Research Database

This paper estimates the expectations of older male workers in the form of a 130 million element Markov transition probability matrix specifying the joint stochastic process for workers’ income, health, martial and employment status, conditioned on workers’ decisions about labor force participation and collection of Social Security benefits. The estimated transition matrix will be used in subsequent work to estimate the unknown parameters of workers’ utility functions under the assumption that their behavior is governed by the solution to a dynamic programming model. The paper also discusses some of the problems involved in constructing good measures of workers’ states and decisions.

During 1870–1913, Canada had a well-diversified branch banking system while banks in the U.S. unit-banking system were less diversified. Canadian banks could issue large-denomination notes with no restrictions on their backing, while all U.S. currency was essentially an obligation of the U.S. government. Also, experience in the two countries with regard to bank failures and panics was quite different. A general equilibrium business cycle model with endogenous financial intermediation is constructed that captures these historical Canadian and American monetary and banking arrangements as special cases. The model's predictions contradict conventional wisdom about the cyclical effects of banking panics. Support for these predictions is found in aggregate annual time series data for Canada and the United States.

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.

The effects of stochastic inflation on equity prices and the equity premium are studied in a pure-endowment asset-pricing model with a cash-in-advance constraint. Stochastic inflation affects the equity premium through two channels: the assessment of an inflation tax and the presence of an inflation premium. Real and monetary versions of the model are simulated and the comparative dynamic results corroborate the conclusion that inflation has quantitatively important effects.

The other important result is that the equity premium in the real version of a model—a continuous state-space generalization of Mehra and Prescott (1985)—and the monetary model is very sensitive to the conditional variance of endowment growth. When the standard deviation of endowment growth is increased from 3.49 percent (the estimated value) to 5.59 percent, the real model can generate an equity premium of 2.8 percent in the range of the risk aversion parameters considered by Mehra and Prescott. The monetary model displays similar sensitivity and can generate an equity premium of 5.81 percent.