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Creator: Boyd, John H., Daley, Lane A., 1953-, and Runkle, David Edward Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 515 Abstract:
This paper examines the seasonal pattern of accruals for loan-loss provisions and chargeoffs chosen by bank managers. Using the existing literature on intra-year discretionary accruals, knowledge of the incentive systems used to evaluate bank managers' performance, and various regulatory characteristics, we predict that accruals for provisions and chargeoffs will cluster in the fourth quarter of each year. We examine quarterly data for 105 large bank holding companies from the first quarter of 1980 through the fourth quarter of 1990. Our results indicate that: (1) provisions and chargeoffs are clustered in the fourth quarter, (2) this clustering is not related to the level of business activity of the banks, (3) the proximity of a bank's actual capital to its regulatory capital requirement does not affect this clustering, and (4) current provisions are affected both by current chargeoffs and by expectations about future chargeoffs. To examine whether the systematic characteristics of these loan-loss provision and chargeoff decisions are understood by users, we also estimate a quarterly equity valuation model in which quarterly provisions should be differentially weighted to reflect their seasonal characteristics. We find strong evidence to indicate that equity prices behave as if the market participants take these seasonal properties into account.
Palavra-chave: Bank lending, Loan-loss provision, Seasonality, Loans, Loan losses, Charge-off, and Banks Sujeito: G14 - Information and Market Efficiency; Event Studies; Insider Trading and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 514 Palavra-chave: Finite element method, Computational time, Accuracy, Stochastic growth model, Applied economics, and Computational method Sujeito: C52 - Model Evaluation, Validation, and Selection and C63 - Computational Techniques; Simulation Modeling
Creator: Atkeson, Andrew and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 513 Abstract:
In this paper, we build a model of the transition following large-scale economic reforms that predicts both a substantial drop in output and a prolonged pause in physical investment as the initial phase of the optimal transition following the reform. We model reform as a change in policy which induces agents to close existing enterprises using old technologies of production and to open up new enterprises adopting new technologies of production. The central idea of our paper is that it is costly to close old enterprises and open new enterprises because, in doing so, information capital built up about old enterprises is lost and time must pass before information capital about new enterprises can be acquired. Thus, an acceleration of the pace of industry evolution leads in the short run to a net loss of information capital, a drop in productivity, a recession, and a fall in physical investment. We calibrate our model of industry evolution, information capital, and transition to match micro data on industry evolution in the United States and macro data from the United States, Japan, and the former communist countries of Europe. We find that the loss of information capital that accompanies a major acceleration in the pace of industry evolution in an economy leads initially to a decade of recession and a five year pause in physical investment before the benefits of reform are realized.
Palavra-chave: Information capital, Recession, Transition, Industrial evolution, Economic reform, Technological evolution, Policy change, and Technology change Sujeito: O25 - Industrial Policy and O33 - Technological Change: Choices and Consequences; Diffusion Processes
Creator: Hansen, Gary D. (Gary Duane) and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 507 Descrição:
Presented at the ASSA meetings in Anaheim, CA.
Palavra-chave: 1991, Recession, Technology shock, Labor, 1990, Productivity, Knowledge, and Technological shocks Sujeito: G14 - Information and Market Efficiency; Event Studies; Insider Trading and O33 - Technological Change: Choices and Consequences; Diffusion Processes
Creator: Braun, R. Anton Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 506 Abstract:
This paper investigates the macroeconomic effects of cyclical fluctuations in marginal tax rates. It finds that systematically including tax variables in a standard real business cycle model substantially improves the model's ability to reproduce basic facts about postwar U.S. business cycle fluctuations. In particular, modeling fluctuations in personal and corporate income tax rates increases the model's predicted relative variability of hours and decreases its predicted correlation between hours and average productivity. Fluctuations in tax rates produce large substitution effects that alter the leisure/labor supply decision.
Palavra-chave: Corporate tax , Taxes, Business cycle, Tax, Income tax, Tax rates, Real business cycle model, Productivity, and Taxation Sujeito: E32 - Business Fluctuations; Cycles, H25 - Business Taxes and Subsidies including sales and value-added (VAT), and H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
Creator: Green, Edward J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 501 Abstract:
I consider two theories of the determination of political institutions. One of these theories stresses effects of changes in the balance of military power between the ruler and subjects on the distribution of property rights which the political system enforces. The other theory emphasizes the effect of changing informational constraints which require institutional changes to be made in order to maintain efficiency. I examine how each of these theories would apply to explaining the development of parliamentary government in thirteenth-century England. My general conclusion is that both theories are required to understand fully the process by which liberal political institutions emerge.
Palavra-chave: History, Government, England, and Great Britain Sujeito: N43 - Economic History: Government, War, Law, International Relations, and Regulation: Europe: Pre-1913 and H11 - Structure, Scope, and Performance of Government
Creator: Green, Edward J. and Oh, Soo-Nam Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 499 Abstract:
In this paper we explain why markets in noncontingent debt securities might be a stable form of market organization for intermediation to households. Efficient-contract allocation might be supported by these markets because households' relationships with their intermediaries do not exactly parallel the explicit form of the noncontingent contracts that they explicitly sign with one another. Also we show that the efficient-contract model can be distinguished from alternative models within the time-series framework that has been widely used to study households' consumption patterns.
Paper prepared for the 'Debt and Credit' Conference at the LSE.
Palavra-chave: Households, Credit contracts, Consumption, Credit, and Debt securities Sujeito: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, C22 - Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes, and D11 - Consumer Economics: Theory
Creator: Backus, David, Kehoe, Patrick J., and Kydland, Finn E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 498 Palavra-chave: Harberger-Laursen-Metzler effect, Net exports , Balance of trade, Terms of trade, J curve, and Marshall-Lerner condition Sujeito: F41 - Open Economy Macroeconomics, F11 - Neoclassical Models of Trade, and F30 - International Finance: General
Creator: Miller, Preston J. and Todd, Richard M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 494 Abstract:
This paper investigates the macroeconomic and welfare effects of a particular public finance decision. That decision was to use debt rather than current taxation to finance deposit insurance payments related to the savings and loan debacle. We find that this decision could have significantly raised real interest rates and affected welfare. The analysis is conducted in a dynamic, open-economy, monetary general equilibrium model in which parameters are set based on empirical observations.
Palavra-chave: Savings and loan, Welfare, Real interest rates, Deposit insurance, Government debt, Public finance, Taxation, and S & L Sujeito: H63 - National Debt; Debt Management; Sovereign Debt and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Miller, Preston J. and Todd, Richard M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 481 Abstract:
This paper investigates the effects of changes in a country's monetary policies on its economy and the welfare of its citizens and those of other countries. Each country is populated by two-period lived overlapping agents who reside in either a home service sector or a world-traded good sector. Policy effects are transmitted through changes in the real interest rate, relative prices, and price levels. Welfare effects are sometimes dominated by relative price movements and can thus be opposite of those found in one-good models. Simulation of dynamic paths also reveals that welfare effects for some types of agents reverse between those born in immediate post-shock periods and those born later.
Palavra-chave: Exchange rates, Real interest rates, Monetary policy, Prices, and Relative prices Sujeito: E31 - Price Level; Inflation; Deflation, F31 - Foreign Exchange, and E52 - Monetary Policy
Creator: Christiano, Lawrence J. and Eichenbaum, Martin S. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 478 Descrição:
This technical appendix supports "Liquidity Effects, Monetary Policy, and the Business Cycle" in Journal of Money, Credit and Banking (November 1995, Vol. 27, No. 4, Pt. 1, pp. 1113-1136), https://doi.org/10.2307/2077793.
Palavra-chave: Appendix, Computations, MATLAB, Monetary policy, Business cycles, Liquidity, and Mathematical computations Sujeito: E32 - Business Fluctuations; Cycles, Y10 - Data: Tables and Charts, and E52 - Monetary Policy
Creator: Kiyotaki, Nobuhiro and Wright, Randall D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 464 Abstract:
The classical and early neoclassical economists knew that the essential function of money was its role as a medium of exchange. Recently, this idea has been formalized using search-theoretic noncooperative equilibrium models of the exchange process. The goal of this paper is to use a simple model of this class to analyze four substantive issues in monetary economics: the interaction between specialization and exchange, dual fiat currency regimes, the welfare improving role of money, and the susceptibility of monetary economies to extrinsic uncertainty.
Palavra-chave: Fiat currency, Exchange, Monetary economics, Fiat money, and Money Sujeito: D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness and E00 - Macroeconomics and Monetary Economics: General
Creator: Boyd, John H., Graham, Stanley L., and Hewitt, R. Shawn Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 431 Palavra-chave: Merger, Bank, and Firm Sujeito: G34 - Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Backus, David, Gregory, Alan, and Zin, Stanley E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 429 Abstract:
We compare the statistical properties of prices of U.S. treasury bills to those generated by a theoretical dynamic exchange economy with complete markets. We show that the model can account for neither the sign nor the magnitude of average risk premiums in forward prices and holding-period returns. The economy is also incapable of generating enough variation in risk premiums to account for rejections of the expectations hypothesis with treasury bill data. These conclusions add to the growing list of empirical deficiencies of the representative agent model of asset pricing.
Palavra-chave: Expectations hypothesis, Forward prices, Holding-period returns, and Autoregressive heteroskedasticity Sujeito: G12 - Asset Pricing; Trading Volume; Bond Interest Rates and C61 - Optimization Techniques; Programming Models; Dynamic Analysis
Creator: Aiyagari, S. Rao Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 424 Palavra-chave: Deficit, Tax policy, Federal government, Taxation, Tax, Tax rates, Taxes , and Budget management Sujeito: H21 - Taxation and Subsidies: Efficiency; Optimal Taxation and H62 - National Deficit; Surplus
Creator: Miller, Preston J. and Roberds, William Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 418 Palavra-chave: Structural model, Deficit, Real interest rates, Budget, and Budget deficit Sujeito: H61 - National Budget; Budget Systems and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Boyd, John H., Graham, Stanley L., and Hewitt, R. Shawn Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 417 Palavra-chave: Merger, Bank, and Firm Sujeito: G34 - Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Christiano, Lawrence J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 415 Abstract:
This article studies the accuracy of two versions of Kydland and Prescott's (1980, 1982) procedure for approximating optimal decision rules in problems in which the objective fails to be quadratic and the constraints fail to be linear. The analysis is carried out using a version of the Brock-Mirman (1972) model of optimal economic growth. Although the model is not linear quadratic, its solution can nevertheless be computed with arbitrary accuracy using a variant of existing value-function iteration procedures. I find the Kydland-Prescott approximate decision rules are very similar to those implied by value-function iteration.
Palavra-chave: Production function, Optimization, Growth model, Markov chain, State space, and Decision rule Sujeito: C40 - Econometric and Statistical Methods: Special Topics: General
Creator: Smith, Bruce D. (Bruce David), 1954-2002 and Stutzer, Michael J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 410 Palavra-chave: Farm Credit System, Assets, Dividends, Adverse selection, Risk, FCS, and Mutuals Sujeito: H81 - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
Creator: Todd, Richard M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 407 Abstract:
Doan, Litterman, and Sims have described a method for estimating Bayesian vector autoregressive (BVAR) forecasting models. The method has been successfully applied to the U.S. macroeconomic dataset, which is relatively long and stable. Despite the brevity and volatility of the post-1976 Chilean macroeconomic dataset, this paper shows that a straightforward application of the DLS method to this dataset, with simple modifications to allow for delays in the release of data, also appears to satisfy at least one criterion of relative forecasting accuracy suggested by Doan, Litterman, and Sims. However, the forecast errors of the Chilean BVARs are still large in absolute terms.Also, the model's coefficients change sharply in periods marked by policy shifts, such as the floating of the peso in 1982.
Palavra-chave: Bayesian autoregressive vector forecasting models and Chile Sujeito: O54 - Economywide Country Studies: Latin America; Caribbean
Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 406 Palavra-chave: Inflation, Money, Monetary policy, Prices, Quantity theory of money, and Central banking Sujeito: E31 - Price Level; Inflation; Deflation and E52 - Monetary Policy
Creator: Williamson, Stephen D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 405 Abstract:
A model is constructed where banks provide access to a communication technology which facilitates trade. Bank liabilities may coexist with alternative means of payment in equilibrium, and there exist regions of the parameter space where banking dominates the payments system and where physical exchange media dominate. The model is consistent with some observations concerning the role of the banking system in economic development, and with characteristics of banking crises. In particular, in early stages of economic development: 1) rapid output growth is accompanied by an increasing share of banking in transactions activity and 2) there are recurrent banking "panics" where reductions in measured aggregate output coincide with increases in the use of alternative means of payment relative to bank liabilities. In later stages of development, growth slackens off, the share of banking in the payments system stabilizes and the economy is less likely to be subject to banking panics.
Palavra-chave: Financial panic, Banks, Banking panics, Communication cost, and Communication technology Sujeito: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages and O33 - Technological Change: Choices and Consequences; Diffusion Processes
Creator: Aiyagari, S. Rao and Peled, Dan Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 503 Abstract:
It is often argued that with a positively skewed income distribution (median less than mean) a majority voting over proportional tax rates would result in higher tax rates than those that maximize average welfare, and will accordingly reduce aggregate savings. We reexamine this view in a capital accumulation model, in which distorting redistributive taxes provide insurance against idiosyncratic shocks, and income distributions evolve endogenously. We find small differences of either sign between the tax rates set by a majority voting and a utilitarian government, for reasonable parametric specifications. We show how these differences reflect a greater responsiveness of a utilitarian government to the average need for the insurance provided by the tax-redistribution scheme. These conclusions remain true despite the fact that the model simulations produce positively skewed distributions of total income across agents.
Palavra-chave: Votes, Taxes, and Income distribution Sujeito: E62 - Fiscal Policy and D72 - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
Creator: Greenwood, Jeremy, 1953- and Jovanovic, Boyan, 1951- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 446 Abstract:
A paradigm is presented where both the extent of financial intermediation and the rate of economic growth are endogenously determined. Financial intermediation promotes growth because it allows a higher rate of return to be earned on capital, and growth in turn provides the means to implement costly financial structures. Thus, financial intermediation and economic growth are inextricably linked in accord with the Goldsmith-McKinnon-Shaw view on economic development. The model also generates a development cycle reminiscent of the Kuznets hypothesis. In particular, in the transition from a primitive slow-growing economy to a developed fast-growing one, a nation passes through a stage where the distribution of wealth across the rich and poor widens.
Palavra-chave: Kuznets curve, Rate of return, Income gap, Income distribution, Growth rate, and Financial intermediation Sujeito: G00 - Financial Economics: General and O11 - Macroeconomic Analyses of Economic Development
Creator: Kehoe, Timothy Jerome, 1953-, Levine, David K., and Romer, Paul Michael, 1955- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 400 Abstract:
We consider a production economy with a finite number of heterogeneous, infinitely lived consumers. We show that, if the economy is smooth enough, equilibria are locally unique for almost all endowments. We do so by converting the infinite dimensional fixed point problem stated in terms of prices and commodities into a finite dimensional Negishi problem involving individual weights in a social value function. By adding a set of artificial fixed factors to utility and production functions, we can write the equilibrium conditions equating spending and income for each consumer entirely in terms of time zero factor endowments and derivatives of the social value function.
Palavra-chave: Consumer, Equilibrium, and Dynamic model Sujeito: C62 - Existence and Stability Conditions of Equilibrium
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 522 Abstract:
We consider a two country growth model with international capital markets. These markets fund capital investment in both countries, and operate subject to a costly state verification (CSV) problem. Investors in each country require some external finance, but also provide internal finance, which mitigates the CSV problem. When two identical (except for their initial capital stocks) economies are closed, they necessarily converge monotonically to the same steady state output level. Unrestricted international financial trade precludes otherwise identical economies from converging, and poor countries are necessarily net lenders to rich countries. Oscillation in real activity and international capital flows can occur.
Palavra-chave: CSV, Open economy, International lending, Costly state verification, Capital investment, Closed economy, Credit rationing, International capital markets, and Credit Sujeito: F34 - International Lending and Debt Problems and O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Creator: Green, Edward J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 509 Abstract:
Thinking regarding the privatization of state industries and enterprises in the former Comecon countries has tended to focus on the efficiency gains that would occur in the privatized sector. Based on the comparatively good performance and the rather rigid configuration of Comecon production institutions, the scope for such productivity gains seems small. Rather, productivity and innovation in the post-Comecon economies are likely to depend greatly on the emergence of new, initially small, entrepreneurial firms. The extent and form of privatization may affect these firms' prospects for success. How the privatized-firm and entrepreneurial sector will interact depends on public-finance considerations as well as on considerations of industrial organization.
Palavra-chave: Soviet bloc, Entrepreneurship, State enterprise, Comecon, Eastern bloc, Privatization, Council for Mutual Economic Assistance, Private enterprise, and Growth Sujeito: G38 - Corporate Finance and Governance: Government Policy and Regulation, L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices, and L33 - Comparison of Public and Private Enterprises and Nonprofit Institutions; Privatization; Contracting Out
Creator: Aiyagari, S. Rao Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 518 Abstract:
This paper is about a useful way of taking account of frictions in asset pricing and macroeconomics. I start by noting that complete frictionless markets models have a number of empirical deficiencies. Then I suggest an alternative class of models with incomplete markets and heterogenous agents which can also accommodate a variety of other frictions. These models are quantitatively attractive and computationally feasible and have the potential to overcome many or all of the empirical deficiencies of complete frictionless markets models. The incomplete markets model can also differ significantly from the complete frictionless markets model on some important policy questions.
Palavra-chave: Macroeconomics, Incomplete markets, Frictionless market model, Asset pricing, and Friction Sujeito: G12 - Asset Pricing; Trading Volume; Bond Interest Rates and E13 - General Aggregative Models: Neoclassical
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 512 Abstract:
We investigate ex-ante efficient contracts in an environment in which implementation is costless. In this environment, standard debt contracts will typically not be optimal. Optimal contracts may involve defaults, even in states in which the borrower is fully able to repay. We then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts. When model parameters are calibrated to realistic values, the welfare loss from exogenously imposing this restriction is extremely small. Thus, if the implementation costs are actually nontrivial (as seems likely), standard debt contracts will be (very close to) optimal.
Palavra-chave: CSV, Optimal contract, CESV, Standard debt contract, Ex ante contract, Costly state verification, Loans, Financial contract, Bankruptcy, Costly ex-post state verification, Contracts, and Debt Sujeito: G10 - General Financial Markets: General (includes Measurement and Data) and D86 - Economics of Contract: Theory
Creator: Glosten, Lawrence R., Jagannathan, Ravi, and Runkle, David Edward Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 505 Abstract:
Earlier researchers have found either no relation or a positive relation between the conditional expected return and the conditional variance of the monthly excess return on stocks when they used the standard GARCH-M model. This is in contrast to the negative relation found when other approaches were used to model conditional variance. We show that the difference in the estimated relation arises because the standard GARCH-M model is misspecified. When the standard model is modified allow for (i) the presence for seasonal patterns in volatility, (ii) positive and negative innovations to returns to having different impacts on conditional volatility, and (iii) nominal interest rates to affect conditional variance, we once again find support for a negative relation. Using the modified GARCH-M model, we also show that there is little evidence to support the traditional view that conditional volatility is highly persistent. Also, positive unanticipated returns result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility of a similar magnitude. Hence the time series properties of the monthly excess return on stocks appear to be substantially different from that of the daily excess return on stocks.
Palavra-chave: Stock market, Rate of return, Risk, Asset valuation, Return rate, and Stocks Sujeito: G12 - Asset Pricing; Trading Volume; Bond Interest Rates and G11 - Portfolio Choice; Investment Decisions
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 399 Abstract:
In this paper we analyze the constraints imposed by dynamic consistency in a model of optimal taxation. We assume that only distorting taxes are available to finance government consumption. Optimal fiscal policy requires the use of debt to smooth distortions over time. Dynamic consistency requires that governments at each point in time not have an incentive to default on the inherited debt. We consider policy functions which map the history of the economy including the actions of past governments into current decisions. A sustainable plan is a sequence of history-contingent policies which are optimal at each date given that future policies will be selected according to the plan. We show that if agents discount the future sufficiently little and if government consumption fluctuates then optimal sustainable plans yield policies and allocations which are identical to those under full commitment. We contrast our notion of dynamic consistency with other definitions.
Palavra-chave: Economic policy, Debt, and Fiscal policy Sujeito: E62 - Fiscal Policy and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Boyd, John H. and Graham, Stanley L. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 398 Abstract:
This study estimates the effects of allowing bank holding companies (BHCs) to enter several lines of financial business not now permitted. A simulation technique is used to estimate the risk and return of hypothetical financial corporations after merger between a BHC and a large firm in each of these industries: securities, real estate, life insurance, property and casualty insurance, and insurance agencies. The study concludes that a merger between a BHC and a life insurance company may decrease the probability of bankruptcy for the merged firm relative to the BHC alone. This result does not hold true, however, for BHC mergers with firms in the other industries. In particular, BHC mergers with securities or real estate firms are found to increase the probability of bankruptcy.
Palavra-chave: Merger, Bank holding companies, Insurance, Real estate, Bankruptcy, Securities, Risk, and Bank holding company Sujeito: G28 - Financial Institutions and Services: Government Policy and Regulation, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 392 Palavra-chave: Discounted repeated game, Repeated game, Game theory, and Aps example Sujeito: C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
Creator: Levine, David K. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 388 Abstract:
Previous authors have argued that the optimal monetary policy is contractionary. If buyers value consumption substantially more than sellers, there is some randomness and informational constraints make asset trading useful, we show that there is an incentive compatible expansionary policy that dominates all incentive compatible contractionary policies.
Palavra-chave: Optimal monetary policy, Contraction, Trade, Private information, Asset trading, and Expansion Sujeito: D82 - Asymmetric and Private Information; Mechanism Design and E52 - Monetary Policy
Creator: Levine, David K. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 386 Abstract:
In a monetary model, it is shown that if there is a unique Pareto inefficient barter equilibrium, then a monetary equilibrium exists when traders are sufficiently patient.
Palavra-chave: Money, Monetary equilbria, Inflation, Barter equilibria, and Consumers Sujeito: E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems and D51 - Exchange and Production Economies
Creator: Williamson, Stephen D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 382 Abstract:
A model with private information is constructed that supports conventional arguments for a government monopoly in supplying circulating media of exchange. The model also yields predictions, including rate-of-return dominance of circulating media of exchange, that are consistent with observations from free banking regimes and fiat money regimes. In a laissez faire banking equilibrium, fiat money is not valued, and the resulting allocation is not Pareto optimal. However, if private agents are restricted from issuing circulating notes, there exists an equilibrium with valued fiat money that Pareto dominates the laissez faire equilibrium and is constrained Pareto optimal.
Palavra-chave: Currency, Fiat money, Assymetric information, Monetary economics, Monetary exchange, Private information, Laissez faire banking, Free banking, and Money Sujeito: D82 - Asymmetric and Private Information; Mechanism Design and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Doan, Thomas, Litterman, Robert B., and Sims, Christopher A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 243 Abstract:
This paper develops a forecasting procedure based on a Bayesian method for estimating vector autoregressions. The procedure is applied to ten macroeconomic variables and is shown to improve out-of-sample forecasts relative to univariate equations. Although cross-variables responses are damped by the prior, considerable interaction among the variables is shown to be captured by the estimates. We provide unconditional forecasts as of 1982:12 and 1963:3* We also describe how a model such as this can be used to make conditional projections and to analyse policy alternatives. As an example, we analyze a Congressional Budget Office forecast made in 1982:12. While no automatic causal interpretations arise from models like ours, they provide a detailed characterization of the dynamic statistical interdependence of a set of economic variables, which may help in evaluating causal hypotheses, without containing any such hypotheses themselves.
Palavra-chave: Forecasting, Macroeconomics, and Bayesian methods Sujeito: E27 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications and C11 - Bayesian Analysis: General
The files below demonstrate how to calibrate the neoclassical growth model and then solve the model numerically, using data from Finland as an example. You can download all files at once by clicking "create the zip" or you can download individual files by clicking on the title or selecting "download" from the action column.
BaseCaseCalibration.xls calibrates model parameters and derives a sequence of TFP values in the ‘calibration’ worksheet. The parameters are also saved in paramBase.txt, and the series of TFP values along with labor endowment and taxes are saved in dataBase.txt. The MATLAB program depressions.m uses these text files and solveModel.m to solve the model numerically. The output this program saves to output.xls can be used to generate the graphs in BaseCaseCalibration.xls.
These files can be used to model any economy over any period by replacing the data in BaseCaseCalibration.xls and saving the results in the correct format to paramBase.txt and dataBase.txt. The files below contain an overview of the calibration procedures, the MATLAB programs, and instructions on using the files on your own data. More details can be found in the files themselves.
Creator: Guvenen, Fatih, Kaplan, Greg, and Song, Jae Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 716 Abstract:
We analyze changes in the gender structure at the top of the earnings distribution in the United States over the last 30 years using a 10% sample of individual earnings histories from the Social Security Administration. Despite making large inroads, females still constitute a small proportion of the top percentiles: the glass ceiling, albeit a thinner one, remains. We measure the contribution of changes in labor force participation, changes in the persistence of top earnings, and changes in industry and age composition to the change in the gender composition of top earners. A large proportion of the increased share of females among top earners is accounted for by the mending of, what we refer to as, the paper floor – the phenomenon whereby female top earners were much more likely than male top earners to drop out of the top percentiles. We also provide new evidence at the top of the earnings distribution for both genders: the rising share of top earnings accruing to workers in the Finance and Insurance industry, the relative transitory status of top earners, the emergence of top earnings gender gaps over the life cycle, and gender differences among lifetime top earners.
Palavra-chave: Glass ceiling, Industry, Paper floor, Top earners, and Gender gap Sujeito: E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, G10 - General Financial Markets: General (includes Measurement and Data), and J31 - Wage Level and Structure; Wage Differentials
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 619_1 Descrição:
Technical appendix for Working Paper 619, https://doi.org/10.21034/wp.619
Creator: Sargent, Thomas J. and Sims, Christopher A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 055 Descrição:
Paper prepared for seminar on New Methods in Business Cycle Research, Federal Reserve Bank of Minneapolis, November 13-14, 1975.
Creator: Sargent, Thomas J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 000 Descrição:
This paper is labeled as "W" and has no issue number. Issue number 0 is used for chronological purposes.
Palavra-chave: Raymond Poincaré, Poincaré miracle, Monetary policy, Margaret Thatcher, Government deficit, Fiscal policy, Momentum, Rational expectations, Inflation, and Ronald Reagan
Creator: He, Hui and Liu, Zheng Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 644 Abstract:
Wage inequality between education groups in the United States has increased substantially since the early 1980s. The relative number of college-educated workers has also increased dramatically in the postwar period. This paper presents a unified framework where the dynamics of both skill accumulation and wage inequality arise as an equilibrium outcome driven by measured investment-specific technological change. Working through equipment-skill complementarity and endogenous skill accumulation, the model does well in capturing the steady growth in the relative quantity of skilled labor during the postwar period and the substantial rise in wage inequality after the early 1980s. Based on the calibrated model, we examine the quantitative effects of some hypothetical tax-policy reforms on skill accumulation, wage inequality, and welfare.
Palavra-chave: Skill premium, Capital-skill complementarity, Investment-specific technological change, and Skill accumulation Sujeito: E25 - Aggregate Factor Income Distribution, J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, O33 - Technological Change: Choices and Consequences; Diffusion Processes, and J31 - Wage Level and Structure; Wage Differentials
Creator: Christiano, Lawrence J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 163 Abstract:
This paper shows how to derive the family of models in which Cagan’s model of hyperinflation is a rational expectations model. The slope parameter in Cagan’s portfolio balance equation is identified in some of these models and in others it is not—a fact which clarifies results obtained in several recent papers.
Creator: Weber, Warren E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 634 Abstract:
This paper describes a newly constructed data set of all U.S. state banks from 1782 to 1861. It contains the names and locations of all banks and branches that went into business and an estimate of when each operated. The compilation is based on reported balance sheets, listings in banknote reporters, and secondary sources. Based on these data, the paper presents a count of the number of banks and branches in business by state. I argue that my series are superior to previously existing ones for reasons of consistency, accuracy, and timing. The paper contains examples to support this argument.
Sujeito: N21 - Economic History: Financial Markets and Institutions: U.S.; Canada: Pre-1913
Creator: Zhang, Yuzhe Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 639 Abstract:
This paper studies the stability of a stochastic optimal growth economy introduced by Brock and Mirman [J. Econ. Theory 4 (1972)] by utilizing stochastic monotonicity in a dynamic system. The construction of two boundary distributions leads to a new method of studying systems with non-compact state space. The paper shows the existence of a unique invariant distribution. It also shows the equivalence between the stability and the uniqueness of the invariant distribution in this dynamic system.
Palavra-chave: Stochastic dominance, Monotonic operator, Stochastic growth, and Global stability Sujeito: C62 - Existence and Stability Conditions of Equilibrium, O41 - One, Two, and Multisector Growth Models, and C61 - Optimization Techniques; Programming Models; Dynamic Analysis
Creator: Altug, Sumru Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 277 Abstract:
This paper presents maximum likelihood estimates of a real business cycle model very similar to one Kydland and Prescott  suggested. The results of the paper conflict with Kydland and Prescott’s. The model leaves unexplained much of the variance of two key investment series, namely, structures and equipment. Also, much of the variation in the differences of per capita hours can be generated assuming that past leisure choices do not affect current utility.
Creator: Engbom, Niklas Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 756 Abstract:
I develop an idea flows theory of firm and worker dynamics in order to assess the consequences of population aging. Older people are less likely to attempt entrepreneurship and switch employers because they have found better jobs. Consequently, aging reduces entry and worker mobility through a composition effect. In equilibrium, the lower entry rate implies fewer new, better job opportunities for workers, while the better matched labor market dissuades job creation and entry. Aging accounts for a large share of substantial declines in firm and worker dynamics since the 1980s, primarily due to equilibrium forces. Cross-state evidence supports these predictions.
Palavra-chave: Economic growth, Employment, Labor turnover, Entrpreneurial choice, and Demographics Sujeito: O40 - Economic Growth and Aggregate Productivity: General, J11 - Demographic Trends, Macroeconomic Effects, and Forecasts, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Bianchi, Javier and Mondragon, Jorge Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 755 Abstract:
This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary autonomy, lenders anticipate that the government will face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy can stabilize the economy and can easily remain immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone vulnerable to a rollover crisis. A lender of last resort can help ease the costs from giving up monetary independence.
Palavra-chave: Monetary unions, Sovereign debt crises, and Rollover risk Sujeito: F34 - International Lending and Debt Problems, G15 - International Financial Markets, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, and E40 - Money and Interest Rates: General
Creator: Bengui, Julien and Bianchi, Javier Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 754 Abstract:
The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages undermine the effectiveness of macroprudential taxes but do not necessarily call for weaker interventions. A quantitative analysis of the model suggests that aggregate welfare gains and reductions in the severity and frequency of financial crises remain, on average, largely unaffected by even significant leakages.
Palavra-chave: Financial crises, Regulatory arbitrage, Macroprudential policy, and Limited regulation enforcement Sujeito: F32 - Current Account Adjustment; Short-term Capital Movements, E32 - Business Fluctuations; Cycles, D62 - Externalities, E44 - Financial Markets and the Macroeconomy, and F41 - Open Economy Macroeconomics
Creator: Benjamin, David and Wright, Mark L. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 753 Abstract:
Negotiations to restructure sovereign debt are time consuming, taking almost a decade on average to resolve. In this paper, we analyze a class of widely used complete information models of delays in sovereign debt restructuring and show that, despite superficial similarities, there are major differences across models in the driving force for equilibrium delay, the circumstances in which delay occurs, and the efficiency of the debt restructuring process. We focus on three key assumptions. First, if delay has a permanent effect on economic activity in the defaulting country, equilibrium delay often occurs; this delay can sometimes be socially efficient. Second, prohibiting debt issuance as part of a settlement makes delay less likely to occur in equilibrium. Third, when debt issuance is not fully state contingent, delay can arise because of the risk that the sovereign will default on any debt issued as part of the settlement.
Palavra-chave: Sovereign debt, Delay, Sovereign default, and Bargaining Sujeito: F34 - International Lending and Debt Problems, H63 - National Debt; Debt Management; Sovereign Debt, and C78 - Bargaining Theory; Matching Theory
Creator: Chari, V. V., Nicolini, Juan Pablo, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 752 Abstract:
We revisit the question of how capital should be taxed, arguing that if governments are allowed to use the kinds of tax instruments widely used in practice, for preferences that are standard in the macroeconomic literature, the optimal approach is to never distort capital accumulation. We show that the results in the literature that lead to the presumption that capital ought to be taxed for some time arise because of the initial confiscation of wealth and because the tax system is restricted.
Palavra-chave: Long run, Uniform taxation, and Capital income tax Sujeito: E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, and E62 - Fiscal Policy
Creator: Guvenen, Fatih, Mataloni Jr., Raymond J., Rassier, Dylan G., and Ruhl, Kim J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 751 Abstract:
Official statistics display a significant slowdown in U.S. aggregate productivity growth that begins in 2004. We show how offshore profit shifting by U.S. multinational enterprises affects GDP and, thus, productivity measurement. Under international statistical guidelines, profit shifting causes part of U.S. production generated by multinationals to be excluded from official measures of U.S. production. Profit shifting has increased significantly since the mid-1990s, resulting in lower measures of U.S. aggregate productivity growth. We construct an alternative measure of value added that adjusts for profit shifting. The adjustments raise aggregate productivity growth rates by 0.09 percent annually for 1994-2004, 0.24 percent annually for 2004-2008, and lowers annual aggregate productivity growth rates by 0.09 percent after 2008. Our adjustments mitigate, but do not eliminate, the measured productivity slowdown. The adjustments are especially large in R&D-intensive industries, which most likely produce intangible assets that facilitate profit shifting. The adjustments boost value added in these industries by as much as 8 percent in the mid-2000s.
Palavra-chave: Tax havens, Productivity slowdown, and Formulary apportionment Sujeito: O40 - Economic Growth and Aggregate Productivity: General, E01 - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts, and F23 - Multinational Firms; International Business
Creator: Bloom, Nicholas, Guvenen, Fatih, Price, David J., Song, Jae, and von Wachter, Till Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 750 Abstract:
We use a massive, matched employer-employee database for the United States to analyze the contribution of firms to the rise in earnings inequality from 1978 to 2013. We ﬁnd that one-third of the rise in the variance of (log) earnings occurred within firms, whereas two-thirds of the rise occurred between firms. However, this rising between-firm variance is not accounted for by the firms themselves: the firm-related rise in the variance can be decomposed into two roughly equally important forces—a rise in the sorting of high-wage workers to high-wage firms and a rise in the segregation of similar workers between firms. In contrast, we do not ﬁnd a rise in the variance of firm-speciﬁc pay once we control for worker composition. Instead, we see a substantial rise in dispersion of person-speciﬁc pay, accounting for 68% of rising inequality, potentially due to rising returns to skill. The rise in between-firm variance, mostly due to worker sorting and segregation, accounted for a particularly large share of the total increase in inequality in smaller and medium firms (explaining 84% for firms with fewer than 10,000 employees). In contrast, in the very largest firms with 10,000+ employees, 42% of the increase in the variance of earnings took place within firms, driven by both declines in earnings for employees below the median and a substantial rise in earnings for the 10% best-paid employees. However, because of their small number, the contribution of the very top 50 or so earners at large firms to the overall increase in within-firm earnings inequality is small.
Palavra-chave: Income inequality, Pay inequality, and Between-firm inequality Sujeito: E23 - Macroeconomics: Production, J21 - Labor Force and Employment, Size, and Structure, and J31 - Wage Level and Structure; Wage Differentials
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 748 Abstract:
Most firms begin very small, and large firms are the result of typically decades of persistent growth. This growth can be understood as the result of some form of capital accumulation-organization capital. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This means that most capital accumulation must be accounted for by incumbent fi rms. This paper describes a range of circumstances in which this implies aggregate convergence rates that are only about half of what they are in the standard Cass-Koopmans economy. Through the lens of the models described in this paper, the aftermath of the Great Recession of 2008 is unsurprising if the events of late 2008 and early 2009 are interpreted as a destruction of organization capital.
Palavra-chave: Firm size distribution, Slow recoveries, Zipf's law, and Business cycles Sujeito: E32 - Business Fluctuations; Cycles and L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
Creator: Cavallo, Michele, Del Negro, Marco, Frame, W. Scott, Grasing, Jamie, Malin, Benjamin A., and Rosa, Carlo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 747 Abstract:
The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to pre-crisis levels has little effect on the likelihood of net losses.
Palavra-chave: Monetary policy, Remittances, and Central bank balance sheets Sujeito: E58 - Central Banks and Their Policies, E59 - Monetary Policy, Central Banking, and the Supply of Money and Credit: Other, and E69 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: Other
Creator: Boerma, Job and Karabarbounis, Loukas Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 746 Abstract:
We revisit the causes, welfare consequences, and policy implications of the dispersion in households' labor market outcomes using a model with uninsurable risk, incomplete asset markets, and home production. Accounting for home production amplifies welfare-based differences across households meaning that inequality is larger than we thought. Home production does not offset differences that originate in the market sector because productivity differences in the home sector are significant and the time input in home production does not covary with consumption expenditures and wages in the cross section of households. The optimal tax system should feature more progressivity taking into account home production.
Palavra-chave: Labor supply, Home production, Inequality, and Consumption Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, J22 - Time Allocation and Labor Supply, D60 - Welfare Economics: General, and D10 - Household Behavior: General
Creator: Chari, V. V., Nicolini, Juan Pablo, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 745 Abstract:
We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should restrictions be placed to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? How can a Ramsey allocation be implemented with residence-based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations.
Palavra-chave: Value-added taxes, Origin- and destination-based taxation, Border adjustment, Free trade, Production efficiency, and Capital income tax Sujeito: E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, and E62 - Fiscal Policy
Creator: Hevia, Constantino and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 744 Abstract:
In this paper, we use a simple model of money demand to characterize the behavior of monetary aggregates in the United States from 1960 to 2016. We argue that the demand for the currency component of the monetary base has been remarkably stable during this period. We use the model to make projections of the nominal quantity of cash in circulation under alternative future paths for the federal funds rate. Our calculations suggest that if the federal funds rate is lifted up as suggested by the survey of economic projections made by the members of the Federal Open Market Committee (FOMC), the fall in total currency demanded in the next two years ranges between 50 and 200 billion. Our discussion suggests that specific measures by the Federal Reserve to absorb that cash could be worth considering to make the future path of the price level consistent with the price stability mandate.
Palavra-chave: Money demand, Currency in circulation, and Inflation Sujeito: E51 - Money Supply; Credit; Money Multipliers, E41 - Demand for Money, and E31 - Price Level; Inflation; Deflation
Creator: Eggertsson, Gauti B., Mehrotra, Neil R., and Robbins, Jacob A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 742 Abstract:
This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from -1.5% to -2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates.
Palavra-chave: Monetary policy, Secular stagnation, and Zero lower bound Sujeito: E52 - Monetary Policy, E31 - Price Level; Inflation; Deflation, and E32 - Business Fluctuations; Cycles
Creator: Crouzet, Nicolas and Mehrotra, Neil R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 741 Abstract:
Drawing from confidential firm-level data of US manufacturing firms, we provide new evidence on the cyclicality of small and large firms. We show that the cyclicality of sales and investment declines with firm size. The effect is primarily driven by differences between the top 0.5% of firms and the rest. Moreover, we show that, due to the skewness of sales and investment, the higher cyclicality of small firms has a negligible influence on the behavior of aggregates. We argue that the size asymmetry is unlikely to be driven by financial frictions given 1) the absence of statistically significant differences in the behavior of production inputs or debt in recessions, 2) the survival of the size effect after directly controlling for proxies of financial strength, and 3) the predictions of a simple financial frictions model, in which unconstrained (large) firms contract more in recessions than constrained (small) firms.
Palavra-chave: Financial accelerator, Firm size, and Business cycles Sujeito: E23 - Macroeconomics: Production, E32 - Business Fluctuations; Cycles, and G30 - Corporate Finance and Governance: General
Creator: Holmes, Thomas J. and Singer, Ethan Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 739 Abstract:
This paper develops and estimates a model of indivisibilities in shipping and economies of scale in consolidation. It uses highly detailed data on imports where it is possible to observe the contents of individual containers. In the model, ﬁrms are able to adapt to indivisibility constraints by using consolidation strategies and by making adjustments to shipment size. The ﬁrm determines the optimal number of domestic ports to use, taking into account that adding more ports lowers inland freight cost, at the expense of a higher indivisibility cost. The estimated model is able to roughly account for Walmart’s port choice behavior. The model estimates are used to evaluate how mergers or dissolutions of ﬁrms or countries, and changes in variety, affect indivisibility costs and inland freight costs.
Palavra-chave: Scale economies, Walmart, Technological change, and Indivisibilities Sujeito: L10 - Market Structure, Firm Strategy, and Market Performance: General, R40 - Transportation Economics: General, and F14 - Empirical Studies of Trade
Creator: Bianchi, Javier, Hatchondo, Juan Carlos, and Martinez, Leonardo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 735 Abstract:
We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for a significant fraction of the holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We also show that income windfalls, improved policy frameworks, larger contingent liabilities, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies. It is essential for our results that debt maturity exceeds one period.
Palavra-chave: Safe assets, Rollover risk, International reserves, and Sovereign default Sujeito: F34 - International Lending and Debt Problems, F32 - Current Account Adjustment; Short-term Capital Movements, and F41 - Open Economy Macroeconomics
Creator: Lagos, Ricardo and Zhang, Shengxing Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 734 Abstract:
We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence.
Palavra-chave: Asset prices, Monetary policy, Monetary transmission, and Liquidity Sujeito: E52 - Monetary Policy, D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness, and G12 - Asset Pricing; Trading Volume; Bond Interest Rates
Creator: Chodorow-Reich, Gabriel and Karabarbounis, Loukas Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 733 Abstract:
By how much does an extension of unemployment benefits affect macroeconomic outcomes such as unemployment? Answering this question is challenging because U.S. law extends benefits for states experiencing high unemployment. We use data revisions to decompose the variation in the duration of benefits into the part coming from actual differences in economic conditions and the part coming from measurement error in the real-time data used to determine benefit extensions. Using only the variation coming from measurement error, we find that benefit extensions have a limited influence on state-level macroeconomic outcomes. We use our estimates to quantify the effects of the increase in the duration of benefits during the Great Recession and find that they increased the unemployment rate by at most 0.3 percentage point.
Palavra-chave: Unemployment, Measurement error, and Unemployment insurance Sujeito: J64 - Unemployment: Models, Duration, Incidence, and Job Search, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, J65 - Unemployment Insurance; Severance Pay; Plant Closings, and E62 - Fiscal Policy
Creator: Kaplan, Greg and Schulhofer-Wohl, Sam Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 732 Abstract:
This appendix contains additional results on using scanner data to estimate inflation rates at the household level. There are three sections. Section 1 shows cross-sectional distributions of Fisher and Paasche inflation rates. Section 2 shows the evolution over time of measures of dispersion of Fisher and Paasche inflation rates. Section 3 shows cross-sectional distributions of two-year inflation rates measured with Fisher and Paasche indexes.
Palavra-chave: Heterogeneity and Inflation Sujeito: D12 - Consumer Economics: Empirical Analysis, D30 - Distribution: General, and E31 - Price Level; Inflation; Deflation
Creator: Kaplan, Greg and Schulhofer-Wohl, Sam Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 731 Abstract:
We use scanner data to estimate inflation rates at the household level. Households' inflation rates are remarkably heterogeneous, with an interquartile range of 6.2 to 9.0 percentage points on an annual basis. Most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods - a source of variation that previous research has not measured. The entire distribution of household inflation rates shifts in parallel with aggregate inflation. Deviations from aggregate inflation exhibit only slightly negative serial correlation within each household over time, implying that the difference between a household's price level and the aggregate price level is persistent. Together, the large cross-sectional dispersion and low serial correlation of household-level inflation rates mean that almost all of the variability in a household's inflation rate over time comes from variability in household-level prices relative to average prices for the same goods, not from variability in the aggregate inflation rate. We provide a characterization of the stochastic process for household inflation that can be used to calibrate models of household decisions.
Palavra-chave: Heterogeneity and Inflation Sujeito: D12 - Consumer Economics: Empirical Analysis, D30 - Distribution: General, and E31 - Price Level; Inflation; Deflation
Creator: Guvenen, Fatih, Kuruscu, Burhanettin, Tanaka, Satoshi, and Wiczer, David Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 729 Abstract:
What determines the earnings of a worker relative to his peers in the same occupation? What makes a worker fail in one occupation but succeed in another? More broadly, what are the factors that determine the productivity of a worker-occupation match? In this paper, we propose an empirical measure of skill mismatch for a worker-occupation match, which sheds light on these questions. This measure is based on the discrepancy between the portfolio of skills required by an occupation and the portfolio of abilities possessed by a worker for learning those skills. This measure arises naturally in a dynamic model of occupational choice and human capital accumulation with multidimensional skills and Bayesian learning about one’s ability to learn these skills. In this model, mismatch is central to the career outcomes of workers: it reduces the returns to occupational tenure, and it predicts occupational switching behavior. We construct our empirical analog by combining data from the National Longitudinal Survey of Youth 1979 (NLSY79), the Armed Services Vocational Aptitude Battery (ASVAB) on workers, and the O*NET on occupations. Our empirical results show that the effects of mismatch on wages are large and persistent: mismatch in occupations held early in life has a strong negative effect on wages in future occupations. Skill mismatch also significantly increases the probability of an occupational switch and predicts its direction in the skill space. These results provide fresh evidence on the importance of skill mismatch for the job search process.
Palavra-chave: ASVAB, Match quality, Skill mismatch, Occupational switching, O*NET, and Mincer regression Sujeito: J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, and J31 - Wage Level and Structure; Wage Differentials
Creator: Bianchi, Javier Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 730 Abstract:
We develop a quantitative equilibrium model of financial crises to assess the interaction between ex-post interventions in credit markets and the buildup of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. We find that moral hazard effects are limited if bailouts are systemic and broad-based. If bailouts are idiosyncratic and targeted, however, this makes the economy significantly more exposed to financial crises.
Palavra-chave: Financial shocks, Credit crunch, Macroprudential policy, and Moral hazard Sujeito: E32 - Business Fluctuations; Cycles, E44 - Financial Markets and the Macroeconomy, G18 - General Financial Markets: Government Policy and Regulation, and F40 - Macroeconomic Aspects of International Trade and Finance: General
Creator: Aizawa, Naoki and Fang, Hanming Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 727 Abstract:
We present and empirically implement an equilibrium labor market search model where risk averse workers facing medical expenditure shocks are matched with firms making health insurance coverage decisions. Our model delivers a rich set of predictions that can account for a wide variety of phenomenon observed in the data including the correlations among firm sizes, wages, health insurance offering rates, turnover rates and workers’ health compositions. We estimate our model by Generalized Method of Moments using a combination of micro datasets including Survey of Income and Program Participation, Medical Expenditure Panel Survey and Robert Wood Johnson Foundation Employer Health Insurance Survey. We use our estimated model to evaluate the equilibrium impact of the 2010 Affordable Care Act (ACA) and find that it would reduce the uninsured rate among the workers in our estimation sample from about 22% in the pre-ACA benchmark economy to less than 4%. We also find that income-based premium subsidies for health insurance purchases from the exchange play an important role for the sustainability of the ACA; without the premium subsidies, the uninsured rate would be around 18%. In contrast, as long as premium subsidies and health insurance exchanges with community ratings stay intact, ACA without the individual mandate, or without the employer mandate, or without both mandates, could still succeed in reducing the uninsured rates to 7.34%, 4.63% and 9.22% respectively.
Palavra-chave: Health care reform, Health, Labor market equilibrium, and Health insurance Sujeito: I11 - Analysis of Health Care Markets, G22 - Insurance; Insurance Companies; Actuarial Studies, J32 - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions, and I13 - Health Insurance, Public and Private
Creator: Hevia, Constantino and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 726 Abstract:
We study a model of a small open economy that specializes in the production of commodities and that exhibits frictions in the setting of both prices and wages. We study the optimal response of monetary and exchange rate policy following a positive (negative) shock to the price of the exportable that generates an appreciation (depreciation) of the local currency. According to the calibrated version of the model, deviations from full price stability can generate welfare gains that are equivalent to almost 0.5% of lifetime consumption, as long as there is a significant degree of rigidity in nominal wages. On the other hand, if the rigidity is concentrated in prices, the welfare gains can be at most 0.1% of lifetime consumption. We also show that a rule - formally defined in the paper - that resembles a "dirty floating" regime can approximate the optimal policy remarkably well.
Palavra-chave: Inflation targeting, Foreign exchange intervention, and Dutch disease Sujeito: F31 - Foreign Exchange and F41 - Open Economy Macroeconomics
Creator: Kaplan, Greg and Schulhofer-Wohl, Sam Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 725 Abstract:
This appendix contains eight sections. Section 1 gives technical details of how we calculate standard errors in the CPS data. Section 2 discusses changes in the ACS procedures before 2005. Section 3 examines demographic and economic patterns in migration over the past two decades, in more detail than in the main paper. Section 4 examines the cross-sectional variance of location-occupation interactions in earnings when we define locations by MSAs instead of states. Section 5 describes alternative methods to estimate the variance of location-occupation interactions in income. Section 6 measures the segregation of industries across states and of occupations and industries across MSAs. Section 7 gives technical details on the use of SIPP and census data to calculate repeat and return migration rates. Section 8 discusses transition dynamics in the model.
Palavra-chave: Gross flows, Information technology, Labor mobility, Interstate migration, and Learning Sujeito: D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness, J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics, J11 - Demographic Trends, Macroeconomic Effects, and Forecasts, J61 - Geographic Labor Mobility; Immigrant Workers, and R12 - Size and Spatial Distributions of Regional Economic Activity
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 724 Abstract:
This paper describes how long-run growth emerges in four closely related models that combine individual discovery with some form of social learning. In a large economy, there is a continuum of long-run growth rates and associated stationary distributions when it is possible to learn from individuals in the right tail of the productivity distribution. What happens in the long run depends on initial conditions. Two distinct literatures, one on reaction-diffusion equations, and another on quasi-stationary distributions suggest a unique long-run outcome when the initial productivity distribution has bounded support.
Palavra-chave: Growth and Knowledge diffusion Sujeito: O33 - Technological Change: Choices and Consequences; Diffusion Processes
Creator: Bocola, Luigi Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 722 Abstract:
This paper examines the macroeconomic implications of sovereign credit risk in a business cycle model where banks are exposed to domestic government debt. The news of a future sovereign default hampers financial intermediation. First, it tightens the funding constraints of banks, reducing their available resources to finance firms (liquidity channel). Second, it generates a precautionary motive for banks to deleverage (risk channel). I estimate the model using Italian data, finding that i) sovereign credit risk was recessionary and that ii) the risk channel was sizable. I then use the model to evaluate the effects of subsidized long term loans to banks, calibrated to the ECB’s longer-term refinancing operations. The presence of strong precautionary motives at the time of policy enactment implies that bank lending to firms is not very sensitive to these credit market interventions.
Palavra-chave: Credit policies, Financial constraints, and Sovereign debt crises Sujeito: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, G01 - Financial Crises, E32 - Business Fluctuations; Cycles, and E44 - Financial Markets and the Macroeconomy
Creator: Hall, Robert E. and Schulhofer-Wohl, Sam Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 721 Abstract:
Matching efficiency is the productivity of the process for matching jobseekers to available jobs. Job-finding is the output; vacant jobs and active jobseekers are the inputs. Measurement of matching efficiency follows the same principles as measuring a Hicks-neutral index of productivity of production. We develop a framework for measuring matching productivity when the population of jobseekers is heterogeneous. The efficiency index for each type of jobseeker is the monthly job-finding rate for the type adjusted for the overall tightness of the labor market. We find that overall matching efficiency declined over the period, at just below its earlier downward trend. We develop a new approach to measuring matching rates that avoids counting short-duration jobs as successes. And we show that the outward shift in the Beveridge curve in the post-crisis period is the result of pre-crisis trends, not a downward shift in matching efficiency attributable to the crisis.
Palavra-chave: Matching efficiency, Job-finding rates, and Beveridge curve Sujeito: J63 - Labor Turnover; Vacancies; Layoffs and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Adam, Klaus, Marcet, Albert, and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 720 Abstract:
Consumption-based asset pricing models with time-separable preferences can generate realistic amounts of stock price volatility if one allows for small deviations from rational expectations. We consider rational investors who entertain subjective prior beliefs about price behavior that are not equal but close to rational expectations. Optimal behavior then dictates that investors learn about price behavior from past price observations. We show that this imparts momentum and mean reversion into the equilibrium behavior of the price-dividend ratio, similar to what can be observed in the data. When estimating the model on U.S. stock price data using the method of simulated moments, we find that it can quantitatively account for the observed volatility of returns, the volatility and persistence of the price-dividend ratio, and the predictability of long-horizon returns. For reasonable degrees of risk aversion, the model generates up to one-half of the equity premium observed in the data. It also passes a formal statistical test for the overall goodness of fit, provided one excludes the equity premium from the set of moments to be matched.
Palavra-chave: Asset pricing, Learning, Internal rationality, and Subjective beliefs Sujeito: G12 - Asset Pricing; Trading Volume; Bond Interest Rates and E44 - Financial Markets and the Macroeconomy
Creator: Guvenen, Fatih, Karahan, Fatih, Ozkan, Serdar, and Song, Jae Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 719 Abstract:
We study the evolution of individual labor earnings over the life cycle using a large panel data set of earnings histories drawn from U.S. administrative records. Using fully nonparametric methods, our analysis reaches two broad conclusions. First, earnings shocks display substantial deviations from lognormality–the standard assumption in the incomplete markets literature. In particular, earnings shocks display strong negative skewness and extremely high kurtosis–as high as 30 compared with 3 for a Gaussian distribution. The high kurtosis implies that in a given year, most individuals experience very small earnings shocks, and a small but non-negligible number experience very large shocks. Second, these statistical properties vary significantly both over the life cycle and with the earnings level of individuals. We also estimate impulse response functions of earnings shocks and find important asymmetries: positive shocks to high-income individuals are quite transitory, whereas negative shocks are very persistent; the opposite is true for low-income individuals. Finally, we use these rich sets of moments to estimate econometric processes with increasing generality to capture these salient features of earnings dynamics.
Palavra-chave: Non-Guassian shocks, Skewness, Earnings dynamics, Kurtosis, Nonparametric estimation, Life-cycle earnings risk, and Normal mixture Sujeito: J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, and J31 - Wage Level and Structure; Wage Differentials
Creator: Lucas, Jr., Robert E. and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 718 Abstract:
We show that regulatory changes that occurred in the banking sector in the early eighties, which considerably weakened Regulation Q, can explain the apparent instability of money demand during the same period. We evaluate the effects of the regulatory changes using a model that goes beyond aggregates as M1 and treats currency and different deposit types as alternative means of payments. We use the model to construct a new monetary aggregate that performs remarkably well for the entire period 1915-2012.
Palavra-chave: Money demand and Monetary base Sujeito: E41 - Demand for Money and E40 - Money and Interest Rates: General
Creator: Blandin, Adam, Boyd, John H., and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 717 Abstract:
We develop an equilibrium concept in the Debreu (1954) theory of value tradition for a class of adverse selection economies which includes the Spence (1973) signaling and Rothschild-Stiglitz (1976) insurance environments. The equilibrium exists and is optimal. Further, all equilibria have the same individual type utility vector. The economies are large with a finite number of types that maximize expected utility on an underlying commodity space. An implication of the analysis is that the invisible hand works for this class of adverse selection economies.
Palavra-chave: The core, Adverse selection equilibrium, Theory of value, Mutual organization, Signaling, and Insurance Sujeito: C62 - Existence and Stability Conditions of Equilibrium, G29 - Financial Institutions and Services: Other, D46 - Value Theory, G22 - Insurance; Insurance Companies; Actuarial Studies, and D82 - Asymmetric and Private Information; Mechanism Design
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 715 Abstract:
Randomness in individual discovery tends to spread out productivities in a population, while learning from others keeps productivities together. In combination, these two mechanisms for knowledge accumulation give rise to long-term growth and persistent income inequality. This paper considers a world in which those with more useful knowledge can teach those with less useful knowledge, with competitive markets assigning students to teachers. In equilibrium, students who are able to learn quickly are assigned to teachers with the most productive knowledge. The long-run growth rate of this economy is governed by the rate at which the fastest learners can learn. The income distribution reflects learning ability and serendipity, both in individual discovery and in the assignment of students to teachers. Because of naturally arising indeterminacies in this assignment, payoff irrelevant characteristics can be predictors of individual income growth. Ability rents can be large when fast learners are scarce, when the process of individual discovery is not too noisy, and when overhead labor costs are low.
Palavra-chave: Growth, Knowledge diffusion, and Inequality Sujeito: O40 - Economic Growth and Aggregate Productivity: General, L20 - Firm Objectives, Organization, and Behavior: General, and O30 - Innovation; Research and Development; Technological Change; Intellectual Property Rights: General
Creator: Buera, Francisco and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 714 Abstract:
We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. These two frictions give rise to a nontrivial financial market in a monetary economy. A tightening of the collateral constraint results in a recession generated by a credit crunch. The model can be used to study the effects on the main macroeconomic variables, and on the welfare of each individual of alternative monetary and fiscal policies following the credit crunch. The model reproduces several features of the recent financial crisis, such as the persistent negative real interest rates, the prolonged period at the zero bound for the nominal interest rate, and the collapse in investment and low inflation in spite of the very large increases in liquidity adopted by the government. The policy implications are in sharp contrast to the prevalent view in most central banks, which is based on the New Keynesian explanation of the liquidity trap.
Palavra-chave: Ricardian equivalence, Monetary policy, Credit crunch, Collateral constraints, and Liquidity trap Sujeito: E58 - Central Banks and Their Policies, E52 - Monetary Policy, E44 - Financial Markets and the Macroeconomy, and E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Creator: Fitzgerald, Terry J. and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 713 Abstract:
This paper makes two straightforward points that we argue are central to understanding the literature and debate surrounding the stability of the Phillips curve. First, the endogeneity of monetary policy implies that aggregate data are largely uninformative as to the existence of a stable relationship between unemployment and future inflation. Second, if the NAIRU model is assumed to be true, regional data can be used to identify the structural relationship between unemployment and future inflation. We find that a 1 percentage point increase in the unemployment rate is associated with a roughly 0.3 percentage point decline in inflation over the next year.
Palavra-chave: Endogenous monetary policy and Stability of the Phillips curve Sujeito: E58 - Central Banks and Their Policies and E52 - Monetary Policy
Creator: Calsamiglia, Caterina and Guell, Maia Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 712 Abstract:
The Boston mechanism is a school allocation procedure that is widely used around the world. To resolve overdemands, priority is often given to families who live in the neighborhood school. We note that such priorities define some schools as being safer. We exploit an unexpected change in the definition of neighborhood in Barcelona to show that when allowing school choice under the BM with priorities: (1) the resulting allocation is not very different from a neighborhood-based assignment, and (2) important inequalities emerge beyond parents’ naivete found in the literature.
Palavra-chave: School choice, Boston mechanism, and Priorities Sujeito: D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement, I24 - Education and Inequality, and C78 - Bargaining Theory; Matching Theory
Creator: Afonso, Gara and Lagos, Ricardo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 711 Abstract:
We present a dynamic over-the-counter model of the fed funds market and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the discount window lending rate, and the interest rate on bank reserves.
Palavra-chave: Fed funds market, Over-the-counter market, Search, and Bargaining Sujeito: D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness, E44 - Financial Markets and the Macroeconomy, C78 - Bargaining Theory; Matching Theory, and G10 - General Financial Markets: General (includes Measurement and Data)
Creator: Afonso, Gara and Lagos, Ricardo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 710 Abstract:
We develop a model of the market for federal funds that explicitly accounts for its two distinctive features: banks have to search for a suitable counterparty, and once they meet, both parties negotiate the size of the loan and the repayment. The theory is used to answer a number of positive and normative questions: What are the determinants of the fed funds rate? How does the market reallocate funds? Is the market able to achieve an efficient reallocation of funds? We also use the model for theoretical and quantitative analyses of policy issues facing modern central banks.
Palavra-chave: Fed funds market, Over-the-counter market, Search, and Bargaining Sujeito: D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness, E44 - Financial Markets and the Macroeconomy, C78 - Bargaining Theory; Matching Theory, and G10 - General Financial Markets: General (includes Measurement and Data)
Creator: Trejos, Alberto and Wright, Randall D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 709 Abstract:
Many applications of search theory in monetary economics use the Shi-Trejos-Wright model, hereafter STW, while applications in finance use Duffie-Gârleanu-Pederson, hereafter DGP. These approaches have much in common, and both claim to be about liquidity, but the models also differ in a fundamental way: in STW agents use assets as payment instruments when trading goods; in DGP there are no gains from exchanging goods, but agents trade because they value assets differently with goods serving as payment instruments. We develop a framework nesting the two. This clarifies the connection between the literatures, and generates new insights and applications. Even in the special cases of the baseline STW and DGP models, we provide propositions generalizing and strengthening what is currently known, and rederiving some existing results using more tractable arguments.
Palavra-chave: Money, Search, Bargaining, and Finance Sujeito: E44 - Financial Markets and the Macroeconomy and E40 - Money and Interest Rates: General
Creator: Afonso, Gara and Lagos, Ricardo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 708 Abstract:
We use minute-by-minute daily transaction-level payments data to document the cross-sectional and time-series behavior of the estimated prices and quantities negotiated by commercial banks in the fed funds market. We study the frequency and volume of trade, the size distribution of loans, the distribution of bilateral fed funds rates, and the intraday dynamics of the reserve balances held by commercial banks. We find evidence of the importance of the liquidity provision achieved by commercial banks that act as de facto intermediaries of fed funds.
Palavra-chave: Federal funds market, Monetary policy, and Federal funds rates Sujeito: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, and E44 - Financial Markets and the Macroeconomy
Creator: Lepetyuk, Vadym and Stoltenberg, Christian Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 705 Abstract:
The rise in within-group consumption inequality in response to the increase in within-group income inequality over the last three decades in the U.S. is puzzling to expected-utility-based incomplete market models. The two-sided lack of commitment models exhibit too little consumption inequality while the standard incomplete markets models tend to predict too much consumption inequality. We show that a model with two-sided lack of commitment and chance attitudes, as emphasized by prospect theory, can explain the relationship and can avoid the systematic bias of the expected utility models. The chance attitudes, such as optimism and pessimism, imply that the households attribute a higher weight to high and low outcomes compared to their objective probabilities. For realistic values of risk aversion and of chance attitudes, the incentives for households to share the idiosyncratic risk decrease. The latter effect endogenously amplifies the increase in consumption inequality relative to the expected utility model, thereby improving the fit to the data.
Palavra-chave: Risk sharing, Consumption inequality, Prospect theory, and Limited enforcement Sujeito: D52 - Incomplete Markets, D31 - Personal Income, Wealth, and Their Distributions, and E21 - Macroeconomics: Consumption; Saving; Wealth
Creator: Guvenen, Fatih and Rendall, Michelle Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 704 Abstract:
In this paper, we study the role of education as insurance against a bad marriage. Historically, due to disparities in earning power and education across genders, married women often found themselves in an economically vulnerable position, and had to suffer one of two fates in a bad marriage: either they get divorced (assuming it is available) and struggle as low-income single mothers, or they remain trapped in the marriage. In both cases, education can provide a route to emancipation for women. To investigate this idea, we build and estimate an equilibrium search model with education, marriage/divorce/remarriage, and household labor supply decisions. A key feature of the model is that women bear a larger share of the divorce burden, mainly because they are more closely tied to their children relative to men. Our focus on education is motivated by the fact that divorce laws typically allow spouses to keep the future returns from their human capital upon divorce (unlike their physical assets), making education a good insurance against divorce risk. However, as women further their education, the earnings gap between spouses shrinks, leading to more unstable marriages and, in turn, further increasing demand for education. The framework generates powerful amplification mechanisms, which lead to a large rise in divorce rates and a decline in marriage rates (similar to those observed in the US data) from relatively modest exogenous driving forces. Further, in the model, women overtake men in college attainment during the 1990s, a feature of the data that has proved challenging to explain. Our counterfactual experiments indicate that the divorce law reform of the 1970s played an important role in all of these trends, explaining more than one-quarter of college attainment rate of women post-1970s and one-half of the rise in labor supply for married women.
Palavra-chave: Divorce, Divorce law reform, College-gender gap, Remarriage, Marriage, and Female labor supply Sujeito: D13 - Household Production and Intrahousehold Allocation, J12 - Marriage; Marital Dissolution; Family Structure; Domestic Abuse, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 703 Abstract:
Consider an economy in which various types of labor are used to produce consumption, but not all types of labor are useful for upgrading the stock of organization capital–that is, for replacing old projects with more productive new projects. When news induces consumers to want to save more, low-quality projects are destroyed across all sectors of the economy, even though the economy is set to increase its stock of new projects. Labor that can be used to create new projects becomes more expensive and labor that cannot becomes cheap. Average wages may not change at all, and the employment of workers who cannot invest in new projects will decline. If physical capital complements the inputs of these workers, investment in physical capital tends to move together with their employment. These results are derived analytically for a prototype economy that has the essential ingredients of empirically relevant equilibrium models of firm heterogeneity.
Palavra-chave: Aggregate consumption, Factor prices, and Bayesian updating Sujeito: E25 - Aggregate Factor Income Distribution, E32 - Business Fluctuations; Cycles, and L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices
Creator: Hevia, Constantino and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 702 Abstract:
We analyze optimal policy in a simple small open economy model with price setting frictions. In particular, we study the optimal response of the nominal exchange rate following a terms of trade shock. We depart from the New Keynesian literature in that we explicitly model interna-tionally traded commodities as intermediate inputs in the production of local final goods and assume that the small open economy takes this price as given. This modification not only is in line with the long-standing tradition of small open economy models, but also changes the optimal movements in the exchange rate. In contrast with the recent small open economy New Keynesian literature, our model is able to reproduce the comovement between the nominal exchange rate and the price of exports, as it has been documented in the commodity currencies literature. Although we show there are preferences for which price stability is optimal even without flexible fiscal instruments, our model suggests that more attention should be given to the coordination between monetary and fiscal policy (taxes) in small open economies that are heavily dependent on exports of commodities. The model we propose is a useful framework in which to study fear of floating.
Palavra-chave: Optimal monetary policy, Small open economy, Terms of trade shocks, and Devaluations Sujeito: E52 - Monetary Policy and F41 - Open Economy Macroeconomics
Creator: Dinkelman, Taryn and Schulhofer-Wohl, Sam Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 700 Abstract:
The direct benefits of infrastructure in developing countries can be large, but if new infrastructure induces in-migration, congestion of other local publicly provided goods may offset the direct benefits. Using the example of rural household electrification in South Africa, we demonstrate the importance of accounting for migration when evaluating welfare gains of spatial programs. We also provide a practical approach to computing welfare gains that does not rely on land prices. We develop a location choice model that incorporates missing land markets and allows for congestion in local land. Using this model, we construct welfare bounds as a function of the income and population effects of the new electricity infrastructure. A novel prediction from the model is that migration elasticities and congestion effects are especially large when land markets are missing. We empirically estimate these welfare bounds for rural electrification in South Africa, and show that congestion externalities from program-induced migration reduced local welfare gains by about 40%.
Palavra-chave: Rural infrastructure, South Africa, Program evaluation, Congestion, Welfare, and Migration Sujeito: R13 - General Equilibrium and Welfare Economic Analysis of Regional Economies, H54 - National Government Expenditures and Related Policies: Infrastructures; Other Public Investment and Capital Stock, H23 - Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies, H43 - Project Evaluation; Social Discount Rate, O18 - Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure, and O15 - Economic Development: Human Resources; Human Development; Income Distribution; Migration
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 699 Abstract:
This paper adds imitation by incumbent firms, and not just by new entrants, to the model of selection and growth developed in Luttmer . Noisy firm-level innovation and imitation give rise to a long-run growth rate that exceeds the average rate at which individual firms innovate. It can be shown, in simple examples, that the economy converges to a long-run balanced growth path from compactly supported initial productivity distributions. The right tail of the stationary distribution of de-trended productivity is approximately Pareto. The tail index of this distribution depends on the rate at which incumbents are able to imitate only indirectly, through general equilibrium effects of this parameter on the equilibrium growth rate.
Palavra-chave: Endogenous growth, Technology diffusion, and Size distribution of firms Sujeito: O33 - Technological Change: Choices and Consequences; Diffusion Processes and L11 - Production, Pricing, and Market Structure; Size Distribution of Firms