Tim Sablik of the Richmond Fed interviews “Ellen McGrattan: On measuring what businesses do, developing effective tax policy, and searching for answers beyond the lamppost” (Econ Focus: Federal Reserve Bank of Richmond, First/Second Quarter 2026). Here are a few of the comments that caught my eye:
How did McGrattan become interested in business cycles?
In grad school, I stumbled upon a paper by Finn Kydland and Ed Prescott that was game changing for me. Their revolutionary idea, which might sound obvious today, was that you should write down a theoretical model, simulate the data from it, and then match it up head to head with actual economic data. That wasn’t what economists were doing at the time. They would write down a theoretical model, understand its inner workings, and then put up a big wall between the model and the empirical work. Kydland and Prescott decided to take all the warts and pimples of an economic model, make predictions based on it, and go head to head with the data. That was the first time I had ever seen that done. I think it is the right approach.
It just so happens that what they were analyzing in that paper was business cycles. … Kydland and Prescott realized that adding the Fed wasn’t the answer, and they pointed to something else: Total factor productivity (TFP). Some might say that TFP is just a measure of our ignorance — it’s what we don’t understand. In some sense, I’ve been struggling with trying to look inside the black box of TFP all my career.
How studying total factor productivity led to intangible assets
My interest in business cycles partly stems from trying to measure what goes into TFP. … What is TFP? It’s what we don’t know, it’s the part that we need to fill in. It’s not just some magic dust that’s in the air. … If you buy, say, a computer, it has to be put on your balance sheet. But if you’re a dentist and you spend time building your patient list, that’s not put on any balance sheet. That patient list is the thing you sell when you retire or relocate, and that asset contributes to the value in the business, but we never see it until it gets sold or transferred somehow.
There are 40 million active businesses in the United States, and most have assets that we can’t see. Assets like customer bases or trademarks — until there’s a transaction, we can’t see them. You might have a good accounting system that you developed within your business, or you’re a chef and you have recipes, and we can only see those things if you trade them. But most ongoing businesses don’t list these assets on a balance sheet, so we never get to see them. And that’s why we need a theory to infer it. … It all ties back to work I was doing to measure movements in the economy over the business cycle, but now I would say the bigger issue is how to measure all activity in the U.S. economy.
McGrattan’s advice to students
I always tell my students, ask a question first. Don’t read what other people have done. Decide on your own, especially when you’re writing your first paper. It doesn’t matter if you reinvent the wheel. If you’re thinking about things without having somebody else in your head, you’re going to come to a new creative idea. It’s fine after you’ve done something to compare yourself, because then you can really sharpen your results and make clear distinctions between what has been done in the past and what you did.
I really don’t like it when students are told to replicate findings from papers because that makes them too comfortable working with models that have already been analyzed to death. They learn an existing model and just make a small tweak to it. Before they do anything, I would rather they think of a good and, as yet, unanswered question and how they would go about answering it.
Often when I ask my students what they’re working on, they tell me they have some interesting data. That’s putting the cart before the horse. Start with an idea and then go down the path that may lead you to that data but may not. Don’t start with data and try to identify a question; start with a question and identify what you need to reliably answer that question.
