Kjetil Storesletten | Macro Paper Warehouse

Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective

Thu, 01 Jan 2026 00:00:00 +0000

This paper asks why the nature of business cycles changes systematically as economies develop and shed their large agricultural sectors. The motivation is both empirical and theoretical. Empirically, countries with large declining agricultural sectors—most prominently China—exhibit business cycle patterns that depart sharply from the textbook procyclical-employment pattern seen in mature economies: aggregate employment is acyclical with respect to GDP, nonagricultural employment is strongly procyclical, agricultural employment is countercyclical, and the labor productivity gap between nonagriculture and agriculture narrows during booms. These cross-country regularities hold in a sample of 63–66 countries using ILO sectoral employment data over 1970–2015, with the correlation between aggregate employment and GDP declining monotonically as the agricultural employment share rises. The cross-country correlation between the agricultural employment share and log GDP per capita is −0.84. For China specifically over 1978–2012, the correlation between HP-filtered agricultural employment and GDP is −0.69, while the correlation for nonagricultural employment with GDP is 0.73. Agricultural employment fell from about 62.4% of total Chinese employment in 1985 to 33.6% in 2012.

Serial Entrepreneurship in China

Thu, 01 Jan 2026 00:00:00 +0000

This paper studies entrepreneurship and new firm creation in China through the lens of serial entrepreneurs (SEs) — individuals who establish more than one firm — contrasting them with non-serial entrepreneurs (Non-SEs). The central question is whether serial entrepreneurs are selected on persistent productive skill or on non-skill advantages such as preferential access to finance, because the two mechanisms have opposite implications for resource allocation: skill-driven serial entrepreneurship raises aggregate productivity, while favoritism-driven serial entrepreneurship generates misallocation.

Quantitative Macroeconomics with Heterogeneous Households

This review article surveys the quantitative macroeconomics literature that models household heterogeneity, centering on the “standard incomplete markets” (SIM) model in which a continuum of ex ante identical households face uninsurable idiosyncratic shocks and self-insure via a single risk-free asset, building on Bewley (1983), Aiyagari (1994), and Huggett (1993). The authors organize the literature around three themes: first, the sources of individual risk and heterogeneity – persistent versus transitory earnings shocks, heterogeneity in initial conditions, and the endogenous component of income dynamics arising from labor supply, job search, and human capital choices, plus emerging work on health and family shocks; second, households’ channels of insurance beyond the risk-free bond – financial markets (including default and housing), flexible labor supply, the family, and government tax-and-transfer programs; and third, how idiosyncratic risk interacts with aggregate risk, covering the Krusell-Smith (1998) computational method and its “approximate aggregation” result, and the implications of heterogeneity for the welfare costs of business cycles, the welfare costs of inflation, and the equity premium puzzle. The authors argue that first-generation SIM models – with only exogenous earnings shocks and only saving as insurance – have since been substantially extended along all three dimensions, though unevenly, and they close by identifying the relationship between idiosyncratic and aggregate risk as the least well understood dimension and a priority for future research.