Creator: Fogli, Alessandra and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 512 Abstract:
Does macroeconomic volatility/uncertainty affect accumulation of net foreign assets? In OECD economies over the period 1970-2012, changes in country specific aggregate volatility are, after controlling for a wide array of factors, significantly positively associated with net foreign asset position. An increase in volatility (measured as the standard deviation of GDP growth) of 0.5% over period of 10 years is associated with an increase in the net foreign assets of around 8% of GDP. A standard open economy model with time varying aggregate uncertainty can quantitatively account for this relationship. The key mechanism is precautionary motive: more uncertainty induces residents to save more, and higher savings are in part channeled into foreign assets. We conclude that both data and theory suggest uncertainty/volatility is an important determinant of the medium/long run evolution of external imbalances in developed countries.
Stichwort: Current account, Business cycles, Uncertainty, Global imbalances, and Precautionary saving Fach: F32 - Current Account Adjustment; Short-term Capital Movements, F41 - Open Economy Macroeconomics, and F34 - International Lending and Debt Problems
Creator: Heathcote, Jonathan and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 508 Abstract:
Between 2007 and 2013, U.S. households experienced a large and persistent decline in net worth. The objective of this paper is to study the business cycle implications of such a decline. We first develop a tractable monetary model in which households face idiosyncratic unemployment risk that they can partially self-insure using savings. A low level of liquid household wealth opens the door to self-fullfilling fluctuations: if wealth-poor households expect high unemployment, they have a strong precautionary incentive to cut spending, which can make the expectation of high unemployment a reality. Monetary policy, because of the zero lower bound, cannot rule out such expectations-driven recessions. In contrast, when wealth is sufficiently high, an aggressive monetary policy can keep the economy at full employment. Finally, we document that during the U.S. Great Recession wealth-poor households increased saving more sharply than richer households, pointing towards the importance of the precautionary channel over this period.
Stichwort: Self-fulfilling crises, Zero lower bound, Aggregate demand, Business cycles, Precautionary saving, and Multiple equilibria Fach: E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian, E21 - Macroeconomics: Consumption; Saving; Wealth, and E52 - Monetary Policy
Creator: Braun, R. Anton Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 506 Abstract:
This paper investigates the macroeconomic effects of cyclical fluctuations in marginal tax rates. It finds that systematically including tax variables in a standard real business cycle model substantially improves the model's ability to reproduce basic facts about postwar U.S. business cycle fluctuations. In particular, modeling fluctuations in personal and corporate income tax rates increases the model's predicted relative variability of hours and decreases its predicted correlation between hours and average productivity. Fluctuations in tax rates produce large substitution effects that alter the leisure/labor supply decision.
Stichwort: Corporate tax , Taxes, Business cycle, Tax, Income tax, Tax rates, Real business cycle model, Productivity, and Taxation Fach: E32 - Business Fluctuations; Cycles, H25 - Business Taxes and Subsidies including sales and value-added (VAT), and H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
Creator: Dinkelman, Taryn and Schulhofer-Wohl, Sam Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 506 Abstract:
The direct benefits of infrastructure in developing countries can be large, but if new infrastructure induces in-migration, congestion of other local publicly provided goods may offset the direct benefits. Using the example of rural household electrification in South Africa, we demonstrate the importance of accounting for migration when evaluating welfare gains of spatial programs. We also provide a practical approach to computing welfare gains that does not rely on land prices. We develop a location choice model that incorporates missing land markets and allows for congestion in local land. Using this model, we construct welfare bounds as a function of the income and population effects of the new electricity infrastructure. A novel prediction from the model is that migration elasticities and congestion effects are especially large when land markets are missing. We empirically estimate these welfare bounds for rural electrification in South Africa and show that congestion externalities from program-induced migration reduced local welfare gains by about 40%.
Stichwort: Rural infrastructure, Program evaluation, Migration, South Africa, Congestion, and Welfare Fach: H43 - Project Evaluation; Social Discount Rate, R13 - General Equilibrium and Welfare Economic Analysis of Regional Economies, H54 - National Government Expenditures and Related Policies: Infrastructures; Other Public Investment and Capital Stock, H23 - Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies, O18 - Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure, and O15 - Economic Development: Human Resources; Human Development; Income Distribution; Migration
Creator: Gittleman, Maury B., Klee, Mark A., and Kleiner, Morris Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 504 Abstract:
Recent assessments of occupational licensing have shown varying effects of the institution on labor market outcomes. This study revisits the relationship between occupational licensing and labor market outcomes by analyzing a new topical module to the Survey of Income and Program Participation (SIPP). Relative to previously available data, the topical module offers more detailed information on occupational licensing from government, with a larger sample size and access to a richer set of person-level characteristics. We exploit this larger and more detailed data set to examine the labor market outcomes of occupational licensing and how workers obtain these licenses from government. More specifically, we analyze whether there is evidence of a licensing wage premium, and how this premium varies with aspects of the regulatory regime such as the requirements to obtain a license or certification and the level of government oversight. After controlling for observable heterogeneity, including occupational status, we find that those with a license earn higher pay, are more likely to be employed, and have a higher probability of retirement and pension plan offers.
Stichwort: Wages, Occupational licensing, and Non-wage benefits Fach: L50 - Regulation and Industrial Policy: General, J30 - Wages, Compensation, and Labor Costs: General, and J44 - Professional Labor Markets; Occupational Licensing
Creator: Koijen, Ralph S. J., Nieuwerburgh, Stijn van, and Yogo, Motohiro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 499 Abstract:
We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life-cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long-term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.
Stichwort: Life insurance, Annuities, Portfolio choice, Health insurance, and Life-cycle model Fach: I13 - Health Insurance, Public and Private, D14 - Household Saving; Personal Finance, G11 - Portfolio Choice; Investment Decisions, and D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
Creator: Glover, Andrew, Heathcote, Jonathan, Krueger, Dirk, and Ríos-Rull, José-Víctor Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 498 Abstract:
We construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of big recessions are distributed across different household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages. Asset price declines hurt the old, who rely on asset sales to finance consumption, but benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline 2.4 times as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is close to welfare neutral for households in the 20–29 age group, but translates into a large welfare loss of more than 8% of lifetime consumption for households aged 70 and over.
Stichwort: Aggregate risk, Asset prices, Great Recession, and Overlapping generations Fach: D58 - Computable and Other Applied General Equilibrium Models, E21 - Macroeconomics: Consumption; Saving; Wealth, D31 - Personal Income, Wealth, and Their Distributions, and D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making