Working Papers
Stimulating discussion and critical comment on research in progress.
2012
- WP 12-40
- The Effect of Local Housing Ordinances
- The housing and economic crises have exerted a strong and lingering impact on housing markets across the nation. In this paper, we assess the degree to which local anti-blight policies have infl uenced housing market outcomes following the crises. The analysis is performed for cities in Cuyahoga County, Ohio. We measure outcomes that characterize market distress and that may be influenced by local housing ordinances including foreclosure, bulk sales, flipping, vacancy, and tax delinquency. Using matching procedures on linked data containing property, loan, and transaction characteristics, we compare outcomes across properties in regulated and unregulated municipalities. Point of sale inspections and vacancy registrations both decrease the probability that homes are flipped (resold within two years). We find that point of sale inspections are positively associated with foreclosures, property tax delinquency, and sales prices below the tax assessed value. The inspections may be revealing the need for expensive repairs in some homes, which could push borrowers underwater and into foreclosure. We find evidence that vacancy registration requirements do lower vacancy. The discussion around policies for housing market recovery, for the most part, has addressed efforts at the federal level. This analysis integrates in discussion of efforts and policies arising at the local level. (PDF)
- WP 12-39
- Privately Optimal Contracts and Suboptimal Outcomes in a Model of Agency Costs
- This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler, and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital and household consumption. Although privately optimal, this contract is not welfare maximizing, as it exacerbates fluctuations in real activity. The household’s desire to hedge business cycle risk, leads, via the financial contract, to greater business cycle risk. The welfare cost of the privately optimal contract (when compared to the planner’s outcome) is significant. A menu of time-varying taxes and subsidies on household income and monitoring costs can decentralize the planner’s allocations. But just one wedge, a time-varying tax on monitoring costs, can come close to achieving the planner’s allocation. This can also be decentralized with a time-varying subsidy on loan repayment rates. (PDF)
- WP 12-38
- Leverage, Investment, and Optimal Monetary Policy
- We study optimal monetary policy in an economy where firms’ debt overhangs lead to under-investment and under-production. The magnitude of this debt-induced distortion varies over the business cycle, rising significantly during recessions. When debt is contracted in nominal terms, this distortion gives rise to a balance sheet channel for monetary policy. In the presence of real and financial shocks, the monetary authority faces a trade-off between inflation and output gap stabilization. The optimal monetary policy rule prescribes that the anticipated component of inflation should be set equal to a target level, while the unanticipated component should rise in response to adverse shocks, smoothing the debt overhang distortion and the output gap. (PDF)
- WP 12-37
- Financial Stress Index: A Lens for Supervising the Financial System
- This paper develops a new financial stress measure (Cleveland Financial Stress Index, CFSI) that considers the supervisory objective of identifying risks to the stability of the financial system. The index provides a continuous signal of financial stress and broad coverage of the areas that could indicate it. The construction methodology uses daily public market data collected from different sectors of financial markets. A unique feature of the index is that it employs a dynamic weighting method that captures the changing relative importance of the different sectors of the financial system. This study shows how the index can be applied to monitoring and analyzing financial system conditions. (PDF)
- WP 12-36
- The Cyclical Behavior of Equilibrium Unemployment and Vacancies across OECD Countries
- We show that the inability of a standardly-calibrated stochastic labor search-and-matching model to account for the observed volatility of unemployment and vacancies extends beyond U.S. data to a set of OECD countries. We also argue that using cross-country data is helpful in evaluating the relative merits of the alternatives that have appeared in the literature. In illustrating this point, we take the solution proposed in Hagedorn and Manovskii (2008) and show that its ability to match the labor market volatility magnitudes seen in the data depends crucially on how persistent the estimated productivity process is. (PDF)
- WP 12-35
- Fiscal Multipliers under an Interest Rate Peg of Deterministic vs. Stochastic Duration
- This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller. Our explanation rests on a Jensen’s inequality type argument: the deterministic multiplier is convex in duration, and the stochastic multiplier is a weighted average of the deterministic multipliers. The quantitative difference in the two multipliers also arises in a model with capital, and in the baseline nonlinear model. However, the differences between the two is less pronounced in the nonlinear models. (PDF)
- WP 12-34
- Inflation and Output in New Keynesian Models with a Transient Interest Rate Peg
- Recent monetary policy experience suggests a simple diagnostic for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be modestly inflationary, and a reasonable model should deliver such a prediction. We pursue this simple diagnostic in several variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where the effect of the interest rate peg can switch from highly inflationary to highly deflationary for only modest changes in the length of the interest rate peg. Curiously, this unusual behavior does not arise in a sticky information model of the Phillips curve. (PDF)
- WP 12-33R
- Assessing the Evidence on Neighborhood Effects from Moving to Opportunity
- This paper shows that the results of the Moving to Opportunity (MTO) housing mobility experiment are much less informative about neighborhood effects than currently interpreted in the literature. I formally state the assumptions necessary for using the random assignment of vouchers in a housing mobility program as an instrument to identify neighborhood effects. I show that these assumptions are also imposed in the literature using Intent-to-Treat (ITT) and Treatment-on-the-Treated (TOT) effects from moving with a voucher assigned through MTO to learn about neighborhood effects. By making them implicit, the program effects approach adopts identifying assumptions that are difficult to defend. Once these assumptions are made explicit and discussed in terms of both theoretical implications and empirical evidence, it is clear that ITT and TOT effects from MTO should not be used to draw conclusions about neighborhood effects. Focusing attention on directly identifying neighborhood effects, empirical evidence is presented that MTO only induced moves from one low-quality neighborhood to another, and therefore can only be used to identify a very limited set of neighborhood effects. (PDF)
- WP 12-32
- Bretton Woods, Swap Lines, and the Federal Reserve’s Return to Intervention
- This paper describes the United States’ first line of defense against shortcomings in the Bretton Woods system, which threatened the system’s continuation as early as 1960. The exposition describes the Federal Reserve’s use of swap lines both to provide cover for central banks’ unwanted dollar exposures, thereby forestalling claims on the U.S. gold stock, and to supply dollar liquidity to countries facing temporary balance-of-payments deficits, thereby bolstering confidence in their parities. As suggested by the expansion and growing use of the swap lines, the operations failed to distinguish between temporary and fundamental disequilibrium forces. In substituting temporary for fundamental adjustments, the lines ultimately proved inadequate. (PDF)
- WP 12-31
- Measures beyond the College Degree Share to Guide Inter-regional Comparisons and Workforce Development
- Raising the share of adults with college degrees in a region or jurisdiction is a nearly universal goal of regional policymakers. They believe that education, as summarized by this statistic, is the cause of increasing employment, productivity, and wages. Using statistics estimated from the decennial censuses and the American Community Survey, this analysis demonstrates how different measures would suggest different rankings of more successful versus less successful metro areas. The "place-of-birth" variable in Census data enables a disaggregation of the origins of the skilled and unskilled adult populations. This provides insight into whether high-skilled regions developed talent among natives or attracted talent nationally or globally. I find that metros in states that are successful at getting their natives through college have experienced lower growth in their native and migrant graduate populations. With a few exceptions, metro areas with high degree shares or large improvements in their degree share have not grown their graduate population at unusually high rates. The numbers suggest that metro areas held up as exemplars of educational attainment have achieved this distinction to a large extent by being unattractive to nongraduates. (PDF)
- WP 12-30
- Land Bank 2.0: An Empirical Evaluation
- Cuyahoga County created a land bank in 2009 explicitly intended to acquire low-value properties, mitigate blighted housing, help stabilize neighborhoods, and slow the decline of property values. This paper evaluates the effectiveness of the land bank by estimating spatially-corrected hedonic price models using sales near the land bank homes. Homes that sold within 500 feet of a property that would be acquired by the land bank in the next six months show a 3 to 5 percent discount versus observationally similar homes. Homes that sold within 500 feet of a land bank owned home sold at prices approximately 5 percent higher than similar homes. A land bank demolition appears to have a positive externality, which adds 9 percent to the value of a nearby home sale. These results are consistent through a wide variety of specifications, but they are not measured precisely enough to be statistically significant. (PDF)
- WP 1229
- Bridging the Gap? Government Subsidized Lending and Access to Capital
- The consequences of providing public funds to financial institutions remain controversial. We examine the Community Development Financial Institution (CDFI) Fund’s impact on credit union activity, using hitherto little studied U.S. Treasury data. The CDFI Fund grants increase lending at credit unions by 3%. For every dollar awarded, 45 additional cents are loaned out to borrowers in the first year, and up to an additional $1.60 is loaned out within three years. Delinquent loan rates also increase slightly. Our panel results are supported by a broadband regression discontinuity analysis. Politics does not seem to play a role in allocating funding. (PDF)
- WP 12-28
- The Panic of 1907
- This paper summarizes the academic literature on the Panic of 1907 in the United States. Despite over 100 years of separation, research by financial economic historians continues to uncover important data and underexploited connections between institutions to improve present day understanding of a watershed economic event—one that preceded the successful movement to establish a central bank in the United States in 1913. (PDF)
- WP 12-27
- Real-Time Nowcasting with a Bayesian Mixed Frequency Model with Stochastic Volatility
- This paper develops a method for producing current-quarter forecasts of GDP growth with a (possibly large) range of available within-the-quarter monthly observations of economic indicators, such as employment and industrial production, and financial indicators, such as stock prices and interest rates. In light of existing evidence of time variation in the variances of shocks to GDP, we consider versions of the model with both constant variances and stochastic volatility. We also evaluate models with either constant or time-varying regression coefficients. We use Bayesian methods to estimate the model, in order to facilitate providing shrinkage on the (possibly large) set of model parameters and conveniently generate predictive densities. We provide results on the accuracy of nowcasts of real-time GDP growth in the U.S. from 1985 through 2011. In terms of point forecasts, our proposal is comparable to alternative econometric methods and survey forecasts. In addition, it provides reliable density forecasts, for which the stochastic volatility specification is quite useful, while parameter time-variation does not seem to matter. (PDF)
- WP 12-26
- Did Local Lenders Forecast the Bust? Evidence from the Real Estate Market
- This paper shows that mortgage lenders with a physical branch near the property being financed have better information about home-price fundamentals than nonlocal lenders. During the real estate run-up from 2002-06, home price growth negatively correlates with the share of loans made by local lenders, namely lenders with a branch in the respective county. Moreover, home prices fell less from 2006-09 in areas where more of the loans were made by local lenders. California foreclosure rates during the crisis are negatively correlated with local lending during the run-up. A 1 standard deviation increase in local loans is associated with 5 fewer foreclosures for every 1,000 houses. When local lenders retain loans for their portfolio rather than securitizing, the results for both home price growth and foreclosures are even stronger. (PDF)
- WP 12-25
- Learning and Occupational Sorting
- This paper develops and estimates a model of occupational choice and learning that allows for correlated learning across occupation specific abilities. In the labor market, workers learn about their potential outcomes in all occupations, not just their current occupation. Based on what they learn, workers engage in directed search across occupations. The estimates indicate that sorting occurs in multiple dimensions. Workers discovering a low ability in their current occupation are signicantly more likely to move to a new occupation. At the same time, workers discovering a high ability in some occupations are more likely to move up the occupational ladder into managerial occupations. By age 28 this sorting process leads to an aggregate increase in wages similar to what would occur if all workers were endowed with an additional year of education. (PDF)
- WP 12-24
- The Ins and Outs of Unemployment in the Long Run: Unemployment Flows and the Natural Rate
- This paper proposes an empirical method for estimating a long-run trend for the unemployment rate that is grounded in the modern theory of unemployment. I write down an unobserved-components model and identify the cyclical and trend components of the underlying unemployment flows, which in turn imply a time-varying estimate of the unemployment trend, the natural rate. I identify a sharp decline in the outflow rate—the job finding rate—since 2000, which was partly offset by the secular decline in the inflow rate—the separation rate—since the 1980s, implying a relatively stable natural rate, currently at 6 percent. Numerical examples show that slower labor reallocation, along with the weak output growth, explains most of the persistence in unemployment since the Great Recession. Contrary to the business-cycle movements of the unemployment rate, a significant fraction of the low-frequency variation can be accounted for by changes in the trend of the inflows, especially prior to 1985. Finally, I highlight several desirable features of this natural rate concept that makes it a better measure than traditional counterparts. These include statistical precision, the significance of required revisions to past estimates with subsequent data additions, policy relevance and its tight link with the theory. (PDF)
- WP 12-23
- Who’s Afraid of Good Governance? State Fiscal Crises, Public Pension Underfunding, and the Resistance to Governance Reform
- This article presents the results of a qualitative study of the funding and governance provisions of 12 public pension plans that are a mix of state and local plans of various funding levels. We find that none of the plans in our study satisfy the best practices that have been established by expert panels, but also that the strength of a plan’s governance provisions does not appear correlated with the plan’s financial health. Our most important finding is that, regardless of the content of a plan’s governance provisions, such provisions are almost never effectively enforced. This lack of enforcement, we theorize, has a significant, detrimental impact on plan funding and governance. If neither plan participants nor state taxpayers are able to effectively monitor and challenge a state’s inadequate funding or improper investment decisions, public plans are very likely to remain underfunded. We conclude by offering several possible reform options to address the monitoring and enforcement problems made clear by our study: automatic benefit haircuts, automatic tax increases, a low-risk investment requirement, and market monitoring through the use of modified pension obligation bonds. (PDF)
- WP 12-22
- Believe Only What You See: Credit Rating Agencies, Structured Finance, and Bonds
- This paper identifies rating verifiability as a key difference that explains why credit rating agencies (CRAs) failed to mitigate information asymmetries in the structured finance market but succeeded in the bond market. Two infinitely repeated models are analyzed. In the first, the rating is unverifiable, and there is no equilibrium where the CRA reveals its information. In the second, the rating is verified with some probability, and full information revelation is guaranteed for any verification probability, when the CRA is patient enough. The interaction between verification probability and CRA patience is also analyzed. (PDF)
- WP 12-21
- Business Cycles and Financial Crises: The Roles of Credit Supply and Demand Shocks
- This paper explores the hypothesis that the sources of economic and financial crises differ from noncrisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and noncrisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations. (PDF)
- WP 12-20R
- Mortgage Companies and Regulatory Arbitrage
- Mortgage companies (MCs) do not fall under the strict regulatory regime applicable to depository institutions. We empirically show that the resulting regulatory arbitrage allowed bank holding companies (BHCs) to circumvent capital requirements and avoid loan-related losses. As compared to bank subsidiaries, MC subsidiaries of BHCs originated riskier mortgages characterized by borrowers with lower credit scores, lower incomes, higher loan-to-income ratios, and higher default rates. Our results imply that regulation had the capacity to prevent the deterioration of pre-crisis lending standards, but only if consistently applied and enforced. Revised May 2013. (PDF)
- WP 12-19
- A Tractable Estimator for General Mixed Multinomial Logit Models
- The mixed logit is a framework for incorporating unobserved heterogeneity in discrete choice models in a general way. These models are difficult to estimate because they result in a complicated incomplete data likelihood. This paper proposes a new approach for estimating mixed logit models. The estimator is easily implemented as iteratively re-weighted least squares: the well known solution for complete data likelihood logits. The main benefit of this approach is that it requires drastically fewer evaluations of the simulated likelihood function, making it signicantly faster than conventional methods that rely on numerically approximating the gradient. The method is rooted in a generalized expectation and maximization (GEM) algorithm, so it is asymptotically consistent, efficient, and globally convergent. (PDF)
- WP 12-18
- The Macroeconomic Forecasting Performance of Autoregressive Models with Alternative Specifications of Time-Varying Volatility
- This paper compares alternative models of time-varying macroeconomic volatility on the basis of the accuracy of point and density forecasts of macroeconomic variables. In this analysis, we consider both Bayesian autoregressive and Bayesian vector autoregressive models that incorporate some form of time-varying volatility, precisely stochastic volatility (both with constant and time-varying autoregressive coefficients), stochastic volatility following a stationary AR process, stochastic volatility coupled with fat tails, GARCH, and mixture-of-innovation models. The comparison is based on the accuracy of forecasts of key macroeconomic time series for real-time post?War-II data both for the United States and United Kingdom. The results show that the AR and VAR specifications with widely used stochastic volatility dominate models with alternative volatility specifications, in terms of point forecasting to some degree and density forecasting to a greater degree. (PDF)
- WP 12-17
- Trimmed-Mean Inflation Statistics: Just Hit the One in the Middle
- This paper reinvestigates the performance of trimmed-mean inflation measures some 20 years since their inception, asking whether there is a particular trimmed-mean measure that dominates the median CPI. Unlike previous research, we evaluate the performance of symmetric and asymmetric trimmed-means using a well-known equality of prediction test. We find that there is a large swath of trimmed-means that have statistically indistinguishable performance. Also, while the swath of statistically similar trims changes slightly over different sample periods, it always includes the median CPI--an extreme trim that holds conceptual and computational advantages. We conclude with a simple forecasting exercise that highlights the advantage of the median CPI relative to other standard inflation measures. (PDF)
- Wp 12-16
- Estimating Contract Indexation in a Financial Accelerator Model
- This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler, and Gilchrist (1999). The principal conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation. (PDF)
- WP 12-15
- Fiscal Multipliers under an Interest Rate Peg of Deterministic vs. Stochastic Duration
- This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller. (PDF)
- WP 12-14
- Deep Recessions, Fast Recoveries, and Financial Crises: Evidence from the American Record
- Do steep recoveries follow deep recessions? Does it matter if a credit crunch or banking panic accompanies the recession? Moreover, does it matter if the recession is associated with a housing bust? We look at the American historical experience in an attempt to answer these questions. The answers depend on the definition of a financial crisis and on how much of the recovery is considered. But in general recessions associated with financial crises are generally followed by rapid recoveries. We find three exceptions to this pattern: the recovery from the Great Contraction in the 1930s; the recovery after the recession of the early 1990s and the present recovery. The present recovery is strikingly more tepid than the 1990s. One factor we consider that may explain some of the slowness of this recovery is the moribund nature of residential investment, a variable that is usually a key predictor of recessions and recoveries. (PDF)
- WP 12-13
- The Relationship between City Center Density and Urban Growth or Decline
- In this paper we contrast the spatial patterns of population density and other demographic changes in growing versus shrinking MSAs from 1980 to 2010. We find that, on average, shrinking MSAs show the steepest drop in population density near the Central Business District (CBD). Motivated by this fact, we explore the connection between changes in population density at the core of the MSA and MSA productivity. We find that changes in near-CBD population density are positively associated with per capita income growth at the MSA-level. (PDF)
- WP 12-12R
- Neighborhood Dynamics and the Distribution of Opportunity
- This paper uses an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation to investigate the effects of neighborhood externalities. In the model, households choose where to live and how much to invest toward the production of their child’s human capital. The return on parents’ investment is determined in part by the child’s ability and in part by an externality from the average human capital in their neighborhood. We use the model to test a prominent hypothesis about the concentration of poverty within racially-segregated neighborhoods (Wilson 1987). We first impose segregation on a model with two neighborhoods and match the model steady state to income and housing data from Chicago in 1960. Next, we lift the restriction on moving and compute the new steady state and corresponding transition path. The transition implied by the model qualitatively supports Wilson’s hypothesis: high-income residents of the low average human capital neighborhood move out, reducing the returns to investment in their old neighborhood. Sorting decreases citywide human capital and produces congestion in the high-income neighborhood, increasing the average cost of housing. On net, average welfare decreases by 3.0 percent of presorting steady state consumption, and 0.01 percent of households starting in the low-income neighborhood receive positive welfare. (PDF)
- WP 12-11
- Diagnosing Labor Market Search Models: A Multiple-Shock Approach
- We construct a multiple shock, discrete time version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to underpredict the volatility of key labor market variables. In addition to the standard labor productivity shock, we introduce shocks to matching efficiency and job separation. We conduct two set of experiments. First, we estimate the joint probability distribution of shocks that simultaneously satisfy the observed data and the first-order conditions of the multiple-shock model, and then simulate its properties. Although the multiple-shock model generates significantly more volatility while preserving the Beveridge curve relationship, it generates counterfactual implications for the cyclicality of job separations. Using a business cycle accounting approach, we design the second set of experiments to isolate the sources of model incompleteness and show that the model requires significant procyclical and volatile matching efficiency and counterfactually procyclical job separations to render the observed data without error. We conjecture that the basic Mortensen-Pissarides model lacks mechanisms to generate sufficiently strong labor market reallocation over the business cycle, and suggest nontrivial labor force participation and job-to-job transitions as promising avenues of research. NOTE: This is a substantial revision of working paper 08-13, which is a substantial revision of working paper 07-20. (PDF)
- WP 12-10
- Approximating High-Dimensional Dynamic Models: Sieve Value Function Iteration
- Many dynamic problems in economics are characterized by large state spaces, which make both computing and estimating the model infeasible. We introduce a method for approximating the value function of high-dimensional dynamic models based on sieves and establish results for the: (a) consistency, (b) rates of convergence, and (c) bounds on the error of approximation. We embed this method for approximating the solution to the dynamic problem within an estimation routine and prove that it provides consistent estimates of the model?s parameters. We provide Monte Carlo evidence that our method can successfully be used to approximate models that would otherwise be infeasible to compute, suggesting that these techniques may substantially broaden the class of models that can be solved and estimated. (PDF)
- WP 12-09
- Bank Balance Sheet Dynamics under a Regulatory Liquidity-Coverage-Ratio Constraint
- This paper presents a dynamic model of a bank’s optimal choices of imposing a binding liquidity-coverage-ratio (LCR) constraint. Our baseline balance-sheet dynamics starts with portfolio separation and no LCR constraint. Under a scenario in which regulators prohibit banks from applying securities to fulfill the LCR constraint, portfolio separation continues to hold, but deposit holdings depend on the extent to which the LCR constraint is binding. When banks are allowed to apply securities toward satisfying the constraint, portfolio separation can break down and lead to ambiguous effects on optimal dynamic loan and deposit paths. Our results indicate that under special cases in which portfolio separation holds, the LCR constraint affects bank-sheet dynamics in ways not previously recognized. As regulators move forward in implementing Basel III style LCR, it is imperative to understand the effects of the LCR constraint on bank balance-sheet dynamics. (PDF)
- WP 12-08R
- Marginal Neighborhood Effects from Moving to Opportunity
- This paper estimates Marginal Treatment Effects (MTEs) of neighborhood quality from the Moving to Opportunity (MTO) housing mobility experiment in a model with multiple treatment levels. We propose and implement a new identification strategy that exploits the identification of the idiosyncratic component of an ordered choice model. Due to the limited changes in neighborhood quality induced by MTO, we only estimate MTEs of moving from the first to second decile of the national distribution of neighborhood quality. These MTEs are heterogeneous over observable characteristics: Labor market outcomes were affected most positively for individuals at the sites in which larger changes in neighborhood quality were induced by MTO. Estimated MTEs are also heterogeneous over unobservables, which we consider evidence in favor of selection occurring in a model with essential heterogeneity. Although there is not enough structure in our model to clearly interpret MTE heterogeneity, we discuss possible reasons for the surprising result that effects are best for those with characteristics that make them less likely to move without the program. (PDF)
- WP 12-07
- Epilogue: Foreign-Exchange-Market Operations in the Twenty-First Century
- Foreign-exchange operations did not end after the United States stopped its activist approach to intervention. Japan persisted in such operations, but avoided overt conflict with its monetary policy. With the onset of the Great Recession, Switzerland has transacted in foreign exchange both for monetary and exchange-rate purposes, and key central banks have used swap facilities to extended their lender-of-last-resort functions. Developing and emerging-market economies continue to intervene, but their actions may hamper the development of their own foreign-exchange markets. China’s undervalued exchange rate is producing inflation and real appreciation, despite China’s efforts to sterilize its reserve accumulation. (PDF)
- WP 12-06
- Common Drifting Volatility in Large Bayesian VARs
- The estimation of large vector autoregressions with stochastic volatility using standard methods is computationally very demanding. In this paper we propose to model conditional volatilities as driven by a single common unobserved factor. This is justified by the observation that the pattern of estimated volatilities in empirical analyses is often very similar across variables. Using a combination of a standard natural conjugate prior for the VAR coefficients and an independent prior on a common stochastic volatility factor, we derive the posterior densities for the parameters of the resulting BVAR with common stochastic volatility (BVAR-CSV). Under the chosen prior, the conditional posterior of the VAR coefficients features a Kroneker structure that allows for fast estimation, even in a large system. Using US and UK data, we show that, compared to a model with constant volatilities, our proposed common volatility model significantly improves model fit and forecast accuracy. The gains are comparable to or as great as the gains achieved with a conventional stochastic volatility specification that allows independent volatility processes for each variable. But our common volatility specification greatly speeds computations. (PDF)
- WP 12-05
- Within-city Variation in Urban Decline: The Case of Detroit
- When a city experiences a decline in income or population, do all neighborhoods within the city decline equally? Or do some neighborhoods decline more than others? What are the characteristics of the neighborhoods that decline the most? We answer these questions by looking at what happened to neighborhoods within Detroit as the city experienced a sharp decline in income and population from the 1980s to the late 2000s. We find patterns of changes in income and population that are consistent with the model and empirical patterns of gentrification presented in Guerrieri, Hartley, and Hurst (2011), only playing out in reverse. (Data description) (PDF)
- WP 12-04
- Privately Optimal Contracts and Suboptimal Outcomes in a Model of Agency Costs
- This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital and household consumption. Although privately optimal, this contract is not welfare maximizing as it exacerbates fluctuations in real activity. The household’s desire to hedge business cycle risk, leads, via the financial contract, to greater business cycle risk. The welfare cost of the privately optimal contract (when compared to the planner outcome) is quite large. A countercyclical tax on lender profits comes close to achieving the planner outcome. (PDF)
- WP12-03
- The Impact of Recovery Efforts on Residential Vacancies
- Legislation aimed at stabilizing housing markets since the recession has focused on providing funding to acquire and remediate foreclosed and abandoned homes or providing financial assistance and incentives to purchase homes. Cuyahoga County has received over $100 million in such funds since 2008. We investigate the impact of these funds on vacancy rates. We examine neighborhoods in Cuyahoga County where National Stabilization Program dollars were spent and find that the program helped reduce vacancies in neighborhoods where properties were primarily purchased for consumption purposes. (PDF)
- WP 12-02
- How Inflationary Is an Extended Period of Low Interest Rates?
- Recent monetary policy experience suggests a simple test of models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. But a monetary model should be rejected if a reasonably short nominal rate peg results in an unreasonably large inflation response. We pursue this simple test in three variants of the familiar dynamic new Keynesian (DNK) model. All of these models fail this test. Further some variants of the model produce inflation reversals where an interest rate peg leads to sharp deflations. (PDF)
- WP 12-01R
- Community-Based Well Maintenance in Rural Haiti
- This paper evaluates a new technology for providing water. The technology, developed by Haiti Outreach (HO), is distinguished by a program training communities to manage wells. The effects of training are identified by comparing HO?s wells with wells refurbished by HO but subsequently managed under the status quo. There are large differences in functionality after only one year (8.7 percentage points). For policymakers choosing between standard and community-based interventions, I quantify the tradeoff between equity (sporadically providing water to all) and efficiency (consistently providing water to most). I interpret the estimated tradeoff to strongly favor community-based interventions. (PDF)