We hope you enjoy these articles and encourage you to keep an eye out for a new initiative Chicago GSB is launching on the interplay between global financial markets and the economy. Some of the research reviewed here�and much of the other research by the macroeconomics and international economics faculty�will contribute to this initiative.
Anil K Kashyap
Edward Eagle Brown Professor of Economics
and Finance at the University of Chicago
Graduate School of Business