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Working Papers 1999: Abstracts
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The
authors investigate the sources of recent changes in the performance of U.S.
banks using concepts and techniques borrowed from the cross-section efficiency
literature. Their most striking result is that during 1991-1997, cost
productivity worsened while profit productivity improved substantially,
particularly for banks engaging in mergers. The data are consistent with the
hypothesis that banks tried to maximize profits by raising revenues as well as
reducing costs, and that banks provided additional services or higher service
quality that raised costs but also raised revenues by more than the cost
increases. The results suggest that methods that exclude revenues may be
misleading.
(191 KB, 49 pages)
The authors compute the potential economic
benefits that would accrue to a typical pre-WWII era U.S. worker from the
post-WWII macroeconomic policy regime. The authors assume that workers face
undiversifiable income risk but can self-insure by saving in nominal assets.
The worker's average utility is computed for two eras: pre-WWII (1875-1941) and
post-WWII. In the pre-WWII era, the worker endured business cycles that were
large in amplitude and quite volatile, a procyclical aggregate price level with
large cyclical amplitude, a high average unemployment rate, and virtually no
trend in the aggregate price level. In the post-WWII era, the same worker would
have encountered business cycles with smaller amplitude and less volatility, a
countercyclical aggregate price level with small cyclical amplitude, a much
lower mean unemployment rate, and a positive trend in the aggregate price
level. Depending on what is assumed about the effects of macroeconomic policies
on the mean and var iance of the unemployment rate, the potential gain in the
worker's welfare ranges between -0.9 (if policies affected the inflation rate
but not the mean or variance of the aggregate unemployment rate) to 4.19
percent of consumption (if policies affected the inflation rate and lowered the
mean and variance of the aggregate unemployment rate).
(399 KB, 49 pages)
U.S. patent law protects
only inventions that are nontrivial advances of the prior art. The legal
requirement is called nonobviousness. During the 1980s, the courts
relaxed the nonobviousness requirement for all inventions, and a new form of
intellectual property, with a weaker nonobviousness requirement, was created
for semiconductor designs. Supporters of these changes argue that a less
stringent nonobviousness requirement encourages private research and
development (R&D) by increasing the probability that the resulting
discoveries will be protected from imitation. This paper demonstrates that
relaxing the standard of nonobviousness creates a tradeoff--raising the
probability of obtaining a patent, but decreasing its value. The author shows
that weaker nonobviousness requirements can lead to less R&D
activity, and this is more likely to occur in industries that rapidly innovate.
(239 KB, 53 pages)
99-4 Dean Croushore and Tom Stark, "A Real-Time Data Set for Macroeconomists"
This paper presents the concept and uses of a real-time data set
that can be used by economists for testing the robustness of published
econometric results, for analyzing policy, and for forecasting. The data set
consists of vintages, or snapshots, of the major macroeconomic data available
at quarterly intervals in real time. The paper illustrates why such data may
matter, explains the construction of the data set, examines the properties of
several of the variables in the data set across vintages, examines key
empirical papers in macroeconomics and investigates their robustness to
different vintages, looks at how policy analysis may be affected by data
revisions, and shows how forecasts can be affected by data revisions.
(1.49 MB, 93 pages)
The authors study the
asset pricing implications of an economy where solvency constraints are
determined to efficiently deter agents from defaulting. The authors present a
simple example for which efficient allocations and all equilibrium elements are
characterized analytically. The main model produces large equity premia and
risk premia for long-term bonds with low risk aversion and a plausibly
calibrated income process. The authors characterize the deviations from
independence of aggregate and individual income uncertainty that produce equity
and term premia.
(702 KB, 44 pages)
99-6 Keith Sill and Jeff Wrase, "Exchange Rates, Monetary Policy Regimes, and Beliefs"
The authors investigate an international monetary business-cycle
model in which agents face monetary policy processes that incorporate regime
shifts. In any given period agents cannot directly observe the policy regime,
but instead form beliefs that are updated via Bayesian learning. As a result,
expectation adjustment displays inertia that adds persistence to the effects of
monetary shocks. Monetary policy process for the U.S. and an aggregate of OECD
countries are estimated using Hamilton's Markov-switching model. The authors
then solve and calibrate a version of the model and examine its quantitative
properties.
(282 KB, 41 pages)
Vector-autoregression
(VAR) forecast models have been developed for many state economies, including
the three states in the Third Federal Reserve District--Pennsylvania, New
Jersey, and Delaware. This paper extends that work by developing a Bayesian VAR
forecast model for the Philadelphia metropolitan area and the city of
Philadelphia.
(60 KB, 25 pages)
The authors explore the economic
rationale for equitable subordination, a legal doctrine that permits a
firm's claimants to seek to subordinate an informed investor's financial claim
in bankruptcy court. Fear of equitable subordination is often cited as a reason
that banks in the U.S. are wary of taking an active management role in their
borrowing firms. The authors show that an optimally designed menu of claims for
a large investor will include features that resemble equitable subordination.
The authors' model provides a partial rationale for a financial system in which
powerful creditors do not generally hold blended debt and equity claims.
(211 KB, 44 pages)
Recent papers have questioned the accuracy of
the Bureau of Labor Statistics' methodology for measuring implicit rents for
owner-occupied housing. The authors propose cross-checking the BLS statistics
by using data on owner-occupied and rental housing from the American Housing
Survey. A hedonic approach that explicitly calculates capitalization rates
appears to be a feasible one for developing a methodologically consistent
measure of the rental cost of owner-occupied housing.
(93 KB, 38 pages)
A key
finding to emerge from this study is that the widely studied suburbanization or
decentralization of employment and population is only part of the story of
postwar urban evolution. Another important part of the story is a postwar trend
of relatively faster growth of jobs and people in the smaller and less-dense
MSAs (deconcentration). The authors find that postwar growth in employment (and
to a lesser extent population) has favored metropolitan areas with smaller
levels of employment (population) density. These trends are shared by major
regions of the country and by manufacturing and non-manufacturing employment.
The fact that employment growth has favored MSAs with smaller levels of
employment (or lower levels of employment density) indicates that economic
processes favoring convergent (as opposed to parallel) metropolitan growth
played an important role in the postwar era.
(74 KB, 30 pages)
99-11 Aubhik Khan, "Financial Development and Economic Growth"
The
author develops a theory of financial development based on the costs associated
with the provision of external finance. These costs are assumed to arise within
an environment where informational asymmetries between borrowers and lenders
are costly to resolve. When borrowing is limited, producers with access to
financial intermediary loans obtain higher returns to investment than other
producers. This creates incentives for others to undertake the technology
adoption necessary to access investment loans. Over time, as increasing numbers
of producers gain access to external finance, borrowers' net worth rises
relative to debt. This reduces the costs of financial intermediation and raises
the overall return on investment. The theory is consistent with recent evidence
that financial development reduces the costs associated with the provision of
external finance and increases the rate of economic growth. Furthermore, the
theory predicts that financial development raises the retu rn on loans and
reduces the spread between borrowing and lending rates.
(309 KB, 44 pages)
99-12 Aubhik Khan and B. Ravikumar, "Growth and Risk-Sharing with Private Information"
The author examines the impact of incomplete
risk-sharing on growth and welfare. The source of market incompleteness in the
economy is private information: a household's idiosyncratic productivity shock
is not observable by others. Risk-sharing between households occurs through
long-term contracts with intermediaries. The author finds that incomplete
risk-sharing tends to reduce the rate of growth relative to the complete
risk-sharing benchmark. Numerical examples indicate that the welfare cost and
the growth effect of private information are small.
(492 KB, 42 pages)
This paper examines monetary regime
switching in Canada and the United States and the implications of regime
switching for exchange rates and key nominal and real macroeconomic aggregates
for the two countries. Evidence of Markov regime switching in the process
governing monetary base growth and in the bilateral exchange rate between the
two countries is presented. Given this evidence, a two-country general
equilibrium monetary model is constructed to account for observed properties of
the U.S.-Canadian dollar exchange rate and for measured effects of monetary
policy on key variables. Agents in the model face a monetary policy process
with regime switching and form beliefs about regimes and money growth using
observations and Bayesian learning. With the driving process for money growth
rates parameterized using estimates from U.S. and Canadian data, quantitative
implications of the model for behaviors of exchange rates and other key
variables are examined. The findings are that inc lusion of learning by agents
contributes somewhat to the model's ability to account for persistence in
effects of money shocks on variables, provided that the shocks themselves are
persistent; inclusion of learning contributes little in accounting for business
cycle fluctuations and exchange rate variability; inclusion of a nonlinear
driving process for money growth rates is important for the model to account
for long swings in exchange rates; inclusion of learning adds only slightly to
the ability of the model to account for long swings. The importance of
nonlinearities in the driving process and the relative lack of importance of
learning are consistent with other findings in the literature of learning
effects in the face of regime switches.
(367 KB, 57 pages)
No abstract available.
(118 KB, 39 pages)
99-15 Dean Croushore and Tom Stark, "Does Data Vintage Matter for Forecasting?"
This paper illustrates the use of a real-time data set for
forecasting. The data set consists of vintages, or snapshots, of the major
macroeconomic data available at quarterly intervals in real time. The paper
explains the construction of the data set, examines the properties of several
of the variables in the data set across vintages, and shows how forecasts can
be affected by data revisions.
(710 KB, 48 pages)
The authors develop a
two-country, two-sector general equilibrium business cycle model with nominal
rigidities featuring deviations from the law of one price. The paper shows that
a model with these features can quantitatively account for the empirical fact
that of the statistical properties of most macroeconomic variables, only the
volatility of the real and nominal exchange rates has dramatically changed
after the fall of the Bretton Woods system. In particular, the authors
replicate some explicit nonstructural tests proposed in the literature with
simulated data from their artificial economy. The authors find that while the
variability of observed fundamentals (e.g., output, money supply, and interest
rates) is barely affected by the exchange rate regime, that of the exchange
rate increases substantially under flexible rates.
(378 KB, 34 pages)
99-17 Gwen Eudey and Roberto Perli, "Regime-Switching in Expectations Over the Business Cycle"
In this paper the authors argue that a plausible
reason why output and other major U.S. macroeconomic time series seem to follow
a Markov switching process might be strictly related to expectations. The
authors show that a time series of expectations of future output from the
Survey of Professional Forecasters is the only one among the many they analyze
that has switching properties compatible with those of output. Starting from
this empirical evidence the authors present a business cycle model with shocks
to expectations (sunspots) that produces time series with the same properties
as the U.S. data.
(516 KB, 29 pages)
In this paper, the authors
describe and compare two approaches to analyzing transactions costs in a
general equilibrium setting. In the first approach, which the authors label the
transactions costs approach, the commodity space is the same as that
used in models without transactions costs. In the second approach, which we
label the valuation equilibrium approach, the commodity space is chosen
so that the exchange problem can be formulated as an instance of the abstract
exchange model described in Debreu (1954). The authors argue that the valuation
equilibrium approach provides a tractable framework for quantitative studies of
the effects of transactions costs on economy-wide resource allocation.
(71 KB, 22 pages)
99-19 Theodore M. Crone, "Using State Indexes to Define Economic Regions in the U.S."
When regional economists study the interaction of multi-state regions in the U.S., they typically use the regional divisions developed by the U.S. Bureau of the Census or the Bureau of Economic Analysis (BEA). The current census divisions were adopted in 1910 and divide the states into nine regional groups for the presentation of data. Since the 1950s, the BEA has grouped the states into eight regions based primarily on cross-sectional similarities in their socioeconomic characteristics. The BEA definition of regions is perhaps the most frequently used grouping of states for economic analysis.
Since many economic studies of regions concentrate on similarities and differences in regional business cycles, it seems appropriate to group states into regions based on some common cyclical behavior. This paper explores the possibility of grouping states into regions based on common movements in state indexes of economic activity. These state indexes are variants of the coincident index developed by James Stock and Mark Watson for the U.S. economy.
The author has applied cluster analysis to the monthly
changes in these economic activity indexes to group the states into regions
with similar business cycles. He has identified six distinct regions consisting
of contiguous states with similar monthly changes in their economic activity
indexes.
(142 KB, 31 pages)
99-20 Kerk Phillips and Jeffrey Wrase, "Schumpeterian Growth and Endogenous Business Cycles"
This paper contains a dynamic general equilibrium model with an endogenous process for growth and business cycles driven partly by technological discovery and diffusion. The model integrates two branches of the literature. One is literature on Schumpeterian, or "quality ladder," models, in which growth is driven endogenously by attempts to innovate in order to capture monopoly rents and in which the focus is on low-frequency fluctuations in variables. The other is the real business cycle literature, in which the focus is on high-frequency fluctuations driven by exogenous productivity shocks. The model in this paper has Schumpeterian-style low-frequency fluctuations stemming from technological discovery in the form of random successes in endogenous research and development efforts. Diffusion of innovations in applied research into basic know-how, along with random shocks to productivity, drives high-frequency fluctuations. Properties of high- and low-frequency fluctuations in data d rawn from simulations of a parameterized version of the model are compared to like properties of data drawn from the postwar U.S. economy. The model accounts for key properties of actual data without heavy reliance on the exogenous, highly persistent, and volatile shocks to productivity typically used in real business cycle analysis.
This paper presents a real-time
data set that can be used by economists for testing the robustness of published
econometric results, for analyzing policy, and for forecasting. The data set
consists of vintages, or snapshots, of the major macroeconomic data available
at quarterly intervals in real time. The paper illustrates why such data may
matter, explains the construction of the data set, examines the properties of
several of the variables in the data set across vintages, and examines key
empirical papers in macroeconomics, investigating their robustness to different
vintages.
(1.0 MB, 56 pages)
The purpose of this paper is to provide a new framework to analyze the potential role of the federal tax treatment of housing in the patterns of metropolitan development. The framework the author uses to address the issue has a very different focus from that of the basic urban model. Following the work of Voith and Gyourko (1998), the author develops an equilibrium model of two communities, one of which has fixed boundaries and the other does not. The author calls the fixed boundary community the city and the unbounded community the suburb. Individuals in these communities are assumed to have similar systematic tastes over housing and community amenities, but they also have an idiosyncratic preference for either the city or the suburb. For a given individual, the relative attractiveness of the city and the suburbs depends on his or her idiosyncratic taste, the relative amenities of the city and suburbs, and the relative price. Community amenities are endogenously determined and ar e assumed to depend on the distribution of high and low income individuals. High concentrations of low income residents in a community potentially can adversely affect the attractiveness of the community. Within this framework, the author examines the residential choices of high and low income individuals with and without zoning constraints. Given these outcomes, the author evaluates the relative profitability of communities choosing exclusionary zoning or not by comparing the aggregate land values under both regimes.
In this framework, the author shows that housing-related
tax incentives are likely to create incentives for suburban communities to
enact exclusionary zoning. To the extent that these incentives actually result
in more exclusionary zoning, it reinforces the marginal effects on
decentralization and sorting that result from the tax code’s effects on
individuals’ choices regarding land consumption and residential location.
This is an important result because it suggests that the spatial and sorting
impact of the tax treatment of housing may be larger than its effects on
individuals’ choices of residential location and housing consumption
alone. In fact, under reasonable parameterizations, the tax incentives can
result in large changes in equilibrium land prices, community choices, and
community characteristics.
(127 KB, 49 pages)
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