Plenary Talks This was perhaps unusual for the SED, in that the three plenary talks were pretty light on theory. Andy Atkeson's Friday evening talk was purely a measurement exercise. The idea is to measure a firm's financial soundness by "distance to insolvency." An increase in leverage or in risk will decrease distance to insolvency. Andy and his coauthors (Andrea Eisfeldt and Pierre Oliver-Weill) isolate three "solvency crises," which occurred in 1932-33, 1937, and 2008. During these crises, you can see what happens to the whole distribution of firms (ranked according to distance to insolvency). Essentially the distribution collapses - all firms get a lot closer to insolvency. Andy makes a big deal of the fact that what we see happening to financial firms is similar to what happens to nonfinancial firms during crises. He wants to question the view that financial firms are especially vulnerable during a financial crisis. I'm not sure. The financial intermediation sector can be fragile, and transmit this fragility everywhere, so that insolvency is observed in both financial and nonfinancial firms. Bailing out the financial firms because they are viewed as "systemically" important may be wrong, but I don't think the work of Andy and his coauthors necessarily suggests that.
The SED has become a very large meeting, with 12 parallel sessions running. That's about 450 papers presented over three days. In spite of its size, though, the conference has retained its midwestern sensibility. The papers are mainly in modern macro and structural applied micro. However, one of the plenary talks each year is typically devoted to a presentation by someone outside the tribe, and this year's was by Christopher Udry, from Yale. Udry talked about work on field experiments in development that related to some of the financial frictions mechanisms that macroeconomists like to think about. Udry characterized the results as mixed - in some experiments it appears that credit frictions seem to matter, and in other cases not. Here, I think the development experimenters and the macroeconomists could benefit more from talking to each other. In some venues, I think this is happening already. For example, Rob Townsend at MIT has made attempts to get the two groups together. One benefit from cross-fertilization would be the integration of more serious theory into the design of field experiments and the interpretation of the evidence. In particular, it wasn't clear that some of the field experiments Udry discussed could actually tell us much about the role of credit and financial arrangements in the economy.
Finally, Monika Piazzesi presented some interesting preliminary work, joint with Juliane Begenau and Martin Schneider, on measuring bank risk. They focus in particular on making inferences about derivative positions, which are in principle difficult to measure. Some of the results indicated that the derivative positions of large banks were increasing risk rather than reducing it. Not sure how we think about this in a systemic context.
RBC is not dead. We would have to go back years to find anything that would resemble a baseline real business cycle (RBC) model in a paper presented at the SED meetings. This year's crop includes plenty of models with heterogeneous firms, heterogeneous consumers, banks and other financial intermediaries, search frictions, etc. A common view of the recent recession is that the standard representative agent RBC model does not fit the facts, particularly with regard to the behavior of labor productivity. However, this paper, by McGrattan and Prescott makes the case that we can solve the "productivity puzzle" by thinking about measurement error in the national income accounts. McGrattan and Prescott argue that the key mismeasurement involves intangible investment. What's that?
Intangible capital is accumulated know-how from investing in research and development, brands, and organizations, which is for the most part expensed by companies rather than capitalized. Because it is expensed, it is not included in measures of business value added and thus is not included in GDP.The argument is that intangible investment is a significant fraction of correctly-measured GDP, and that it is volatile and procyclical, just like tangible investment. MacGrattan/Prescott claim that intangible investment helps us understand both the 1990s boom and the 2008-2009 bust as TFP-driven. You may think that factors other than TFP are important for business cycles, or that TFP is some kind of reduced form for those other factors, but people with alternative ideas need to be as serious about the data as MacGrattan and Prescott are. Popular discussions about the role of Keynesian phenomena in the recent recession are, in this respect, particularly loose.