David Romer's research while affiliated with University of California, Berkeley and other places

Publications (84)

Article
This paper considers fiscal policy during the pandemic through the lens of optimal social insurance. We develop a simple framework to analyze how government taxes and transfers could mimic the insurance that people would like to have had against pandemic income losses. Permutations of the framework provide insight into how unemployment insurance sh...
Article
Analysis based on a new measure of financial distress for 24 advanced economies in the postwar period shows substantial variation in the aftermath of financial crises. This paper examines the role that macroeconomic policy plays in explaining this variation. We find that the degree of monetary and fiscal policy space prior to financial distress—tha...
Article
This paper examines the aftermath of postwar financial crises in advanced countries. We construct a new semiannual series on financial distress in 24 OECD countries for the period 1967-2012. The series is based on assessments of the health of countries' financial systems from a consistent, real-time narrative source, and classifies financial distre...
Article
This paper uses Social Security benefit increases from 1952 to 1991 to investigate the macroeconomic effects of changes in transfers. It finds a large, immediate, and significant positive response of consumption to permanent benefit increases. The response declines after about five months, and does not appear to spread to industrial production or e...
Article
Full-text available
Acemoglu, Johnson, and Robinson’s (2001) seminal article argues property-rights institutions powerfully affect national income, using estimated mortality rates of early European settlers to instrument capital expropriation risk. However, 36 of the 64 countries in the sample are assigned mortality rates from other countries, often based on mistaken...
Article
Monetary policy-makers' beliefs about how the economy functions are a key determinant of the conduct of policy. That monetary policy has little impact under the prevailing circumstances is a belief which has resurfaced periodically over the Federal Reserve's 100-year history. In both the 1930s and the 1970s a belief in the ineffectiveness of moneta...
Article
This paper examines an important gap in the monetary explanation of the Great Depression: the lack of a well-articulated and documented transmission mechanism of monetary shocks to the real economy. It begins by reviewing the challenge to Friedman and Schwartz’s monetary explanation provided by the decline in nominal interest rates in the early 193...
Article
Will the Arab Spring lead to long-lasting democratic change? To explore this question I examine the determinants of the Arab world's democratic de…cit in 2010. I …nd that the percent of a country's landmass that was conquered by Arab armies following the death of the prophet Muhammad statistically accounts for this de…cit. Using history as a guide,...
Article
This paper uses the interwar period in the United States as a laboratory for investigating the incentive effects of changes in marginal income tax rates. Marginal rates changed frequently and drastically in the 1920s and 1930s, and the changes varied greatly across income groups at the top of the income distribution. We examine the effect of these...
Article
We are grateful to Jeanette Ling and Priyanka Rajagopalan for research assistance, and to the National Science Foundation for financial support.
Article
This paper presents a novel stylized fact and analyzes its contribution to the skill bias of technical change in U.S. manufacturing. The share of skilled labor embedded in intermediate inputs correlates strongly with the skill share employed in final production. This finding points towards an intersectoral technology-skill complementarity (ITSC). T...
Article
Full-text available
We propose a new identi…cation strategy to measure the causal impact of govern-ment spending on the economy. Our methodology isolates exogenous cross-sectional variation in government spending using a novel instrument. We use the fact that a large number of federal spending programs depend on local population levels. Every ten years, the Census pro...
Article
This paper describes a new data set of the forecasts of output growth, inflation, and unemployment prepared by individual members of the Federal Open Market Committee. The paper discusses the scope of the data set, possibilities for extending it, and some potential uses. It offers a preliminary examination of some of the cross-sectional features of...
Article
This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to...
Article
Disclaimer: The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. The great moderation lulled macroeconomists and policymakers alike in the belief that we knew how to conduct macroeconomic policy. The crisis clearly forces us to question that assessment. In this paper, w...
Article
This paper sheds light on two problems in the Penn World Table (PWT) GDP estimates. First, we show that these estimates vary substantially across different versions of the PWT despite being derived from very similar underlying data and using almost identical methodologies; that this variability is systematic; and that it is intrinsic to the methodo...
Article
This paper sheds light on two problems— variability and valuation— in the Penn World Table (PWT) GDP estimates. We show that these estimates vary substantially across di¤erent versions of the PWT; that this variability is systematic; and that it is intrinsic to the methodology deployed by the PWT to estimate growth rates. Moreover, this variability...
Article
We are grateful to Priyanka Rajagopalan for research assistance and to the National Science Foundation for financial support.
Article
Full-text available
This paper presents a novel stylized fact and analyzes its contribution to the skill bias of techni-cal change: The share of skilled labor embedded in intermediate inputs correlates strongly with the skill share employed in final production. This finding points towards an intersectoral technology-skill complementarity (ITSC). Empirical evidence sug...
Article
Should monetary policymakers take the staff forecast of the effects of policy actions as given, or should they attempt to include additional information? This paper seeks to shed light on this question by testing the usefulness of the FOMC's own forecasts. Twice a year, the FOMC makes forecasts of major macroeconomic variables. FOMC members have ac...
Article
This paper by Daron Acemoglu and his coauthors addresses an important topic. In general terms, the question is when and how policy reforms are successful or unsuccessful. More specifically, the paper focuses on central bank independence (CBI), and its goal is to shed some light on the inconclusive results in the literature regarding the benefits of...
Article
Per capita income in the richest countries of the world exceeds that in the poorest countries by more than a factor of 50. What explains these enormous differences? This paper returns to two old ideas in development economics and proposes that linkages and complementarity are at the heart of the explanation. First, linkages between firms through in...
Chapter
Real rigidities are forces that reduce the responsiveness of firms’ profit-maximizing prices to variations in aggregate output resulting from variations in aggregate demand. Real rigidities make firms less inclined to take actions that dampen movements in aggregate output, and so increase the responsiveness of output to disturbances. They appear es...
Article
The hypothesis that decreases in taxes reduce future government spending is often cited as a reason for cutting taxes. However, because taxes change for many reasons, examinations of the relationship between overall measures of taxation and subsequent spending are plagued by problems of reverse causation and omitted variable bias. To deal with thes...
Article
This paper examines a single, narrow decision—the choice on fourth down in the National Football League between kicking and trying for a first down—as a case study of the standard view that competition in the goods, capital, and labor markets leads firms to make maximizing choices. Play-by-play data and dynamic programming are used to estimate the...
Article
This paper uses the lessons of history to identify the sources of monetary policy successes and failures in the past and to suggest a strategy for choosing successful Federal Reserve chairs in the future. It demonstrates that since at least the mid-1930s, the key determinant of the quality of monetary policy has been policymakers' beliefs about how...
Article
This paper develops a measure of U. S. monetary policy shocks for the period 1969–1996 that is relatively free of endogenous and anticipatory movements. Quantitative and narrative records are used to infer the Federal Reserve's intentions for the federal funds rate around FOMC meetings. This series is regressed on the Federal Reserve's internal for...
Article
This paper studies the welfare effects of the relative-price variability arising from inflation. If customers and suppliers form long-term relationships, prices have an informational role: a potential customer uses current prices as signals of future prices. Inflation reduces the informativeness of current prices, causing customers to make costly m...
Article
A large literature shows that strategic interactions among actors with conflicting objectives can cause the political process to produce outcomes that lower welfare. This paper investigates an alternative explanation of such outcomes: if individuals" errors in assessing the likely effects of proposed policies are correlated, democratic decisionmaki...
Article
This paper uses play-by-play accounts of virtually all regular season National Football League games for 1998-2000 to analyze teams' choices on fourth down between trying for a first down and kicking. Dynamic programming is used to estimate the values of possessing the ball at different points on the field. These estimates are combined with data on...
Article
Regional patterns of inflation persistence have received attention only at a very coarse level of territorial disaggregation, that of EMU member states. However economic disparities within EMU member states are an equally important policy issue. This paper considers a country with a large regional divide, i.e., Italy, at a fine level of territorial...
Article
The paper focuses on satisfaction with income and proposes a utility model built on two value systems, the `Ego' system - described as one own income assessment relatively to one own past and future income - and the `Alter' system - described as one own income assessment relatively to a reference group. We show how the union of these two value syst...
Article
This paper tests for the existence of asymmetric information between the Federal Reserve and the public by examining Federal Reserve and commercial inflation forecasts. It demonstrates that the Federal Reserve has considerable information about inflation beyond what is known to commercial forecasters. It also shows that monetary-policy actions prov...
Article
Using the TAXSIM model for the period 1962-95, we consider the federal tax system's impact as an automatic stabilizer. Despite the many changes in the tax system, there has been relatively little change in its role as an automatic stabilizer. We estimate that individual federal taxes offset perhaps as much as 8 percent of initial shocks to GDP. We...
Article
Changes in both the macroeconomy and in macroeconomics suggest that the IS-LM-AS model is no longer the best baseline model of short-run fluctuations for teaching and policy analysis. This paper presents an alternative model that replaces the assumption that the central bank targets the money supply with an assumption that it follows a simple inter...
Article
Full-text available
Examining the correlation between trade and income cannot identify the direction of causation between the two. Countries' geographic characteristics, however, have important effects on trade and are plausibly uncorrelated with other determinants of income. This paper, therefore, constructs measures of the geographic component of countries' trade an...
Article
Poverty is arguably the most pressing economic problem of our time. And because rising inequality, for a given level of income,> implies greater poverty, the distribution of income is also a central concern. At the same time, monetary policy is one of the modern age's most potent tools for managing the economy. Given the importance of poverty and t...
Article
While there is ample evidence that high inflation is harmful, little is known about how best to reduce inflation or how far it should be reduced. In this volume, sixteen distinguished economists analyze the appropriateness of low inflation as a goal for monetary policy and discuss possible strategies for reducing inflation. Section I discusses the...
Article
Contrary to the arguments of Leeper (1997), the problems that arise in VAR investigations of monetary policy do not arise with our use of the narrative approach. The apparent high predictability of our monetary-policy variable that Leeper finds is due to overfitting. And the estimated effects of our measure when variables other than output are cons...
Article
Increased transmission capacity and diminishing returns to scale in power production capacities have raised the opportunity cost of electricity in many countries. The resulting market changes have often been counteracted by policy, i.e. subsidized electricity prices to for instance energy intensive industries. Firm data, emphasizing cost heterogene...
Article
Full-text available
Countries' geographic characteristics have important effects on their trade, and are plausibly uncorrelated with other determinants of their incomes. This paper therefore constructs measures of the geographic component of countries' trade and uses those measures to obtain instrumental variables estimates of the effect of trade on income. The result...
Article
Full-text available
Estimates of growth equations have found a role for openness, particularly in explaining rapid growth among East Asian countries. But major concerns of simultaneous causality between growth and trade have been expressed. This study aims to deal with the endogeneity of trade by using as instrumental variables the exogenous determinants from the grav...
Article
This paper analyzes the contributions of monetary and fiscal policy to postwar economic recoveries. We find that the Federal Reserve typically responds to downturns with prompt and large reductions in interest rates. Discretionary fiscal policy, in contrast, rarely reacts before the trough in economic activity, and even then the responses are usual...
Article
This paper addresses Hoover and Perez's comments on our 1989 paper. We first show that the estimated impact of monetary policy shifts remains large and ranges from marginally to strongly significant when oil shocks are controlled for. We then extend our previous work by expanding the sample period and identifying an additional policy shift in Decem...
Article
This paper shows that the disproportionate impact of tight monetary policy on banks' ability to lend is largely the consequence of Federal Reserve actions aimed at reducing bank loans directly, rather than an inherent feature of the monetary transmission mechanism. We provide two types of evidence for this conclusion. First, a detailed examination...
Article
Because unanticipated monetary expansion leads to real exchange rate depreciation, and because the harms of real depreciation are greater in more open economies, the benefits of unanticipated expansion are decreasing in the degree of openness. Models in which the absence of precommitment in monetary policy leads to excessive inflation therefore pre...
Article
This paper argues that an important part of movements in asset prices may be caused by neither external news nor irrationality but by the revelation of information by the trading process itself. Two models are developed that illustrate this general idea. One model is based on investor uncertainty about the quality of other investors' information; t...
Article
Full-text available
This paper examines whether the Solow growth model is consistent with the international variation in the standard of living. It shows that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data. The paper also examines the implications of the Solow model f...
Article
This paper presents and implements statistical tests of stock market forecastability and volatility that are immune from the severe statistical problems of earlier tests. It finds that although the null hypothesis of market efficiency is rejected, the rejections are only marginal. The paper also shows how volatility tests and recent regression test...
Article
This paper links the "coordination failure" and "menu cost" approaches to the microeconomic foundations of Keynesian macroeconomics. If a firm's desired price is increasing in others' prices, then the gain from price adjustment after a nominal shock is greater if others adjust. This "strategic complementarity" leads to multiple equilibria in the de...
Article
This paper uses the historical record to isolate episodes in which there were large monetary disturbances not caused by output fluctuations. It then tests whether these monetary changes have important real effects. The central part of the paper is a study of postwar U.S. monetary history. We identify six episodes in which the Federal Reserve in eff...
Article
Rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks. And, by themselves, small frictions in nominal adjustment, such as costs of changing prices, create only small non-neutralities. But this paper shows that substantial nominal rigidity can arise from a combination of real rigiditie...
Article
The question of how monetary policy affects the real economy is a perennial one in macroeconomics. Over the past several decades, however, the focus of the debate has changes. Today it is taken for granted that monetary policy affects aggregate demand; what is debated is why prices do not adjust fully to compensate for shifts in demand. Thirty year...
Article
This paper shows that small costs of changing nominal prices can lead to rigidities that cause highly inefficient fluctuations in real variables. As a result, aggregate demand stabilization can be very desirable even though the frictions that cause fluctuations in aggregate demand to have real effects are slight. Inefficient price rigidity arises b...
Article
A model of staggered price setting in which the frequency of price changes is endogenous is presented.
Article
This paper studies the welfare properties of the equilibrium timing of price changes. Staggered price setting has the advantage that it permits rapid adjustment to firm-specific shocks, but the disadvantages that it causes unwanted fluctuations in relative prices and that, by creating price level inertia, it can increase aggregate fluctuations. Bec...
Article
The purpose of this paper is to provide evidence supporting new Keynesian theories. We point out a simple prediction of Keynesian models that contradicts other leading macroeconomic theories and show that it holds in actual economies. In doing so, we point out a "new phenomenon" that Keynesian theories "render comprehensible." The prediction we tha...
Article
Nominal price rigidity has a negative externality: rigidity in one firm's price increases the variability of aggregate real spending, which harms all firms. This paper investigates whether this externality is large, which would imply that stabilization policy can be highly beneficial even if the costs of making prices flexible are small. There are...
Article
Full-text available
Standard real business cycle models must rely on total factor productivity (TFP) shocks to explain the observed comovement of consumption, investment, and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption can generate comovement in the absence of TFP shocks. Intertemporal...
Article
The paper analyzes the effects of financial shocks on an economy in which individuals hold money to make purchases and in which the frequency of conversions of other assets into money is endogenous. The paper thus extends the work of Sanford Grossman and Laurence Weiss (1983) and Julio Rotemberg (1984) by allowing agents to choose the timing of tri...
Article
This paper presents a simple general equilibrium model that includes optimizing choices of the frequency of trips to the bank. The model is used to analyze the effect of inflation on the capital stock, the interest elasticity of money demand, the optimum quantity of money, and the welfare costs of inflationary finance.
Article
Reserve requirements are examined in a general equilibrium context. The paper develops a simple general equilibrium model that includes diverse opportunities for investment and a role for financial intermediaries. Two versions of the model are considered. One is a thought experiment in which currency serves purely to satisfy legal reserve requireme...
Article
Changes in variance, or volatility, over time can be modeled using the approach based on autoregressive conditional heteroscedasticity. Another approach is to model variance as an unobserved stochastic process. Although it is not easy to obtain the exact likelihood function for such stochastic variance models, they tie in closely with developments...
Article
Can unprofitable social customs persist? Can they account for important economic phenomena? Akerlof's original model of social custom suffers from two defects: First, sanctions for violating the custom depend discontinuously on the size of the violation, and second, the model borders on the unmanageable. This paper shows that customs can persist an...
Article
Full-text available
This paper decomposes unemployment into cyclical and frictional components in a model integrating search-and-matching and job-rationing theories of unemployment. I define the cyclical component of unemployment as the part that would prevail if search costs were zero, and the frictional component as additional unemployment due to these search costs....
Article
This paper proposes a model that integrates a bilateral Nash bargain-ing mechanism between a retailer and a wholesaler into a menu cost model. In a static model of Nash bargaining without menu cost, negative correla-tions between the bargaining power and the price duration and that with pass-through rates are established, which are consistent with...
Article
Full-text available
We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infreq...
Article
We look at a simple financial model of exchange rate determination with investors who have heterogeneous information. The exchange rate can be expressed as a sum of averages of higher order expectations of future interest rates. Lack of common knowledge of information about the interest rate process leads investors to rationally confuse persistent...
Article
We provide evidence on the causal link between financing constraints and the risk of corporate cash flows and returns. For identification, we compare public U.S. firms in the same industry, location, and size quintile, but whose access to bank credit was differentially affected by WorldCom's demise in 2002. A credit shortage induces a permanent inc...

Citations

... Overall, the results suggest that better fiscal preconditions allowed for a larger expansion of hospital capacity during the pandemic period. In the literature, evidence is found that the existence of fiscal space is also important for countries' recovery from economic crises (ROMER AND ROMER, 2019;KOSE et al., 2017). Greater fiscal space allows countries to adopt countercyclical policies that enable the economy to recover more quickly. ...
... To reform macroeconomics instruction, teachers must have a thorough understanding of the following principles. e guiding concept [10] is the first. Macroeconomics is a highly theoretical topic that serves as the foundation for students learning economic management courses. ...
... It shows that 6.5% of them took place from 1970 to 1979; 30.8% from 1980 to 1989; 38.3% from 1990 to 1999; and 24.4% from 2000 to 2017. On this subject, see also Demirgüç-Kunt and Detragiache (1998) Honohan and Laeven (2005), Valencia (2008, 2013), Reinhart and Rogoff (2009), Schularick and Taylor (2012), Romer and Romer (2017). 2 The debate submitted three generations of models. ...
... Other attempts at disaggregating fiscal adjustments can be found inMertens and Ravn (2013),Romer and Romer (2016), andPerotti (2014). These papers, however, are limited to the U.S. and often only consider either the tax or the spending side of fiscal corrections.Content courtesy of Springer Nature, terms of use apply. ...
... Lastly, on the macroeconomic front, education is considered the basis of human capital contributing to economic growth, as the recent growth models suggest (Riley, 2014;Mankiw et al., 1992). Although the classical economic growth theory considers labour productivity an exogenous factor, the new growth theories emphasise the importance of education as an element of human capital (Pelinescu, 2015). ...
... This substantial cross-country variation makes understanding why TFP levels differ an important research question. Two broad (proximate) explanations can be relevant, namely that individual firms are less productive in one country than another, for example because of differences in technology adoption (e.g., Comin and Hobijn, 2010), or the allocation of resources between firms may be less efficient (e.g., Jones, 2011). Regardless of which of these explanations is most important, it implies that a highproductivity economy is more efficient in meaningful ways. ...
... O último, "Consenso e Contrassenso: por uma economia não dogmática", é aquele em que Lara Resende abraça as ideias do MMT. Em âmbito internacional e, talvez especialmente nos Estados Unidos, tem havido uma crescente percepção de que a teoria macroeconômica está em crise (BLANCHARD et al., 2010;, tanto pela insuficiência de seus diagnósticos -o caso mais gritante foi a total incapacidade de antever a chegada da crise de 2008 -quanto pela ineficácia das políticas que prescreve. Em um cenário macroeconômico de aumento do endividamento público e ampliação do balanço patrimonial dos bancos centrais -resultados das políticas de resgate pós-crise de 2008 -o mainstream economics não prescrevia políticas fiscais expansionistas para estimular a economia, o que caberia à política monetária. ...
... In the post 1980s period, many economists find that the structure of monetary policy has changed considerably, and the federal funds rate may not have been a good indicator of monetary policy (Balke and Emery 1994, Bernanke and Blinder 1992). Some explanations for this include; financial innovation and deregulation during the 1980s may have changed the effectiveness and transmission mechanism of monetary policy (Bosworth 1989 and Kahn 1989), the high inflation period of the 1970s may have changed the way the public reacts to inflation (Balke and Emery 1994), or the Fed may have focused more of its policy on controlling inflation before it had the chance to accelerate. In other words, the last explanation translates to the Fed choosing to conduct monetary policy in a more forward-looking manner (Stock and Watson 2001) 9 by increasing the federal funds rate in anticipation of inflation so as to not get behind the curve with respect to fighting inflation. ...
... 6. An early paper that considers endogenous price stickiness is Ball, Mankiw, and Romer (1988). ...
... This matters for three things. First, one of the key factors triggering the Great Recession is that economists did not take seriously the systemic risk factors that might emanate from diverse expectations and imperfect knowledge of heterogeneous economic actors, and thus excluded the financial system from macroeconomic models assuming that they are internally efficient and would not subsequently become a risk factor for overall economic systems (Romer & Romer, 2013). As a result, Keynesian Dynamic Stochastic General Equilibrium (DSGE) models that underlay macroeconomic research failed in explaining the great macroeconomic crises in three-quarters of a century, the foremost of which is the Great Recession (Blanchard, 2018: 45). ...