Working Papers

Investment and Risk under Flexible Capacity Utilization
    With Gill Segal
We study the implications of flexible capacity utilization for firms’ investment and risk in an RBC framework. Capacity utilization improves the model’s fit for numerous investment-related moments. Specifically, flexible utilization reconciles the positive sign of firm-level investment skewness with the data. Without utilization, the model-implied skewness bears the wrong sign. The model predicts an annual risk premium spread between low and high utilization firms of about 5%. We confirm this novel utilization spread in the data. Empirically, utilization explains premia beyond other intensive-margin characteristics. Our results demonstrate the importance of utilization for the joint dynamics of firms’ production and valuation.

Real-time Forecasts of State and Local Government Budgets
    With Eric Ghysels and Nazire Ozkan
Using a sample of the 48 contiguous United States, we consider the problem of forecasting state and local governments' revenues and expenditures in real time using models featuring mixed-frequency data. Among the single-equation models we consider, we find that ADL-MIDAS regressions combining high-frequency economic variables together with low-frequency fiscal data yield forecast gains over traditional models in which all data are included at the same (low) sampling frequency. Among the multi-equation models we consider, we find that low-frequency Bayesian vector autoregressions (BVARs) typically outperform both mixed-frequency Bayesian vector autoregressions (MF-BVARs) and low-frequency vector autoregressions (VARs). When we directly compare the forecasts from ADL-MIDAS regressions to those from MF-BVARs and BVARs, we find that ADL-MIDAS models typically produce the most accurate forecasts of state-level revenues and expenditures. A simulation exercise confirms this conclusion and shows that ADL-MIDAS models typically produce accurate forecast in many empirically realistic settings. Overall, our results show that ADL-MIDAS regressions provide policy makers and market participants with a simple yet reliable tool for forecasting fiscal variables in real time.