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Working Paper Archives

Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.

The Closing of a Major Airport: Immediate and Longer-Term Housing Market Effects

The closing of a busy airport has large effects on noise and economic activity. Using a unique dataset, we examine the effects of closing Denver’s Stapleton Airport on nearby housing markets. We find evidence of immediate anticipatory price effects upon announcement, but no price changes at closing and little evidence of upward trending prices between announcement and closing. However, after airport closure, more higher income and fewer black households moved into these locations, and developers built higher quality houses. Finally, post-closing, these demographic and housing stock changes had substantial effects on housing prices, even after restricting the sample to sales of pre-existing housing.

The Determination of Public Debt under both Aggregate and Idiosyncratic Uncertainty

We use an analytically tractable model to show that the Ramsey planner's decisions to finance stochastic public expenditures under uninsurable idiosyncratic risk implies a departure from tax smoothing. In the absence of state-contingent bonds the government's attempt to balance the competing incentives between tax smoothing and individual consumption smoothing---even at the cost of extra tax distortion---implies a bounded stochastic unit root component in optimal taxes. Nonetheless, a sufficiently high average level of public debt to support individuals’ self-insurance position is welfare improving, consistent with the strictly positive quantity of government debt observed throughout human history.

Predicting Benchmarked US State Employment Data in Real Time

US payroll employment data come from a survey and are subject to revisions. While revisions are generally small at the national level, they can be large enough at the state level to alter assessments of current economic conditions. Users must therefore exercise caution in interpreting state employment data until they are “benchmarked” against administrative data 5–16 months after the reference period. This paper develops a state-space model that predicts benchmarked state employment data in real time. The model has two distinct features: 1) an explicit model of the data revision process and 2) a dynamic factor model that incorporates real-time information from other state-level labor market indicators. We find that the model reduces the average size of benchmark revisions by about 11 percent. When we optimally average the model’s predictions with those of existing models, the model reduces the average size of the revisions by about 14 percent.

Policy Interventions in Sovereign Debt Restructurings

The wave of sovereign defaults in the early 1980s and the string of debt crises in the decades that followed have fostered proposals involving policy interventions in sovereign debt restructurings. A key question about these proposals that has proved hard to handle is how they in influence the behavior of creditors and debtors. We address such challenge by incorporating these policy proposals into a quantitative model in the tradition of Eaton and Gersovitz (1981) that includes renegotiation in sovereign debt restructurings. Critically, the model also endogenizes the choice of debt maturity, an essential aspect of sovereign defaults and restructurings. We evaluate several policy interventions, and we identify the crucial features that matter to improve the outcome of distressed debt restructurings and reduce the frequency of debt distress events.

A Theory of Economic Unions: A Comment

Gino Gancia, Giacomo Ponzetto and Jaume Ventura have written an extremely interesting paper on a topic that is very timely for the global economy. In this article, I will first argue that GPV have succeeded in formalizing their hypothesis, and that while providing very suggestive analytical results, additional work can and should be done with the model, especially with regards to relative changes in the relative weights of incumbent countries. Second, I will comment on the potential insights if the rest of the world is modeled more realistically. Third, I will call for extending the baseline model to incorporate additional aspects beyond trade, such as investment and immigration flows, which appear to be relevant for the story of the European Union and its discontents. Four, I will add my non-European perspective on using the model to understand the story of the European Union.

Tax Progressivity, Economic Booms, and Trickle-Up Economics

We propose a method to decompose changes in the tax structure into orthogonal components measuring the level and progressivity of taxes. The level shock is similar to tax shocks found in the empirical literature--increasing the tax level is contractionary. On the other hand, an increase in tax progressivity is expansionary. When tax progressivity increases, the bottom of the income distribution experiences an increase in disposable income. Agents at the low end of the income distribution who have high marginal propensity to consume offset the decrease in consumption by the savers at the high end of the income distribution. In the medium term, the economic expansion benefits those at the top of the income distribution: Capital gains they experience from the boom offset income losses from the increase in tax progressivity. The net result is that an increase in progressivity leads to an increase in income inequality, contrary to what conventional wisdom might suggest. We interpret these results as evidence in favor of trickle up, not trickle down, economics.

Crises in the Housing Market: Causes, Consequences, and Policy Lessons

The global financial crisis of the past decade has shaken the research and policy worlds out of their belief that housing markets are mostly benign and immaterial for understanding economic cycles. Instead, a growing consensus recognizes the central role that housing plays in shaping economic activity, particularly during large boom and bust episodes. This article discusses the latest research regarding the causes, consequences, and policy implications of housing crises with a broad focus that includes empirical and structural analysis, insights from the 2000's experience in the United States, and perspectives from around the globe. Even with the significant degree of heterogeneity in legal environments, institutions, and economic fundamentals over time and across countries, several common themes emerge to guide current and future thinking in this area.

MoNK: Mortgages in a New-Keynesian Model

There has been much interest recently in the role of household long-term, mortgage, debt in the transmission of monetary policy. This paper offers a tractable framework that integrates the long-term debt channel with the standard New-Keynesian channel, providing a tool for monetary policy analysis that reflects the recent debates in the literature. As the model includes both short- and long-term debt, it provides a useful laboratory for the analysis of monetary policy operating not only through short-term actions, as has been done traditionally in the literature, but also through expected, persistent, changes in its stance.

International Technology Licensing, Intellectual Property Rights, and Tax Havens

This paper investigates the determinants of international technology licensing using data for 61 countries during 1995-2012. A multi-country model of innovation and diffusion with international technology licensing yields a structural gravity equation for royalty payments as a function of fundamentals. The gravity equation is estimated using nonlinear methods. The model’s fundamentals account for 45% of the variation in royalty payments. Other factors such as imperfect IPR protection and tax havens account for a substantial fraction of the unexplained variation. A back-of-the-envelope calculation suggests that technology transfer from the United States to China would have been 20% larger if China had standards of IPR protection similar to those in the United States.

Bretton Woods and the Reconstruction of Europe

The Bretton Woods international financial system, which was in place from roughly 1949 to 1973, is the most significant modern policy experiment to attempt to simultaneously manage international payments, international capital flows, and international currency values. This paper uses an international macroeconomic accounting methodology to study the Bretton Woods system and finds that it: (1) significantly distorted both international and domestic capital markets and hence the accumulation and allocation of capital; (2) significantly slowed the reconstruction of Europe, albeit while limiting the indebtedness of European countries. Our results also provide support for the utility of the accounting methodology in that it finds a sharp change in the behavior of domestic and international capital market wedges that coincides with the breakdown of the system.

Binary Conditional Forecasts

While conditional forecasting has become prevalent both in the academic literature and in practice (e.g., bank stress testing, scenario forecasting), its applications typically focus on continuous variables. In this paper, we merge elements from the literature on the construction and implementation of conditional forecasts with the literature on forecasting binary variables. We use the Qual-VAR [Dueker (2005)], whose joint VAR-probit structure allows us to form conditional forecasts of the latent variable which can then be used to form probabilistic forecasts of the binary variable. We apply the model to forecasting recessions in real-time and investigate the role of monetary and oil shocks on the likelihood of two U.S. recessions.

House Price Growth Interdependencies and Comovement

This paper examines why there is house price comovement across some U.S. metropolitan areas (MSAs), and which MSAs cluster together for each of these reasons. Past studies have attributed common recessions in different regions as possible explanations for comovement. We explore other channels, and find some clusters based on common industry concentration (such as information technology), developable land area, as well as a cluster of MSAs that are desirable for retirees (in the sun belt). We find seven clusters of MSAs, where each cluster experiences idiosyncratic house price downturns, plus one distinct national house price cycle. Notably, only the housing downturn associated with the Great Recession spread across all the MSAs in our sample; all other house price downturns remained contained to a single cluster. We also identify MSA economic and geographic characteristics that correlate with cluster membership, which implies comovement due to mobility of residents. In addition, while prior research has found housing and business cycles to be related closely at the national level, we find very different house price comovement and employment comovement across clusters and across MSAs.

How to Starve the Beast: Fiscal Policy Rules

Countries have widely imposed fiscal rules designed to constrain government spending and ensure fiscal responsibility. This paper studies the effectiveness and welfare implications of revenue, deficit and debt rules when governments are discretionary and prone to overspending. The optimal prescription is a revenue ceiling coupled with a balance budget requirement. For the U.S., the optimal revenue ceiling is about 15% of output, 3 percentage points below the postwar average. Most of the benefits can still be reaped with a milder constraint or escape clauses during adverse times. Imposing a single fiscal rule allows governments to comply without necessarily curbing spending; on their own, revenue ceilings are only mildly effective, while deficit and debt rules are altogether ineffective.

Macroeconomic Implications of Uniform Pricing

We compile a new database of grocery prices in Argentina. We find uniform pricing both within and across regions—i.e., prices almost do not vary within stores of a chain. In line with uniform pricing, prices in stores of chains operating in one region react to changes in regional employment, while prices in multi-region chains do not. Using a quantitative regional model with multi-region firms and uniform pricing, we find a one-half smaller elasticity of prices to a regional than an aggregate shock. This result highlights that some caution may be necessary when using regional shocks to estimate aggregate elasticities.

What Does Financial Crisis Tell Us About Exporter Behavior and Credit Reallocation?

Using Japanese firm data covering the Japanese financial crisis in the early 1990s, we find that exporters' domestic sales declined more significantly than their foreign sales, which in turn declined more significantly than non-exporters' sales. This stylized fact provides a new litmus test for different theories proposed in the literature to explain a trade collapse associated with a financial crisis. In this paper we embed the Melitz's (2003) model into a tractable DSGE framework with incomplete financial markets and endogenous credit allocation to explain both the Japanese firm-level data and the well-documented aggregate trade collapse during a financial crisis in world economic history. The model highlights the role of credit reallocation between non-exporters and exporters as the main mechanism in explaining exporters' behaviors and trade collapse following a financial crisis.

Labor Market Responses to Unemployment Insurance: The Role of Heterogeneity

We document considerable scope of heterogeneity within the unemployed, especially when the unemployed are divided along eligibility and receipt of unemployment insurance (UI). We develop a heterogeneous-agent job-search model capable of matching the wealth and income differences that distinguish UI recipients from non-recipients. Labor market responses to UI changes are non-monotonic in wealth because the poorest individuals exhibit weak responses due to the high value they attribute to employment. Differential elasticities imply that the extent to which structural models account for the composition of UI recipients is material to aligning predicted responses with empirical estimates and to policy evaluation.

What Do Survey Data Tell Us about US Businesses?

This paper examines the reliability of survey data on business incomes, valuations, and rates of return, which are key inputs for studies of wealth inequality and entrepreneurial choice. We compare survey responses of business owners with available data from administrative tax records, brokered private business sales, and publicly traded company filings and document problems due to nonrepresentative samples and measurement errors across several surveys, subsamples, and years. We find that the discrepancies are economically relevant for the statistics of interest. We investigate reasons for these discrepancies and propose corrections for future survey designs.

Spousal Labor Supply Response to Job Displacement and Implications for Optimal Transfers

I document a small spousal earnings response to the job displacement of the family head. The response is even smaller in recessions, when earnings losses are larger and additional insurance is most valuable. I investigate whether the small response is an outcome of the crowding-out effects of government transfers. To accomplish this, I use an incomplete markets model with family labor supply and aggregate fluctuations where predicted spousal labor supply elasticities with respect to transfers are in line with microeconomic estimates both in aggregate and across subpopulations. Counterfactual experiments indeed reveal that generous transfers in recessions discourage the spousal labor supply significantly. I then show that the optimal policy features procyclical means-tested and countercyclical employment-tested transfers, unlike the existing policy that maintains generous transfers of both types in recessions. Abstracting from the incentive costs of transfers on the spousal labor supply changes both the level and cyclicality of optimal transfers.

What is the Value of Being a Superhost?

We construct a search model where sellers post prices and produce goods of unknown quality. A match reveals the quality of the seller. Buyers rate sellers based on quality. We show that unrated sellers charge a low price to attract buyers and that highly rated sellers post a high price and sell with a higher probability than unrated sellers. We nd that welfare is higher with a ratings system. Using data on Airbnb rentals, we show that Superhosts and hosts with high ratings: 1) charge higher prices, 2) have a higher occupancy rate and 3) higher revenue than average hosts.

Diverging Tests of Equal Predictive Ability

We investigate claims made in Giacomini and White (2006) and Diebold (2015) regarding the asymptotic normality of a test of equal predictive ability. A counterexample is provided in which, instead, the test statistic diverges with probability one under the null.

Effects of Neighboring Nation Terrorism on Imports

We present a monopolistic competition model to analyze the effects of own nation and neighboring nation terrorism on a nation’s imports. The theoretical analysis shows that own nation terrorism may leave relative price of imports unaffected, but neighboring nation terrorism must raise the relative price, reducing imports. We find that a 10% increase in terrorist attacks in a neighboring nation reduces a country’s imports from the rest of the world by approximately $320 million USD, on average. Mediation analysis shows that trading delays is a potential channel of transmission of trade costs of terrorism to a neighbor.

Comparative Advantage and Moonlighting

We document three facts: (i) Higher educated workers are more likely to moonlight; (ii) conditional on education, workers with higher wages are less likely to moonlight; and (iii) the prevalence of moonlighting is declining over time for all education groups. We develop an equilibrium model of the labor market to explain these patterns. A dominating income effect explains the negative correlation of moonlighting with productivity in the cross section and the downward trend over time. A higher part-to-full time pay differential for skilled workers (a comparative advantage) explains the positive correlation with education. We provide empirical evidence of the comparative advantage using CPS data. We calibrate the model to 1994 cross-sectional data and assess its ability to reproduce the 2017 data. The driving forces are productivity variables and the proportion of skilled workers. The model accounts for 56% of the moonlighting trend for skilled workers, and 67% for unskilled workers.

The Nonlinear Effects of Fiscal Policy

We argue that the fiscal multiplier of government purchases is nonlinear in the spending shock, in contrast to what is assumed in most of the literature. In particular, the multiplier of a fiscal consolidation is decreasing in the size of the consolidation. We empirically document this fact using aggregate fiscal consolidation data across 15 OECD countries. We show that a neoclassical life-cycle, incomplete markets model calibrated to match key features of the U.S. economy can explain this empirical finding. The mechanism hinges on the relationship between fiscal shocks, their form of financing, and the response of labor supply across the wealth distribution. The model predicts that the aggregate labor supply elasticity is increasing in the fiscal shock, and this holds regardless of whether shocks are deficit- or balanced-budget financed. We find evidence of our mechanism in microdata for the US.

Contagious Switching

We analyze the propagation of recessions across countries. We construct a model that allows for multiple qualitative state variables in a vector autoregression (VAR) setting. The VAR structure allows us to include country-level variables to determine whether policy also propagates across countries. We consider two different versions of the model. One version assumes the discrete state of the economy (expansion or recession) is observed. The other assumes that the state of the economy is unobserved and must be inferred from movements in economic growth. We apply the model to Canada, Mexico, and the United States to test if spillover effects were similar before and after the North American Free Trade Agreement (NAFTA). We find that trade liberalization has increased the degree of business cycle propagation across the three countries.

Occupation Mobility, Human Capital and the Aggregate Consequences of Task-Biased Innovations

We construct a dynamic general equilibrium model with occupation mobility, human capital accumulation and endogenous assignment of workers to tasks to quantitatively assess the aggregate impact of automation and other task-biased technological innovations. We extend recent quantitative general equilibrium Roy models to a setting with dynamic occupational choices and human capital accumulation. We provide a set of conditions for the problem of workers to be written in recursive form and provide a sharp characterization for the optimal mobility of individual workers and for the aggregate supply of skills across occupations. We craft our dynamic Roy model in a production setting where multiple tasks within occupations are assigned to workers or machines. We solve for the balanced-growth path and characterize the aggregate transitional dynamics ensuing task-biased technological innovations. In our quantitative analysis of the impact of task-biased innovations in the U.S. since 1980, we find that they account for an increased aggregate output in the order of 75% and for a much higher dispersion in earnings. If the U.S. economy had larger barriers to mobility it would have experienced less job polarization but substantially higher inequality and lower output as occupation mobility has provided an "escape" for the losers from automation.

New Estimates of the Lerner Index of Market Power for U.S. Banks

The Lerner index is widely used to assess firms' market power. However, estimation and interpretation present several challenges, especially for banks, which tend to produce multiple outputs and operate with considerable inefficiency. We estimate Lerner indices for U.S. banks for 2001-18 using nonparametric estimators of the underlying cost and profit functions, controlling for inefficiency, and incorporating banks' off-balance-sheet activities. We find that mis-specification of cost or profit functional forms can seriously bias Lerner index estimates, as can failure to account for inefficiency and off-balance-sheet output.

Tests of Conditional Predictive Ability: Some Simulation Evidence

In this note we use simple examples and associated simulations to investigate the size and power properties of tests of predictive ability described in Giacomini and White (2006; Econometrica). While we find that the tests can be accurately sized and powerful in large enough samples we identify details associated with the tests that are not otherwise apparent from the original text. In order of importance these include (i) the proposed test of equal finite-sample unconditional predictive ability is not asymptotically valid under the fixed scheme, (ii) for the same test, but when the rolling scheme is used, very large bandwidths are sometimes required when estimating long-run variances, and (iii) when conducting the proposed test of equal finite-sample conditional predictive ability, conditional heteroskedasticity is likely present when lagged loss differentials are used as instruments.

Business Cycles Across Space and Time

We study the comovement of international business cycles in a time series clustering model with regime-switching. We extend the framework of Hamilton and Owyang (2012) to include time-varying transition probabilities to determine what drives similarities in business cycle turning points. We find four groups, or "clusters", of countries which experience idiosyncratic recessions relative to the global cycle. Additionally, we find the primary indicators of international recessions to be fluctuations in equity markets and geopolitical uncertainty. In out-of-sample forecasting exercises, we find that our model is an improvement over standard benchmark models for forecasting both aggregate output growth and country-level recessions.

Optimal Monetary Policy for the Masses

We study nominal GDP targeting as optimal monetary policy in a simple and stylized model with a credit market friction. The macroeconomy we study has considerable income inequality, which gives rise to a large private sector credit market. There is an important credit market friction because households participating in the credit market use non-state contingent nominal contracts (NSCNC). We extend previous results in this model by allowing for substantial intra-cohort heterogeneity. The heterogeneity is substantial enough that we can approach measured Gini coefficients for income, financial wealth, and consumption in the U.S. data. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supplying their desired amount of labor, a type of "divine coincidence" result. We also further characterize monetary policy in terms of nominal interest rate adjustment.

A Quantitative Analysis of the Countercyclical Capital Buffer

What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2.5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium.

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