Research Database

We develop a model of banking industry dynamics to study the quantitative impact of regulatory policies on bank risk taking and market structure. Since our model is matched to U.S. data, we propose a market structure where big banks with market power interact with small, competitive fringe banks as well as non-bank lenders. Banks face idiosyncratic funding shocks in addition to aggregate shocks which affect the fraction of performing loans in their portfolio. A nontrivial bank size distribution arises out of endogenous entry and exit, as well as banks' buffer stock of capital. We show the model predictions are consistent with untargeted business cycle properties, the bank lending channel, and empirical studies of the role of concentration on financial stability. We find that regulatory policies can have an important impact on banking market structure, which, along with selection effects, can generate changes in allocative efficiency and stability.

The slope of the Phillips curve in New Keynesian models is difficult to estimate using aggregate data. We show that in a Bayesian estimation, the priors placed on the parameters governing nominal rigidities significantly influence posterior estimates and thus inferences about the importance of nominal rigidities. Conversely, we show that priors play a negligible role in a New Keynesian model estimated using state-level data. An estimation with state-level data exploits a relatively large panel dataset and removes the influence of endogenous monetary policy.

In social science research, household income is widely used as a stand-in for, or approximation to, the economic well-being of households. In a parallel way, income-inequality has been employed as a stand-in for inequality of economic well-being, or for brevity, "economic-inequality." But there is a force in market economies, ones with extensive amounts of monopoly, like the United States, which leads income-inequality to understate economic-inequality. This force has not been recognized before and derives from how monopolies behave. Monopolies, of course, raise prices. This reduces the purchasing power of households, or the value of their income. But monopolies, in fact, reduce the purchasing power of low-income households much more than high-income households. What has not been recognized is that, in many markets, as monopolies raise the prices for their goods, they simultaneously destroy substitutes for their products, low-cost substitutes that are purchased by low-income households. In these markets, then, while high-income households face higher prices, low-income households are shut out of markets, markets for goods and services that are extremely important for their economic well-being. It often leaves them with extremely poor alternatives, and sometimes none, for these products. Some of the markets we discuss include those for housing, financial services, and K-12 public education services. We also discuss markets for legal services, health care services, used durable equipment and repair services. Monopolies that infiltrate public institutions to enrich members, including those in foster care services, voting institutions and antitrust institutions, are also discussed.

Reparations is a policy proposal aiming to address the wealth gap between Black and White households. We provide a first formal analysis of the economics of reparations using a long-run model of heterogeneous dynasties with an occupational choice and bequests. Our innovation is to introduce endogenous dispersion of beliefs about risky returns, reflecting differences in dynasties' experiences with entrepreneurship over time. Feeding the exclusion of Black dynasties from labor and capital markets as driving force, the model quantitatively reproduces current and historical racial gaps in wealth, income, entrepreneurship, mobility, and beliefs about risky returns. We use the model to evaluate reparations and find that transfers eliminating the racial gap in average wealth today do not lead to wealth convergence in the long run. The logic is that century-long exclusions lead Black dynasties to enter into reparations with pessimistic beliefs about risky returns and to forego investment opportunities. We conclude by showing that entrepreneurial subsidies are more effective than wealth transfers in achieving racial wealth convergence in the long run.

The interest rate on government debt is significantly lower than the rates of return on other assets. From the perspective of standard models of optimal taxation, this empirical fact is puzzling: typically, the government should finance expenditures either through contingent taxes, or by previously-issued state-contingent debt, or by labor taxes, with only minor effects arising from intertemporal distortions on interest rates. We study how this answer changes in an economy with financial frictions, where the government cannot directly redistribute towards the agents in need of liquidity, but has otherwise access to a complete set of linear tax instruments. We establish a stark result. Provided this is feasible, optimal policy calls for the government to increase its debt, up to the point at which it provides sufficient liquidity to avoid financial constraints. In this case, capital-income taxes are zero in the long run, and the returns on government debt and capital are equalized. However, if the fiscal space is insufficient, a wedge opens between the rate of return on government debt and capital. In this case, optimal long-run tax policy is driven by a trade-off between the desire to mitigate financial frictions by subsidizing capital and the incentive to exploit the quasi-rents accruing to producers of capital by taxing capital instead. This latter incentive magnifies the wedge between rates of return on publicly and privately-issued assets.

In this paper, we review the relationship between inflation rates, nominal interest rates, and rates of growth of monetary aggregates for a large group of OECD countries. We conclude that the low-frequency behavior of these series maintains a close relationship, as predicted by standard quantity theory models. In an estimated model, we show those relationships to be relatively invariant to alternative frictions that can deliver very different high-frequency dynamics. We argue that these relationships are useful for policy design aimed at controlling inflation.

U.S. government concerns about great disparities in housing conditions are at least 100 years old. For the first 50 years of this period, U.S. housing crises were widely considered to stem from the failure of the construction industry to adopt new technology -- in particular, factory production methods. The introduction of these methods in many industries had already greatly narrowed the quality of goods consumed by low- and high-income Americans. It was widely known why the industry failed to adopt these methods: Monopolies in traditional construction blocked and sabotaged them. Very little has changed in the last 50 years. The industry still fails to adopt factory methods, with monopolies, like HUD and NAHB, blocking attempts to adopt them. As a result, the productivity record of the construction industry has been horrendous. One thing has changed. Today there is very little discussion of factory-built housing; of the very few that recognize the industry's failure to adopt factory methods, there is no realization that monopolies are blocking the methods. That these monopolies, in particular, HUD and NAHB, can cause so much hardship in our country, and through misinformation and deceit cover it up, seems almost beyond belief. But, unfortunately, it's a history that is not uncommon. There are many other industries where monopolies have inflicted great harm on Americans, like the tobacco industry, yet through misinformation and deceit cover up the great harm.

The Covid-19 crisis has exposed the vast inequalities that exist within the US economy. As the virus has spread silently, it has laid bare other crises that face our nation---especially the economic vulnerabilities of the country's poor and marginalized. Many of these vulnerabilities can, in fact, be traced back to a single cause that itself has spread silently, but over the last several decades, not months: Monopolies. That monopolies are "silent spreaders of poverty and economic inequality" was well known to economic and legal scholars of the 1930s and 1940s. Wendell Berge, who was Assistant Attorney General for Antitrust in the 1940s, wrote: "Monopoly conditions have often grown up almost unnoticed by the public until one day it is suddenly realized that an industry is no longer competitive but is governed by an economic oligarchy." The harm caused by these monopolies that have mostly avoided detection often exist in markets with small firms, low concentration levels, and small price-cost margins, as in residential construction, or wreak their harm in public institutions, where prices and concentration have no meaning. While there has been a very welcome resurgence in the concern about monopolies in the last decade or so, this has primarily involved vast corporations, and often about their threat to democratic institutions. Though greatly welcomed, we should not let apprehension with these larger companies distract us from the many hidden monopolies that have silently spread harm to the poor for the last 100 years -- not just the last 10 or so. We should stand on the shoulders of giants that taught us this about monopolies, not only Berge, but Thurman Arnold, Henry Simons, and others.

Social learning plays an important role in models of productivity dispersion and long-run growth. In economies with a continuum of producers and unbounded productivity distributions, social learning can sometimes leave long-run growth rates completely indeterminate. This paper modifies a model in which potential entrants attempt to imitate randomly selected incumbent firms by introducing an upper bound on how much entrants can learn from incumbents. When this upper bound is taken to infinity, a unique long-run growth rate emerges, even though the economy without upper bound has an unbounded continuum of balanced growth rates.

What is the role of credit scores in credit markets? We argue that it is a stand in for a market assessment of a person's unobservable type (which here we take to be patience). We pose a model of persistent hidden types where observable actions shape the public assessment of a person's type via Bayesian updating. We show how dynamic reputation can incentivize repayment without monetary costs of default beyond the administrative cost of filing for bankruptcy. Importantly we show how an economy with credit scores implements the same equilibrium allocation. We estimate the model using both credit market data and the evolution of individual’s credit scores. We find a 3% difference in patience in almost equally sized groups in the population with significant turnover and a shift towards becoming more patient with age. If tracking of individual credit actions is outlawed, the benefits of bankruptcy forgiveness are outweighed by the higher interest rates associated with lower incentives to repay.