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Working Papers 2004: Abstracts
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04-1 Ethan Lewis, "Local Open Economies Within the U.S.: How Do Industries Respond to Immigration?"
A series of studies has found that relative wages and employment
rates in different local labor markets of the US are surprisingly unaffected by
local factor supplies. This paper evaluates two explanations for this puzzling
empirical fact: (1) Interregional trade mitigates the local impact of supply
shocks. (2) Production technology rapidly adapts to the local mix of workers.
The author tests these alternative explanations by estimating the effect of
increases in relative supplies of particular skill groups on the relative
growth rates of different industries and on the relative utilization of these
skill groups within industries. Labor supply shocks are identified with a
component of foreign immigration driven by the historical regional settlement
patterns of immigrants from different countries. Using establishment-level
output and capital stock data from the Longitudinal Research Database,
augmented with employment and labor force data from the 1980 and 1990 Censuses
of Population, changes in local labor supply during the 1980s are shown to have
had little influence on local industry mix. Instead, citywide increases in the
relative supply of a particular skill group lead to increases in relative
factor intensity, with little or no effect on relative wages. These patterns
suggest that industries adapt their use of labor inputs to local supplies, as
predicted by theoretical models of endogenous technological change. Consistent
with this interpretation, on-the-job computer use expanded most rapidly over
the 1980s in cities where the relative supply of educated labor grew
fastest.
(231 KB, 59 pages)
04-2 Edward L. Glaeser and Albert Saiz, "The Rise of the Skilled City"
For more than a century,
educated cities have grown more quickly than comparable cities with less human
capital. This fact survives a battery of other control variables, metropolitan
area fixed effects, and tests for reverse causality. The authors also find that
skilled cities are growing because they are becoming more economically
productive (relative to less skilled cities), not because these cities are
becoming more attractive places to live. Most surprisingly, they find evidence
suggesting that the skills-city growth connection occurs mainly in declining
areas and occurs in large part because skilled cities are better at adapting to
economic shocks. As in Schultz (1964), skills appear to permit
adaptation.
(634 KB, 68 pages)
04-3 Ethan Lewis, "How Did the Miami Labor Market Absorb the Mariel Immigrants?"
Card's (1990)
well-known analysis of the Mariel boatlift concluded that this mass influx of
mostly less-skilled Cubans to Miami had little impact on the labor market
outcomes of the city's less-skilled workers. This paper evaluates two
explanations for this. First, consistent with an open-economy framework, this
paper asks whether after the boatlift, Miami increased its production of
unskilled-intensive manufactured goods, allowing it to "export" the impact of
the boatlift. Second, this paper asks whether Miami adapted to the boatlift by
implementing new skill-complementary technologies more slowly than would have
otherwise been the case. Using a confidential micro data version of the Annual
Surveys of Manufactures, the author shows that following the boatlift, Miami's
relative output of different manufacturing industries trended similary to other
cities with similar pre-boatlift trends in manufacturing mix. The response of
industry mix to the boatlift therefore appears to be small. Supporting the
second type of adjustment, utilization of Cuban labor by Miami's industries
rose proportionately to the supply increase generated by the boatlift. In
adition, post-boatlift computer use at work was lower in Miami than in other
cities with similar levels of computer-based employment before the event, even
among non-Hispanic workers in the same detailed cells defined by industry,
occupation, and education. This suggests the boatlift induced Miami's
industries to employ more unskilled-intensive production technologies. The
results suggest an explanation for why native wages are consistently found to
be insensitive to local immigration shocks: markets adapt production technology
to local factor supplies.
(255 KB, 43 pages)
04-4 Raphael
Bergoeing, Timothy J. Kehoe, Vanessa Strauss-Kahn, and Kei-Mu Yi, "Why Is
Manufacturing Trade Rising Even as Manufacturing Output is Falling?"
(247 KB, 15 pages)
The key feature of the
modern U.S. personal bankruptcy law is to provide debtors a financial fresh
start through debt discharge. The primary justification for the discharge
policy is to preserve human capital by maintaining incentives for work. In this
paper, the authors test this fresh start argument by providing the first
estimate of the effect of personal bankruptcy filing on the labor supply using
data from the Panel Study of Income Dynamics (PSID). Their econometric approach
controls for the endogenous self-selection of bankruptcy filing and allows for
dependence over time for the same household. They find that filing for
bankruptcy does not have a positive impact on annual hours worked by bankrupt
households, a result mainly due to the wealth effects of debt discharge. The
finding is robust to a number of alternative model specifications and sample
selections. Therefore, the authors' analysis does not find supporting evidence
for the human capital argument for bankruptcy discharge.
(247 KB, 35 pages)
04-6 Kevin X. D.
Huang and Zheng Liu, "Inflation Targeting: What Inflation Rate to Target?"
Revision forthcoming in the Journal of Monetary
Economics
In an economy with nominal rigidities in both an
intermediate good sector and a finished good sector, and thus with a natural
distinction between CPI and PPI inflation rates, a benevolent central bank
faces a tradeoff between stabilizing the two measures of inflation: a final
output gap, and unique to the authors' model, a real marginal cost gap in the
intermediate sector, so that optimal monetary policy is second-best. The
authors discuss how to implement the optimal policy with minimal information
requirement and evaluate the robustness of these simple rules when the central
bank may not know the exact sources of shocks or nominal rigidities. A main
finding is that a simple hybrid rule under which the short-term interest rate
responds to CPI inflation and PPI inflation results in a welfare level close to
the optimum, whereas policy rules that ignore PPI inflation or PPI sector
shocks can result in significant welfare losses.
(338 KB, 38 pages)
A central challenge to
monetary business-cycle theory is to find a solution to the problem of
persistence and delay in the real effects of monetary shocks. Previous research
has identified separately specific factors and intermediate inputs as two
promising mechanisms for generating the persistence and delay in a staggered
price-setting framework. Models based on either of these two mechanisms have
also been used in the design of optimal monetary
policy.
By examining a staggered price model
that features both specific factors and intermediate inputs, the author finds
an offsetting interaction between the two individually promising mechanisms,
which leads to a cancellation of much of the impact of each in propagating
monetary shocks. This finding posits a challenge to the search for a robust
monetary transmission mechanism and design of optimal monetary policy.
(492 KB, 45 pages)
The authors
construct a two-country DSGE model with multiple stages of processing and
local-currency staggered price-setting to study cross-country quantity
correlations driven by monetary shocks. The model embodies a mechanism that
propagates a monetary surprise in the home country to lower the foreign price
level while restraining the home price level from rising too quickly. It does
so through reducing material costs in terms of the foreign currency unit while
dampening the upward movements in the costs in terms of the home currency unit,
both in absolute terms and relative to the costs of primary factors. The
authors show that, through this mechanism and a resulting factor substitution
effect, the model is able to generate significant cross-country quantity
correlations, with correlations in consumption considerably lower than
correlations in output, as in the data.
(420 KB, 41 pages)
04-9 Theodore M.
Crone and Alan Clayton-Matthews, "Consistent Economic Indexes for the 50
States"
Supersedes Working Paper No. 02-7/R
In
the late 1980s James Stock and Mark Watson developed for the U.S. economy an
alternative coincident index to the one now published by the Conference Board.
They used the Kalman filter to estimate a latent dynamic factor for the
national economy and designated the common factor as the coincident index. This
paper uses the Stock/Watson methodology to estimate a consistent set of
coincident indexes for the 50 states. These indexes provide researchers with a
comprehensive monthly measure of economic activity that can be used to examine
a number of state and regional issues.
(446 KB, 79 pages)
04-10 Jay Hong and José-Victor RÍos-Rull, "Life Insurance and Household Consumption"
In this paper, the authors use data of life
insurance holdings by age, sex, and marital status to infer how individuals
value consumption in different demographic stages. Essentially, they use
revealed preference to estimate equivalence scales and altruism simultaneously
in the context of a fully specified model with agents facing U.S. demographic
features and with access to savings markets and life insurance markets. The
authors' findings indicate that individuals are very caring for their
dependents, that there are large economies of scale in consumption, that
children are costly but wives with children produce a lot of goods in the home,
and that while females seem to have some form of habits created by marriage,
men do not. These findings contrast sharply with the standard notions of
equivalence scales.
(374 KB, 36 pages)
The authors develop an
equilibrium business cycle model in which the producers of final goods pursue
generalized (S,s) inventory policies with respect to intermediate goods, a
consequence of nonconvex factor adjustment costs. Calibrating their model to
reproduce the average inventory-to-sales ratio in postwar U.S. data, they find
that it explains over half of the cyclical variability of inventory investment.
Moreover, inventory accumulation is strongly procyclical, and production is
more volatile than sales, as in the data.
The
comovement between inventory investment and final sales is often interpreted as
evidence that inventories amplify aggregate fluctuations. In contrast, the
authors' model economy exhibits a business cycle similar to that of a
comparable benchmark without inventories, though they do observe somewhat
higher variability in employment, and lower variability in consumption and
investment. Thus, equilibrium analysis, which necessarily endogenizes final
sales, alters our understanding of the role of inventory accumulation for
cyclical movements in GDP. The presence of inventories does not substantially
raise the variability of production, because it dampens movements in final
sales. Similarly, when reductions in adjustment costs lower, but do not
eliminate, average inventory holdings, the variability of GDP is essentially
unchanged, because the reduced costs cause an offsetting rise in the
variability of final sales.
(484 KB, 45 pages)
04-12 Theodore M. Crone, "A Redefinition of Economic Regions in the U.S."
Since the 1950s the Bureau of Economic Analysis (BEA) has grouped the states
into eight regions based primarily on cross-sectional similarities in their
socioeconomic characteristics. This is the most frequently used grouping of
states in the U.S. for economic analysis. Since several recent studies
concentrate on similarities and differences in regional business cycles, this
paper groups states into regions based not on a broad set of socioeconomic
characteristics but on the similarities in their business cycles. The analysis
makes use of a consistent set of coincident indexes estimated from a Stock and
Watson-type model. The authors applied k-means cluster analysis to the cyclical
components of these indexes to group the 48 contiguous states into eight
regions with similar cycles. Having grouped the states into regions, they
determine the relative strength of cohesion among the states in the various
regions. Finally, they compare the regions defined in this paper with the BEA
regions.
(435 KB, 38 pages)
04-13 Aubhik Khan and Julia K. Thomas, "Modeling Inventories over the Business Cycle"
The authors search for useful models of aggregate
fluctuations with inventories. They focus exclusively on dynamic stochastic
general equilibrium models that endogenously give rise to inventory investment
and evaluate two leading candidates: the (S,s) model and the stockout avoidance
model. Each model is examined under both technology shocks and preference
shocks, and its performance gauged by its ability to explain the observed
magnitude of inventories in the U.S. economy, alongside other empirical
regularities, such as the procyclicality of inventory investment and its
positive correlation with sales. The authors find that the (S,s) model is far
more consistent with the behavior of aggregate inventories in the postwar U.S.
when aggregate fluctuations arise from technology, rather than preference,
shocks. The converse is true for the stockout avoidance model. Overall, while
the (S,s) model performs well with respect to the inventory facts and other
business cycle regularities, the stockout avoidance model does not. There, the
essential motive for stocks is insufficient to generate inventory holdings near
the data without destroying the model’s performance along other important
margins. Finally, the stockout avoidance model appears incapable of sustaining
inventories alongside capital. This suggests a fundamental problem in using
reduced-form inventory models with stocks rationalized by this motive.
(412 KB, 37 pages)
The authors develop and test a
model of mortgage underwriting, with particular reference to the role of
generic credit bureau scores. In their model, scores are used in a standardized
fashion, which reflects the prevalence of automated underwriting in industry
practice. They show that their model has implications for the debate on the
effect of personal bankruptcy exemptions on secured lending.
Recent literature (Berkowitz and Hynes
(1999), Lin and White (2001)) has developed conflicting theories — and
found conflicting results — seeking to explain how exemptions affect the
mortgage market. By contrast, the authors' model implies that when lenders use
credit scores in a standardized manner, exemptions should actually be
irrelevant to the mortgage underwriting decision. Merging data from a major
credit bureau with the Home Mortgage Disclosure Act (HMDA) data set, they
confirm this prediction of their model.
The
authors' model also implies that while an econometrician ignoring borrower
credit quality may find exemptions to be significant, once one controls for
credit scores, exemptions should have no effect on the likelihood that a
mortgage application is denied. They confirm this empirically and argue that it
may help explain some of the results of the previous literature. Finally, they
also discuss the extent to which this use of generic credit scores for mortgage
underwriting is optimal.
(155 KB, 33 pages)
The authors
solve equilibrium models of lumpy investment wherein establishments face
persistent shocks to common and plant-specific productivity. Nonconvex
adjustment costs lead plants to pursue generalized (S,s) decision rules with
respect to capital; as a result, their individual investments are lumpy. In
partial equilibrium, this yields substantial skewness and kurtosis in aggregate
investment, though with differences in plant-level productivity, these
nonlinearities are far less pronounced. Moreover, nonconvex costs, like
quadratic adjustment costs, greatly increase the persistence of aggregate
investment rates, yielding a better match with the
data.
In general equilibrium, aggregate
nonlinearities disappear, and investment rates are very persistent, regardless
of capital adjustment costs. While the aggregate implications of lumpy
investment change substantially in equilibrium, the inclusion of fixed costs or
idiosyncratic shocks yields an average distribution of plant investment rates
that, in contrast, is largely unaffected by market-clearing movements in real
wages and interest rates. Nonetheless, the authors find that to understand the
dynamics of plant-level investment requires general equilibrium analysis.
(1.03 MB, 50 pages)
04-16/R
Gerald Carlino, Satyajit Chatterjee, and Robert Hunt, "Matching and Learning in
Cities: Urban Density and the Rate of Invention"
Superseded by Working Paper
06-14
(1.15 MB, 48 pages)
04-17 Theodore
M. Crone, Leonard I. Nakamura, and Richard Voith, "The CPI for Rents: A Case of
Understated Inflation"
Superseded by Working Paper 08-28
(902 KB, 44 pages)
In a
closed economy general equilibrium model, Hopenhayn and Rogerson (1993) find
large welfare gains to removing firing restrictions. Alessandria and Delacroix
explore the extent to which international trade alters this result. When
economies trade, labor market policies in one country spill over to other
countries through a change in the terms of trade. This reduces the incentive to
reform labor markets. In a policy game over firing taxes between countries,
they find that countries optimally choose positive levels of firing taxes. A
coordinated elimination of firing taxes yields considerable benefits. This
insight provides some explanation for recent efforts toward labor market reform
in the European Union.
(522 KB, 42 pages)
04-19 George
Alessandria and Joseph Kaboski, "Violating Purchasing Power Parity"
Superseded by Working Paper 07-29
(461 KB, 49 pages)
04-20 Loretta
J. Mester, Leonard I. Nakamura, and Micheline Renault, "Transactions Accounts
and Loan Monitoring"
Superseded by Working Paper 05-14
(1.12 MB, 45 pages)
04-21/R Gerald Carlino, Robert DeFina, and Keith Sill, "On the Stability of Employment Growth: A Postwar View from the U.S. States" (Supersedes Working Paper 04-21)
In 1952, the average quarterly volatility of U.S. state employment growth was 1.5 percent. By 1995, it was just under 0.5 percent. While all states shared in the decline, some declined more dramatically than others. The authors analyze aspects of this decline using data covering postwar industry employment by state. Estimates from a pooled cross-section/time-series model indicate that fluctuations in macroeconomic and state-specific variables have both played an important role in explaining volatility trends. However, macroeconomic shocks account for more of the postwar fluctuations in state employment growth volatility than do state-specific forces.
(685 KB, 40 pages)
Recent papers have questioned the accuracy of the Bureau of Labor Statistics'
methodology for measuring rent increases and changes in implicit rents for
owner-occupied housing. The authors compare the BLS estimates of increases in
rents and owner-occupied housing costs to regression-based estimates using data
from the American Housing Survey. A hedonic approach that explicitly calculates
capitalization rates produces a methodologically consistent measure of the
rental cost of owner-occupied housing. They estimate that between 1985 and 1999
the Consumer Price Index (CPI-U) may have understated the cumulative increase
in rents. But any understatement was slight. On the other hand, the authors
estimate that the CPI overstated the increase in the cost of housing services
for homeowners by 0.4 percent on an annualized basis from 1985 to 1999.
(289 KB, 35 pages)
04-23 Shigeru Fujita, "Vacancy Persistence"
This paper reevaluates the
quantitative performance of the standard labor-market matching model developed
by Mortensen and Pissarides with special attention to the behavior of
vacancies, one of the key variables in the model. The author first estimates
trivariate vector autoregressions with gross worker flows and vacancies and
identify an aggregate shock by imposing only minimal sign restrictions on the
responses of worker flows and employment growth and no restrictions on the
response of vacancies. The data strongly suggest a hump-shaped and persistent
response of vacancies. The calibrated model, on the other hand, predicts that
vacancies respond to aggregate shocks with no delay and are not persistent even
though an aggregate productivity shock is assumed to be highly persistent.
These problems in vacancy behavior also cause gross flow series to exhibit
counterfactual cyclical properties.
(379 KB, 40 pages)
The authors build a model in which
financial intermediaries provide insurance to households against a liquidity
shock. Households can also invest directly on a financial market if they pay a
cost. In equilibrium, the ability of intermediaries to share risk is
constrained by the market. This can be beneficial because intermediaries invest
less in the productive technology when they provide more risk-sharing. The
authors' model predicts that bank-oriented economies should grow slower than
more market-oriented economies, which is consistent with some recent empirical
evidence. They show that the mix of intermediaries and market that maximizes
welfare under a given level of financial development depends on economic
fundamentals. They also show the optimal mix of two structurally very similar
economies can be very different.
(569 KB, 53 pages)
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