Working Papers 2003: Abstracts
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Monetary policy research using time series methods
has been criticized for using more information than the Federal Reserve had
available in setting policy. To quantify the role of this criticism, the
authors propose a method to estimate a VAR with real-time data while accounting
for the latent nature of many economic variables, such as output. The authors'
estimated monetary policy shocks are closely correlated with a typically
estimated measure. The impulse response functions are broadly similar across
the methods. The authors' evidence suggests that the use of revised data in VAR
analyses of monetary policy shocks may not be a serious limitation.
(459 KB, 33 pages)
Is the stock market boom a result of the baby
boom? This paper develops an overlapping generations model in which a baby boom
is modeled as a high realization of a random birth rate, and the price of
capital is determined endogenously by a convex cost of adjustment. A baby boom
increases national saving and investment and thus causes an increase in the
price of capital. The price of capital is meanreverting so the initial increase
in the price of capital is followed by a decrease. Social Security can
potentially affect national saving and investment, though in the long run, it
does not affect the price of capital.
(485 KB, 33 pages)
03-3 Yaron Leitner, "Non-Exclusive
Contracts, Collateralized Trade, and a Theory of an Exchange"
Superseded by Working Paper 10-28.
The existing literature on the stabilizing properties of
interest-rate feedback rules has stressed the perils of linking interest rates
to forecasts of future inflation. Such rules have been found to give rise to
aggregate fluctuations due to self-fulfilling expectations. In response to this
concern, a growing literature has focused on the stabilizing properties of
interest-rate rules whereby the central bank responds to a measure of past
inflation. The consensus view that has emerged is that backward-looking rules
contribute to protecting the economy from embarking on expectations-driven
fluctuations. A common characteristic of the existing studies that arrive at
this conclusion is their focus on local analysis. The contribution of this
paper is to conduct a more global analysis. The authors find that
backward-looking interest-rate feedback rules do not guarantee uniqueness of
equilibrium. They present examples in which for plausible parameterizations
attracting equilibrium cycles exist. The paper also contributes to the quest
for policy rules that guarantee macroeconomic stability globally. The authors'
analysis indicates that policy rules whereby the interest rate is set as a
function of the past interest rate and current inflation are likely to ensure
global stability provided that the coefficient on lagged interest rates is
greater than unity.
(665 KB, 42 pages)
03-5 Gerald A. Carlino and Robert H. DeFina, "How Strong Is Co-Movement in Employment Over the Business Cycle? Evidence from State/Industry Data"
This study measures the
extent of co-movement in employment across states and industries at
business-cycle frequencies. The strength of co-movement is quantified using the
bi-variate and multi-variate measures of cohesion developed in Crous, Forni,
and Reichlin (2001). The data indicate that cohesion is generally positive for
the state/industry pairs, although the distribution masses around a relatively
low value. The results suggest that cohesion has risen over time and that
cohesion increases with spatial aggregation. Evidence is presented revealing
that the measured degree of co-movement is sensitive to the chosen periodicity
of the data and that there is much greater cohesion across states for a given
industry than across different industries within a state. An investigation into
the sources of cross-state variation in cohesion reveals that important
determinants include the strength of input-output linkages within each state,
the different effects of monetary policy actions on each state's employment,
and the degree of industrial diversity within a state. No state-level support
is found for Shea's (1996) hypothesis that industries that locate together
co-move to a greater extent than do those that are more spatially diffused.
(350 KB, 31 pages)
03-6 Eric J. Higgins and Joseph R. Mason, "What Is the Value of Recourse to Asset Backed Securities? A Clinical Study of Credit Card Banks"
The present paper uses data
from revolving credit card securitizations to show that, conditional on being
in a position where implicit recourse has become necessary and actually
providing that recourse, recourse to securitized debt may benefit short- and
long-term stock returns, and long-term operating performance of sponsors. The
paper suggests that this result may come about because those sponsors providing
the recourse do not seem to be extreme default or insolvency risks. However,
sponsors providing recourse do experience an abnormal delay in their normal
issuance cycle around the event. Hence, it appears that the asset-backed
securities market is like the commercial paper market, where a firm's ability
to issue is directly correlated with credit quality. Therefore, although in
violation of regulatory guidelines and FASB140, recourse may have beneficial
effects for sponsors by revealing that the shocks that made recourse necessary
are transitory.
(1.51 MB, 48 pages)
03-7 Charles W. Calomiris and Joseph R. Mason, "Credit Card Securitization and Regulatory Arbitrage"
This paper explores the motivations and desirability of
off-balance-sheet financing of credit card receivables by banks. The authors
explore three related issues: the degree to which securitizations result in the
transfer of risk out of the originating bank, the extent to which
securitization permits banks to economize on capital by avoiding regulatory
minimum capital requirements, and whether banks' avoidance of minimum capital
regulation through securitization with implicit recourse has been undesirable
from a regulatory standpoint. The authors show that this intermediation
structure could be motivated either by desirable efficient contracting in the
presence of asymmetric information or by undesirable safety net abuse. They
find that securitization results in some transfer of risk out of the
originating bank but that risk remains in the securitizing bank as a result of
implicit recourse. Clearly, then, securitization with implicit recourse
provides an important means of avoiding minimum capital requirements. The
authors also find, however, that securitizing banks set their capital relative
to managed assets according to market perceptions of their risk and seem not to
be motivated by maximizing implicit subsidies relating to the government safety
net when managing their risk. Thus, the evidence is more consistent with the
efficient contracting view of securitization with implicit recourse than with
the safety net abuse view. Concerns expressed by policymakers about this form
of capital requirement avoidance appear to be overstated.
(458 KB, 36 pages)
03-8 Dean Croushore, "A Short-Term Model of the Fed's Portfolio Choice"
What would happen if the
Federal Reserve were to change the assets in its portfolio? Suppose that
instead of using open-market operations in Treasury securities to increase the
monetary base, the Fed were to engage in open-market operations in private
securities or to use discount loans via a mechanism that allowed banks to
borrow as much as they would like at a fixed discount rate. The analysis in
this paper shows the impact on the economy in a static general-equilibrium
model. This model follows Santomero (1983), adapted to evaluate a change in the
Fed’s portfolio and how that affects the economy’s general
equilibrium at a point in time. The nature of the exercise done here is
completely static in nature and does not evaluate the economy’s response
to a disappearance of government debt, analysis of which would require a more
complete model that’s dynamic in nature and incorporates real effects. The
present model focuses on the more narrow issue of the direction of portfolio
changes with no real-side economic effects. But the model is general
equilibrium in nature and thus performs a reasonable comparative-static
exercise. In what follows, the author first describes the model in Section I.
Next, the author models a situation in which the Fed changes its portfolio in
such a way as to keep the interest rate on deposits from changing (Section II).
Section III generates results under a special set of assumptions that lock most
interest rates together. Section IV attempts to generalize the results to a
situation in which the monetary base is unchanged. Section V summarizes the
results.
(452 KB, 33 pages)
03-9 Joseph Gyourko and Albert Saiz "Urban Decline and Housing Reinvestment: The Role of Construction Costs and the Supply Side"
Negative demand shocks have afflicted many
American cities in the 20th century and are the main explanation for their
decaying housing markets. But what is the role of housing supply? Rational
entrepreneurs should not invest in new buildings and renovation when home
values are below replacement cost. Households with an investment motive should
behave similarly. Empirically, the authors find that construction costs are not
very sensitive to building activity but do vary with local income, unionization
rates in the construction sector, the level of local regulation, and region.
They also document that the variance in building costs generates substantial
variance in renovation expenditures across cities. Owner-occupied homes with
market values below replacement costs spend about 50 percent less on renovation
than similar homes with market values above construction costs. The authors
also report on the distribution of the ratio of house value-to-construction
cost across markets. The distribution is relatively flat in a number of
declining cities, especially older manufacturing areas. In these places, a
relatively modest 10 percent decline in replacement costs would find between
7-15 percent of the local housing stock moving from being valued below cost to
above cost. Even though modest declines in construction costs are unlikely to
change basic urban trends, the authors' results suggest they can be an
important factor in determining whether various neighborhoods in declining
cities will experience any significant reinvestment. In this respect, declining
cities truly cannot afford to be expensive cities in terms of replacement
costs: urban scholars and policy makers should begin to pay more attention to
the cost side of cities.
(947 KB, 56 pages)
03-10 Robert M. Hunt, "An Introduction to the Economics of Payment Card Networks"
Open payment card networks typically coordinate the activities of
thousands of financial institutions that issue cards, millions of retail
locations that accept them, and several hundred million consumers that use
them. This coordination can include the collective setting of certain prices
and other controversial network rules. Such practices have recently come under
the scrutiny of antitrust authorities in the U.S. and abroad. This paper
provides a brief overview of the economics of the payment card industry,
explaining some of the differences from the textbook model of competitive
markets. Such differences are important factors for the antitrust analysis of
payment card networks.
(483 KB, 22 pages)
03-11 F.M. Scherer, "A Note on Global Welfare in Pharmaceutical Patenting"
This paper revisits the question of whether global welfare is
higher under a uniform world-wide system of pharmaceutical product patents or
with international rules allowing low-income nations to free-ride on the
discoveries of firms in rich nations. Key variables include the extent to which
free-riding reduces the discovery of new drugs, the rent potential of rich as
compared to poor nations, the ratio of the marginal utility of income in poor
as compared to rich nations, and the competitive environment within which
R&D decisions are made. Global welfare is found to be higher with
free-riding over plausible discovery impairment and income utility
combinations, especially when rent-seeking behavior leads to an expansion of
R&D outlays exhausting appropriable rents.
(220 KB, 19 pages)
03-12 Albert Saiz, "Immigration and Housing Rents in American Cities"
Is there a local
economic impact of immigration? Immigration pushes up rents and housing values
in destination cities. The positive association of rent growth and immigrant
inflows is pervasive in time series for all metropolitan areas. The author uses
instrumental variables based on a “shift-share” of national levels of
immigration into metropolitan areas. Conditioning on other variables, an
immigration inflow equal to 1 percent of the city population is associated with
increases in rents and housing values of about 1 percent. The results suggest
an economic impact that is an order of magnitude bigger than that found on
labor markets.
(1.03 MB, 49 pages)
03-13 Loretta J. Mester, "Applying Efficiency Measurement Techniques to Central Banks"
This paper reviews the standard techniques of efficiency
measurement, discusses some of the issues that arise in applying these standard
techniques to central banks, and reviews some of the literature that has
attempted to apply these techniques to central banking. The uniqueness of some
of the activities of central banking, the difficulty in measuring some of the
central banking outputs, and the complicated and multiple objectives pursued by
central banks makes application of the standard techniques problematic.
However, certain central bank activities do lend themselves to efficiency
measurement, e.g., payment services provision.
(330 KB, 40 pages)
03-14 Wenli Li and Pierre-Daniel Sarte, "The Macroeconomics of U.S. Consumer Bankruptcy Choice: Chapter 7 or Chapter 13?"
Because of the recent surge in U.S. personal
defaults, Congress is currently debating bankruptcy reform legislation
requiring a means test for Chapter 7 filers. This paper explores the effects of
such a reform in a model where, in contrast to previous work, bankruptcy
options and production are explicitly taken into account. The authors' findings
indicate that means testing would not improve upon current bankruptcy
provisions and, at best, leaves aggregate filings, output, and welfare
unchanged. Put simply, given already existing provisions, the introduction of
an efficient means test would not bind. However, we do find that a tightening
of existing bankruptcy laws, in the form of lower Chapter 7 asset exemptions,
can be welfare improving. Contrary to previous studies, the analysis also
suggests that eliminating bankruptcy entirely would cause significant declines
in both output and welfare.
(401 KB, 39 pages)
03-15 Wenli Li and Pierre-Daniel Sarte, "Growth Effects of Progressive Taxes"
The authors study the effects of progressive taxes in conventional
endogenous growth models augmented to include heterogeneous households. In
contrast to representative agent models with flat-rate taxes, this framework
allows us to distinguish between marginal tax rates and the empirical proxies
that are typically used for these rates such as the share of tax revenue, or
government expenditures, in GDP. The analysis then illustrates how the
endogenous nature of these proxy variables causes them to be weakly correlated,
or even increase, with economic growth. This study, therefore, helps explain
why cross-country regressions have mostly failed to uncover the distortional
growth effects of taxes. In fact, while past U.S. tax reforms appear to have
contributed only small increases in per capita GDP growth, the authors'
analysis nevertheless suggests that differences in tax codes across countries
explain a two and a half percent variation in cross-sectional growth rates.
Finally, the authors show that progressivity also introduces significant lags
in the effects of tax changes on output growth.
(586 KB, 41 pages)
03-16 David Humphrey, Magnus Willesson, Göran Bergendahl, and Ted Lindblom, "Cost Savings From Electronic Payments and ATMs in Europe"
Electronic
payments are considerably cheaper than their paper-based alternatives.
Similarly, ATMs are a more cost-efficient way to deliver certain depositor
services than are branch offices. As the share of electronic payments in 12
European countries rose from 0.43 in 1987 to 0.79 in 1999 and ATMs expanded
while the number of branch offices was constant, bank operating costs are
estimated to be $32 billion lower than they otherwise might have been, saving
0.38% of the 12 nations’ GDP. The authors' results are robust to the form
of cost function estimated—composite, Fourier, or translog.
(417 KB, 29 pages)
03-17/R James Bessen and Robert M. Hunt, "An Empirical Look At Software Patents"
U.S. legal
changes have made it easier to obtain patents on inventions that use software.
Software patents have grown rapidly and now comprise 15 percent of all patents.
They are acquired primarily by large manufacturing firms in industries known
for strategic patenting; only 5 percent belong to software publishers. The very
large increase in software patent propensity over time is not adequately
explained by changes in R&D; investments, employment of computer
programmers, or productivity growth. The residual increase in patent propensity
is consistent with a sizable rise in the cost effectiveness of software patents
during the 1990s. We find evidence that software patents substitute for R&D
at the firm level; they are associated with lower R&D intensity. This
result occurs primarily in industries known for strategic patenting and is
difficult to reconcile with the traditional incentive theory of patents.
(356 KB, 54 pages)
03-18 Gerald Carlino, Robert DeFina, and Keith Sill, "Postwar Period Changes in Employment Volatility: New Evidence from State/Industry Panel Data"
Many recent studies have identified a decline in the volatility of U.S. real output over the last half century. This study examines a less discussed and analyzed trend, but one as significant as the drop in output volatility, namely a substantial decline in employment volatility during the postwar period. Using a new panel data set covering industry employment by state since 1952, the authors find that a large decline in employment growth volatility began in the early 1950s and largely ended by the mid- to late 1960s. This study also illuminates the geographical dimension of the declines, an aspect that has heretofore been unexamined. The data indicate that all states have shared in the volatility decline, although the magnitudes have differed.
A pooled cross-section/time-series model indicates that
fluctuations in statespecific (state level differences in demographic and
industrial composition) and macro variables (e.g., changes in monetary policy
regimes) have each played a potentially substantial role in explaining
volatility trends. The authors find that state-specific forces account for
between 1 percent and 24 percent of the variations in employment volatility
across time and space. Macro variables account for between 30 percent and 76
percent of the movements in employment volatility, a range broadly consistent
with the findings of Stock and Watson (2002). An important finding of this
study is that “unknown forms of good luck,” in the form of smaller
shocks to employment, account for between 1 percent and 10 percent of the
observed fluctuations. This latter finding suggests a reduced role for unknown
forms of good luck in describing the postwar decline in volatility compared to
the findings in Stock and Watson’s (2002) analysis of the variance of real
output growth.
(289 KB, 38 pages)
03-19 Giancarlo Corsetti, Luca Dedola, and Sylvain Leduc, "International Risk-Sharing and the Transmission of Productivity Shocks"
A central puzzle in
international finance is that real exchange rates are volatile and, in stark
contradiction to efficient risk-sharing, negatively correlated with relative
consumptions across countries. This paper shows that a model with incomplete
markets and a low price elasticity of imports can account for these properties
of real exchange rates. The low price elasticity stems from introducing
distribution services, which drive a wedge between producer and consumer prices
and lowers the impact of terms-of-trade changes on optimal agents’
decisions. In the authors' model, two very different patterns of the
international transmission of productivity shocks generate the observed degree
of risk-sharing: one associated with an improvement, the other with a worsening
of the country’s terms of trade and real exchange rate. The authors
provide VAR evidence on the effect of technology shocks to U.S. manufacturing,
identified through long-run restrictions, in support of the first transmission
pattern. These findings are at odds with the presumption that terms-of-trade
movements foster international risk-pooling.
(547 KB, 50 pages)
03-20 Satyajit Chatterjee and Dean
Corbae, "On the Welfare Gains of Eliminating a Small Likelihood of Economic
Crises: A Case for Stabilization Policies?"
This paper is superseded by Working Paper 06-18
(684 KB, 29 pages)
03-21 John P. Caskey, "The Evolution of the Philadelphia Stock Exchange: 1964-2002"
This paper
analyzes the evolution of the Philadelphia Stock Exchange (PHLX),
America’s oldest stock exchange, from 1964 through 2002. The paper seeks
to explain how the PHLX managed to attract a sufficient volume of trading
orders to support its members and cover its operating costs during this period,
and how it adapted to survive in an era with profound changes in the structure
of securities markets.
(969 KB, 70 pages)
03-22/R Sylvain Leduc and Keith Sill, "Monetary Policy, Oil Shocks, and TFP: Accounting for the Decline in U.S. Volatility"
The volatility of the U.S. economy since the
mid-1980s is much lower than it was during the prior 20-year period. The
proximate causes of the increased stability and their relative importance
remain unsettled, but the sharpness of the volatility decline and its timing
has led authors such as Taylor (2000) to argue that a sudden shift in monetary
policy is a prime candidate. The authors assess this claim using a calibrated
stochastic dynamic general equilibrium model to quantify the contribution of
monetary policy and exogenous shocks to the postwar volatility pattern for U.S.
output. Their principal finding is that the change in monetary policy played a
relatively small role in the postwar volatility decline, accounting for 10 to
15 percent of the drop in real output volatility. The model attributes most of
the output volatility decline to smaller TFP shocks: oil shocks end up
increasing volatility in the post-84 period relative to the pre-79 period.
Negative oil shocks do lead to significant downturns in real output in the
model, but the pattern of exogenous shocks post-84 is not different enough from
the pre-79 pattern to play a meaningful role in lowering output
volatility.
(454 KB, 43 pages)
03-23 Theodore M. Crone, "An Alternative Definition of Economic Regions in the U.S. Based on Similarities in State Business Cycles"
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 author applies 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, the author determines
the relative strength of cohesion among the states in the various regions.
Finally, the author compares the regions defined in this paper with the BEA
regions.
(789 KB, 36 pages)
03-24 Satyajit Chatterjee, "On the Contribution of Agglomeration Economies to the Spatial Concentration of U.S. Employment"
Why does the level of economic activity vary
so much across space? One reason given is “agglomeration economies,”
meaning that a firm’s or household’s production costs (of market and
home goods, respectively) are lower when production is carried out in close
proximity to other firms and households. In this paper the author explores, via
a quantitative spatial macroeconomic model, the contribution of agglomeration
economies to the observed spatial concentration of U.S. employment. The approach
is analogous to “business-cycle accounting” or “growth
accounting.” The results of the “spatial accounting” performed
in this study depend on the details of the model used. The critical detail
pertains to how the model rationalizes the stability of low density localities.
If it is rationalized via an appeal to restrictions on labor mobility, the
accounting implies that the bulk of spatial concentration results from an
unequal distribution of natural advantages. In contrast, if it is rationalized
via an agglomeration threshold (an employment level below which local
increasing returns do not operate), the accounting implies that the bulk of the
spatial concentration results from increasing returns.
(937 KB, 41 pages)
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