The views expressed in these papers are solely those of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of Philadelphia or Federal Reserve System.

06-22: Immigration and the Neighborhood by Albert Saiz and Susan Wachter

What impact does immigration have on neighborhood dynamics? Within metropolitan areas, the authors find that housing values have grown relatively more slowly in neighborhoods of immigrant settlement. They propose three nonexclusive explanations: changes in housing quality, reverse causality, or the hypothesis that natives find immigrant neighbors relatively less attractive (native flight). To instrument for the actual number of new immigrants, the authors deploy a geographic diffusion model that predicts the number of new immigrants in a neighborhood using lagged densities of the foreign-born in surrounding neighborhoods. Subject to the validity of their instruments, the evidence is consistent with a causal interpretation of an impact from growing immigration density to native flight and relatively slower housing price appreciation. Further evidence indicates that these results may be driven more by the demand for residential segregation based on race and education than by foreignness per se.

06-21: Owning Versus Leasing: Do Courts Matter? by Pablo Casas-Arce and Albert Saiz

The authors develop a legal contract enforcement theory of the own versus lease decision. The allocation of ownership rights will minimize enforcement costs when the legal system is inefficient. In particular, when legal enforcement of contracts is costly, there will be a shift from arrangements that rely on such enforcement (such as a rental agreement) toward other forms that do not (such as direct ownership). The authors then test this prediction and show that costly enforcement of rental contracts hampers the development of the rental housing market in a cross-section of countries. They argue that this association is not the result of reverse causation from a developed rental market to more investor-protective enforcement and is not driven by alternative institutional channels. The results provide supportive evidence on the importance of legal contract enforcement for market development and the optimal allocation of property rights.

06-20: A Quantitative Assessment of the Role of Agglomeration Economies in the Spatial Concentration of U.S. Employment by Satyajit Chatterjee

This paper seeks to quantify the contribution of agglomeration economies to the spatial concentration of U.S. employment. A spatial macroeconomic model with heterogeneous localities and agglomeration economies is developed and calibrated to U.S. data on the spatial distribution of employment. The model is used to answer the question: By how much would the spatial concentration of employment decline if agglomeration economies were counterfactually suppressed? For the most plausible calibration, the answer is about 48 percent. More generally, the general equilibrium contribution of agglomeration economies appears to be substantial, with empirically defensible calibrations yielding estimates between 40 and 60 percent.

06-19: An Evaluation of Inflation Forecasts from Surveys Using Real-Time Data by Dean Croushore

This paper carries out the task of evaluating inflation forecasts from the Livingston Survey and the Survey of Professional Forecasters, using the real-time data set for macroeconomists as a source of real-time data. The author examines the magnitude and patterns of revisions to the inflation rate based on the output price index and describe what data to use as “actuals” in evaluating forecasts. The author then runs tests on the forecasts from the surveys to see how good they are, using a variety of actuals. The author finds that much of the empirical work from 20 years ago was a misleading guide to the quality of forecasts because of unique events during the earlier sample period. Repeating that empirical work over a longer sample period shows no bias or other problems in the forecasts. The use of real-time data also matters for some key tests on some variables. If a forecaster had used the empirical results from the late 1970s and early 1980s to adjust survey forecasts of inflation, forecast errors would have increased substantially.

06-18: On the Aggregate Welfare Cost of Great Depression Unemployment by Satyajit Chatterjee and Dean Corbae

The potential benefit of policies that eliminate a small likelihood of economic crises is calculated. An economic crisis is defined as an increase in unemployment of the magnitude observed during the Great Depression. For the U.S., the maximum-likelihood estimate of entering a depression is found to be about once every 83 years. The welfare gain from setting this small probability to zero can range between 1 and 7 percent of annual consumption in perpetuity. For most estimates, more than half of these large gains result from a reduction in individual consumption volatility.

Revision forthcoming in the Journal of Monetary Economics.
This paper supersedes Working Paper 03-20.

06-17: The Cyclicality of Job Loss and Hiring by Shigeru Fujita and Garey Ramey

The authors study the cyclical behavior of job loss and hiring using CPS worker flow data, adjusted for margin error and time aggregation error. The band pass filter is used to isolate cyclical components. They consider both total worker flows and transition hazard rates within a united framework. Their results provide overwhelming support for a "separation-driven" view of employment adjustment, whereby total job loss and hiring rise sharply during economic downturns, initiated by increases in the job loss hazard rate. Worker flows and transition hazard rates are highly volatile at business cycle frequencies. These patterns are especially strong among prime-age workers. For young workers, job loss and hiring adjust procyclically due to movements into and out of the labor force.

06-16/R: A Tale of Two States: Maharashtra and West Bengal by Amartya Lahiri and Kei-Mu Yi

In this paper the authors study the decline of West Bengal relative to Maharashtra, historically two of the most important states of India. In 1960, West Bengal's per capita income exceeded that of Maharashtra, the third richest state at the time. By 1993, it had fallen to just 69 percent of Maharashtra's per capita income. They employ a "wedge" methodology based on the first order conditions of a multi-sector neoclassical growth model to ascertain the output and factor market sources of the divergent economic performances. The authors' diagnostic analysis reveals that a large part of West Bengal's development woes can be attributed to: (a) low sectoral productivity, especially in manufacturing and services; and (b) sectoral misallocation in labor markets between the manufacturing sector and the other sectors of the economy. The authors also present evidence on the labor market, the manufacturing sector, and public infrastructure that suggests a systematic worsening of the business environment in West Bengal during this period.

06-15: Capitalization of the Quality of Local Public Schools: What Do Home Buyers Value? by Theodore M. Crone

The expansion of state-mandated tests in the 1990s and the testing requirements of the No Child Left Behind Act have supplied researchers with an abundance of data on test scores that can be used as measures of school quality. This paper uses the state-mandated test scores for 5th grade and 11th grade in Montgomery County, Pennsylvania, to examine three issues about the capitalization of school quality into house prices: (1) At what level do prospective home buyers evaluate the quality of local public education — at the district level or the level of the neighborhood school? (2) After accounting for student achievement as reflected in test scores, are other aspects of the local public school system, such as class size or expenditures, capitalized into the value of a house? (3) Are the positive results we get for the capitalization of school quality into house prices due simply to the correlation between high test scores and other desirable neighborhood characteristics? The results of our investigation suggest that to home buyers some test-score averages are significantly better indicators of the quality of the local public school system than others. In particular, home buyers seem to evaluate the quality of public education at the district level rather than at the level of the local school. Class size at the high-school level has some independent effect on house prices, but not class size at the elementary school level. And once we account for student achievement, expenditures per pupil have no further effect on house prices. Finally, restricting our sample to similar neighborhoods along school district boundaries confirms our earlier results for high school test scores but not for elementary school scores.

06-14: Urban Density and the Rate of Invention by Gerald Carlino, Satyajit Chatterjee, and Robert Hunt

Economists, beginning with Alfred Marshall, have studied the significance of cities in the production and exploitation of information externalities that, today, we call knowledge spillovers. This paper presents robust evidence of those effects. We show that patent intensity — the per capita invention rate — is positively related to the density of employment in the highly urbanized portion of MAs. All else equal, a city with twice the employment density (jobs per square mile) of another city will exhibit a patent intensity (patents per capita) that is 20 percent higher. Patent intensity is maximized at an employment density of about 2,200 jobs per square mile. A city with a more competitive market structure or one that is not too large (a population less than 1 million) will also have a higher patent intensity. These findings confirm the widely held view that the nation’s densest locations play an important role in creating the flow of ideas that generate innovation and growth.

This paper supersedes Working Paper 04-16/R.

06-13:  Job Matching and Propagation by Shigeru Fujita and Garey Ramey

In the U.S. labor market, the vacancy-unemployment ratio and employment react sluggishly to productivity shocks. The authors show that the job matching model in its standard form cannot reproduce these patterns due to excessively rapid vacancy responses. Extending the model to incorporate sunk costs for vacancy creation yields highly realistic dynamics. Creation costs induce entrant firms to smooth the adjustment of new openings following a shock, leading the stock of vacancies to react sluggishly.

06-12: Monetary and Financial Forces in the Great Depression by Satyajit Chatterjee and Dean Corbae

What caused the worldwide collapse in output from 1929 to 1933? Why was the recovery from the trough of 1933 so protracted for the U.S.? How costly was the decline in terms of welfare? Was the decline preventable? These are some of the questions that have motivated economists to study the Great Depression. In this paper, the authors review some of the economic literature that attempts to answer these questions.

06-11: National Income Accounts by Leonard I. Nakamura

This article presents a brief overview of the national income accounts. It summarizes the main parts of accounts and situates them within the efforts of economists to quantify economic activity and economic well-being. The author argues that these statistics are necessarily provisional and imperfect but nevertheless extremely useful. Some current directions for economic research seeking to extend the accounts are also discussed.

06-10: Labor Supply and Personal Computer Adoption by Mark Doms and Ethan Lewis

The positive correlations found between computer use and human capital are often interpreted as evidence that the adoption of computers has raised the relative demand for skilled labor, the widely touted skill-biased technological change hypothesis. However, several models argue that the skill intensity of technology is endogenously determined by the relative supply of skilled labor. The authors use instruments for the supply of human capital coupled with a rich data set on computer usage by businesses to show that the supply of human capital is an important determinant of the adoption of personal computers. Their results suggest that great caution must be exercised in placing economic interpretations on the correlations often found between technology and human capital.

06-9: Nontraded Goods, Market Segmentation, and Exchange Rates by Michael Dotsey and Margarida Duarte 

Empirical evidence suggests that movements in international relative prices (such as the real exchange rate) are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect behind international relative price movements. In this paper we show that nontraded goods have important implications for exchange rate behavior, even though fluctuations in the relative price of nontraded goods account for a relatively small fraction of real exchange rate movements. In our quantitative study nontraded goods magnify the volatility of exchange rates when compared to the model without nontraded goods. Cross-country correlations and the correlation of exchange rates with other macro variables are closer in line with the data. In addition, contrary to a large literature, standard alternative assumptions about the currency in which firms price their goods are virtually inconsequential for the properties of aggregate variables in our model, other than the terms of trade.

06-8: A Phillips Curve with an Ss Foundation by Mark Gertler and John Leahy

The authors develop an analytically tractable Phillips curve based on state-dependent pricing. They differ from the existing literature by considering a local approximation around a zero inflation steady state and introducing idiosyncratic shocks. The resulting Phillips curve is a simple variation of the conventional time-dependent Calvo formulation but with some important differences. First, the model is able to match the micro evidence on both the magnitude and timing of price adjustments. Second, holding constant the frequency of price adjustment, our state-dependent model exhibits greater flexibility in the aggregate price level than does the time-dependent model. On the other hand, with real rigidities present, our state-dependent pricing framework can exhibit considerable nominal stickiness, of the same order of magnitude suggested by a conventional time-dependent model.

06-7: The CPI for Rents: A Case of Understated Inflation by Theodore M. Crone, Leonard I. Nakamura, and Richard Voith

Superseded by Working Paper 08-28

06-6: When Do More Patents Reduce R&D? by Robert M. Hunt

This paper develops a simple duopoly model in which investments in R&D and patents are inputs in the production of firm rents. Patents are necessary to appropriate the returns to the firm’s own R&D, but patents also create potential claims against the rents of rival firms. Analysis of the model reveals a general necessary condition for the existence of a positive correlation between the firm’s R&D intensity and the number of patents it obtains. When that condition is violated, changes in exogenous parameters that induce an increase in firms’ patenting can also induce a decline in R&D intensity. Such a negative relationship is more likely when (1) there is sufficient overlap in firms’ technologies so that each firm’s inventions are likely to infringe the patents of another firm, (2) firms are sufficiently R&D intensive, and (3) patents are cheap relative to both the cost of R&D and the value of final output.

06-5: Bayesian Analysis of DSGE Models by Sungbae An and Frank Schorfheide

This paper reviews Bayesian methods that have been developed in recent years to estimate and evaluate dynamic stochastic general equilibrium (DSGE) models. The authors consider the estimation of linearized DSGE models, the evaluation of models based on Bayesian model checking, posterior odds comparisons, and comparisons to vector autoregressions, as well as the nonlinear estimation based on a second-order accurate model solution. These methods are applied to data generated from correctly specified and misspecified linearized DSGE models, and a DSGE model that was solved with a second-order perturbation method.

06-4: Monetary Policy Analysis with Potentially Misspecified Models by Marco Del Negro and Frank Schorfheide

The paper proposes a novel method for conducting policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models and applies it to a New Keynesian DSGE model along the lines of Christiano, Eichenbaum, and Evans (JPE2005) and Smets and Wouters (JEEA2003). The authors first quantify the degree of model misspecification and then illustrate its implications for the performance of different interest-rate feedback rules. The authors find that many of the prescriptions derived from the DSGE model are robust to model misspecification.

06-3: Non-Stationary Hours in a DSGE Model by Yongsung Chang, Taeyoung Doh, and Frank Schorfheide

The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods the authors estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. The authors find that the data support the latter specification.

06-2: Predatory Lending in a Rational World by Philip Bond, David K. Musto, and Bilge Yilmaz

Regulators express growing concern over “predatory lending,” which the authors take to mean lending that reduces the expected utility of borrowers. The authors present a rational model of consumer credit in which such lending is possible, and identify the circumstances in which it arises with and without competition. Predatory lending is associated with imperfect competition, highly collateralized loans, and poorly informed borrowers. Under most circumstances competition among lenders eliminates predatory lending.

06-1: Macroeconomic Volatility and the Equity Premium by Keith Sill

Recent empirical work documents a decline in the U.S. equity premium and a decline in the standard deviation of real output growth. The author investigates the link between aggregate risk and the asset returns in a dynamic production based asset-pricing model. When calibrated to match asset return moments, the model implies that the post-1984 reduction in TFP shock volatility of 60 percent gives rise to a 40 percent decline in the equity premium. Lower macroeconomic risk post-1984 can account for a substantial fraction of the decline in the equity premium.