Creator: Bengui, Julien and Bianchi, Javier Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 754 Abstract:
The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages undermine the effectiveness of macroprudential taxes but do not necessarily call for weaker interventions. A quantitative analysis of the model suggests that aggregate welfare gains and reductions in the severity and frequency of financial crises remain, on average, largely unaffected by even significant leakages.
Stichwort: Regulatory arbitrage, Macroprudential policy, Financial crises, and Limited regulation enforcement Fach: F32 - Current Account Adjustment; Short-term Capital Movements, E44 - Financial Markets and the Macroeconomy, E32 - Business Fluctuations; Cycles, F41 - Open Economy Macroeconomics, and D62 - Externalities
Creator: Benjamin, David and Wright, Mark L. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 753 Abstract:
Negotiations to restructure sovereign debt are time consuming, taking almost a decade on average to resolve. In this paper, we analyze a class of widely used complete information models of delays in sovereign debt restructuring and show that, despite superficial similarities, there are major differences across models in the driving force for equilibrium delay, the circumstances in which delay occurs, and the efficiency of the debt restructuring process. We focus on three key assumptions. First, if delay has a permanent effect on economic activity in the defaulting country, equilibrium delay often occurs; this delay can sometimes be socially efficient. Second, prohibiting debt issuance as part of a settlement makes delay less likely to occur in equilibrium. Third, when debt issuance is not fully state contingent, delay can arise because of the risk that the sovereign will default on any debt issued as part of the settlement.
Stichwort: Bargaining, Sovereign debt, Sovereign default, and Delay Fach: H63 - National Debt; Debt Management; Sovereign Debt, F34 - International Lending and Debt Problems, and C78 - Bargaining Theory; Matching Theory
Creator: Chari, V. V., Nicolini, Juan Pablo, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 752 Abstract:
We revisit the question of how capital should be taxed, arguing that if governments are allowed to use the kinds of tax instruments widely used in practice, for preferences that are standard in the macroeconomic literature, the optimal approach is to never distort capital accumulation. We show that the results in the literature that lead to the presumption that capital ought to be taxed for some time arise because of the initial confiscation of wealth and because the tax system is restricted.
Stichwort: Long run, Capital income tax, and Uniform taxation Fach: E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, and E62 - Fiscal Policy
Creator: Guvenen, Fatih, Mataloni Jr., Raymond J., Rassier, Dylan G., and Ruhl, Kim J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 751 Abstract:
Official statistics display a significant slowdown in U.S. aggregate productivity growth that begins in 2004. We show how offshore profit shifting by U.S. multinational enterprises affects GDP and, thus, productivity measurement. Under international statistical guidelines, profit shifting causes part of U.S. production generated by multinationals to be excluded from official measures of U.S. production. Profit shifting has increased significantly since the mid-1990s, resulting in lower measures of U.S. aggregate productivity growth. We construct an alternative measure of value added that adjusts for profit shifting. The adjustments raise aggregate productivity growth rates by 0.09 percent annually for 1994-2004, 0.24 percent annually for 2004-2008, and lowers annual aggregate productivity growth rates by 0.09 percent after 2008. Our adjustments mitigate, but do not eliminate, the measured productivity slowdown. The adjustments are especially large in R&D-intensive industries, which most likely produce intangible assets that facilitate profit shifting. The adjustments boost value added in these industries by as much as 8 percent in the mid-2000s.
Stichwort: Formulary apportionment, Productivity slowdown, and Tax havens Fach: E01 - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts, F23 - Multinational Firms; International Business, and O40 - Economic Growth and Aggregate Productivity: General
Creator: Bloom, Nicholas, Guvenen, Fatih, Price, David J., Song, Jae, and von Wachter, Till Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 750 Abstract:
We use a massive, matched employer-employee database for the United States to analyze the contribution of firms to the rise in earnings inequality from 1978 to 2013. We ﬁnd that one-third of the rise in the variance of (log) earnings occurred within firms, whereas two-thirds of the rise occurred between firms. However, this rising between-firm variance is not accounted for by the firms themselves: the firm-related rise in the variance can be decomposed into two roughly equally important forces—a rise in the sorting of high-wage workers to high-wage firms and a rise in the segregation of similar workers between firms. In contrast, we do not ﬁnd a rise in the variance of firm-speciﬁc pay once we control for worker composition. Instead, we see a substantial rise in dispersion of person-speciﬁc pay, accounting for 68% of rising inequality, potentially due to rising returns to skill. The rise in between-firm variance, mostly due to worker sorting and segregation, accounted for a particularly large share of the total increase in inequality in smaller and medium firms (explaining 84% for firms with fewer than 10,000 employees). In contrast, in the very largest firms with 10,000+ employees, 42% of the increase in the variance of earnings took place within firms, driven by both declines in earnings for employees below the median and a substantial rise in earnings for the 10% best-paid employees. However, because of their small number, the contribution of the very top 50 or so earners at large firms to the overall increase in within-firm earnings inequality is small.
Stichwort: Income inequality, Between-firm inequality, and Pay inequality Fach: J21 - Labor Force and Employment, Size, and Structure, J31 - Wage Level and Structure; Wage Differentials, and E23 - Macroeconomics: Production
Creator: Karabarbounis, Loukas and Neiman, Brent Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 749 Abstract:
Comparing U.S. GDP to the sum of measured payments to labor and imputed rental payments to capital results in a large and volatile residual or “factorless income.” We analyze three common strategies of allocating and interpreting factorless income, speciﬁcally that it arises from economic proﬁts (Case Π), unmeasured capital (Case K), or deviations of the rental rate of capital from standard measures based on bond returns (Case R). We are skeptical of Case Π as it reveals a tight negative relationship between real interest rates and markups, leads to large ﬂuctuations in inferred factor-augmenting technologies, and results in markups that have risen since the early 1980s but that remain lower today than in the 1960s and 1970s. Case K shows how unmeasured capital plausibly accounts for all factorless income in recent decades, but its value in the 1960s would have to be more than half of the capital stock, which we ﬁnd less plausible. We view Case R as most promising as it leads to more stable factor shares and technology growth than the other cases, though we acknowledge that it requires an explanation for the pattern of deviations from common measures of the rental rate. Using a model with multiple sectors and types of capital, we show that our assessment of the drivers of changes in output, factor shares, and functional inequality depends critically on the interpretation of factorless income.
Stichwort: Return to capital, Missing capital, Profits, and Factor shares Fach: E01 - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts, E25 - Aggregate Factor Income Distribution, E22 - Investment; Capital; Intangible Capital; Capacity, and E23 - Macroeconomics: Production
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 748 Abstract:
Most firms begin very small, and large firms are the result of typically decades of persistent growth. This growth can be understood as the result of some form of capital accumulation-organization capital. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This means that most capital accumulation must be accounted for by incumbent fi rms. This paper describes a range of circumstances in which this implies aggregate convergence rates that are only about half of what they are in the standard Cass-Koopmans economy. Through the lens of the models described in this paper, the aftermath of the Great Recession of 2008 is unsurprising if the events of late 2008 and early 2009 are interpreted as a destruction of organization capital.
Stichwort: Slow recoveries, Firm size distribution, Zipf's law, and Business cycles Fach: E32 - Business Fluctuations; Cycles and L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
Creator: Cavallo, Michele, Del Negro, Marco, Frame, W. Scott, Grasing, Jamie, Malin, Benjamin A., and Rosa, Carlo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 747 Abstract:
The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to pre-crisis levels has little effect on the likelihood of net losses.
Stichwort: Central bank balance sheets, Remittances, and Monetary policy Fach: E59 - Monetary Policy, Central Banking, and the Supply of Money and Credit: Other, E58 - Central Banks and Their Policies, and E69 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: Other
Creator: Boerma, Job and Karabarbounis, Loukas Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 746 Abstract:
We revisit the causes, welfare consequences, and policy implications of the dispersion in households' labor market outcomes using a model with uninsurable risk, incomplete asset markets, and home production. Accounting for home production amplifies welfare-based differences across households meaning that inequality is larger than we thought. Home production does not offset differences that originate in the market sector because productivity differences in the home sector are significant and the time input in home production does not covary with consumption expenditures and wages in the cross section of households. The optimal tax system should feature more progressivity taking into account home production.
Stichwort: Inequality, Labor supply, Home production, and Consumption Fach: D10 - Household Behavior: General, J22 - Time Allocation and Labor Supply, E21 - Macroeconomics: Consumption; Saving; Wealth, and D60 - Welfare Economics: General
Creator: Chari, V. V., Nicolini, Juan Pablo, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 745 Abstract:
We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should restrictions be placed to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? How can a Ramsey allocation be implemented with residence-based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations.
Stichwort: Capital income tax, Border adjustment, Value-added taxes, Origin- and destination-based taxation, Free trade, and Production efficiency Fach: E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, and E62 - Fiscal Policy