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Creator: Kehoe, Timothy Jerome, 1953- and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 418 Abstract:
Three of the arguments made by Temin (2008) in his review of Great Depressions of the Twentieth Century are demonstrably wrong: that the treatment of the data in the volume is cursory; that the definition of great depressions is too general and, in particular, groups slow growth experiences in Latin America in the 1980s with far more severe great depressions in Europe in the 1930s; and that the book is an advertisement for the real business cycle methodology. Without these three arguments — which are the results of obvious conceptual and arithmetical errors, including copying the wrong column of data from a source — his review says little more than that he does not think it appropriate to apply our dynamic general equilibrium methodology to the study of great depressions, and he does not like the conclusion that we draw: that a successful model of a great depression needs to be able to account for the effects of government policy on productivity.
Palavra-chave: General equilibrium models, Depressions, and Economic fluctuations Sujeito: E32 - Business Fluctuations; Cycles and N10 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: General, International, or Comparative
Creator: Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 420 Abstract:
Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynamics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household heterogeneity, with a special emphasis on the “standard” incomplete markets model. We organize the vast literature according to three themes that are central to understanding how inequality matters for macroeconomics. First, what are the most important sources of individual risk and cross-sectional heterogeneity? Second, what are individuals’ key channels of insurance? Third, how does idiosyncratic risk interact with aggregate risk?
Sujeito: J22 - Time Allocation and Labor Supply and E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data)
Creator: Piazzesi, Monika and Schneider, Martin Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 422 Abstract:
This paper studies household beliefs during the recent US housing boom. To characterize the heterogeneity in households’ views about housing and the economy, we perform a cluster analysis on survey responses at different stages of the boom. The estimation always finds a small cluster of households who believe it is a good time to buy a house because house prices will rise further. The size of this “momentum” cluster doubled towards the end of the boom. We also provide a simple search model of the housing market to show how a small number of optimistic investors can have a large effect on prices without buying a large share of the housing stock.
This paper is an extension of Monika Piazzesi's and Martin Schneider's work while they were in the Research Department of the Federal Reserve Bank of Minneapolis.
Sujeito: D12 - Consumer Economics: Empirical Analysis, R31 - Housing Supply and Markets, and R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
Creator: Piazzesi, Monika and Schneider, Martin Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 423 Abstract:
In the 1970s, U.S. asset markets witnessed (i) a 25% dip in the ratio of aggregate household wealth relative to GDP and (ii) negative comovement of house and stock prices that drove a 20% portfolio shift out of equity into real estate. This study uses an overlapping generations model with uninsurable nominal risk to quantify the role of structural change in these events. We attribute the dip in wealth to the entry of baby boomers into asset markets, and to the erosion of bond portfolios by surprise inflation, both of which lowered the overall propensity to save. We also show that the Great Inflation led to a portfolio shift by making housing more attractive than equity. Apart from tax effects, a new channel is that disagreement about inflation across age groups drives up collateral prices when credit is nominal.
This paper is an extension of Monika Piazzesi's and Martin Schneider's work while they were in the Research Department of the Federal Reserve Bank of Minneapolis.
Creator: Herrendorf, Berthold, Schmitz, James Andrew, and Teixeira, Arilton Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 425 Abstract:
We study the effects of large transportation costs on economic development. We argue that the Midwest and the Northeast of the U.S. is a natural case because starting from 1840 decent data is available showing that the two regions shared key characteristics with today’s developing countries and that transportation costs were large and then came way down. To disentangle the effects of the large reduction in transportation costs from those of other changes that happened during 1840–1860, we build a model that speaks to the distribution of people across regions and across the sectors of production. We find that the large reduction in transportation costs was a quantitatively important force behind the settlement of the Midwest and the regional specialization that concentrated agriculture in the Midwest and industry in the Northeast. Moreover, we find that it led to the convergence of the regional per capita incomes measured in current regional prices and that it increased real GDP per capita. However, the increase in real GDP per capita is considerably smaller than that resulting from the productivity growth in the nontransportation sectors.
Palavra-chave: Settlement, Regional income covergence, Transportation costs, and Structural transformation Sujeito: O41 - One, Two, and Multisector Growth Models, O18 - Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure, and O11 - Macroeconomic Analyses of Economic Development
Creator: Lagakos, David P. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 428 Abstract:
I document that cross-country productivity differences in retail trade, which employs around 20% of workers, are accounted for in large part by compositional differences. In richer countries, most retailing is done in modern stores, with high measured output per worker, whereas in developing countries, retail trade is dominated by less-productive traditional stores. I hypothesize that developing countries rationally adopt few modern stores since car ownership rates are low. A simple quantitative model of home production supports the role of cars in determining the composition of retail technologies used and retail-sector productivity differences across countries.
Palavra-chave: Productivity differences, Technology adoption, and Retail trade Sujeito: L81 - Retail and Wholesale Trade; e-Commerce, O33 - Technological Change: Choices and Consequences; Diffusion Processes, O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, and O11 - Macroeconomic Analyses of Economic Development
Creator: Ordonez, Guillermo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 429 Abstract:
It is well known that movements in lending rates are asymmetric; they rise quickly and sharply, but fall slowly and gradually. Not known is the fact that the asymmetry is stronger the less developed a country’s financial system is. This new fact is here documented and explained in a model with an endogenous flow of information about economic conditions. The stronger asymmetry in less developed countries stems from their greater financial system frictions, such as monitoring and bankruptcy costs, which first magnify jumps of lending rates and then delay their recoveries by restricting the generation of information after the crisis. A quantitative exploration of the model shows the data are consistent with this explanation.
Creator: Ordonez, Guillermo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 430 Abstract:
Scapegoating is often said to be a source of inefficiency in organizations. In this paper, I analyze the consequences of scapegoating within a firm in a model where reputation concerns drive the actions of superiors. Consider delegation choices, for example. Hiring efficient workers may be a good idea if successful production is the only way to build reputation. But if successful scapegoating also increases reputation, superiors will tend to hire less efficient workers and will eventually blame them for failures. I characterize scapegoating as an activity “nested” after failures. Even though the results of scapegoating do not affect welfare directly, they do so indirectly through the decisions governing the probability of success in production. We examine how activities “nested” after good results may increase efficiency without relying on costly incentives and why superiors tend to hire better workers during good times.
Creator: Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 432 Abstract:
This paper develops a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing, and to decompose inequality into life-cycle shocks versus initial heterogeneity in preferences and productivity. Closed-form solutions are obtained for equilibrium allocations and for moments of the joint distribution of consumption, hours, and wages. We prove identification and estimate the model with data from the CEX and the PSID over the period 1967–2006. We find that (i) 40% of permanent wage shocks pass through to consumption; (ii) the share of wage risk insured privately increased until the early 1980s and remained stable thereafter; (iii) life-cycle productivity shocks account for half of the cross-sectional variance of wages and earnings, but for much less of dispersion in consumption or hours worked.
Sujeito: E23 - Macroeconomics: Production, E31 - Price Level; Inflation; Deflation, E21 - Macroeconomics: Consumption; Saving; Wealth, and E52 - Monetary Policy
Creator: Fuentes-Albero, Cristina, 1980-, Kryshko, Maxym, Ríos-Rull, José-Víctor, Santaeulalia-Llopis, Raul, and Schorfheide, Frank Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 433 Abstract:
In this paper, we employ both calibration and modern (Bayesian) estimation methods to assess the role of neutral and investment-specific technology shocks in generating fluctuations in hours. Using a neoclassical stochastic growth model, we show how answers are shaped by the identification strategies and not by the statistical approaches. The crucial parameter is the labor supply elasticity. Both a calibration procedure that uses modern assessments of the Frisch elasticity and the estimation procedures result in technology shocks accounting for 2% to 9% of the variation in hours worked in the data. We infer that we should be talking more about identification and less about the choice of particular quantitative approaches.
Creator: Guvenen, Fatih Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 434 Abstract:
I study asset prices in a two-agent macroeconomic model with two key features: limited stock market participation and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices, such as a high equity premium; relatively smooth interest rates; procyclical stock prices; and countercyclical variation in the equity premium, its volatility, and in the Sharpe ratio. In this model, the risk-free asset market plays a central role by allowing non-stockholders (with low EIS) to smooth the fluctuations in their labor income. This process concentrates non-stockholders’ labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non-stockholders in the US data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model’s ability to generate a countercyclical equity premium. When it comes to business cycle performance the model’s progress has been more limited: consumption is still too volatile compared to the data, whereas investment is still too smooth. These are important areas for potential improvement in this framework.
Palavra-chave: Wealth inequality, Equity premium puzzle, Limited stock market participation, Epstein–Zin preferences, and Elasticity of intertemporal substitution
Creator: Heathcote, Jonathan, Perri, Fabrizio, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 436 Abstract:
We conduct a systematic empirical study of cross-sectional inequality in the United States, integrating data from the Current Population Survey, the Panel Study of Income Dynamics, the Consumer Expenditure Survey, and the Survey of Consumer Finances. In order to understand how different dimensions of inequality are related via choices, markets, and institutions, we follow the mapping suggested by the household budget constraint from individual wages to individual earnings, to household earnings, to disposable income, and, ultimately, to consumption and wealth. We document a continuous and sizable increase in wage inequality over the sample period. Changes in the distribution of hours worked sharpen the rise in earnings inequality before 1982, but mitigate its increase thereafter. Taxes and transfers compress the level of income inequality, especially at the bottom of the distribution, but have little effect on the overall trend. Finally, access to financial markets has limited both the level and growth of consumption inequality.
Palavra-chave: Wage dynamics, Inequality over the life cycle, and Consumption, income, and wealth inequality Sujeito: J31 - Wage Level and Structure; Wage Differentials, D31 - Personal Income, Wealth, and Their Distributions, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, and H31 - Fiscal Policies and Behavior of Economic Agents: Household
Creator: Bridgman, Benjamin, Qi, Shi, and Schmitz, James Andrew Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 437 Abstract:
We study the U.S. sugar manufacturing cartel that was created during the New Deal. This was a legal-cartel that lasted 40 years (1934-74). As a legal-cartel, the industry was assured widespread adherence to domestic and import sales quotas (given it had access to government enforcement powers). But it also meant accepting government-sponsored cartel-provisions. These provisions significantly distorted production at each factory and also where the industry was located. These distortions were reflected in, for example, a declining industry recovery rate, that is, the pounds of white sugar produced per ton of beets. It declined from about 310 pounds in 1934 to 240 pounds in 1974. The cartel provisions also distorted the location of industry. For example, it kept production in California and the Far West. Since the cartel ended in 1974, California's share of sugar production has dropped dramatically.
Creator: Guvenen, Fatih, Kuruscu, Burhanettin, and Ozkan, Serdar Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 438 Abstract:
Wage inequality has been significantly higher in the United States than in continental European countries (CEU) since the 1970s. Moreover, this inequality gap has further widened during this period as the US has experienced a large increase in wage inequality, whereas the CEU has seen only modest changes. This paper studies the role of labor income tax policies for understanding these facts. We begin by documenting two new empirical facts that link these inequality differences to tax policies. First, we show that countries with more progressive labor income tax schedules have significantly lower before-tax wage inequality at different points in time. Second, progressivity is also negatively correlated with the rise in wage inequality during this period. We then construct a life cycle model in which individuals decide each period whether to go to school, work, or be unemployed. Individuals can accumulate skills either in school or while working. Wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks. Progressive taxation compresses the (after-tax) wage structure, thereby distorting the incentives to accumulate human capital, in turn reducing the cross-sectional dispersion of (before-tax) wages. We find that these policies can account for half of the difference between the US and the CEU in overall wage inequality and 76% of the difference in inequality at the upper end (log 90-50 differential). When this economy experiences skill-biased technological change, progressivity also dampens the rise in wage dispersion over time. The model explains 41% of the difference in the total rise in inequality and 58% of the difference at the upper end.
Palavra-chave: Progressive taxation, Human capital, Ben-Porath, Skillbiased technical change, Wage inequality, and Labour income tax Sujeito: E62 - Fiscal Policy and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Holmes, Thomas J. and Schmitz, James Andrew Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 439 Abstract:
Does competition spur productivity? And if so, how does it do so? These have long been regarded as central questions in economics. This essay reviews the literature that makes progress toward answering both questions.
Palavra-chave: Innovation, Market power, and Monopoly
Creator: Del Negro, Marco, Perri, Fabrizio, and Schivardi, Fabiano Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 441 Abstract:
The paper studies a fiscal policy instrument that can reduce fiscal distortions without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each citizen, whereby the citizen can choose to pay a fixed price in exchange for a given reduction in her tax rate for a period of time. We introduce the tax buyout in a dynamic overlapping generations economy, calibrated to match several features of the US income, taxes and wealth distribution. Under simple pricing, the introduction of the buyout is revenue neutral but, by reducing distortions, it benefits a significant fraction of the population and leads to sizable increases in aggregate labor supply, income and consumption.
Creator: Williamson, Stephen D. and Wright, Randall D. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 442 Abstract:
This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: New Monetarism has something in common with Old Monetarism, but there are also important differences; it has little in common with Keynesianism. We describe the principles of these schools and contrast them with our approach. To show how it works, in practice, we build a benchmark New Monetarist model, and use it to study several issues, including the cost of inflation, liquidity and asset trading. We also develop a new model of banking.
Sujeito: E00 - Macroeconomics and Monetary Economics: General, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E10 - General Aggregative Models: General, and E40 - Money and Interest Rates: General
Creator: Williamson, Stephen D. and Wright, Randall D. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 443 Abstract:
The purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understanding monetary issues. We survey recent papers on monetary theory, showing how they build on common foundations. We then lay out a tractable benchmark version of the model that allows us to address a variety of issues. We use it to analyze some classic economic topics, like the welfare effects of inflation, the relationship between money and capital accumulation, and the Phillips curve. We also extend the benchmark model in new ways, and show how it can be used to generate new insights in the study of payments, banking, and asset markets.
Palavra-chave: Monetary Theory, Monetary Policy, and New Monetarism Sujeito: E00 - Macroeconomics and Monetary Economics: General, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E10 - General Aggregative Models: General, and E40 - Money and Interest Rates: General
Creator: Atkeson, Andrew and Burstein, Ariel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 444 Abstract:
We present a general equilibrium model of the response of firms' decisions to operate, innovate, and engage in international trade to a change in the marginal cost of international trade. We find that, although a change in trade costs can have a substantial impact on heterogeneous firms' exit, export, and process innovation decisions, the impact of changes in these decisions on welfare is largely offset by the response of product innovation. Our results suggest that microeconomic evidence on firms' responses to changes in international trade costs may not be informative about the implications of changes in these trade costs for aggregate welfare.
Creator: Holmes, Thomas J. and Stevens, John J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 445 Abstract:
There is wide variation in the sizes of manufacturing plants, even within the most narrowly defined industry classifications used by statistical agencies. Standard theories attribute all such size differences to productivity differences. This paper develops an alternative theory in which industries are made up of large plants producing standardized goods and small plants making custom or specialty goods. It uses confidential Census data to estimate the parameters of the model, including estimates of plant counts in the standardized and specialty segments by industry. The estimated model fits the data relatively well compared with estimates based on standard approaches. In particular, the predictions of the model for the impacts of a surge in imports from China are consistent with what happened to U.S. manufacturing industries that experienced such a surge over the period 1997--2007. Large-scale standardized plants were decimated, while small-scale specialty plants were relatively less impacted.