Economic Research and Data

2004 Working Papers

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WP 04-16
Firm-Specifc Capital, Nominal Rigidities, and the Business Cycle
by David E. Altig, Lawrence J. Christiano, Martin Eichenbaum, and Jesper Linde

Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our model is consistent with post-war U.S. evidence on inflation inertia even though firms re-optimize prices on average once every 1.5 quarters. The key feature of our model is that capital is firm-specific and predetermined within a period.

PDF file 864K


WP 04-15 top
Geographic Redistribution of U.S. Manufacturing and the Role of State Development Policy
by Yoonsoo Lee

Competition among state and local governments to lure businesses has attracted considerable interest from economists, as well as legislators and policymakers. This paper quantifies the role of plant relocations in the geographic redistribution of manufacturing employment and examines the effectiveness of state development policy. Only a few studies have looked at how manufacturing firms geographically locate their production facilities and have used either small manufacturing samples or small geographic regions. This paper provides broader evidence of the impact of plant relocations using confidential establishment level data from the U.S. Census Longitudinal Research Database (LRD), covering the full population of manufacturing establishments in the United States over the period 1972 to 1992. This paper finds a relatively small role for relocation in explaining the disparity of manufacturing employment growth rates across states. Moreover, it finds evidence of very weak effects of incentive programs on plant relocations.

PDF file 1,887K


WP 04-14top
Bank Seasoned Equity Offers: Do Voluntary and Involuntary Offers Differ?
by O. Emre Ergungor, C.N.V. Krishnan, Ajai K. Singh, and Allan A. Zebedee

Recent research has shown that for industrial and utilities’ seasoned equity offers (SEOs) the offer price discount is informative and has significant price effects. We examine whether the offer price discount for SEOs made by undercapitalized banks is different from those made by banks that were already overcapitalized prior to issue announcement. The former are labeled "involuntary" issues, and the latter "voluntary." Voluntary issues are likely made by opportunistic managers at times when their stock is overvalued. Prior research has argued and provided evidence suggesting that for involuntary issues, such timing discretion may be limited. However, we find no significant differences in the issue-date discount, and in issue-date abnormal returns between the two types of issues. We find that trading volume increases dramatically at the offer date, stays at abnormally high levels over a 60-day post–issue period, and is accompanied by a positive abnormal return in the post-offer period for both types of issues. The post-issue long-run returns are positive for both types of issues. Inconsistent with prior research, we do not find a significant difference even in the announcement date returns of the involuntary and voluntary issues. It appears that the market does not perceive the voluntary and involuntary issuers to be different.

PDF file 789K


WP 04-13top
Asset Prices, Nominal Rigidities, and Monetary Policy
by Charles T. Carlstrom and Timothy S. Fuerst

Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy.

PDF file 266K


WP 04-12top
The Effects of Minimum Wages on the Distribution of Family Incomes: A Nonparametric Analysis
by David Neumark, Mark Schweitzer, and William Wascher

The primary goal of a national minimum wage floor is to raise the incomes of poor families with members in the work force. We present evidence on the effects of minimum wages on family incomes from March CPS surveys. Using non-parametric estimates of the distributions of family income relative to needs in states and years with and without minimum wage increases, we examine the effects of minimum wages on this distribution, and on the distribution of the changes in income that families experience. Although minimum wages do increase the incomes of some poor families, the evidence indicates that their net effect is, if anything, to increase the proportions of families with incomes below or near the poverty line. Thus, it would appear that reductions in the proportions of families that are poor or near-poor should not be counted among the potential benefits of minimum wages.

PDF file 422K


WP 04-11top
Monetary Policy, Endogenous Inattention, and theVolatility Trade-off
by William A. Branch, John Carlson, George W. Evans,Bruce McGough

This paper addresses the output-price volatility puzzle by studying the interaction
of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs. Endogenous inattention is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down. This provides a potential explanation for the "great moderation" that began in the 1980s.

PDF file 450K


WP 04-10top
Thinking about Monetary Policy without Money: A Review of Three Books: Inflation Targeting, Monetary Theory and Policy, and Interest and Prices
by Charles T. Carlstrom and Timothy S. Fuerst

This paper reviews three recent books. Two books, one by Carl Walsh and one by Michael Woodford, focus on the development of monetary theory. In contrast, the third book is a collection of papers in an NBER volume on inflation targeting. This volume outlines some of the issues that arise when applying the tools described by Walsh and Woodford to the policy goal of targeting inflation rates. A central theme of all three works is the desirability of abstracting from money demand in the analysis of monetary policy. In our review we focus the bulk of our discussion on the absence of money in these models.

PDF file 412K


WP 04-09top
The Forecast Ability of Risk-Neutral Densities of Foreign Exchange
by Ben R. Craig and Joachim G. Keller

We estimate the process underlying the pricing of American options by using higher-order lattices combined with a multigrid method. This paper also tests whether the risk-neutral densities given from American options provide a good forecasting tool. We use a nonparametric test of the densities that is based on the inverse probability functions and is modified to account for correlation across time between our random variables, which are uniform under the null hypothesis. We find that the densities based on the American option markets for foreign exchange do quite well for the forecasting period
over which the options are thickly traded. Further, simple models that fit the densities do about as well as more sophisticated models.

PDF file 374K


WP 04-08top
Friedman Meets Hosios: Efficiency in Search Models of Money
by Aleksander Berentsen, Guillaume Rocheteau and Shouyong Shi

In this paper the authors study the inefficiencies of the monetary equilibrium and optimal monetary policies in a search economy. They show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades (or search decisions). The Friedman rule eliminates the first inefficiency, and the Hosios rule the second. A monetary equilibrium attains the social optimum if and only if both rules are satisfied. When the two rules cannot be satisfied simultaneously, which occurs in a large set of economies, optimal monetary policy achieves only the second best. The authors analyze when the second-best monetary policy exceeds the Friedman rule and when it obeys the Friedman rule. Furthermore, they extend the analysis to an economy with barter and show how the Hosios rule must be modified in order to internalize all search externalities.

PDF file 699K


WP 04-07top
Inflation, Output, and Welfare
by Ricardo Lagos and Guillaume Rocheteau

This paper studies the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so inflation affects the frequency of trade as well as the quantity of output produced in each trade. We consider the standard pricing mechanism for search models, i.e., ex-post bargaining, as well as a notion of competitive pricing. If prices are bargained over, the equilibrium is generically inefficient and an increase in inflation reduces buyers’ search intensities, output, and welfare. If prices are posted and buyers can direct their search, search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates.

PDF file 419K


WP 04-06top
Loggers vs. Campers: Compensation for the Taking of Property Rights
by Ronald Giammarino and Ed Nosal

Governments often have the power to take property rights from private citizens but their responsibility to pay compensation is typically not well specified. In this paper we examine how the compensation rule adopted by a country affects both private investment decisions and takings decisions. We build on a widely accepted argument that any lump sum compensation, including zero, is the socially optimal compensation scheme. The lump sum compensation result hinges critically on the assumptions that the government maximizes social welfare and that the level of private investment does not affect the alternative use of the property rights. We find that when either of these assumptions is relaxed, the optimal compensation scheme will generally depend upon market values. The model presented here provides strong support for market value compensation for the taking of property rights in modern societies.

PDF file 413K


WP 04-05top
Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium
by Guillaume Rocheteau and Randall Wright

We compare three market structures for monetary economies: bargaining (search equilibrium); price taking (competitive equilibrium); and price posting (competitive search equilibrium). We also extend work on the microfoundations of money by allowing a general matching technology and entry. We study how equilibrium and the effects of policy depend on market structure. Under bargaining, trade and entry are both inefficient, and inflation implies first-order welfare losses. Under price taking, the Friedman rule solves the first inefficiency but not the second, and inflation may actually improve welfare. Under posting, the Friedman rule yields the first best, and inflation implies second-order welfare losses.

PDF file 550K


WP 04-04top
The Business Cycle and the Life Cycle
by Paul Gomme, Richard Rogerson, Peter Rupert, and Randall Wright

The paper documents how cyclical fluctuations in market work vary over the life cycle and then assesses the predictions of a life-cycle version of the growth model for those observations. The analysis yields a simple but striking finding. The main discrepancy between the model and that data lies in the inability of the model to account for fluctuations in hours for individuals in the first half of their life cycle. The
predictions for those in the latter half of the life cycle are quite close to the data.

PDF file 271K


WP 04-03top
On SBA-Guaranteed Lending and Economic Growth
by Ben R. Craig, William E. Jackson, III, and James B. Thomson

Increasingly, policymakers are looking to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary policy objective of the Small Business Administration (SBA) loan-guarantee program. Using a panel data set of SBA-guaranteed loans we assess whether SBA-guaranteed lending has an observable impact on local and regional economic performance.

PDF file 968K


WP 04-02top
The Yield Curve, Recessions, and the Credibility of the Monetary Regime:
Long-run Evidence, 1875-1997

by Michael D. Bordo and Joseph G. Haubrich

This paper brings historical evidence to bear on the stylized fact that the yield curve predicts future growth. The spread between corporate bonds and commercial paper reliably predicts future growth over the period 1875-1997. This predictability varies over time, however, particularly across different monetary regimes. In accord with our proposed theory, regimes with low credibility (high persistence of inflation) tend to have better predictability.

PDF file 648K


WP 04-01top
A Model of (the Threat of) Counterfeiting
by Ed Nosal and Neil Wallace

A simple matching-model of money with the potential for counterfeiting is constructed. In contrast to the existing literature, counterfeiting, if it occurred, would be accompanied by two distortions: costly production of counterfeits and harmful effects on trade. However, application of the Cho-Kreps refinement is shown to imply that there is no equilibrium with counterfeiting. If the cost of producing counterfeits is low enough, then there is no monetary equilibrium. Otherwise, there is a monetary equilibrium without counterfeiting.

PDF file 263K



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