Report

Teaser, summary, work performed and final results

Periodic Reporting for period 2 - MACROTRADE (Research on Macroeconomic Fluctuations and Trade)

Teaser

The research is divided into three strands whose main goals are to i) study macroeconomic fluctuations, ii) identify the mechanisms that drive and propagate these fluctuations, and iii) use the empirical findings to inform and formulate models that can be used for quantitative...

Summary

The research is divided into three strands whose main goals are to i) study macroeconomic fluctuations, ii) identify the mechanisms that drive and propagate these fluctuations, and iii) use the empirical findings to inform and formulate models that can be used for quantitative policy and positive analysis

Work performed

My research proposal was organised in three strands. I first list below the outcomes so far and then expand on each of them.

Strand 1: The results of this research are summarised in “History Dependence in Housing Markets”, joint with Phillippe Bracke. Our study has been invited for a revised resubmission by the American Economic Journal: Macroeconomics.
It can be downloaded from: http://personal.lse.ac.uk/tenreyro/history.pdf

Strand 2: This strands has produced two main papers. The first is “The Transmission of Monetary Policy Through Redistributions and Durables Purchases”, joint with Vincent Sterk. This has been published in the Journal of Monetary Economics. It can be downloaded from
http://personal.lse.ac.uk/tenreyro/NNKM.pdf
The second paper is “Optimal Inflation and the Phillips Curve”, joint with Michael McLeay, forthcoming in the NBER Macroeconomics Annual.:
http://personal.lse.ac.uk/tenreyro/inflation1.pdf This will probably be my most influential paper. It has served as input in the conference on the Revaluation of the Fed, held in Chicago, June 2-3.

Strand 3: This strands has produced four papers so far: “Commodity Booms and Busts in Emerging Economies,” joint with Thomas Drechsel. This has been published in the Journal of International Economics. http://personal.lse.ac.uk/tenreyro/commodity.pdf
A second paper, still in progress is “Piggy Back Exporting and the Gains from Trade in Developing Economies,” joint with Swati Dhingra. We are still working on finishing it. A version of it can be found in http://personal.lse.ac.uk/tenreyro/piggyback.pdf
A spinoff idea that came off from doing this work was published in a paper that dealt with the question of population in developing countries, as I was concerned about controlling for long term trends in my study of terms of trend fluctuations. The paper dealt with a drastic change in population growth, and discusses a key factor behind it that had been neglected in the literature. “The Fall in Global Fertility: A Quantitative Model,” joint with Tiloka DeSilva. Published in The American Economic Journal: Macroeconomics. It can be downloaded from http://personal.lse.ac.uk/tenreyro/fertility2.pdf

In what follows, I expand on each of the research outputs.

1. History Dependence in Housing Markets, Revise and Resubmit invited by The American Economic Journal: Macroeconomics
This paper documents a novel pattern of history dependence in house prices and transactions. Specifically, aggregate house prices in the year a house was previously bought influence the individual price at which the house sells next, as well as the probability that the transaction takes place. The results are based on twenty million housing transactions from England and Wales and are not driven by changes in the composition of the houses transacted. We complement our analysis with matched administrative data on mortgages and on-line house listings. The effects of history dependence on house prices and the probability of sale can be material. Consider two identical houses sold in 2014, one previously acquired in 2007, when aggregate prices peaked and the other in 2001. On average, all else equal, the house bought in 2007 will carry a premium of over 10 percent over the one bought in 2001. Moreover, the house bought in 2007 will sell, on average with a 15 percent lower probability. (We control for tenure duration so the results are not driven by shorter durations in the more recent period.) History dependence in housing markets is clearly at odds with a frictionless model in which the value of a house and its transactability depend exclusively on the future stream of dividends (rental value) the property delivers. A possible interpretation of the results is the notion of anchoring or reference dependence, an idea that goes back to Tversky and Kahneman (1982) and builds on a well-established result from laboratory experiments: in estimating the value of an asset agents tend to show

Final results

“Optimal Inflation and The Phillips Curve” is possibly the most important of all these papers in terms of having an influence on the policy sphere. As mentioned above, it has been used to push back on the attach on the policy framework currently used by central banks. It has generated a lot of interest in the academic and policy sphere.

Awards:
I have been appointed Fellow of the British Academy (2018), External Monetary Policy Committee Member, Bank of England (2017).
I have been elected Vice-President European Economic Association (2019) and will become President in 2020.

I have been given the Carl Menger Prize on Monetary Macroeconomics 2018