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

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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: Evidence from Italy

Abstract:

This paper examines the welfare implications of a particular kind of prenuptial agreement, which allows Italian couples to costlessly choose at the time of marriage how they want their assets to be divided in case of divorce. Using unique administrative data on marriages and divorces from 1995 to 2009, it shows that both separation of property and community property are popular choices among Italian couples, and that the choice of regime is systematically correlated with the couples’ characteristics. These patterns of correlations are consistent with a model in which some couples decide to commit to a property division rule that will require splitting assets equally, as they anticipate that one spouse will be making substantial marriage-specific investments, while other couples choose to hold their assets in separation of property, as both spouses are able to maintain good economic outside options to the marriage. For the couples who choose separation of property, the welfare benefits of foregoing community property are sizable, and increasing in the wife’s permanent income.

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

Experience Matters: Human Capital and Development Accounting

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

Traditional and Shadow Banking

Monetary Policy and the Quantity Theory of Money

Traditional and Shadow Banking

(1) Cultural Origin of Gender Roles; (2) Family Ties and Economic Outcomes

Principles of Optimal Taxation

Food Development, War and Famine

Trickle-Down Consumption

Abstract:

While incomes of the non-rich in the United States have only risen slowly over the last three decades, incomes in the upper part of the income distribution have risen sharply. Concurrently, the average savings rate has been in decline. We ask whether these two trends are related: does rising consumption among (increasingly richer) rich households induce the non-rich to consume more? We find evidence consistent with this, suggesting that up to a quarter of the decline in the savings rate over the last three decades could be attributed to trickle-down consumption. Additional tests argue against permanent income explanations and against upwardly-biased expectations of future income. Consistent with the trickle-down interpretation of our core finding, households exposed to more spending by the rich self-report more financial duress. Likewise, higher top income levels are predictive of more personal bankruptcy filings. Finally, looking to the political economy implications in both federal and state legislations, we find evidence that, holding ideology constant, legislators that represent areas where income inequality is higher are more likely to vote in favor of policies that increase credit availability or decrease the cost of credit.

(1) Cultural Origin of Gender Roles; (2) Family Ties and Economic Outcomes

Principles of Optimal Taxation

Food Development, War and Famine

For further details, please see Scientific Events.

For further details, please see Scientific Events.

For further details, please see Scientific Events.

Random and Directed Search Models of the Labor Market

(1) Regulatory Forbearance in the Financial Crisis and Accounting; (2) Runs, on Banks and Otherwise

Random and Directed Search Models of the Labor Market

(1) Regulatory Forbearance in the Financial Crisis and Accounting; (2) Runs, on Banks and Otherwise

For further details, please see Scientific Events.

For further details, please see Scientific Events.

For further details, please see Scientific Events.

(1) Natural Resources and Conflict; (2) Political Economy of Institutions

The Political Economy of the Public Debt

Facts and Models of International Relative Prices

(1) Natural Resources and Conflict; (2) Political Economy of Institutions

The Political Economy of the Public Debt

Facts and Models of International Relative Prices

Transport and Urban Form

Transport and Urban Form

Women’s Rights and Development

(1) Dynamics of Institutions; (2) Political Economy of Non-democracies

Microstructure and Aggregate Productivity

(1) Dynamics of Institutions; (2) Political Economy of Non-democracies

Microstructure and Aggregate Productivity

Cream Skimming in Financial Markets (with Tano Santos and Jose Scheinkman)

Credit Derivatives and the Cost of Capital

Partial Fiscal Decentralization and Public-Sector Heterogeneity: Theory and Evidence from Norway

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A Real Options Perspective on the Future of the Euro

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Do Fair Elections Enhance Government Legitimacy? Experimental Evidence from Afghanistan

Monetary Policy Neutrality? Sign Restrictions Go to Monte Carlo

Political Uncertainty and Risk Premia

On ABCs (and Ds) of VAR Representations of DSGE Models

Repo, Fire Sales and Bankruptcy Policy

The Money Value of a Man

Measuring Sovereign Contagion in Europe

The Geography of the Great Recession

Abstract:
This paper documents, using county level data, some geographical features of the US business cycle over the past 30 years, with particular focus on the Great Recession. It shows that county level unemployment rates are spatially dispersed and spatially correlated, and documents how these characteristics evolve during recessions. It then shows that some of these features of county data can be generated by a model which includes simple channels of transmission of economic conditions from a county to its neighbours. The model suggests that these local channels are quantitatively important for the amplification/muting of aggregate shocks.

Better Workers Move to Better Firms: A Simple Test to Identify Sorting

Transnational Household Finance: A Field Experiment on the Cross-Border Impacts of Financial Education for Migrant Workers

Predation, Economic Activity and Violence: Evidence from the Philippines, Iraq and Afghanistan

Happiness and the Persistence of Income Shocks

Distortions, Endogenous Managerial Skills and Productivity Differences

Family firms and the agency cost of debt: The role of soft information during a crisis

Equilibrium Corporate Finance: Makowski meets Prescott and Townsend

Grab them Before they Go Generic: Habit Formation and the Emerging Middle Class

Market Maker Pricing and Information about Prospective Order Flow

The seminar will be based on the following two papers:

Exorbitant Privilege and Exorbitant Duty
The Financial Crisis and The Geography of Wealth Transfers

Analyzing the E ffects of Insuring Health Risks: On the Tradeoff between Short Run Insurance Benefits vs. Long Run Incentive Costs

Anatomy of Cartel Contracts

Abstract:

We study cartel contracts using data on 18 contract clauses of 109 Finnish cartels. One third of these clauses relate to raising profits. The remaining clauses deal with the instability of the cartel arrangement either through incentive compatibility, cartel organization, or external threats. Cartels use three approaches to raise profits: Price, market allocation, and specialization. These appear to be substitutes. Choosing one has implications on how they deal with instability. We find that industry- and cartel heterogeneity matters. The number of cartel members, the degree of product differentiation and industry- and macro-characteristics are all associated with contract choices.

Testing for Threshold Homogeneity

Experiments On The Lucas Asset Pricing Model

Conflict and the Evolution of Societies

Acquisitions, Ownership Efficiency, and the Tax Shield of Debt

Abstract:
We show how the tax shield of debt can distort ownership efficiency in the market for corporate control. Firms with higher optimal leverage, but who are less efficient owners, can outbid more efficient owners of assets with lower optimal leverage. Policies to equalize the tax treatment of debt and equity (such as limits the tax shield of debt) can improve ownership efficiency and total welfare by weakening the connection between leverage and outcomes in acquisition contests. Alternatively, if the acquisition price is fully deductible, tax shields play no role because competitive bidding for assets generate sufficient non-debt deductions from the acquisition price alone to ensure bidders pay no taxes in equilibrium.

Credibility for Sale

Mismatch and Unemployment Risk

Abstract:

Risk aversion is a natural source of mismatch. We consider sorting of workers with different asset holdings into jobs of varying productivity. In order to smooth consumption, job searchers choose the optimal bundle of wages and unemployment risk. Workers with low asset holdings direct their job search to low productivity firms because they offer low wage, low risk jobs. We show that this occurs under a necessary and sufficient condition closely related to Decreasing Relative Risk Aversion. Assets and productivities are complementary, but the sorting outcome is inefficient. Under complete information, the planner would like to reduce income inequality as well as unemployment risk. We also analyze the optimal mechanism when asset holdings are private information.

Sovereign default risk and state-dependent twin deficits

Abstract:
This paper studies government default in a small open economy model and shows that the propagation of economic shocks results in a state-dependent correlation of the fiscal balance and the current account. The model features two assets - private and public debt - where non-linear risk premia on government bonds arise endogenously when public debt is close to its fiscal limit, i.e. the maximum capacity of a country to repay its debt. Households internalize that the possibility of government default implies an increase in the dispersion of resulting tax levels leading to precautionary savings at high debt levels. The model is in line with empirical evidence that shows a decrease in the correlation of the twin deficits the higher is public debt.

Do Stock Traders Learn From Experience? Evidence from an Emerging Market

Abstract:
This paper reports evidence that individual investors in Indian equities hold better performing portfolios as they become more experienced in the equity market. Several standard measures of investment mistakes, including underdiversification, high turnover, and the disposition effect, also decline with account age. These mistakes become less prevalent when investors experience poor returns resulting from them, consistent with models of reinforcement learning.

The Baby Boom and World War II: A Macroeconomic Analysis

Liquidity-Based Security Design: The Case of Uninformed Sellers

Non-Uniqueness of Deep Parameters and Shocks in Estimated DSGE Models: A Health Warning

Decentralized Deterrence, with an Application to Labor Tax Auditing

Market leadership through technology – Backward compatibility in the U.S. Handheld Video Game Industry

The Dynamics of Sovereign Debt Crises and Bailouts

Conditional Alphas and Realized Betas

Perks as Second Best Optimal Compensations

Judging the DSGE Model by Its Forecast

Abstract:

We study the forecasting ability of the standard estimated medium scale dynamic stochastic general equilibrium model. We show that although the model forecasts have lower root mean squared error compared to judgmental and statistical forecasts, the absolute forecasting ability is very poor. We argue that average forecasting ability during the Great Moderation is not a good metric to judge a model’s validity. We then offer alternative ways of using forecasts to judge the model. Importantly, we also highlight the importance of data and sample choices in the model’s forecasting ability. With the proper data treatment and choice of sample period when macroeconomic aggregates were indeed forecastable (pre-Great Moderation) the model provides a good forecasting performance.

Educational Policies in a Long Run perspective

Efficient Child Care Subsidies (with Christine Ho, Singapore Management University)

Abstract:

We introduce household-provided child care in an optimal income taxation problem `a la Mirrlees. In our model, individuals have private information on effort cost and can devote part of their time to child care activities. We first characterize the constrained efficient allocation and propose an implementation that makes an efficiency case for child care subsidies on formal child care cost. Consistently with existing schemes, the optimal subsidies follow a sliding scale where higher child care subsidies are paid to lower income earners. We then calibrate our model to features of the US economy and focus on single mothers with children aged below 6. The optimal average subsidy rates are less generous than existing one, they range between 51% for low income earners decreasing to 5% for moderately low income earners and are nil for high and very high income earners.

Identifying the weights in exchange market pressure

Ranking Scientific Journals Via Latent Class Models for Polytomous Item Response Data

Prudential Policy For Peggers

European Fiscal Union: A Vision for the Long Run

Open Market Operations and Money Supply at Zero Nominal Interest Rates

Did the Community Reinvestment Act (CRA) Lead to Risky Lending?

Leaders and Followers: A Case Study of Papal Influences on Fertility Preferences and Behavior (joint with Vittorio Bassi - UCL and IFS)

Can basic entrepreneurship transform the economic lives of the poor?

Abstract:
This paper provides causal evidence on whether transferring capital and skills enables the most disadvantaged within a society to alter their occupational choices and exit poverty. We conduct a randomized evaluation of a program that provides assets and training to the poorest women in rural Bangladesh. We find that the program transforms the occupational choices of the poor - treated women spend 92% more hours running their new businesses and 26% less hours in wage employment. This shift from insecure wage labor to self-employment is associated with a 38% increase in earnings. Women, who were largely assetless and illiterate agricultural laborers at baseline, begin to close the gap with middle class women on dimensions such as occupational choice, regularity of earnings, household per capita expenditure and happiness. Inculcating basic entrepreneurship, where the most disadvantaged women take on business activities which hitherto had been the preserve of non-poor women, is shown to be a powerful means of transforming the economic lives of the poor.