EIEF

News, Noise and Fluctuations: an Empirical Investigation

Abstract:

I will present some new results for our paper. Old abstract: We explore empirically models of aggregate fluctuations with two basic ingredients: agents form anticipations about the future based on noisy sources of information; these anticipations affect spending and output in the short run. Our objective is to separate fluctuations due to actual changes in fundamentals (news) from those due to temporary errors in the private sector’s estimates of these fundamentals (noise). Using a simple model where the consumption random walk hypothesis holds exactly, we address some basic methodological issues and take a first pass at the data. First, we show that if the econometrician has no informational advantage over the agents in the model, structural VARs cannot be used to identify news and noise shocks. Next, we develop a structural Maximum Likelihood approach which allows us to identify the model’s parameters and to evaluate the role of news and noise shocks. Applied to postwar U.S. data, this approach suggests that noise shocks play an important role in short-run fluctuations.

Sovereign Default, Domestic Banks and Financial Institutions

Abstract

We build a model where sovereign defaults weaken banks’ balance sheets because banks hold sovereign bonds, causing private credit to decline. Stronger financial institutions boost default costs by amplifying these balance-sheet effects. This yields a novel complementarity between public debt and domestic credit markets, where the latter sustain the former by increasing the costs of default. Confirming our model’s predictions, we document three novel empirical facts: public defaults are followed by large private credit contractions; these contractions are stronger in countries where banks hold more public debt and financial institutions are stronger; in these same countries default is less likely.

Medicaid and the Labor Supply of Single Mothers: Implications for Health Care Reform

Corporate Networks and Peer Effects in Firm Policies

Wealth Inequality and the Losses from Financial Frictions

The Real Cost of Conglomerates

One Sided Representations of Generalized Dynamic Factor Models: Solving the Non-fundamentalness Problem

Reading the Fine Print: Credit Demand and Information Disclosure in Brazil

Firm Boundaries and the Power of Incentives: Evidence from Mutual Funds

Heterogeneity and Behavioral Responses to Unemployment Benefits over the Business Cycle

Bayesian Inference and Non-Bayesian Prediction and Choice; Foundations and an Application to Entry Games with Multiple Equilibria

Micro-level Misallocation and Selection: Estimation and Aggregate Implications

Sophisticated Intermediation and Aggregate Volatility

Retiring Cold Turkey

Trading by Bank Insiders before and during the Financial Crisis

Securitized Banking, Asymmetric Information, and Financial Crisis: Regulating Systemic Risk Away

Separate or Joint Financing? Coinsurance, Risk Contamination, and Optimal Conglomeration with Bankruptcy Costs

Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity

Public Policy in an Uncertain World: Analysis and Decisions

The Labor Productivity Puzzle

For further details, please see the Program.

Please note that participation is free but registration is required due to space constraints.

Public Policy in an Uncertain World: Analysis and Decisions

Estimation of a Roy/Search/Compensating Differential Model of the Labor Market

Why Rent When You Can Buy? A Theory of Repurchase Agreements

Optimal Life Cycle Unemployment Insurance

How Do Voters Respond to Information? Evidence from a Randomized Campaign

If financial development matters, then how? National banks in the United States 1870–1900

Topics in Asset Pricing

Topics in Asset Pricing

Marijuana on Main Street: What if?

Monetary Policy Rules for a Two-Speed World Economy

For further details, please see Scientific Events

For further details, please see Scientific Events

Private Equity and Employees

Why Doesn’t Technology Flow from Rich to Poor Countries?

Optimal Certification Design

Abstract:

A public rating of a product is issued by a certifier who internalizes the buyers’ surplus and receives payments from a seller. A rating scheme compatible with Bayesian updating by buyers is characterized when the payment to the certifier is 1) fixed, 2) contingent on the rating and publicly known, 3) contingent on the rating and privately known to the seller and the certifier. A feasible rating scheme under contingent private payment implies coarse ratings and pooling on the top property: high ratings are issued for a wide range of qualities.
If the seller were to choose the rating scheme, then under a contingent public payment she would induce pooling up to some quality threshold and perfect revelation afterwards. Under a private contingent payment or a fixed payment she would induce complete pooling. Contrary to conventional wisdom, a regulation that prohibits public contingent payments may harm information revelation and social welfare. A desirable regulation calls for transparent payments between the seller and the certifier.

Trade Adjustment: Worker-Level Evidence

Abstract:

In the past two decades, China’s manufacturing exports have grown spectacularly. U.S. imports from China have surged, while U.S. exports to China have increased more modestly, consistent with the two countries’ divergent current account imbalances. Using data on individual earnings by employer from the Social Security Administration, we examine how workers in manufacturing industries exposed to import competition from China have fared in terms of labor income, employment, job mobility, and receipt of Social Security benefits. Over the period 1992 to 2007, workers who in 1991 were employed in industries that experienced high subsequent levels of import growth have more years with zero labor earnings, lower cumulative earnings over the period, and a greater likelihood of receiving Social Security Disability Insurance as the only recorded source of income in a given year. More exposed individuals spend less time working for their initial employers, less time working in their initial two-digit manufacturing industries, and more time working elsewhere in manufacturing. Effects on earnings and employment are much larger for women than for men, and also larger for individuals whose initial employers were relatively large, whose initial wages where below their firm’s average, and who in the pre-sample period worked part time or intermittently. Individuals who work in regions more exposed to import growth (beyond their industry of employment) have more years with zero labor earnings as well. We obtain similar results using alternative measures of trade exposure. Our findings suggest that there is significant worker-level adjustment cost to import shocks and that adjustment is highly uneven across individuals according their conditions of employment in the pre-shock period.

Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking

Topics in Asset Pricing

“Empirical Evidence and Tax Reform”

Abstract:

This paper examines the role of evidence in drawing up the recommendations for tax reform in the Mirrlees Review. The arguments are organised loosely under five related headings: (i) Key margins of adjustment, (ii) Measurement of effective tax rates, (iii) The importance of information and complexity, (iv) Evidence on the size of responses, and (v) Implications from theory for tax design. Although the Mirrlees Review focusses on all aspects of tax reform, the focus is this paper is on the taxation of earnings with some examples drawn from the taxation of consumption and savings.

For further details, please see Scientific Events

For further details, please see Scientific Events

The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes

Topics in Asset Pricing

Stylized (Arte)Facts on Sectoral Inflation

Moral hazard in health insurance: How important is forward looking behavior?

The Welfare Cost of Unpriced Heterogeneity in Insurance Markets

Abstract:

We consider the welfare loss of unpriced heterogeneity in insurance markets, which results when private information or regulatory constraints prevent insurance companies to set premiums reflecting expected costs.
We propose a methodology which uses survey data to measure this welfare loss.
After identifying some ‘deep types’ which determine expected risk and insurance demand, we use these deep types to derive the demand and cost functions for each unobservable type, quantifying the efficiency costs of unpriced heterogeneity.
We apply our methods to the US Long-Term Care and Medigap insurance markets, where we find that unpriced heterogeneity causes substantial inefficiency.

Topics in Asset Pricing

Portfolio Home Bias and External Habit Formation

Topics in Asset Pricing

Job Creation Tax Credits and Job Growth: Evidence from the U.S. States

Abstract:

An unemployment rate remaining unacceptably high and monthly job gains barely keeping pace with labor force growth have generated discussions about innovative fiscal policy instruments, such as job creation tax credits (JCTCs), to help stimulate labor demand. This paper studies the effects of JCTCs enacted by U.S. states over the past 20 years. Twenty-three states have adopted JCTCs, and their experiences provide a rich source of information for assessing the effectiveness of such policies. We investigate whether JCTCs affect employment growth before, at, and after the time they go into effect. These questions are investigated in an event study framework applied to monthly panel data on employment, the JCTC effective and legislative dates, and various controls. We find that the JCTC elasticity of employment is 0.35. This estimate suggests that President Obama’s recently proposed JCTC would create 280,000 more jobs and would lower the unemployment rate by 0.1 percentage points.

Topics in Asset Pricing

The Household Revolution: Childcare, Housework, and Female Labor Force Participation

Effects of Banks and Households’ Optimism on Collateralized Debt: The Case of Home Equity Extraction

Abstract:

The last two decades have been characterized by a boom in the credit market for collateralized debt, namely mortgages and home equity loans, which led to a severe financial crisis. In this paper, we first document that players on both sides of the credit market, i.e. banks and households, were over-optimistic about future housing prices. We propose a parsimonious statistical approach to model biased expectations, aimed to capture information incompleteness about the data generating process. We then propose a more general model of a collateralized credit market, where households choose how much to borrow and whether to repay their debt, and banks decide the quantity of credit supplied, taking into account default possibilities. We show that over-optimistic expectations lead to severe distortions on the credit market, resulting in a large quantity of debt issued at a low price. We finally investigate the role of different policies in eliminating these distortions.

Technology Transfer through Capital Imports: Firm-level Evidence

Abstract:

What is the effect of imported technology on firm productivity? To study this question, we develop a dynamic model of firm investment and importing decisions and estimate it in Hungarian firm-level panel data. Our preliminary results indicate that (i) The share of imported capital is strongly positively related to productivity; (ii) Imports from R&D abundant countries matter more for productivity than imports from low-R&D countries; (ii) Imported capital and imported material inputs are complementary, which strengthens the productivity effect.

Topics in Asset Pricing

Participatory Accountability and Collective Action

Topics in Asset Pricing

Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement

Technological Revolutions and Debt Hangovers: Is There a Causal Link?

Abstract:
Three major private debt caused recessions in developed economies — the Great Recession, the Japanese crisis of the 90s, and the Great Depression — have been preceded by periods of great technological innovation and economic transformation. Motivated by this fact, we write a business cycle model featuring imperfect information. We estimate this model using time series data for the three episodes. This exercise, together with other reduced form evidence, allows us to highlight some similarities between the three episodes. Indeed, our estimates suggest that these economies have gone through a slow moving process in which a technological revolution creates a boom in productivity, followed by a vague of optimism about the long run. The end of the boom implied a slowdown of innovation, together with a slowdown of aggregate productivity growth. Because of imperfect information, beliefs were persistent and, therefore, the private sector remained optimistic for a sizeable period of time even after the slowdown of productivity. We analyze the implications of optimism in a model with explicit borrowing and lending. In the model, the degree of optimism observed in the data implies a large accumulation of debt. The debt burden coupled with the slowdown of productivity can drag the economy into a long recession lasting, according to our estimates, about 10 years.

Lifetime Labor Supply and Human Capital Accumulation

Topics in Asset Pricing

Prenuptial Agreements and Household Welfare: Theory and Evidence from Italy

Monetary Shocks with Observation and Menu Costs (with F. Alvarez and F. Lippi)

Abstract:

We compute the impulse response of output and prices to an aggregate monetary shock in a general equilibrium model where firms set prices subject to observation and menu costs. We study how the predictions about the aggregate effects of monetary shocks depend on the relative size of the information and adjustment frictions.
We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks with respect to models with menu cost only. However, we also find that the large power of monetary shocks typical of models with Calvo type exogenous adjustments cannot be rationalized with any empirically reasonable combination of menu and observation costs.

Equilibrium Existence and Approximation for Incomplete Market Models with Substantial Heterogeneity

A State-Space Stochastic Frontier Panel Data Model

Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading

Liquidity Spillovers in Sovereign Bond and CDS Markets: An Analysis of The Eurozone Sovereign Debt Crisis

Two can live as cheaply as one…But three’s a crowd

TBA

TBA