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Abstract

This dissertation studies macroeconomic questions in the fields of monetary economics, economic growth, and income inequality through the lens of detailed micro data sets. In the first chapter of this dissertation (joint with Chen Yeh), we study the role of product entry and exit in propagating nominal shocks to the real economy. Toward that goal, we show that product turnover has an extensive role in the aggregate economy and that the frequency and size of price adjustments are negatively related to a product’s age. We exploit information from product-level characteristics and the timing of products’ launches to provide empirical support that these stylized facts can be rationalized by an active learning motive: firms with new products are faced with demand uncertainty and can optimally obtain valuable information by varying their prices. Building on the empirical findings, we construct a menu cost model with active learning and quantify the importance of age-dependent pricing moments for the propagation of nominal shocks. In the calibrated version of our model, the cumulative response of output to a nominal shock more than doubles compared to the standard menu cost model and this response is higher during economic booms.,In the second chapter (joint with Munseob Lee and Sara Moreira), we use detailed product- and firm-level data to study the sources of innovation and the patterns of productivity growth over the period from 2007 to 2013. We document several new facts on product reallocation. First, every quarter around 8 percent of products are reallocated in the economy, and the entry and exit of products are prevalent among different types of firms. Second, most reallocation of products occurs within the boundaries of the firm. The entries and exits of firms only make a small contribution in the overall creation and destruction of products. Third, product reallocation is strongly pro-cyclical and declined by more than 25 percent during the Great Recession. This cyclical pattern is almost entirely explained by a decline in within firm reallocation. Motivated by these facts, we study the causes and consequences of reallocation within incumbent firms. As predicted by Schumpeterian growth theories, the rate of product reallocation strongly depends on the innovation efforts of the firms and has important implications for revenue growth, improvements in products’ quality, and productivity dynamics. Our estimates suggest that the decline in product reallocation through these margins has contributed greatly to the slow growth experienced after the Great Recession. Lastly, in the third and last chapter of this dissertation (joint with Munseob Lee), we construct income-specific price indices for the period from 2004 to 2010. We find substantial differences across income groups that arise during the Great Recession. The annual inflation in the cost of living of the highest quartile is on average 0.59 percentage points lower than that of the lowest quartile of the income distribution. We find that product quality substitution, a margin mostly available to richer households, is the main mechanism explaining the differences. Our evidence shows that not accounting for these differences could lead to significant biases in the calculation of inequality and poverty measures.

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