Pablo Ottonello | Macro Paper Warehouse

Capital Unemployment

Physical capital, like labour, can be “unemployed” — sitting idle while its owner searches for a buyer or tenant — and this paper documents that in the United States such idle capital is large, volatile, and rises in downturns. Using vacancy rates for commercial office, retail and industrial space, the paper measures a capital-unemployment rate for U.S. structures averaging 10.9% over 1980–2015, more than the 6.4% average labour-unemployment rate over the same period, with a standard deviation of 2.4% in raw data and a correlation with cyclical GDP of about −0.52; micro data on 1.2 million Spanish online listings show a listed unit stays on the market 8 months on average, and that the quarterly rate at which listings are withdrawn fell by half, from 36% to 17%, as Spain’s recession deepened between 2007 and 2012. The paper builds a stochastic neoclassical growth model with directed search in the market for capital and with financial frictions affecting firms’ capital purchases, and shows that in this calibrated model financial shocks — not productivity shocks — generate capital-unemployment fluctuations of the size seen in the data; a version driven only by total-factor-productivity shocks predicts fluctuations one order of magnitude smaller. Two macroeconomic consequences follow within the model. First, a downturn that leaves a large stock of unemployed capital is followed by an investment slump, because the economy recovers by absorbing idle units rather than producing new ones: through the lens of the model, almost half of the gap between the data and a neoclassical benchmark in the capital stock’s deviation from trend after the U.S. Great Recession can be attributed to this dampening effect, and across U.S. metropolitan areas the correlation between capital unemployment at the 2010 trough and investment during the 2010–2014 recovery is −0.52. Second, capital unemployment is a propagation channel for financial shocks: the peak output response to a one-standard-deviation contractionary financial shock is 0.8% with trading frictions, against 0.06% in an otherwise comparable model with Walrasian capital markets, and because idle capital shows up in the aggregate as lower measured productivity, this mechanism offers one account of the large measured-TFP movements seen in financial crises.

Financial Heterogeneity and the Investment Channel of Monetary Policy

Motivated by the observation that aggregate investment is one of the most cyclically responsive components of GDP, this paper asks which firms drive that response: those most affected by financial frictions, or those least affected? Combining a high-frequency-identified measure of monetary policy shocks with quarterly Compustat data, the paper finds that firms with lower default risk – measured by lower leverage and a higher structural “distance to default” – invest significantly more in response to an expansionary monetary shock than high-default-risk firms, with a one-standard-deviation lower leverage ratio associated with roughly a one-quarter larger investment semielasticity and a one-standard-deviation higher distance to default with roughly a one-half larger one; these differential responses persist for up to three years and are accompanied by low-risk firms gaining relatively more access to external finance and facing smaller increases in borrowing costs than high-risk firms after an expansionary shock. To interpret this finding, the paper embeds heterogeneous firms subject to collateralized borrowing and endogenous default risk into an otherwise standard New Keynesian model with sticky-price retailers, calibrated to match firm-level investment, borrowing, and lifecycle facts, and reproduces the empirical pattern: low-risk firms are more responsive because they face a comparatively flat marginal cost-of-investment-finance curve, so the direct effect of a lower real interest rate on the marginal benefit of capital passes through to investment largely undamped, whereas high-risk (net-worth-constrained) firms sit on the upward-sloping segment of that curve, where a monetary expansion’s cash-flow, collateral-value, and default-probability channels only partially offset the higher financing cost of additional capital. The paper’s decomposition further shows that, unlike in household-consumption models (Kaplan, Moll and Violante 2018; Auclert 2019), where indirect general-equilibrium income effects dominate the direct interest-rate effect, both direct and indirect price effects contribute quantitatively to firm investment responses, because firms are more interest-sensitive than consumption-smoothing households. Because low-risk firms drive most of the aggregate response, the model implies the aggregate potency of monetary policy depends on the prevailing cross-sectional distribution of default risk: a counterfactual low-net-worth initial distribution generates an aggregate capital response about 33% smaller than the calibrated steady-state distribution, even though every constrained firm remains more responsive to monetary policy than it would be absent financial frictions altogether – consistent with the amplification logic of Bernanke, Gertler and Gilchrist (1999).

Illiquid Lemon Markets and the Macroeconomy

The paper develops a quantitative capital-accumulation model in which capital trades in illiquid markets with asymmetric information — sellers know the quality of their capital but buyers do not. It combines this model with microdata on nonresidential capital units listed for trade to measure the degree of information asymmetry and quantify its macroeconomic effects.

Model: The economy features heterogeneous capital units characterized by observed quality ω (e.g., size, location, age — observable to both buyers and sellers) and unobserved quality a (known only to the seller). Capital trades in directed-search markets: sellers post a price and a target submarket; buyers direct their search; a matching function determines trade probabilities. Buyers observe announced quality and have an inspection technology that reveals true quality with probability ψ (“lemon detection probability”); with probability 1−ψ a low-quality unit goes undetected. In equilibrium, sellers of high-quality capital signal their type by listing at higher prices and accepting lower trading probabilities (the Guerrieri-Shimer-Wright 2010 competitive search separating equilibrium, adapted to the capital accumulation setting). The key model prediction is that the residual price — the component of a listed price orthogonal to observed characteristics — is positively correlated with duration on the market, with the slope increasing as the degree of asymmetric information (1−ψ) rises.

Monetary Policy and Redistribution in Open Economies

This paper builds an open-economy heterogeneous-agent New Keynesian (HANK) model in which households differ not only in income and wealth, as in standard closed-economy HANK models, but in their “real integration” (whether they work in a home tradable sector exposed to foreign demand, or a purely domestic nontradable sector) and “financial integration” (whether they can save and borrow internationally, or only in domestic securities priced off the domestic policy rate). Calibrated to Canada, the model is used to revisit three classic questions from Mundell (1963) and Fleming (1962) – the international spillovers of shocks and policies, the comparison of exchange-rate regimes, and the implications of the international price system – but from a distributional rather than purely aggregate perspective. The paper’s central finding is a systematic trade-off between aggregate stabilization and consumption inequality: fixed exchange rates amplify the aggregate response to external shocks (as in standard representative-agent open-economy models) but reduce the cross-household dispersion of that response, because defending a peg requires cutting domestic rates more aggressively, which disproportionately benefits financially non-integrated and nontradable-sector households. A parallel finding is that lower degrees of real and financial integration dampen an economy’s aggregate exposure to external shocks but concentrate their distributional impact on a narrower set of directly-exposed households, leading the authors to conclude that the “discontents” of globalization may stem from integration being insufficiently generalized, rather than from integration itself.