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National Accounts in a World of Naturally Occurring Data: A Proof of Concept for Consumption

Joint with Gergely Buda, Vasco M. Carvalho, Stephen Hansen, Álvaro Ortiz and Tomasa Rodrigo

This paper provides a first proof of concept that naturally occurring transaction data, arising from the decentralized activity of millions of economic agents, can be harnessed to produce both traditional national accounts-like objects and novel representative economic statistics. We deploy comprehensive transaction-level data and its associated metadata arising from the universe of Spanish retail accounts of Banco Bilbao Vizcaya Argentaria (BBVA). We first organize the resulting 3 billion individual transactions by 1.8 million bank customers in a large and highly detailed representative consumption panel. Based on this, we then show that the aggregation of such data, once organized according to national accounting principles, can reproduce current official statistics on aggregate consumption in the national accounts with a high degree of precision. As a result of the richness of the transaction data, we additionally show that such data can produce novel, highly detailed distributional accounts for consumption which show larger consumption inequality than surveys suggest, particularly in the right tail. Finally, we use the panel nature of the data to offer a non-parametric analysis of individual consumption dynamics which feature a significant degree of mean reversion. Moreover, the distribution of consumption growth has thick tails.

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Short and Variable Lags

Joint with Gergely Buda, Vasco M. Carvalho, Giancarlo Corsetti, João B. Duarte, Stephen Hansen, Afonso S. Moura, Álvaro Ortiz, Tomasa Rodrigo and Guilherme Alves da Silva

We study the transmission of monetary policy shocks using daily consumption, corporate sales and employment series. We find that the economy responds at both short and long lags that are variable in economically significant ways. Consumption reacts in one week, reaches a local trough in one quarter, recovers, and declines again after three quarters. Sales follow a similar pattern, but the initial drop, while delayed (one month), is deeper. In contrast, employment falls monotonically for five quarters albeit with a smaller impact reaction. We show that these short lags are masked by time aggregation at lower —quarterly— frequencies.

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The Rise of Meritocracy and the Inheritance of Advantage

Joint with David Comerford (Strathclyde) and Michael J Watts (Edinburgh)

Journal of Economic Growth

We present a model where more accurate information on the background of individuals facilitates statistical discrimination, increasing inequality and intergenerational persistence in income. Surprisingly, more accurate information on the actual capabilities of workers leads to the same result – firms give increased weight to the more accurate information, increasing inequality, which itself fosters discrimination. The rich take advantage of this through educational investments in their children, and mobility decreases as a consequence of an increase in the ability to reward talent. Using our model to interpret the data suggests that a country like the US might indeed be a land of opportunity for the sufficiently able, as conditional on ability background may have relatively little effect. Nevertheless the US has a relatively low degree of intergenerational mobility precisely because meritocracy facilitates a high correlation of ability with background

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The Gains from Economic Integration

Joint with David Comerford (University of Strathclyde)

Economic Policy

This paper measures the effect of political integration, such as sharing a national state or economic union, on the degree of trade integration. Consistently with previous work, we find large border effects. However, such estimates may be biased and overestimate the effects of borders because of endogeneity: selection into sharing a political space is correlated with affinities for trade. We propose a method to address this and we produce estimates which are closer to the causal effect. We then conduct speculative exercises showing the costs and benefits of the changing levels of integration associated with: the independence of Scotland, Catalonia and the Basque Country from the United Kingdom and Spain [but remaining within the European Union (EU)]; the United Kingdom’s exit from the EU; the break-up of the EU itself and closer integration within the EU so that its internal borders appear similar to the internal borders of individual countries (as opposed to its current state of being simply a closely integrated group of countries). We find that the border effect between countries is an order of magnitude larger than the border effect associated with the EU.

Thus, the costs associated to Scottish Independence appear to be very large, while the costs associated to Brexit are relatively modest. Moreover, Brexit increases the expected costs of Scottish independence, as it places the remaining of the UK even "further" away from an Independent Scotland.

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Distortions, Misallocation and the Endogenous Determination of the Size of the Financial Sector

Joint with Christian Bauer

The Economic Journal

We present a model of heterogeneous firms and misallocation in which financial frictions are partially overcome if more human resources are devoted to intermediation, at the cost of having fewer resources employed in directly productive activities. Not only does an inefficient financial sector result in an inefficient final good sector; an inefficient final good sector results in an inefficient financial sector. Exogenous inefficiencies in the productive sector generate decreased demand for financial services, which translates into a smaller and less efficient financial sector, worsening the resource allocation in the productive sector. This direction of causality seems in line with cross-country evidence.

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New Directions in Measuring Intergenerational Mobility

Joint with Maia Guell and Gary Solon

The Economic Journal

paper we overview some recent literatu re that exemplify several of the cutting edges in research on intergenerational transmission of socioeconomic status and highlight some cross- cutting themes. We also offer a few suggestions for future research

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Correlating Social Mobility and Economic Outcomes

Joint with Maia Güell (University of Edinburgh), Michele Pellizzari (University of Geneve) and Giovanni Pica (Universita di Salerno)

The Economic Journal

We construct comparable measures of intergenerational mobility (IM) for 103 Italian provinces using the methodology of Güell et al. (2007, 2015a) and explore their correlation with a variety of social and economic outcomes. We find that higher IM is positively associated with economic activity, education and social capital and negatively correlated with inequality. Moreover, there is no clear pattern of correlation with other socio-political variables. These results are qualitatively similar to Chetty et al. (2014), with the important difference that Italy is a highly centralised state where institutions and policies are ‘de jure’ the same in all provinces. This suggests that something beyond institutional and policy differences also shapes intergenerational mobility.

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Intergenerational Mobility and the Informative Content of Surnames

Joint with Maia Guell (University of Edinburgh) and Chris Telmer (CMU)

Review of Economic Studies

We propose a new methodology for measuring intergenerational mobility in economic wellbeing. Our method is based on the joint distribution of surnames and economic outcomes. It circumvents the need for intergenerational panel data, a long-standing stumbling block for understanding mobility. A single cross-sectional dataset is sufficient. Our main idea is simple. If "inheritance" is important for economic outcomes, then rare surnames should predict economic outcomes in the cross-section. This is because rare surnames are indicative of familial linkages. Of course, if the number of rare surnames is small, this will not work. But rare surnames are abundant in the highly-skewed nature of surname distributions from most Western societies.

We develop a model that articulates this idea and shows that the more important is inheritance, the more informative will be surnames. This result is robust to a variety of different assumptions about fertility and mating. We apply our method using the 2001 census from Catalonia, a large region of Spain. We use educational attainment as a proxy for overall economic well-being. A calibration exercise results in an estimate of the intergenerational correlation coefficient of 0:60. We also find evidence suggesting that mobility has decreased among the different generations of the 20th century. A complementary analysis based on sibling correlations confirms our results and provides a robustness check on our method. Our model and our data allow us to examine one possible explanation for the observed decrease in mobility. We find that the degree of assortative mating has increased over time. Overall, we argue that our method has promise because it can tap the vast mines of census data that are available in a heretofore unexploited manner.

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Temporary Contracts, Incentives and Unemployment

Joint with Maia Guell (University of Edinburgh)

Firing-cost-free temporary contracts were introduced in Europe during the 1980’s in order to fight unemployment in a context of high firing costs that were politically hard to decrease. Since then, they have become a prevalent labor market institution in many countries. Yet evidence indicates that these contracts have not been successful at bringing down unemployment levels. In this paper we argue that the rational for the introduction of temporary contracts is flawed at its root. We provide a novel explanation of why temporary contracts increase unemployment even in a context where a reduction of firing costs would actually reduce unemployment. We argue that, if minimum wages are kept at high levels, temporary contracts have an effect not unlike an increase of unemployment benefits. By increasing the flows in and out of unemployment into relatively highly paid temporary jobs (minimum wage), they increase the value of being unemployed. This has a negative effect on the incentives to work for permanent workers, increases their efficiency wages and reduces the willingness of firms to create employment. We present empirical evidence compatible with the main implications of the model.

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Unemployment Insurance Design: inducing moving and retraining

European Economic Review

Evidence suggests that unemployed individuals can sometimes affect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity only arises for some individuals and the identity of those may be unobservable ex- ante. The problem of characterizing constrained optimal unemployment insurance in this case has been neglected in previous literature. We construct a model of optimal unemployment insurance where multiple incentive constraints are easily handled. The model is used to analyze the case when an incentive constraint involving moving costs must be respected in addition to the standard constraint involving costly unobservable job-search. Absent wealth effects on behavior, we derive closed-form solutions showing that when the moving/retraining incentive constraint binds, unemployment bene?ts should increase over the unemployment spell, with an initial period with low benefi?ts and an increase after this period has expired.

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The Effect of GNP Announcements on Fluctuations of GNP Growth

Joint with Paul Schulstald (God knows where)

European Economic Review

This paper is an empirical study of the degree in which perceptions affect the evolution of the economy. We study the effects of the announcements that the government makes on GNP growth. These announcements are subject to a substantial degree of noise and its accuracy improves with time. A revised number is published several years after the first announcement was made public. We consider that the final revision is the ?true? value of GNP growth. We show that once announcements are taken into account, the true value of GNP growth at time t has no predictive power in determining growth at any future time. All the predictive power lies in the announcements, and not in the true level of growth. Actually, we show that the variable that determines future growth is the unexpected part of the announcements. We also show that announcements affect growth via aggregate investment.

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The Survival of the Welfare State

With John Hassler, Kjetil Storesletten and Fabrizio Zilibotti

American Economic Review

This paper provides an analytical characterization of Markov perfect equilibria in a model with repeated voting, where agents vote over distortionary income redistribution. A key result is that the future constituency for redistributive policies depends positively on current redistribution, since this affects both private investments and the future distribution of voters. The model features multiple equilibria. In some equilibria, positive redistribution persists forever. In other equilibria, even a majority of beneficiaries of redistribution vote strategically so as to induce the end of the welfare state next period. Skill-biased technical change makes the survival of the welfare state less likely.

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Employment Turnover and the Public Allocation of Unemployment Insurance

With John Hassler

Journal of Public Economics

Unemployment benefits are higher and turnover between unemployment and employment is lower in Europe than in the U.S. We model the political determination of the unemployment insurance to explain these differences. We show that saving and borrowing is a good substitute for unemployment insurance when turnover is high. With high turnover, the median voter thus prefers low unemployment insurance. With low turnover, generous unemployment insurance becomes more valuable. If the median voter cannot bind future voters, the voting cycle must, however, be long in order to support a high level of insurance. Endogenizing turnover produces the possibility of multiple political equilibria.

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Spirits, but not so Animal

This paper stresses the importance of information diffusion problems in the business cycles. It shows that it is possible to modelize ``animal spirits'' in a context of perfectly rational and forward-looking agents whose only source of information is their perception on the past behaviour of the economy. In the animal spirits equilibrium the economy will move from booms to recessions according to changes in the optimism of the agents. These changes are due to what they \emph{percieve} that was the past evolution of the economy \textit{not to the presence of exogenous coordination devices or shocks}. Agents use their perception of the past in order to forecast what will happen in the future. Each of them collects her information by observing the actions taken by a different sample of individuals. Consequently, the perceptions are noisy (no agent is ever sure that what she sees is what really happened) and may differ across agents. The amount of noise that agents face is in itself an endogenous variable, a product of the state of the economy. The stochastic dynamic structure of the aggregates is then endogenous and mimics business cycle behaviour.

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