UC Davis

This dissertation explores the long-run consequences of temporary macroeconomic shocks. It relies on the combination of historical data, frontier methods in empirical macroeconomics, and macroeconomic models featuring firm heterogeneity. The first chapter provides evidence of substantial long-run effects from monetary shocks on two sources of endogenous growth; human capital and technological adoption. This contribution is the first to test for the presence of this hysteresis in direct measures of the supply-side potential of economies, rather than on indirect measures, e.g., total factor productivity. To estimate the effects of exogenous monetary policy shocks, I improve identification using the trilemma of international finance by developing a mean-unbiased instrumental variable estimator. Results show substantial hysteresis in both human capital and technological adoption. Importantly, monetary shocks have asymmetric effects, as only contractionary shocks result in long lasting responses in productivity. I evaluate the aggregate importance of monetary hysteresis with a growth accounting exercise. Across the 17 countries in the sample, the accumulated average cost of monetary hysteresis ranges between 1.2 and 9.6% of total factor productivity. The second chapter examines the lasting impact of temporary productivity shocks on technological adoption in a model where firms, decide whether to adopt or abandon a new technology after an unexpected productivity shock. The setting is based on firms that face heterogeneous fixed costs to implement and operate said technology. Due to complementarity in the production of the final good, individual technological choices are interlinked, thereby amplifying and prolonging the effects of large shocks. I find that the estimates align closely with the model's predictions, by merging international cross-country data from three databases and using a non-parametric local projections method. A simplified version of the model, calibrated to match the empirical estimates, reveals that subsidizing the operational costs of technology leads to welfare improvements by protecting the economy's productive potential. Lastly, Chapter 3 (prepared as part of a research project with Michaela Elfsbacka Schmöller from the Bank of Finland) explores the sectoral reallocation effects of monetary policy shocks and their transmission to aggregate productivity. Using data for 65 industries for the period 1948-2014, we show by means of local projections that monetary policy shocks reallocate resources towards the services sector and away from the rest of the economy. Results suggest that, since the services sector had lower productivity growth, monetary-originated reallocation contributed negatively to aggregate productivity growth over the sample period.