http://www.minneapolisfed.org/publications_papers/sr/ <em>Staff Reports</em> are a series of academic research papers written by economists affiliated with the Federal Reserve Bank of Minneapolis. Many <em>Staff Reports</em> are available in electronic form as PDF and/or PostScript files. <br><br> Those not available electronically should be available at your local library. 2013-06-18T00:00:00-06:00 http://www.minneapolisfed.org/disclaimer.cfm en Federal Reserve Bank of Minneapolis http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5121 2013-06-18T00:00:00-06:00 Building on the Merton (1974) and Leland (1994) structural models of credit risk, we develop a simple, transparent, and robust method for measuring the financial soundness of individual firms using data on their equity volatility. We use this method to retrace quantitatively the history of firms’ financial soundness during U.S. business cycles over most of the last century. We highlight three main findings. First, the three worst recessions between 1926 and 2012 coincided with insolvency crises, but other recessions did not. Second, fluctuations in asset volatility appear to drive variation in firms’ financial soundness. Finally, the financial soundness of financial firms largely resembles that of nonfinancial firms. Measuring the Financial Soundness of U.S. Firms, 1926–2012 2013-06-18T00:00:00-06:00 Andrew Atkeson Andrew Atkeson Andrea L. Eisfeldt Andrea L. Eisfeldt Pierre-Olivier Weill Pierre-Olivier Weill 2013-06 Staff Report June 2013 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5120 2013-06-17T00:00:00-06:00 We show how to use panel data on household consumption to directly estimate households’ risk preferences. Specifically, we measure heterogeneity in risk aversion among households in Thai villages using a full risk-sharing model, which we then test allowing for this heterogeneity. There is substantial, statistically significant heterogeneity in estimated risk preferences. Full insurance cannot be rejected. As the risk sharing, as-if-complete-markets theory might predict, estimated risk preferences are unrelated to wealth or other characteristics. The heterogeneity matters for policy: Although the average household would benefit from eliminating village-level risk, less-risk-averse households who are paid to absorb that risk would be worse off by several percent of household consumption. Heterogeneity and Risk Sharing in Village Economies 2013-06-17T00:00:00-06:00 Robert Townsend Robert Townsend Sam Schulhofer-Wohl Sam Schulhofer-Wohl Pierre-Andre Chiappori Pierre-Andre Chiappori Krislert Samphantharak Krislert Samphantharak 2013-06 Staff Report June 2013 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5117 2013-06-04T00:00:00-06:00 In order to analyze careers both within and across firms, this paper proposes a matching model of the labor market that extends existing models of job assignment and learning about workers’ abilities. The model accounts for worker mobility across jobs and firms, for varying degrees of generality of ability, and for the possibility that firms affect the information they acquire about workers through job assignment. I characterize equilibrium assignment and wages, and show how, depending on how abilities and jobs are distributed across firms, equilibrium gives rise to widely varying patterns of job mobility within firms and turnover across firms, even if matching would be perfectly assortative in the absence of uncertainty. The implied job and wage dynamics display features that are consistent with a broad set of empirical findings on careers in firms and the labor market. In particular, workers can experience gradual promotions and wage increases following successful performance but few or no demotions when employed by the same firm. The model also produces turnover across firms and occupations after both successful and unsuccessful experiences, leading to wage increases or decreases following a firm or occupation change. Overall, the results in this paper provide a unified framework in which to interpret the dynamics of jobs and wages in firms and the labor market. Job Matching Within and Across Firms 2013-06-04T00:00:00-06:00 Elena Pastorino Elena Pastorino 2013-06 Staff Report June 2013 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4928 2013-06-03T00:00:00-06:00 This paper develops and structurally estimates a labor market model that integrates job assignment, learning, and human capital acquisition to account for the main patterns of careers in firms. A key innovation is that the model incorporates workers’ job mobility within and between firms, and the possibility that, through job assignment, firms affect the rate at which they acquire information about workers. The model is estimated using longitudinal administrative data on managers from one U.S. firm in a service industry (the data of Baker, Gibbs, and Holmström (1994a,b)) and fits the data remarkably well. The estimated model is used to assess both the direct effect of learning on wages and its indirect effect through its impact on the dynamics of job assignment. Consistent with the evidence in the literature on comparative advantage and learning, the estimated direct effect of learning on wages is found to be small. Unlike in previous work, by jointly estimating the dynamics of beliefs, jobs, and wages imposing all of the model restrictions, the impact of learning on job assignment can be uncovered and the indirect effect of learning on wages explicitly assessed. The key finding of the paper is that the indirect effect of learning on wages is substantial: overall learning accounts for one quarter of the cumulative wage growth on the job during the first seven years of tenure. Nearly all of the remaining growth is from human capital acquisition. A related novel finding is that the experimentation component of learning is a primary determinant of the timing of promotions and wage increases. Along with persistent uncertainty about ability, experimentation is responsible for substantially compressing wage growth at low tenures. <br><br> RELATED PAPER: Staff Report 470 <i><a href='http://www.minneapolisfed.org/research/sr/sr470.pdf'>Supplementary Appendix: Careers in Firms—Estimating a Model of Job Assignment, Learning, and Human Capital Acquisition </a></i> Careers in Firms: Estimating a Model of Job Assignment, Learning, and Human Capital Acquisition 2013-06-03T00:00:00-06:00 Elena Pastorino Elena Pastorino 2013-06 Staff Report Revised June 2013 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4929 2013-06-03T00:00:00-06:00 In this appendix I present details of the model and the empirical analysis, and results of counterfactual experiments omitted from the paper. In Section 1 I describe a simple example that illustrates how, even in the absence of human capital acquisition, productivity shocks, or separation shocks, the learning component of the model can naturally generate mobility between jobs within a firm and turnover between firms. I also include the proofs of Propositions 1 and 2 in the paper. In Section 2 I discuss model identification in detail, where, in particular, I prove that information in my data on the performance ratings of managers allows me to identify the learning process separately from the human capital process. In Section 3 I describe the original U.S. firm dataset of Baker, Gibbs, and Holmström (1994a,b), on which my work is based. In Section 4 I provide details about the estimation of the model, including the derivation of the likelihood function, a description of the numerical solution of the model, and a discussion of the results from a Monte Carlo exercise showing the identifiability of the model’s parameters in practice. There I also derive bounds on the informativeness of the jobs of the competitors of the firm in my data, based on the estimates of the parameters reported in the paper. Finally, in Section 5 I present estimation results based on a larger sample that includes entrants into the firm at levels higher than Level 1. Results of counterfactual experiments omitted from the paper are contained in Tables A.12–A.14. <br><br> RELATED PAPER: Staff Report 469 <i><a href='http://www.minneapolisfed.org/research/sr/sr469.pdf'>Careers in Firms: Estimating a Model of Job Assignment, Learning, and Human Capital Acquisition </a></i> Supplementary Appendix: Careers in Firms—Estimating a Model of Job Assignment, Learning, and Human Capital Acquisition 2013-06-03T00:00:00-06:00 Elena Pastorino Elena Pastorino 2013-06 Staff Report Revised June 2013 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5096 2013-04-26T00:00:00-06:00 We develop a model in which, in order to provide managerial incentives, it is optimal to have costly bankruptcy. If benevolent governments can commit to their policies, it is optimal not to interfere with private contracts. Such policies are time inconsistent in the sense that, without commitment, governments have incentives to bail out firms by buying up the debt of distressed firms and renegotiating their contracts with managers. From an ex ante perspective, however, such bailouts are costly because they worsen incentives and thereby reduce welfare. We show that regulation in the form of limits on the debt-to-value ratio of firms mitigates the time-inconsistency problem by eliminating the incentives of governments to undertake bailouts. In terms of the cyclical properties of regulation, we show that regulation should be tightest in ag-gregate states in which resources lost to bankruptcy in the equilibrium without a government are largest. Bailouts, Time Inconsistency, and Optimal Regulation 2013-04-26T00:00:00-06:00 Patrick J. Kehoe Patrick J. Kehoe V. V. Chari V. V. Chari 2013-04 Staff Report April 2013 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5081 2013-04-03T00:00:00-06:00 This chapter is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of resources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow faster in the long run also tend to save more both domestically and internationally. These facts suggest that either the long-run allocation of resources across countries is inefficient, or that there is a systematic relation between fast growth and preference for delayed consumption. The third part applies the methodology to the allocation of resources across developed countries at the business cycle frequency. Here we discuss how evidence on international quantity comovement, exchange rates, asset prices, and international portfolio holdings can be used to assess efficiency. Overall, quantities and portfolios appear consistent with efficiency, while evidence from prices is difficult to interpret using standard models. The welfare costs associated with an inefficient allocation of resources over the business cycle can be significant if shocks to relative country permanent income are large. In those cases partial financial liberalization can lower welfare. Assessing International Efficiency 2013-04-03T00:00:00-06:00 Fabrizio Perri Fabrizio Perri Jonathan Heathcote Jonathan Heathcote 2013-04 Staff Report April 2013 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=975 2013-04-03T00:00:00-06:00 We propose a methodology for studying changes in bilateral commodity trade due to goods not exported previously or exported only in small quantities. Using a panel of 1,900 country pairs, we find that increased trade of these “least-traded goods” is an important factor in trade growth. This extensive margin accounts for 10 percent of the growth in trade for NAFTA country pairs, for example, and 26 percent in trade between the United States and Chile, China, and Korea. Looking at country pairs with no major trade policy change or structural change, however, we find little change in the extensive margin. How Important Is the New Goods Margin in International Trade? 2013-04-03T00:00:00-06:00 Timothy J. Kehoe Timothy J. Kehoe Kim J. Ruhl Kim J. Ruhl 2013-04 Staff Report Revised April 2013 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5080 2013-04-01T00:00:00-06:00 We develop a model of equilibrium entry, trade, and price formation in over-the-counter (OTC) markets. Banks trade derivatives to share an aggregate risk subject to two trading frictions: they must pay a fixed entry cost, and they must limit the size of the positions taken by their traders because of risk-management concerns. Although all banks in our model are endowed with access to the same trading technology, some large banks endogenously arise as “dealers,” trading mainly to provide intermediation services, while medium sized banks endogenously participate as “customers” mainly to share risks. We use the model to address positive questions regarding the growth in OTC markets as trading frictions decline, and normative questions of how regulation of entry impacts welfare. The Market for OTC Derivatives 2013-04-01T00:00:00-06:00 Andrew Atkeson Andrew Atkeson Andrea L. Eisfeldt Andrea L. Eisfeldt Pierre-Olivier Weill Pierre-Olivier Weill 2013-04 Staff Report April 2013 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5022 2012-12-28T00:00:00-06:00 We build a variation of the neoclassical growth model in which financial shocks to households or wealth shocks (in the sense of wealth destruction) generate recessions. Two standard ingredients that are necessary are (1) the existence of adjustment costs that make the expansion of the tradable goods sector difficult and (2) the existence of some frictions in the labor market that prevent enormous reductions in real wages (Nash bargaining in Mortensen-Pissarides labor markets is enough). We pose a new ingredient that greatly magnifies the recession: a reduction in consumption expenditures reduces measured productivity, while technology is unchanged due to reduced utilization of production capacity. Our model provides a novel, quantitative theory of the current recessions in southern Europe. Engineering a Paradox of Thrift Recession 2012-12-28T00:00:00-06:00 José-Víctor Ríos-Rull José-Víctor Ríos-Rull Zhen Huo Zhen Huo 2012-12 Staff Report December 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5021 2012-12-27T00:00:00-06:00 Beginning in the early 1900s, Puerto Rican sugar has entered the U.S. mainland tariff free. Given this new status, the Puerto Rican sugar industry grew dramatically, soon far outstripping Louisiana’s production. Then, in the middle 1960s, something amazing happened. Production collapsed. Manufacturing sugar in Puerto Rico was no longer profitable. Louisiana, in contrast, continued to produce and grow sugar. We argue that local economic policy was responsible for the industry’s demise. In the 1930s and 1940s, the local Puerto Rican government enacted policies to stifle the growth of large cane-farms. As a result, starting in the late 1930s, farm size fell, mechanization of farms essentially ceased, and the Puerto Rican sugar industry’s productivity (relative to Louisiana) rapidly declined until the industry collapsed. The overall Puerto Rican economy also began to perform poorly in the late 1930s. In particular, Puerto Rico’s per capita income was converging to that of the poorest U.S. states until the late 1930s, but since then it has lost ground to these states. One naturally wonders: was the poor overall performance of the Puerto Rican economy also the result of policy? We show that Puerto Rico embarked on other economic policies in the early 1940s that proved to be major setbacks to its economic development. What Ever Happened to the Puerto Rican Sugar Manufacturing Industry? 2012-12-27T00:00:00-06:00 James A. Schmitz, Jr. James A. Schmitz, Jr. Arilton Teixeira Arilton Teixeira Benjamin Bridgman Benjamin Bridgman Michael Maio Michael Maio 2012-12 Staff Report December 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5002 2012-12-03T00:00:00-06:00 This paper studies the nature of business cycle variation in individual earnings risk using a confidential dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2010. We use these data to decompose individual earnings growth during recessions into “between-group” and “within-group” components. We begin with the behavior of within-group shocks. Contrary to past research, we do not find the variance of idiosyncratic earnings shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses—large upward earnings movements become less likely—whereas the bottom end expands—large drops in earnings become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left-skewed and, hence, risky during recessions. Second, to study between-group differences, we group individuals based on several observable characteristics at the time a recession hits. One of these characteristics—the average earnings of an individual at the beginning of a business cycle episode—proves to be an especially good predictor of fortunes during a recession: prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings (which is not the case during expansions). Finally, we find that the cyclical nature of earnings risk is dramatically different for the top 1 percent compared with all other individuals—even relative to those in the top 2 to 5 percent. The Nature of Countercyclical Income Risk 2012-12-03T00:00:00-06:00 Fatih Guvenen Fatih Guvenen Serdar Ozkan Serdar Ozkan Jae Song Jae Song 2012-12 Staff Report December 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5001 2012-11-30T00:00:00-06:00 We analyze commitment to employment in an environment in which an infinitely lived firm faces a sequence of finitely lived workers who differ in their ability to produce output. The ability of a worker is initially unknown to both the worker and the firm, and a worker's effort affects the information on ability that is conveyed by performance. We characterize equilibria and show that they display commitment to employment only when effort has a persistent but delayed impact on output. In this case, by providing insurance against early termination, commitment encourages workers to exert effort, thus improving the firm's ability to identify their talent. We argue that the incentive value of commitment to retention helps explain the use of fixed probationary appointments in environments in which there exists uncertainty about ability. Learning-by-Employing: The Value of Commitment Under Uncertainty 2012-11-30T00:00:00-06:00 Elena Pastorino Elena Pastorino Braz Camargo Braz Camargo 2012-11 Staff Report November 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4943 2012-10-01T00:00:00-06:00 A problem facing the United States is financing retirement consumption as its population ages. Policy analysts increasingly advocate savings-for-retirement systems, but are concerned with insufficient savings opportunities with limited government debt. This concern is unwarranted. First, there is more productive capital than commonly assumed in macroeconomic modeling. Second, if the policy reform subsumes the elimination of capital income taxes, then the value of business equity increases relative to the capital stock. Phasing in a switch from the current U.S. system to a savings-for-retirement system without capital income taxes increases welfare of all current and future cohorts.<br> <br> RELATED PAPER: Staff Report 473 <i><a href='http://www.minneapolisfed.org/research/sr/sr473.pdf'>Technical Appendix: On Financing Retirement with an Aging Population</a></i> On Financing Retirement with an Aging Population 2012-10-01T00:00:00-06:00 Edward C. Prescott Edward C. Prescott Ellen R. McGrattan Ellen R. McGrattan 2012-10 Staff Report Revised October 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4951 2012-10-01T00:00:00-06:00 No abstract available. <br> <br> RELATED PAPER: Staff Report 472 <i><a href='http://www.minneapolisfed.org/research/sr/sr472.pdf'>On Financing Retirement with an Aging Population</a></i> Technical Appendix: On Financing Retirement with an Aging Population 2012-10-01T00:00:00-06:00 Edward C. Prescott Edward C. Prescott Ellen R. McGrattan Ellen R. McGrattan 2012-10 Staff Report Revised October 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4955 2012-09-27T00:00:00-06:00 <i>The Cincinnati Post</i> published its last edition on New Year’s Eve 2007, leaving the <i>Cincinnati Enquirer</i> as the only daily newspaper in the market. The next year, fewer candidates ran for municipal office in the Kentucky suburbs most reliant on the <i>Post</i>, incumbents became more likely to win re-election, and voter turnout and campaign spending fell. These changes happened even though the <i>Enquirer</i> at least temporarily increased its coverage of the <i>Post</i>’s former strongholds. Voter turnout remained depressed through 2010, nearly three years after the <i>Post</i> closed, but the other effects diminished with time. We exploit a difference-in-differences strategy and the fact that the <i>Post</i>’s closing date was fixed 30 years in advance to rule out some noncausal explanations for our results. Although our findings are statistically imprecise, they suggest that newspapers—even underdogs such as the <i>Post</i>, which had a circulation of just 27,000 when it closed—can have a substantial and measurable impact on public life. Do Newspapers Matter? Short-Run and Long-Run Evidence from the Closure of <i>The Cincinnati Post</i> 2012-09-27T00:00:00-06:00 Sam Schulhofer-Wohl Sam Schulhofer-Wohl Miguel Garrido Miguel Garrido 2012-09 Staff Report September 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4939 2012-08-28T00:00:00-06:00 We develop a new methodology to compute differences in the expected longevity of individuals who are in different socioeconomic groups at age 50. We deal with two main problems associated with the standard use of life expectancy: that people’s socioeconomic characteristics evolve over time and that there is a time trend that reduces mortality over time. Using HRS data for individuals from different cohorts, we estimate a hazard model for survival with time-varying stochastic endogenous covariates that yields the desired expected durations. We uncover an enormous amount of heterogeneity in expected longevities between individuals in different socioeconomic groups, albeit less than implied by a naive (static) use of socioeconomic characteristics. Our analysis allows us to decompose the longevity differentials into differences in health at age 50, differences in mortality conditional on health, and differences in the evolution of health with age. Remarkably, it is the latter that is the most important for most socioeconomic characteristics. For instance, education and wealth are health protecting but have little impact on two-year mortality rates conditional on health. Finally, we document an increasing time trend of all these differentials in the period 1992–2008, and a likely increase in the socioeconomic gradient in mortality rates in the near future. The mortality differences that we find have huge welfare implications that dwarf the differences in consumption accruing to people in different socioeconomic groups. Heterogeneity in Expected Longevities 2012-08-28T00:00:00-06:00 José-Víctor Ríos-Rull José-Víctor Ríos-Rull Josep Pijoan-Mas Josep Pijoan-Mas 2012-08 Staff Report August 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4927 2012-07-23T00:00:00-06:00 Fifty-eight years ago, Harberger (1954) estimated that the costs of monopoly, which resulted from misallocation of resources <i>across</i> industries, were trivial. Others showed the same was true for tariffs. This research soon led to the consensus that monopoly costs are of little significance—a consensus that persists to this day. <br><br> This paper reports on a new literature that takes a different approach to the costs of monopoly. It examines the costs of monopoly and tariffs <i>within</i> industries. In particular, it examines the histories of industries in which a monopoly is destroyed (or tariffs greatly reduced) and the industry transitions quickly from monopoly to competition. If there are costs to monopoly and high tariffs within industries, we should be able to see these costs whittled away as the monopoly is destroyed. <br><br> In contrast to the prevailing consensus, this new research has identified significant costs of monopoly. Monopoly (and high tariffs) is shown to significantly lower productivity within establishments. It also leads to misallocation within industry: resources are transferred from high to low productivity establishments. <br><br> From these histories a common theme (or theory) emerges as to why monopoly is costly. When a monopoly is created, “rents” are created. Conflict emerges among shareholders, managers, and employees of the monopoly as they negotiate how to divide these rents. Mechanisms are set up to split the rents. These mechanisms are often means to reduce competition <i>among</i> members of the monopoly. Although the mechanisms divide rents, they also destroy them (by leading to low productivity and misallocation). New and Larger Costs of Monopoly and Tariffs 2012-07-23T00:00:00-06:00 James A. Schmitz, Jr. James A. Schmitz, Jr. 2012-07 Staff Report July 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4926 2012-07-20T00:00:00-06:00 The interplay between competition and trust as efficiency-enhancing mechanisms in the private provision of money is studied. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on efficiency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved. The quality of money can be observed only after its purchasing capacity is realized. In this sense, money is an experience good. Money Is an Experience Good: Competition and Trust in the Private Provision of Money 2012-07-20T00:00:00-06:00 Juan Pablo Nicolini Juan Pablo Nicolini Pedro Teles Pedro Teles Ramon Marimon Ramon Marimon 2012-07 Staff Report July 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4923 2012-07-17T00:00:00-06:00 We develop a model for analyzing the sovereign debt crises of 2010–2012 in the Eurozone. The government sets its expenditure-debt policy optimally. The need to sell large quantities of bonds every period leaves the government vulnerable to self-fulfilling crises in which investors, anticipating a crisis, are unwilling to buy the bonds, thereby provoking the crisis. In this situation, the optimal policy of the government is to reduce its debt to a level where crises are not possible. If, however, the economy is in a recession where there is a positive probability of recovery in fiscal revenues, the government may optimally choose to “gamble for redemption,” running deficits and increasing its debt, thereby increasing its vulnerability to crises. Gambling for Redemption and Self-Fulfilling Debt Crises 2012-07-17T00:00:00-06:00 Timothy J. Kehoe Timothy J. Kehoe Juan Carlos Conesa Juan Carlos Conesa 2012-07 Staff Report June 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4056 2012-07-16T00:00:00-06:00 Recent studies say prices change about every four months. Economists have interpreted this high frequency as evidence against the importance of sticky prices for the real effects of monetary policy. Theory implies that this interpretation is correct if most price changes are regular, but not if most are temporary, as in the data. Temporary changes have a striking feature: after such a change, the nominal price tends to return exactly to its preexisting level. We study versions of Calvo and menu cost models that replicate this feature. Both models predict that the degree of aggregate price stickiness is determined mostly by the frequency of regular price changes, not by the combined frequency of temporary and regular price changes. Since regular prices are sticky in the data, the models predict a substantial degree of aggregate price stickiness even though micro prices change frequently. In particular, the aggregate price level in our models is as sticky as in standard models in which micro prices change about once a year. In this sense, prices are sticky after all. Prices Are Sticky After All 2012-07-16T00:00:00-06:00 Patrick J. Kehoe Patrick J. Kehoe Virgiliu Midrigan Virgiliu Midrigan 2012-07 Staff Report Revised July 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4919 2012-07-11T00:00:00-06:00 During the recent U.S. financial crisis, the large decline in economic activity and credit was accompanied by a large increase in the dispersion of growth rates across firms. However, even though aggregate labor and output fell sharply during this period, labor productivity did not. These features motivate us to build a model in which increased volatility at the firm level generates a downturn but has little effect on labor productivity. In the model, hiring inputs is risky because financial frictions limit firms' ability to insure against shocks that occur between the time of production and the receipt of revenues. Hence, an increase in idiosyncratic volatility induces firms to reduce their inputs to reduce such risk. We find that our model can generate about 67% of the decline in output of the Great Recession of 2007–2009. Financial Frictions and Fluctuations in Volatility 2012-07-11T00:00:00-06:00 Patrick J. Kehoe Patrick J. Kehoe Cristina Arellano Cristina Arellano Yan Bai Yan Bai 2012-07 Staff Report July 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4618 2012-04-18T00:00:00-06:00 No abstract available. <br><br> RELATED PAPER: Staff Report 454 <i><a href='http://www.minneapolisfed.org/research/sr/sr454.pdf'>Transition to FDI Openness: Reconciling Theory and Evidence</a></i> Technical Appendix: Transition to FDI Openness—Reconciling Theory and Evidence 2012-04-18T00:00:00-06:00 Ellen R. McGrattan Ellen R. McGrattan 2012-04 Staff Report Revised April 2012