Research Database

We study the effect on the growth of an economy of alternative financing opportunities in a stochastic growth model with incentive constraints. Efficient accumulation mechanisms are designed and computed for economies that differ in their incentive structure. We show that when borrowing is subject to information constraints, there is a computable efficient transfer mechanism that does not affect capital accumulation and investment patterns, even though consumption patterns and the distribution of wealth are affected. In contrast, enforcement constraints can severely reduce the outside financing opportunities and affect investment patterns and economic growth. We adapt numerical algorithms for obtaining numerical solutions of these models.

In Japan, as in the United States, stocks that are more sensitive to changes in the monthly growth rate of labor income earn a higher return on average. Whereas the stock-index beta can only explain 2 percent of the cross-sectional variation in the average return on stock portfolios, the stock-index beta and the labor-beta together explain 75 percent of the variation. We find that the labor-beta drives out the size effect but not the book-to-market-price effect that is documented in the literature. We explore the extent to which these results are an artifact of seasonal patterns in labor-income growth rates as well as asset returns. In Japan, the book-to-market-price characteristic can be adequately captured by a particular factor-beta, as suggested by Fama and French (1993). This is in contrast to the findings reported by Daniel and Titman (1997) for the United States.

People are enjoying longer retirement periods, and population growth is slowing and, in some countries, falling. In this article, we determine the implications of these demographic changes for the needed amount of government debt. If tax rates and the transfer share of gross national income (GNI) are both high, the needed debt is near zero. With such a system, however, huge deadweight losses are incurred as a result of the high tax rate on labor income. With a savings system, a large government debt to annual GNI ratio is needed. In a country with early retirement and no population growth, the needed government debt is as large as five times GNI, and welfare is as much as 24 percent higher in terms of lifetime consumption equivalents in the savings system relative to the tax-and-transfer system.

This paper is a case study of the use of vector autoregression (VAR) models to test economic theories. It focuses on the work of Christopher A. Sims, who in 1980 found that relationships in economic data generated by a small VAR model were inconsistent with those implied by a simple form of monetarist theory. The paper describes the work of researchers who criticized Sims' results as not robust and Sims' response to these critics. The paper reexamines all of this work by estimating hundreds of variations of Sims' model. The paper concludes that both Sims and his critics are right: Sims' conclusion about monetarism is robust, but some of his other statistical results are not. In general, the paper concludes that VAR models can be used to test theories, but that any relationships they uncover in the data must be carefully checked for robustness.

We propose and evaluate an explicit test of the null hypothesis of no difference in the accuracy of two competing forecasts. In contrast to previously developed tests, a wide variety of accuracy measures can be used (in particular, the loss function need not be quadratic, and need not even be symmetric), and forecast errors can be non-Gaussian, nonzero mean, serially correlated and contemporaneously correlated.

A real business cycle model with heterogeneous agents is parameterized, calibrated, and simulated to see if it can account for some stylized facts characterizing postwar U.S. business cycle fluctuations, such as the countercyclical movement of labor’s share of income, and the acyclical behavior of real wages. There are two types of agents in the model, workers and entrepreneurs, who participate on an economy-wide market for contingent claims. On this market workers purchase insurance from entrepreneurs, through optimal labor contracts, against losses in income due to business cycle fluctuations. The model is used to study the allocation of risk and the distribution of income over the business cycle.

Why did states agree to a U.S. Constitution that prohibits them from issuing their own money? This article argues that two common answers to this question—a fear of inflation and a desire to control what money qualifies as legal tender—do not fit the facts. The article proposes a better answer: a desire to form a viable monetary union that both eliminates the variability of exchange rates between various forms of money and avoids the seigniorage problem that otherwise occurs in a fixed exchange rate system. Supporting evidence is offered from three periods of U.S. history: the colonial period (1690–1776), the Revolutionary War (1776–83), and the Confederation period (1783–89).

This article argues that the quantity theory of money is not supported by the evidence. Contrary to the quantity theory, the article says, the value of money depends primarily on how carefully it is backed. That is, the rate of inflation depends more on underlying fiscal policies than on rates of money growth. The evidence for this argument comes from a close look at the way in which the colony of Massachusetts ended a severe long-term inflation in 1750. Other British North American colonies endured similar episodes, all of which parallel some periods of severe inflation in the 20th century United States. The 18th century evidence thus contains lessons for modern monetary policy.

Estimates of interindustry wage differentials are obtained using a fixed-effects estimator on a long panel, the National Longitudinal Survey of Young Men (NLS). After controlling for observable worker characteristics, 84 percent of the residual variance of log wages across industries is explained by individual fixed-effects. Only 16 percent of the residual variance is “explained” by industry dummies. Since no controls for specific job characteristics are used, job characteristics that vary across industries could potentially explain this rather small residual across-industry log wage variance that is not attributable to individual effects. Clearly then, these data do not force us to resort to noncompetitive explanations of interindustry wage differentials, such as efficiency wage theory. Furthermore, efficiency wage theories predict that wages in efficiency wage paying (or primary) industries should be relatively rigid. Therefore, industry wage differentials should widen in recessions. However, no such tendency is found in the data.

This study overturns the conclusion of a 1990 study by David Humphrey and Allen Berger, which found that check float is responsible for the popularity of checks despite their high resource cost compared to electronic payment instruments. The new study examines recent data on the costs of checks and automated clearinghouse (ACH) payments. It finds that the value of check float has decreased significantly since the 1990 study and is no longer large enough to make checks more attractive than ACH payments. The study also questions whether the idea that float could be responsible for the persistent use of checks is reasonable given standard assumptions about the behavior of economic agents. The study ends by speculating on why checks are used more than less-costly alternatives and by encouraging policymakers to wait for researchers to adequately answer that question before intervening in the market for payment instruments.

Americans now work 50 percent more than do the Germans, French, and Italians. This was not the case in the early 1970s, when the Western Europeans worked more than Americans. This article examines the role of taxes in accounting for the differences in labor supply across time and across countries; in particular, the effective marginal tax rate on labor income. The population of countries considered is the G-7 countries, which are major advanced industrial countries. The surprising finding is that this marginal tax rate accounts for the predominance of differences at points in time and the large change in relative labor supply over time.

Many researchers, policymakers, and pundits 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.