Research Database

Financial planners typically advise people to shift investments away from stocks and toward bonds as they age. The planners commonly justify this advice in three ways. They argue that stocks are less risky over a young person’s long investment horizon, that stocks are often necessary for young people to meet large financial obligations (like college tuition for their children), and that younger people have more years of labor income ahead with which to recover from the potential losses associated with stock ownership. This article uses economic reasoning to evaluate these three different justifications. It finds that the first two arguments do not make economic sense. The last argument is valid—but only for people with labor income that is relatively uncorrelated with stock returns. If a person’s labor income is highly correlated with stock returns, then that investor is better off shifting investments toward stocks over time.

Does the magnitude of a trough in employment differ from the magnitude of a peak in employment, and is the time employment spends in rising from a trough to a peak longer than the time spends in falling from a peak to a trough? In this paper we measure the “asymmetry of magnitudes” and the “asymmetry of durations” of seven US postwar employment series. The series are detrended using the Hodrick-Prescott filter prior to the analysis. Appropriate measurements of the two types of asymmetry are the skewness of the detrended series and the skewness of the first differenced detrended series, respectively. Monte Carlo and bootstrapping procedures are used to evaluate the significance levels. Five out of seven series show negative skewnesses in levels as well as in first differences. The skewnesses of “magnitudes” and “durations” of US aggregate employment are significant, and yield –0.50 and –0.60 respectively.

In the second part of the paper a nonlinear AR model is derived from the theory of Hermitian type polynomials that have the potential to realize stochastic asymmetric self-sustained oscillations. In contrast with the standard linear AR model, the nonlinear AR model, fitted to the employment series, accurately generates the two types of asymmetry.

In this paper we use micro panel data to examine the effects of oil price shocks on employment and real wages, at the aggregate and industry levels. We also measure differences in the employment and wage responses for workers differentiated on the basis of skill level. We find that oil price increases result in a substantial decline in real wages for all workers, but raise the relative wage of skilled workers. The use of panel data econometric techniques to control for unobserved heterogeneity is essential to uncover this result, which is completely hidden in OLS estimates. While the short-run effect of oil price increases on aggregate employment is negative, the long-run effect is negligible. We find that oil price shocks induce substantial changes in employment shares and relative wages across industries. However, we find little evidence that oil price shocks cause labor to flow into those sectors with relative wage increases.

This paper is a study of bank panics under the U.S. National Banking System in 1864–1913. During this period, bank deposits in the United States, like those in Great Britain and Canada, were not insured by the government. Unlike the United States, however, neither of those countries had any bank panics. The U.S. panics were caused essentially by two unique features of the U.S. banking system: prohibitions on bank branching and pyramiding of bank reserves. In the paper, a model which includes these features is constructed, and it is shown that bank panics can occur even though all agents are rational. In this model, bank panics can be eliminated by a combination of reserve requirements, central bank loans, and occasional restrictions on cash payments by banks. The conclusion is that to eliminate bank panics, deposit insurance is not necessary.