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Working Papers

Working Papers

  • WP 18-03R | Assessing International Commonality in Macroeconomic Uncertainty and Its Effects


    Andrea Carriero Todd E. Clark Massimiliano Marcellino

    Original Paper: WP 18-03

    Abstract

    This paper uses a large vector autoregression to measure international macroeconomic uncertainty and its effects on major economies. We provide evidence of significant commonality in macroeconomic volatility, with one common factor driving strong comovement across economies and variables. We measure uncertainty and its effects with a large model in which the error volatilities feature a factor structure containing time-varying global components and idiosyncratic components. Global uncertainty contemporaneously affects both the levels and volatilities of the included variables. Our new estimates of international macroeconomic uncertainty indicate that surprise increases in uncertainty reduce output and stock prices, adversely affect labor market conditions, and in some economies lead to an easing of monetary policy.   Read More

  • WP 18-01R | Excess Persistence in Employment of Disadvantaged Workers


    Bruce Fallick Pawel Krolikowski

    Original Paper: WP 18-01

    Abstract

    We examine persistence in employment-to-population ratios in excess of that implied by persistence in aggregate labor market conditions, among less-educated individuals using state-level data for the United States. Dynamic panel regressions and local projections indicate a moderate degree of excess persistence, which dissipates within three years. We find no significant asymmetry between the excess persistence of high vs. low employment rates. The cumulative effect of excess persistence in the business cycle surrounding the 2001 recession was mildly positive, while the effect in the cycle surrounding the 2008-09 recession was decidedly negative. Simulations suggest that the lasting employment benefits of temporarily running a “high-pressure” economy are small.   Read More

  • WP 19-02R | Landlords and Access to Opportunity


    Dionissi Aliprantis Hal Martin David Phillips

    Original Paper: WP 19-02

    Abstract

    Despite being eligible for use in any neighborhood, housing choice vouchers tend to be redeemed in low-opportunity neighborhoods. This paper investigates how landlords contribute to this outcome and how they respond to efforts to change it. We leverage a policy change in Washington, DC, that increased voucher rental payments only in high-rent neighborhoods. Using two waves of a correspondence experiment that bracket the policy change, we show that most opportunity landlords screen out prospective voucher tenants, and we detect no change in average screening behavior after a $450 per month increase in voucher payments. In lease-up data, however, enough landlords do respond to increased payments to equalize the flow of voucher tenants into high- vs. low-rent neighborhoods. Using tax data and listings from a website specializing in subsidized housing, we characterize a group of marginal opportunity landlords who respond to higher payments. Marginal opportunity landlords are relatively rare, list their units near market rates, operate on a small scale, and negatively select into the voucher program based on hard-to-observe differences in unit quality.   Read More

  • WP 19-16 | A Theory of Intrinsic Inflation Persistence


    Takushi Kurozumi Willem Van Zandweghe

    Abstract

    We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and variable elasticity of demand in a model with staggered price and wage setting. Under nonzero trend inflation, the variable elasticity generates intrinsic persistence in inflation through a measure of price dispersion stemming from staggered price setting. It also introduces intrinsic persistence in wage inflation under staggered wage setting, which affects price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to a monetary policy shock. We also show that a credible disinflation leads to a gradual decline in inflation and a fall in output, and lower trend inflation reduces inflation persistence, as observed around the time of the Volcker disinflation.   Read More

  • WP 19-17 | On the Optimality of Differential Asset Taxation


    Tom Phelan

    Abstract

    How should a utilitarian government balance redistributive concerns with the need to provide incentives for business creation and investment? Should they tax business profits, the (risk-free) savings of owners, or some combination of both? To address this question, this paper presents a model in which the desirability of differential asset taxation emerges endogenously from the presence of agency frictions. I consider an environment in which entrepreneurs hire workers and rent capital to produce output subject to privately observed shocks and have the ability to both divert capital to private consumption and abscond with a fraction of assets. To provide incentives to invest, the wealth of an agent must depend on the performance of his/her firm, leading to ex-post inequality in all efficient allocations. I show that the efficient stationary distribution of wealth exhibits a thick right (Pareto) tail, with the degree of inequality monotonically increasing in the number of workers per entrepreneur. The efficient allocation is then implemented in a general equilibrium model using history-independent linear taxes on risk-free savings and (reported) business profits. The tax on entrepreneurs’ savings may be positive or negative, while the tax on business profits depends solely upon the degree of private information and is independent of all technological and preference parameters.   Read More

  • WP 19-15 | Thinking Outside the Box: Do SPF Respondents Have Anchored Inflation Expectations?


    Carola Conces Binder Wesley Janson Randal J. Verbrugge

    Abstract

    Despite the stability of the median 10-year inflation expectations in the Survey of Professional Forecasters (SPF) near 2 percent, we show that not a single SPF respondent’s expectations have been anchored at the target since the Federal Open Market Committee’s (FOMC) enactment of an inflation target in January 2012, or even since 2015. However, we find significant evidence for “delayed anchoring,” or a move toward being anchored, particularly after the federal funds rate lifted off in December 2015.   Read More

  • WP 16-35R2 | Goods-Market Frictions and International Trade


    Pawel Krolikowski Andrew McCallum

    Original Paper: WP 16-35R

    Abstract

    We add goods-market frictions to a general equilibrium dynamic model with heterogeneous exporting producers and identical importing retailers. Our tractable framework leads to endogenously unmatched producers, which attenuate welfare responses to foreign shocks but increase the trade elasticity relative to a model without search costs. Search frictions are quantitatively important in our calibration, attenuating welfare responses to tariffs by 40 percent and increasing the trade elasticity by 50 percent. Eliminating search costs raises welfare by 1 percent and increasing them by only a few dollars has the same effects on welfare and trade flows as a 10 percent tariff.   Read More

  • WP 19-06R | On the Heterogeneous Welfare Gains and Losses from Trade


    Daniel R. Carroll Sewon Hur

    Original Paper: WP 19-06

    Abstract

    How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods and services constitute a larger fraction of expenditures for low-wealth and low-income households. Second, we build a trade model with nonhomothetic preferences—to generate the documented relationship between tradable expenditure shares, income, and wealth—and uninsurable earnings risk—to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we permanently reduce trade costs so as to generate a rise in import share of GDP commensurate with that seen in the data from 2001 to 2014. We find that households in the lowest wealth decile experience welfare gains over the transition, measured by permanent consumption equivalents, that are 67 percent larger than those in the highest wealth decile.   Read More

  • WP 18-14R | A New Look at Historical Monetary Policy and the Great Inflation through the Lens of a Persistence-Dependent Policy Rule


    Richard Ashley Kwok Ping Tsang Randal J. Verbrugge

    Original Paper: WP 18-14

    Abstract

    The origins of the Great Inflation, a central 20th century U.S. macroeconomic event, remain contested. Prominent explanations are poor forecasts or deficient activity gap estimates. An alternative view: the FOMC was unwilling to fight inflation, perhaps due to political pressures. Our findings, based on a novel approach, support the latter view. New econometric tools allow us to credibly identify the particular activity gap, if any, in use. Persistence-dependent unemployment (gap) responses in the 1970s were essentially the same pre- and post-Volcker. Conversely, FOMC behavior vis-à-vis inflation—also persistence-dependent—changed markedly starting with Volcker, consistent with (though not proving) the political pressures view.   Read More

  • WP 16-14R2 | The Impact of Stricter Merger Control on Bank Mergers and Acquisitions. Too-Big-To-Fail and Competition


    Elena Carletti Steven Ongena Jan-Peter Siedlarek Giancarlo Spagnolo

    Original Paper: WP 16-14R

    Abstract

    The effect of regulations on the banking sector is a key question for financial intermediation. This paper provides evidence that merger control regulation, although not directly targeted at the banking sector, has substantial economic effects on bank mergers. Based on an extensive sample of European countries, we show that target announcement premia increased by up to 16 percentage points for mergers involving control shifts after changes in merger legislation, consistent with a market expectation of increased profitability. These effects go hand-in-hand with a reduction in the propensity for mergers to create banks that are too-big-to-fail in their country.   Read More