Interview with Ellen McGrattan: Business Cycles and Intangible Capital

Key Takeaways

• TFP captures unobserved productivity, driving business‑cycle fluctuations
• Intangible assets like customer lists remain off balance sheets
• 40 million U.S. firms hold hidden intangibles affecting aggregate growth
• McGrattan urges students to start with questions, not data
• Model‑data matching, pioneered by Kydland‑Prescott, remains core to macro research

Pulse Analysis

Ellen McGrattan credits the 1980s breakthrough by Finn Kydland and Edward Prescott for shaping her approach to business‑cycle research. Their insight—building a structural model, simulating it, and confronting the simulated series with real‑world data—replaced the old habit of keeping theory and empirics apart. McGrattan adopted this “model‑data matching” framework to probe the forces behind fluctuations, arguing that only by testing predictions against observed output can macroeconomists identify the true drivers of growth and recessions. The method now underpins most contemporary dynamic stochastic general equilibrium (DSGE) work.

The same line of inquiry led McGrattan to the hidden side of total factor productivity: intangible capital. She points out that the United States hosts roughly 40 million active firms, many of which own assets such as customer relationships, brand equity, proprietary recipes, or internal accounting systems that never appear on balance sheets. ” Recognizing and quantifying intangibles could sharpen fiscal policy, improve investment forecasts, and refine the Fed’s assessment of underlying economic strength.

Beyond research, McGrattan’s counsel to graduate students stresses curiosity over replication. She advises scholars to pose original questions first, then seek the data needed to answer them, rather than letting available datasets dictate the research agenda. This mindset encourages novel measurement techniques—such as using transaction data to infer the value of non‑tangible assets—and helps avoid the trap of incremental model tweaks. As the economy becomes increasingly knowledge‑driven, the next generation of macro‑economists will need both rigorous theory and inventive empirical tools to capture the forces shaping growth.