Twitter really has gone down in quality quite a bit… please don’t stop the memes, we need some laughs during these times!

#econsky 📉📈

Please help me share my JMP titled

* The Firm Life Cycle Origins of the Aggregate Investment Puzzle *

🧵 above + abstract + link to paper website here:

sites.harvard.edu/martin-arago...

let me end JMP 🧵 w/ optimistic note

Since 2010 US Census shows startup resurgence!

Even accelerated thru COVID!!

Why? Has startup deficit ended? I'm investigating this...

JMP shows startup surging across OECD countries

along with investment / profits like in my model

JMP 🧵 9/ In many models profitable firms invest more

In life cycle models, startups shifts GDP

from YOUNG firms front-loading investment to grow

to OLD firms back-loading profits rewarding past investment

Generating ⬆️ profits ⬇️ investment in macro data!

JMP 🧵 8/ S&D economics

I solved the life cycle investment model in closed-form!

startup rates shifted *both* supply & demand

S: yes, r* should have stimulated I/Y but...

D: firm aging depressed investment demand even more

=> "unintuitive" r & I/Y covariance

JMP 🧵 7/ fewer startups => lower rates r*

Why did interest rates not stimulate investment?

Because startup rate had 2 effects

PE: Firm aging, depressing investment I/Y

GE: Slower consumption growth, depressing r*

Model fits data best when firms are insensitive to r*

JMP 🧵 6/ life cycle origins of the investment puzzle

Since 80s startup activity collapsed...

firms got older!

Investment declined despite rising profits in macro data

Why didn't profitability stimulate investment?

Life cycle economics:

Higher profits reward past investment!

JMP 🧵 5/ life cycle origins of investment

I find the investment puzzle is actually not so puzzling...

once the model experiences historical startup rates!

From WWII to mid-70s: Startup rate
Peak ~Microsoft/Apple launched

firms turned younger!

and investment/GDP boomed!

JMP 🧵 4/ neoclassical theory of the investment puzzle

I add investment to my favorite model (Hopenhayn '92)
+ force it to match US Census firm life cycle dynamics!

How?

I propose a calibration method I found useful:

Matching the terms in the formula I used for empirics!

JMP 🧵 3/ missing investment boom

Literature tried to come up with "micro" reasons why firms invest less

But...

Census shows firm-level investment given age boomed!

Do you think business/VC world think investment fell? No

Firm aging likely made macro fall despite micro boom

JMP 🧵 2/ firm aging depressed macro investment!

Firm aging predicts puzzling Investment/GDP decline

Why? Confidential Census micro data shows:

A. economy has shifted from young to old firms

B. older firms invest less intensely, but more profitable?

I build a formula with A + B