Creator: Holmes, Thomas J., McGrattan, Ellen R., and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 687 Abstract:
It is widely believed that an important factor underlying the rapid growth in China is increased foreign direct investment (FDI) and the transfer of foreign technology capital, which is accumulated know-how from investment in research and development (R&D), brands, and organizations that is not specific to a plant. In this paper, we study two channels through which FDI can contribute to upgrading of the stock of technology capital: knowledge spillovers and appropriation. Knowledge spillovers lead to new ideas that do not directly compete or devalue the foreign affiliate's stock. Appropriation, on the other hand, implies a redistribution of property rights over patents and trademarks; the gain to domestic companies comes at a loss to the multinational company (MNC). In this paper we build these sources of technology capital transfer into the framework developed by McGrattan and Prescott (2009, 2010) and introduce an endogenously-chosen intensity margin for operating technology capital in order to capture the trade-offs MNCs face when expanding their markets internationally. We first demonstrate that abstracting from technology capital transfers results in predicted bilateral FDI inflows to China that are grossly at odds with the data. We then use the bilateral inflows to parameterize the model with technology capital transfers and compute the global economic impact of Chinese policies that encouraged greater inflows of FDI and technology capital transfers. Microevidence on automobile patents is used to support our parameter choices and main findings.
Subject (JEL): O33 - Technological Change: Choices and Consequences; Diffusion Processes, F41 - Open Economy Macroeconomics, F23 - Multinational Firms; International Business, and O34 - Intellectual Property and Intellectual Capital
Creator: Garrido, Miguel and Schulhofer-Wohl, Sam Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 686 Abstract:
The Cincinnati Post published its last edition on New Year’s Eve 2007, leaving the Cincinnati Enquirer as the only daily newspaper in the market. The next year, fewer candidates ran for municipal office in the Kentucky suburbs most reliant on the Post, incumbents became more likely to win reelection, and voter turnout and campaign spending fell. These changes happened even though the Enquirer at least temporarily increased its coverage of the Post’s former strongholds. Voter turnout remained depressed through 2010, nearly three years after the Post closed, but the other effects diminished with time. We exploit a difference-in-differences strategy and the fact that the Post’s closing date was fixed 30 years in advance to rule out some non-causal explanations for our results. Although our findings are statistically imprecise, they demonstrate that newspapers—even underdogs such as the Post, which had a circulation of just 27,000 when it closed—can have a substantial and measurable impact on public life
Keyword: Elections, Newspapers, and Joint operating agreements Subject (JEL): N82 - Micro-Business History: U.S.; Canada: 1913-, K21 - Antitrust Law, L82 - Entertainment; Media, and D72 - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
Creator: Glover, Andrew, Heathcote, Jonathan, Krueger, Dirk, and Ríos-Rull, José-Víctor Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 684 Abstract:
In this paper 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 severe 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, as observed in the data. 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 more than twice as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is approximately welfare-neutral for households in the 20–29 age group, but translates into a large welfare loss of around 10% of lifetime consumption for households aged 70 and over.
Keyword: Aggregate risk, Recessions, Overlapping generations, and Asset prices Subject (JEL): D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, D31 - Personal Income, Wealth, and Their Distributions, D58 - Computable and Other Applied General Equilibrium Models, and E21 - Macroeconomics: Consumption; Saving; Wealth
Creator: Chiappori, Pierre-André, Samphantharak, Krislert, Schulhofer-Wohl, Sam, and Townsend, Robert M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 683 Abstract:
We show how to use panel data on household consumption to directly estimate households’ risk preferences. Specifically, we measure heterogeneity in risk aversion among households in Thai villages using a full risk-sharing model, which we then test allowing for this heterogeneity. There is substantial, statistically significant heterogeneity in estimated risk preferences. Full insurance cannot be rejected. As the risk sharing, as-if-complete-markets theory might predict, estimated risk preferences are unrelated to wealth or other characteristics. The heterogeneity matters for policy: Although the average household would benefit from eliminating village-level risk, less-risk-averse households who are paid to absorb that risk would be worse off by several percent of household consumption.
Keyword: Insurance, Risk preferences, Complete markets, and Heterogeneity Subject (JEL): D81 - Criteria for Decision-Making under Risk and Uncertainty, O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance, D14 - Household Saving; Personal Finance, G11 - Portfolio Choice; Investment Decisions, D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, D12 - Consumer Economics: Empirical Analysis, and D53 - General Equilibrium and Disequilibrium: Financial Markets
Creator: Schulhofer-Wohl, Sam Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 682 Abstract:
Some commentators have argued that the housing crisis may harm labor markets because homeowners who owe more than their homes are worth are less likely to move to places that have productive job opportunities. I show that, in the available data, negative equity does not make homeowners less mobile. In fact, homeowners who have negative equity are slightly more likely to move than homeowners who have positive equity. Ferreira, Gyourko, and Tracy's (2010) contrasting result that negative equity reduces mobility arises because they systematically drop some negative-equity homeowners' moves from the data.
Keyword: Household mobility and Negative equity Subject (JEL): R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand and R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics
Creator: Kaplan, Greg and Schulhofer-Wohl, Sam Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 681 Abstract:
We show that much of the recent reported decrease in interstate migration is a statistical artifact. Before 2006, the Census Bureau's imputation procedure for dealing with missing data inflated the estimated interstate migration rate. An undocumented change in the procedure corrected the problem starting in 2006, thus reducing the estimated migration rate. The change in imputation procedures explains 90 percent of the reported decrease in interstate migration between 2005 and 2006, and 42 percent of the decrease between 2000 (the recent high-water mark) and 2010. After we remove the effect of the change in procedures, we find that the annual interstate migration rate follows a smooth downward trend from 1996 to 2010. Contrary to popular belief, the 2007–2009 recession is not associated with any additional decrease in interstate migration relative to trend.
Keyword: Mobility, Item nonresponse, Interstate migration, Hot deck imputation, Missing data, and Current Population Survey Subject (JEL): C81 - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access, J11 - Demographic Trends, Macroeconomic Effects, and Forecasts, R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics, and C83 - Survey Methods; Sampling Methods
Creator: Adão, Bernardino, Correia, Isabel, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 680 Abstract:
We show that short and long nominal interest rates are independent monetary policy instruments. The pegging of both helps solving the problem of multiplicity that arises when only short rates are used as the instrument of policy. A peg of the nominal returns on assets of different maturities is equivalent to a peg of state-contingent interest rates. These are the rates that should be targeted in order to implement unique equilibria. At the zero bound, while it is still possible to target state-contingent interest rates, that is no longer equivalent to the target of the term structure.
Keyword: Term structure, Long rates, Monetary policy, Maturities, Multiplicity of equilibria, Monetary policy instruments, Sticky prices, and Short rates Subject (JEL): E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), and E40 - Money and Interest Rates: General
Creator: Weber, Warren E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 679 Abstract:
Prior to 1861, several U.S. states established bank liability insurance schemes. One type was an insurance fund. Member banks paid into a state-run fund that paid bank creditors’ losses. A second scheme was a mutual guarantee system. Member banks were legally responsible for the liabilities of any insolvent bank. This paper’s hypothesis is that the moral hazard problem was controlled under a scheme to the degree that member banks had the power and incentive to control or modify others’ risk-taking behavior. Schemes that gave member banks both strong incentives and power were able to control the moral hazard problem better than schemes in which one or both features were weak. Empirical evidence on bank failures and losses on banks’ asset portfolios is consistent with this hypothesis.
Keyword: Banknotes, Moral hazard, and Deposit insurance Subject (JEL): N21 - Economic History: Financial Markets and Institutions: U.S.; Canada: Pre-1913 and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 678 Abstract:
Although employment at individual firms tends to be highly non-stationary, the employment size distribution of all firms in the United States appears to be stationary. It closely resembles a Pareto distribution. There is a lot of entry and exit, mostly of small firms. This paper surveys general equilibrium models that can be used to interpret these facts and explores the role of innovation by new and incumbent firms in determining aggregate growth. The existence of a balanced growth path with a stationary employment size distribution depends crucially on assumptions made about the cost of entry. Some type of labor must be an essential input in setting up new firms.
Keyword: Heterogeneous productivity, Firm size distribution, Selection, and Organization capital Subject (JEL): O33 - Technological Change: Choices and Consequences; Diffusion Processes and E10 - General Aggregative Models: General
Creator: Kaplan, Greg Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 677 Abstract:
This paper uses an estimated structural model to argue that the option to move in and out of the parental home is an important insurance channel against labor market risk for youths who do not attend college. Using data from the NLSY97, I construct a new monthly panel of parent-youth coresidence outcomes and use it to document an empirical relationship between these movements and individual labor market events. The data is then used to estimate the parameters of a dynamic game between youths and their altruistic parents, featuring coresidence, labor supply and savings decisions. Parents can provide both monetary support through explicit financial transfers, and non-monetary support in the form of shared residence. To account for the data, two types of exogenous shocks are needed. Preference shocks are found to explain most of the cross-section of living arrangements, while labor market shocks account for individual movements in and out of the parental home. I use the model to show that coresidence is a valuable form of insurance, particularly for youths from poorer families. The option to live at home also helps to explain features of aggregate data for low-skilled young workers: their low savings rates and their relatively small consumption responses to labor market shocks. An important implication is that movements in and out of home can reduce the consumption smoothing benefits of social insurance programs.
Subject (JEL): J01 - Labor Economics: General
Creator: Phelan, Christopher Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 676 Abstract:
No abstract available. Introduction: This paper considers the question, Does the limited liability associated with banking make it necessary for a government to regulate bank employee compensation? It attempts to shed light on this question by considering a mechanism design framework. In it, a single risk averse employee must be induced to search for good investment opportunities and turn down bad investment opportunities.
Subject (JEL): J38 - Wages, Compensation, and Labor Costs: Public Policy
Creator: Kaplan, Greg Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 675 Abstract:
This paper examines the relationship between the dynamics of parent-youth living arrangements and labor market outcomes for youths who do not go to college in the United States. The data come from a newly constructed panel data set based on retrospective monthly coresidence questions in the NLSY97. This is the first data set containing information on the labor market circumstances of youths at the time of movements in and out of the parental home. Based on estimates from duration models that allow for unobserved heterogeneity, I find that moving from employment to non-employment increases the hazard of moving back home in a given month by 64% for males and 71% for females. These results suggest that labor market factors play an important role in determining the dynamics of parent-youth living arrangements and that coresidence may be an important way in which insurance against labor market shocks takes place within the family.
Keyword: Intergenerational support, Cohabitation family, Duration models, and Parental coresidence Subject (JEL): J13 - Fertility; Family Planning; Child Care; Children; Youth, C41 - Duration Analysis; Optimal Timing Strategies, J20 - Demand and Supply of Labor: General, and J12 - Marriage; Marital Dissolution; Family Structure; Domestic Abuse
Creator: Hosseini, Roozbeh, Jones, Larry E., and Shourideh, Ali Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 674 Abstract:
We use an extended Barro-Becker model of endogenous fertility, in which parents are heterogeneous in their labor productivity, to study the efficient degree of consumption inequality in the long run. In our environment a utilitarian planner allows for consumption inequality even when labor productivity is public information. We show that adding private information does not alter this result. We also show that the informationally constrained optimal insurance contract has a resetting property—whenever a family line experiences the highest shock, the continuation utility of each child is reset to a (high) level that is independent of history. This implies that there is a non-trivial, stationary distribution over continuation utilities and there is no mass at misery. The novelty of our approach is that the no-immiseration result is achieved without requiring that the objectives of the planner and the private agents disagree. Because there is no discrepancy between planner and private agents' objectives, the policy implications for implementation of the efficient allocation differ from previous results in the literature. Two examples of these are: 1) estate taxes are positive and 2) there are positive taxes on family size.
Subject (JEL): H21 - Taxation and Subsidies: Efficiency; Optimal Taxation, D30 - Distribution: General, D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement, D64 - Altruism; Philanthropy; Intergenerational Transfer, H23 - Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies, H43 - Project Evaluation; Social Discount Rate, and C61 - Optimization Techniques; Programming Models; Dynamic Analysis
Creator: Chari, V. V., Golosov, Mikhail, and Tsyvinski, Aleh Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 673 Abstract:
Innovative activities have public good characteristics in the sense that the cost of producing the innovation is high compared to the cost of producing subsequent units. Moreover, knowledge of how to produce subsequent units is widely known once the innovation has occurred and is, therefore, non-rivalrous. The main question of this paper is whether mechanisms can be found which exploit market information to provide appropriate incentives for innovation. The ability of the mechanism designer to exploit such information depends crucially on the ability of the innovator to manipulate market signals. We show that if the innovator cannot manipulate market signals, then the efficient levels of innovation can be implemented without deadweight losses–for example, by using appropriately designed prizes. If the innovator can use bribes, buybacks, or other ways of manipulating market signals, patents are necessary.
Keyword: Innovations, Mechanism design, Patents, Prizes, and Economic growth Subject (JEL): O31 - Innovation and Invention: Processes and Incentives, D86 - Economics of Contract: Theory, O34 - Intellectual Property and Intellectual Capital, D82 - Asymmetric and Private Information; Mechanism Design, O40 - Economic Growth and Aggregate Productivity: General, and D04 - Microeconomic Policy: Formulation, Implementation, and Evaluation
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 672 Abstract:
Suppose firms are subject to decreasing returns and permanent idiosyncratic productivity shocks. Suppose also firms can only stay in business by continuously paying a fixed cost. New firms can enter. Firms with a history of relatively good productivity shocks tend to survive and others are forced to exit. This paper identifies assumptions about entry that guarantee a stationary firm size distribution and lead to balanced growth. The range of technology diffusion mechanisms that can be considered is greatly expanded relative to previous work. High entry costs slow down the selection process and imply slow aggregate growth. They also push the firm size distribution in the direction of Zipf’s law.
Keyword: Productivity, Selection, Imitation, and Diffusion Subject (JEL): O30 - Innovation; Research and Development; Technological Change; Intellectual Property Rights: General and L10 - Market Structure, Firm Strategy, and Market Performance: General
Creator: McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 671 Abstract:
Empirical studies quantifying the benefits of increased foreign direct investment (FDI) have been unable to provide conclusive evidence of a positive impact on the host country’s economic performance. I show that the lack of robust evidence is not inconsistent with theory, even if the gains to FDI openness are large. Anticipated welfare gains to increased inward FDI should lead to immediate declines in domestic investment and employment and eventual increases. Furthermore, since part of FDI is intangible investment that is expensed from company profits, gross domestic product (GDP) and gross national product (GNP) should decline during periods of abnormally high FDI investment. Using the model of McGrattan and Prescott (2009) and data from the IMF Balance of Payments to parameterize the time paths of FDI openness for each country in the sample, I do not find an economically significant relationship between the amount of inward FDI a country did over the period 1980—2005 and the growth in real GDP predicted by the model. This finding rests crucially on the fact that most of these countries are still in transition to FDI openness.
Keyword: Foreign direct investment, Technology capital, and Development Subject (JEL): F23 - Multinational Firms; International Business, F21 - International Investment; Long-term Capital Movements, and O23 - Fiscal and Monetary Policy in Development
Creator: McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 670 Abstract:
Previous studies quantifying the effects of increased taxation during the U.S. Great Depression find that its contribution is small, in accounting for both the downturn in the early 1930s and the slow recovery after 1934. This paper shows that this conclusion rests critically on the assumption that the only taxable capital income is business profits. Effects of capital taxation are much larger when taxes on property, capital stock, excess profits, undistributed profits, and dividends are included in the analysis. When fed into a general equilibrium model, the increased taxes imply significant declines in investment and equity values and nontrivial declines in gross domestic product (GDP) and hours of work. Of particular importance during the Great Depression was the dramatic rise in the effective tax rate on corporate dividends.
Subject (JEL): E13 - General Aggregative Models: Neoclassical, E32 - Business Fluctuations; Cycles, and H25 - Business Taxes and Subsidies including sales and value-added (VAT)