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Working Papers

Working Papers

  • WP 21-06 | All Forecasters Are Not the Same: Time-Varying Predictive Ability across Forecast Environments


    Robert Rich Joseph Tracy

    Abstract

    This paper examines data from the European Central Bank’s Survey of Professional Forecasters to investigate whether participants display equal predictive performance. We use panel data models to evaluate point- and density-based forecasts of real GDP growth, inflation, and unemployment. The results document systematic differences in participants’ forecast accuracy that are not time invariant, but instead vary with the difficulty of the forecasting environment. Specifically, we find that some participants display higher relative accuracy in tranquil environments, while others display higher relative accuracy in volatile environments. We also find that predictive performance is positively correlated across target variables and horizons, with density forecasts generating stronger correlation patterns. Taken together, the results support the development of expectations models featuring persistent heterogeneity.   Read More

  • WP 21-05 | Inflation Gap Persistence, Indeterminacy, and Monetary Policy


    Yasuo Hirose Takushi Kurozumi Willem Van Zandweghe

    Abstract

    Empirical studies have documented that the persistence of the gap between inflation and its trend declined after the Volcker disinflation. Previous research into the source of the decline has offered competing views while sidestepping the possibility of equilibrium indeterminacy. This paper examines the source by estimating a medium-scale DSGE model using a Bayesian method that allows for indeterminacy. The estimated model shows that the Fed's change from a passive to an active policy response to the inflation gap or a decrease in firms' probability of price change can fully account for the decline in inflation gap persistence by ruling out indeterminacy that induces persistent dynamics of the economy.   Read More

  • WP 21-04 | Applications of Markov Chain Approximation Methods to Optimal Control Problems in Economics


    Tom Phelan Keyvan Eslami

    Abstract

    In this paper we explore some of the benefits of using the finite-state Markov chain approximation (MCA) method of Kushner and Dupuis (2001) to solve continuous-time optimal control problems. We first show that the implicit finite-difference scheme of Achdou et al. (2017) amounts to a limiting form of the MCA method for a certain choice of approximating chains and policy function iteration for the resulting system of equations. We then illustrate the benefits of departing from policy function iteration by showing that using variations of modified policy function iteration to solve income fluctuation problems in two and three dimensions can lead to an increase in the speed of convergence of more than an order of magnitude. We then show that the MCA method is also well-suited to solving portfolio problems with highly correlated state variables, a setting that commonly occurs within general equilibrium models with financial frictions and for which it is difficult to construct monotone (and hence convergent) finite-difference schemes.   Read More

  • WP 21-03 | Location, Location, Structure Type: Rent Divergence within Neighborhoods


    Brian Adams Randal J. Verbrugge

    Abstract

    Housing rents are a large share of household budgets and make a large contribution to overall inflation. Rent inflation rates for different types of housing units sometimes diverge, even in the same neighborhoods. We estimate during 2013 to 2016 apartment rents outpaced rents for detached housing in the United States by 0.76 percentage points annually after controlling for location effects. These rent dynamics imply a segmented housing market. They also suggest rent indexes need to be based on data structurally representative of their measurement objective. In particular, indexes based on professionally managed apartment complexes mismeasure the rents for housing generally. Even indexes based on careful geographical sampling, such as the Consumer Price Index’s Owners’ Equivalent Rent component, may be biased by using an unrepresentative mix of apartments and houses.   Read More

  • WP 21-02 | Addressing COVID-19 Outliers in BVARs with Stochastic Volatility


    Andrea Carriero Todd E. Clark Massimiliano Marcellino Elmar Mertens

    Abstract

    Incoming data in 2020 posed sizable challenges for the use of VARs in economic analysis: Enormous movements in a number of series have had strong effects on parameters and forecasts constructed with standard VAR methods. We propose the use of VAR models with time-varying volatility that include a treatment of the COVID extremes as outlier observations. Typical VARs with time-varying volatility assume changes in uncertainty to be highly persistent. Instead, we adopt an outlier-adjusted stochastic volatility (SV) model for VAR residuals that combines transitory and persistent changes in volatility. In addition, we consider the treatment of outliers as missing data. Evaluating forecast performance over the last few decades in quasi-real time, we find that the outlier-augmented SV scheme does at least as well as a conventional SV model, while both outperform standard homoskedastic VARs. Point forecasts made in 2020 from heteroskedastic VARs are much less sensitive to outliers in the data, and the outlier-adjusted SV model generates more reasonable gauges of forecast uncertainty than a standard SV model. At least pre-COVID, a close alternative to the outlier-adjusted model is an SV model with t-distributed shocks. Treating outliers as missing data also generates better-behaved forecasts than the conventional SV model. However, since uncertainty about the incidence of outliers is ignored in that approach, it leads to strikingly tight predictive densities.   Read More

  • WP 21-01 | Employer Wage Subsidy Caps and Part-Time Work


    Joel Elvery C. Lockwood Reynolds Shawn Rohlin

    Abstract

    Hiring credits and employer wage subsidies are tools that policymakers have available to attempt to improve labor market conditions for workers. This study explores how capped-wage subsidies affect firms’ labor market decisions, in particular, their reliance on part-time and low-skill workers. We focus on the federal Empowerment Zone program, which offers firms in targeted areas a 20 percent wage subsidy (capped at $3,000 per year) for each employee who also resides in the Empowerment Zone. Results using different methods of identification suggest that firms respond to capped-wage subsidies by expanding their use of part-time workers, particularly where the subsidy cap is likely to bind. We also provide evidence of a shift toward lower-skill workers.   Read More

  • WP 20-37 | Neighborhood Sorting Obscures Neighborhood Effects in the Opportunity Atlas


    Dionissi Aliprantis Hal Martin

    Abstract

    The Opportunity Atlas (OA) is an innovative data set that ranks neighborhoods according to children’s adult outcomes in several domains, including income. Conceptually, outcomes offer new evidence about neighborhood effects when measured in isolation from neighborhood sorting. This paper shows that neighborhood sorting contributes to OA estimates. We document cases in which small sample sizes and changes over time can explain disagreements between OA rankings and those based on contemporaneous variables. Our results suggest caution for interpretations of the OA data set at a granular level, particularly for predictions about the outcomes of black children in high-income neighborhoods.   Read More

  • WP 20-36 | What Determines the Success of Housing Mobility Programs?


    Dionissi Aliprantis Hal Martin Kristen Tauber

    Abstract

    There is currently interest in crafting public housing policy that combats, rather than contributes to, the residential segregation in American cities. One such policy is the Housing Mobility Program (HMP), which aims to help people move from disinvested neighborhoods to ones with more opportunities. This paper studies how design features influence the success of HMPs in reducing racial segregation. We find that the choice of neighborhood opportunity index used to define the opportunity areas to which participants are encouraged to move has limited influence on HMP success. In contrast, we find that three design features have large effects on HMP success: 1) whether the geographic scope is confined to the central city or is implemented as a metro-level partnership; 2) whether the eligibility criteria are race-based, race-conscious, or race-neutral; 3) whether tenant counseling, tenant search assistance, and landlord outreach are successful in relaxing rental housing supply constraints.   Read More

  • WP 20-35 | Macroeconomic Changes with Declining Trend Inflation: Complementarity with the Superstar Firm Hypothesis


    Takushi Kurozumi Willem Van Zandweghe

    Abstract

    Recent studies indicate that, since 1980, the average markup and the profit share of income have increased, while the labor share and the investment share of spending have decreased. We examine the role of monetary policy in these changes as inflation has concurrently trended down. In a simple staggered price model with a non-CES aggregator of differentiated goods, a decline in trend inflation as measured since 1980 can account for a substantial portion of the changes. Moreover, introducing a rise in the productivity of “superstar firms” in the model can better explain not only the macroeconomic changes but also the micro evidence on the distribution of firms’ markups, including the flat median markup.   Read More

  • WP 20-34 | Does the Yield Curve Predict Output?


    Joseph G. Haubrich

    Abstract

    Does the yield curve have the ability to predict output and recessions? At some times and in certain places, of course! But many details are matters of dispute: When and where does the yield curve predict successfully, which aspects of the curve matter most, and which economic forces account for the predictive ability? Over the years, an increasingly sophisticated set of tools, both statistical and theoretical, have addressed these issues. For the US, an inverted yield curve, particularly when the spread between the yield on 10-year and 3-month Treasuries becomes negative, has been a robust indicator of recessions in the post-World War Two period. The spread also predicts future real GDP growth for the US, although the forecast ability varies by time period, in ways that appear to depend on monetary policy. The evidence is less clear in other countries, but the yield curve shows some predictive ability for the UK and Germany, among others.   Read More