Macroeconomics

This paper shows that the pace of technology creation is a key driver of the skill premium. It develops a model in which skilled workers have a comparative advantage in learning new technologies. As technologies age, they become standardized and accessible to other workers. The skill premium is determined by the interplay between the pace of technology creation and standardization. A rapid pace of technology creation leads to a sustained increase in the skill premium. We calibrate the model using novel text-based data on new technologies and their changing demand for skills as they age. These data show that new technologies are initially skill intensive but become less so as they age. The data also point to an increased pace of new technology creation starting in the 1970s and tapering off in the 2000s. In response to this rapid pace of technology creation, the model generates a 32 percent increase in the college premium, which begins to reverse in the 2010s. Our framework also explains why the college premium is higher in dense cities, why its increase was mainly urban, and why it rose first for young workers and later for older workers.

Modern theories of the business cycle do not allow for the simultaneous rational choice of both prices and quantities, instead assuming that an “invisible hand” determines one of these variables to clear markets. In this paper, we develop a macroeconomic framework in which both prices and quantities are chosen directly by firms, and exchange is both voluntary and efficient. Because of uncertainty about demand and productivity, individual product markets can be in excess supply or rationed. The absence of market-clearing changes pricing and production in qualitatively important ways: markups are no longer determined solely by the elasticity of demand, and higher uncertainty reduces production and increases markups. In equilibrium, production in rationed markets has a negative aggregate demand externality on demand in slack markets. Differently from New Keynesian economies, monetary shocks propagate by reducing economic slack, raising aggregate labor productivity and consumption, while uncertainty shocks act as stagflationary cost-push shocks. We integrate our theory of disequilibrium in a dynamic, rational-expectations “New Old Keynesian Model” and demonstrate its implications for the business cycle.

Modern macroeconomics ignores the recent proliferation of new monies. We show in our model that new monies like credit cards or stable coins or crypto currencies or helicopter money can cause a huge increase in prices, like the 1970s inflation when credit cards emerged in full use. These monies are not perfect substitutes, so shrinking conventional money supply to compensate for the growth of new monies comes at a welfare cost. Price levels are determined by money chasing goods, measured by the separate quantities of each kind of money and the scale of individual transactions. In Part I we introduce a one period version of our model in which we concentrate on the transactions role of monies. We show how fiat wealth (net of taxes) can be positive if there are enough gains to trade. Monies that raise fiat wealth (such as helicopter money) cause more inflation—eventually even hyperinflation—by increasing the interest rate, which reduces transactions. In contrast, credit cards (and central bank purchases of bonds) also cause inflation, but they enhance transactions and welfare. In Part II we present a multiperiod version in which the store-of-value role of money, and expectations about future policy, also affect inflation.