Francisco Rosas, Iowa State University, will present an Agricultural Economics Workshop/Econ 693 Presentation on Tuesday, April 17. "Econometric Analysis Based on Duality Theory: How Reliable is it with Real-world Data?" Is the title of his presentation, which will start at 3:40 PM in 368A Heady Hall.

Abstract: The Neoclassical theory of production establishes a dual relationship between the profit value function of a competitive firm and its underlying production technology. This relationship, usually referred to as the duality theory, has been widely used in empirical work to estimate production parameters without the requirement of explicitly specifying the technology. We analyze the ability of this approach to recover the underlying production parameters and its effects on estimated elasticities when the data available for estimation features typical realistic characteristics: unobserved firm heterogeneity, decisions under uncertainty, unexpected production and price shocks, endogenous prices, outputs and inputs aggregation, measurement error in variables, and omitted variables. We compute the data generating process by Monte Carlo simulations, so that the true technology parameters are known and calibrate the dataset to yield realistic magnitudes of noise comparable to those found find in widely used datasets. By construction, this noise introduced in estimation prevents duality theory from holding exactly. Our findings show that the true production parameters are not precisely recovered and therefore the elasticities are inaccurately estimated. We compare the estimated production parameters with the true (and known) parameters by means of the identities between the Hessians of the production and profit functions. The deviation of the own- and cross-price elasticities from their true values, given our parameter calibration, ranges between 2% and 188%, with an average of 85%. Also, own-price elasticities are as imprecisely recovered as cross-price elasticities.

Department alumnus Simon Gilchrist, Boston University, will present the Charles Sivesind Memorial Seminar on Wednesday, April 18. "Uncertainty, Financial Frictions, and Irreversible Investment," is the title of his talk, which will start at 3:40 PM in 368A Heady Hall.

Simon Gilchrist is a professor of economics at Boston University and a research associate at the National Bureau of Economic Research. His research interests relate to monetary economics and applied macroeconomics, focusing on the consequences of financial market turmoil and its impact on real economic activity, with particular focus on the implications for investment behavior, business-cycle dynamics, and the conduct of monetary policy. In recent work, Gilchrist has explored the causes and consequences of financial crises and asset prices bubbles, as well as the appropriate monetary policy response to such events.

He received his BA from Iowa State University in 1984, and his Ph.D. from the University of Wisconsin in 1990. Prior to arriving at Boston University in 1995, Simon Gilchrist served as a staff economist at the Board of Governors of the Federal Reserve System and has held visiting positions at the Massachusetts Institute of Technology and the Federal Reserve Bank of New York. He has also served as an academic consultant to the Board of Governors of the Federal Reserve System, the Bank of Canada, the Bank of England, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of Boston, the Federal Reserve Bank of New York, the Federal Reserve Bank of San Francisco and the International Monetary Fund. He is currently a member of the editorial board of the American Economic Review, and an associate editor at the Review of Economics and Statistics.

Abstract: This paper analyzes—both empirically and theoretically—how fluctuations in uncertainty interact with financial market imperfections in determining economic outcomes in a model that allows for irreversible investment. With investment irreversibility, an increase in uncertainty reduces investment and economic activity owing to the increase in the real option of waiting to invest. In a standard bond-contracting framework, an increase in uncertainty benefits equity holders at the expense of bondholders. In such an environment, increased uncertainty causes a reduction in bond-financing and implies a higher cost of capital. This mechanism implies a further decline in investment and economic activity.

Using both aggregate time-series and firm-level data, we find strong evidence supporting the notion that financial frictions play a major role in shaping the uncertainty-investment nexus. We then develop a tractable general equilibrium model in which individual firms face time-varying uncertainty and imperfect capital markets when issuing risky bonds and equity to finance irreversible investment projects. We calibrate the uncertainty process using micro-level estimates of shocks to the firms’ profits and show that the combination of uncertainty shocks and financial frictions can generate fluctuations in economic activity that are substantially greater than those obtained under a model with irreversible investment but no financial frictions.

This seminar honors the memory of Charlie Sivesind, a 1975 PhD in the Department of Economics at Iowa State University. Charlie was a visiting assistant professor in this department during the 1974-75 academic year. He also taught courses at Fordham, Colombia, New York, and Pace Universities. From 1975 until early 1979 he worked as an economist with the Federal Reserve Bank of New York. From the time he left the New York Fed until his death, he was employed as a financial economist by Morgan Stanley & Co. During the five years of his professional life, Charlie became a well-known and highly respected monetary economist. In 1977, he won the Abram Award of the National Association of Business Economists for applied economic research.

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