Research

Title: TFP Growth Regimes and the State Dependence of the Slope of the Phillips Curve

Abstract: What is the relationship between the long-run productivity growth and the short-run trade-off between inflation and economic slack? This paper studies the state dependence of the slope of the Phillips curve on the trend productivity growth. By merging two longitudinal databases, this paper presents estimates of the ``average'' New Keynesian Phillips curve for 17 advanced economies across TFP growth regimes since 1890. Following the latest state-of-art method, estimation of the hybrid New Keynesian Phillips curve using trilemma monetary shocks as instruments shows that the Phillips curve is steeper (flatter) in the high (low) growth regime. The empirical finding is consistent with the following mechanism: the structural changes that contribute to higher productivity growth also result in more competitive market, increasing the price elasticity of demand so that the pass-through of marginal costs from short-run demand changes is higher, and vice versa. This mechanism is qualitatively consistent with the recent trends of flattening Phillips curve and productivity slowdown amid rising market concentration in major advanced economies. The policy implication is that structural reforms that can improve productivity and restore business dynamism help enhance the potency of monetary policy in the long run.

Title: TFP News Shock, Balance Sheet Liquidity, and Investment Dynamics

Abstract: This paper combines the identified TFP news shock using the maximum FEV approach with panel local projection techniques for micro-level data to study the relevance of financial frictions in explaining firms’ heterogeneous investment responses to TFP news shocks. I find that the liquid asset ratio is the strongest predictor. Leverage, size, age, and paying dividends or not are less relevant after controlling for the liquid asset ratio. Regarding the possible transmission mechanism, this paper finds that upon the arrival of favorable TFP news shocks, firms’ net worth in book value rises significantly and persistently, especially for firms with more liquid asset holdings. This enables them to borrow more long-term debts from financial intermediaries to finance their investment projects beyond their cash buffers. Besides, following their investment responses, more liquid firms exhibit higher operational efficiency and price markups.