# Jonathan J. Adams

### Macroeconomist

## About Me

I am an Assistant Professor in the Economics Department at the University of Florida. My research interests include Growth and Macroeconomics in general, while most of my current research is focused on Macroeconomics with Information Frictions.

email: adamsjonathan@ufl.edu

## Working Papers

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### Household Consumption and Dispersed Information

### Conditionally Accepted - Journal of Monetary Economics

We study the effects of aggregate income shocks in a small open economy heterogeneous agent model. By introducing a standard information friction, we are able to explain two patterns of small economies experiencing large income changes: (1) excess volatility in consumption and (2) household consumption elasticities that have low correlation with income. With a standard dispersed information structure, households cannot distinguish aggregate income shocks from idiosyncratic ones. Therefore their consumption responds excessively to aggregate income changes, which they forecast as likely to be more persistent than they would if they had full information. We demonstrate that this effect occurs at all points in the income distribution, lowering the correlation of the consumption elasticity with income. Finally, we corroborate our central mechanism using survey data on household expectations of their future income.

### Macroeconomic Models with Incomplete Information and Endogenous Signals

Revise and Resubmit - Journal of Economic Theory This paper characterizes a general class of macroeconomic models with incomplete information, which feature endogenous signal processes. These types of models are not always well-behaved, possibly featuring zero or many equilibria, and solution algorithms may not converge. I introduce an Information Feedback Regularity condition to discipline these models. If the regularity condition is satisfied, then the model exhibits a number of nice properties, including: a "computable" equilibrium must exist, and if an equilibrium is stable, then it is the globally unique stable equilibrium. I prove that computable equilibria approximate uncomputable infinite-dimensional stable equilibria arbitrarily well, and that the regularity condition is necessary for any equilibrium to be stable. Then, I study the regularity condition and equilibrium properties in a number of example applications. Finally, I introduce an algorithm to solve the general model, and provide resources to compute it.

### Shocks to Inflation Expectations

### Revise and Resubmit - Review of Economic Dynamics

The consensus among central bankers is that higher inflation expectations can drive up actual inflation. We assess this by devising a novel method for identifying shocks to inflation expectations, estimating a semi-structural VAR where an expectation shock is identified as that which causes measured forecasts to diverge from the rational expectation. Using data for the United States, we find that a positive inflation expectation shock is contractionary and deflationary: output, inflation, and interest rates all fall. These results are inconsistent with the standard New Keynesian model, which predicts inflation and interest rate hikes. We discuss possible resolutions to this puzzle.

### Optimal Policy Without Rational Expectations: A Sufficient Statistic Solution

New!!How should policymakers respond to mistakes made by agents without rational expectations? I demonstrate in a general setting that the optimal policy is determined by a sufficient statistic: agents' belief distortion or "sentiment". This result is both simple and only semi-structural: in order to calculate policy from the sentiment, the policymaker does not need to know the whole macroeconomic model. They only need to know how sentiments and policies distort decisions. Crucially, they do not even need to know how expectations are formed; they only need to measure them. Next, I study several examples. In a behavioral RBC model, the optimal policy is to tax capital when agents are overly optimistic about future returns. In a behavioral New Keynesian model, the optimal policy is raise interest rates when agents misperceive the economy to be running hot. I conclude by arguing for policymakers to focus on estimating sentiments in the data.

We propose a method to identify the anticipated components of macroeconomic shocks in a structural VAR. We include empirical forecasts about each time series in the VAR. This introduces enough linear restrictions to identify each structural shock and to further decompose each one into "news" and "surprise" shocks. We estimate a VAR on US time series using forecast data from the SPF, CBO, Federal Reserve, and asset prices. Unanticipated fiscal stimulus and monetary policy shocks have typical effects that match existing evidence. In our news-surprise decomposition, we find that news drives around one quarter of US business cycle volatility. News explains a larger share of the variance due to fiscal shocks than for monetary policy shocks. Finally, we use the news structure of the shocks to estimate counterfactual policy rules, and compare the ability of fiscal and monetary policy to moderate output and inflation. We find that coordinated fiscal and monetary policy are substantially more effective than either tool is individually.

### Equilibrium Determinacy with Behavioral Expectations

Under Review Behavioral expectations affect determinacy in macroeconomic models. Relaxing rational expectations can make models more or less well behaved, depending on the behavioral assumptions. In some cases, multiplicity is created; in other cases, multiplicity is eliminated. Is it possible to tell exactly when there are multiple solutions? Yes: I derive a Behavioral Blanchard-Kahn sufficient condition that ensures a unique equilibrium exists. If and only if this condition or a Sunspot Admissibility condition hold, then a model's solution must be unique. These conditions depend on the spectrum of the behavioral expectation operator. I describe how to check these conditions for an arbitrary behavioral expectation, and illustrate with a large variety of popular types of expectations, heuristics, and information frictions. As an example, I demonstrate that a large class of behavioral expectations imply a unique solution to the New Keynesian model with an interest rate peg, including all strictly backwards-looking heuristics. Another class of expectations imply that asset prices exhibit non-fundamental volatility in a standard model.

### Firestorm: Multiplicity in Models with Full Information

Under Review Dynamic stochastic models with full information and rational expectations (FIRE) are not as well determined as is commonly believed. If the assumption of causality is relaxed so that prices and decisions may anticipate future shocks, then FIRE models generally feature multiple equilibria. The multiplicity is due to the endogenous feedback from choices to information to choices, which in equilibrium may contain self-fulfilling news about future shocks. I demonstrate the multiplicity in several examples, including canonical asset pricing and business cycle models. To motivate relaxing the causality assumption, I also study examples with apparent non-causality, even if the model is fundamentally causal. Then I examine how the multiplicity arises in a dynamic programming problem with decentralized markets. Finally, I argue that the business cycle literature must reject FIRE.

### The Rise and Fall of Armies

Revise and Resubmit - Macroeconomic Dynamics For a thousand years, income growth was associated with a rising military employment share. But this share peaked in the early 20th century, after which military employment shares fell with income growth. I argue that rising military shares were driven by structural change out of agriculture, and the recent declines are driven by substitution from soldiers towards military goods. I document evidence for this substitution effect: as countries' incomes rise, the ratio of their military expenditure share to their military employment share rises too. I introduce a game theoretic model of growth and warfare that reproduces the time series patterns of military expenditure and employment. The model also correctly predicts the cross-sectional pattern, that military employment and expenditure shares are decreasing in income during wars. Finally, I show that faster economic growth can reduce military expenditure in the long run.

## Publications

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### Moderating Noise-Driven Macroeconomic Fluctuations Under Dispersed Information

Journal of Economic Dynamics and Control (2023)Can aggregate noise shocks produce large macroeconomic fluctuations, and if so, is there anything that policymakers can do about them? Yes and yes. I study a business cycle model where agents with rational expectations receive noisy signals about future productivity. The model features dispersed information, which allows aggregate noise shocks to produce frequent large bubbles in the capital stock. Because of the information friction, a policymaker with an informational advantage can improve outcomes. I consider policies that affect investment incentives by distorting the intertemporal wedge. I calculate the optimal policy rule, and find that policymakers should discourage investment booms after aggregate news shocks.

### Why are Countries' Asset Portfolios Exposed to Nominal Exchange Rates?

### Journal of International Money and Finance (2021)

Most countries hold large gross asset positions, lending in their domestic currency and borrowing in foreign currency. As a result, their balance sheets are exposed to nominal exchange rate movements. We argue that when asset markets are incomplete, nominal exchange rate exposure allows countries to partially insure against shocks that move real exchange rates. We demonstrate that asset market incompleteness which features a meaningful portfolio choice can simultaneously generate realistic gross asset positions and also resolve the Backus-Smith puzzle: that relative consumptions and real exchange rates are negatively correlated. We also show that local perturbation methods that use endogenous discount factors to stabilize models are inaccurate when the average and steady state interest rates differ, even when they correctly characterize the average portfolio holdings. To address this, we develop a novel global solution method to accurately solve the equilibrium portfolio problem.

### Urbanization, Long-Run Growth, and the Demographic Transition

Journal of Demographic Economics (2021)Advanced economies undergo three transitions during their development: 1. They transition from a rural to an urban economy. 2. They transition from low income growth to high income growth. 3. Their demographics transition from initially high fertility and mortality rates to low modern levels. The timings of these transitions are correlated in the historical development of most advanced economies. I unify complementary theories of the transitions into a nonlinear model of endogenous long run economic and demographic change. The model reproduces the timing and magnitude of the transitions. Because the model captures the interactions between all three transitions, it is able to explain three additional empirical patterns: a declining urban-rural wage gap, a declining rural-urban family size ratio, and most surprisingly, that early urbanization slows development. This third prediction distinguishes the model from other theories of long-run growth, so I test and confirm it in cross-country data.

## Research in Progress

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### Irreversible Investment and Incomplete Information

### with Cheng Chen, Min Fang, Takahiro Hatorri, and Eugenio Rojas

How do investment frictions and information frictions interact? We study this question in a model of heterogeneous firms facing incomplete information and irreversible investment. In a continuous time setting, we can explicitly solve for firms' decision rules and distributions, which allows us to learn exactly how incomplete information distorts firm behavior. We find that the noisier information shrinks a firms inaction region, makes firms riskier, compresses the firm size distribution, and increases misallocation. Then, we test these predictions using data from Japan that matches firm-level expectations to production and investment.

### Terms of Trade Shocks and Heterogeneous International Portfolio Positions

### with Philip Barrett

How do terms of trade shocks affect open economies? We use a panel of global commodity prices to estimate the dynamic effects of terms of trade shocks on macroeconomic variables for 205 countries. We find that terms of trade shocks resemble wealth shocks: a terms of trade improvement increases consumption and investment by more than output and decreases net exports, contrary to prior evidence and standard theory. To explain this outcome, we also show that terms of trade improvements increase countries' net foreign asset position, due to valuation effects of nominal net assets. To make sense of these results, we augment a standard business cycle model with realistic international portfolio choice. We estimate the model for a large sample of countries, and show that it can replicate our empirical findings: terms of trade improvements look like wealth shocks, and their importance for business cycles is heterogeneous, depending on the country's international portfolio position.

### Decreasing Returns to R&D and Declining Growth Rates

Why is growth slowing? Two facts are documented: 1. Richer countries spend a greater share of their income on research and development, and 2. Countries with high spending on research and development grow slower. These facts are evident in both the US time series and in the cross-section of countries. The paper proposes a model that explains these two facts, driven by declining returns to research and development. As technology advances, it costs a greater share of output to increase at the same rate; innovators compensate by spending more in R&D, but cannot compensate fully. In the long run, the R&D share of output asymptotes to 3.0-3.9%, and the per capita GDP growth rate declines to 1.0-1.5%.

## Contact me

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University of Florida Economics

333 Matherly Hall

1405 W University Ave.

Gainesville, FL 32611