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Working Papers

Working Papers

  • WP 16-02R | Downward Nominal Wage Rigidity in the United States during and after the Great Recession

    Bruce Fallick Daniel Villar William Wascher

    Original Paper: WP 16-02


    Rigidity in wages has long been thought to impede the functioning of labor markets. In this paper, we investigate the extent of downward nominal wage rigidity in US labor markets using job-level data from a nationally representative establishment-based compensation survey collected by the Bureau of Labor Statistics. We use several distinct methods to test for downward nominal wage rigidity and to assess whether such rigidity is less or more severe in the presence of negative economic shocks than in more normal economic times. We find a significant amount of downward nominal wage rigidity in the United States and no evidence that the high degree of labor market distress during the Great Recession reduced downward nominal wage rigidity. We further find a lower degree of nominal rigidity at multi-year horizons.   Read More

  • WP 20-09 | Intermediation in the Interbank Lending Market

    Ben R. Craig Yiming Ma


    This paper studies systemic risk in the interbank market. We first establish that in the German interbank lending market, a few large banks intermediate funding flows between many smaller periphery banks and that shocks to these intermediary banks in the financial crisis spill over to the activities of the periphery banks. We then develop a network model in which banks trade off the costs and benefits of link formation to explain these patterns. The model is structurally estimated using banks’ preferences as revealed by the observed network structure in the precrisis period. It explains why the interbank intermediation arrangement arises, estimates the frictions underlying the arrangement, and quantifies how shocks are transmitted across the network. Model estimates based on precrisis data successfully predict changes in network-links and in lending arising from the crisis in out-of-sample tests. Finally, we quantify the systemic risk of a single intermediary and the impact of ECB funding in reducing this risk through model counterfactuals.   Read More

  • WP 20-08 | A New Tool for Robust Estimation and Identification of Unusual Data Points

    Christian Garciga Randal J. Verbrugge


    Most consistent estimators are what Müller (2007) terms “highly fragile”: prone to total breakdown in the presence of a handful of unusual data points. This compromises inference. Robust estimation is a (seldom-used) solution, but commonly used methods have drawbacks. In this paper, building on methods that are relatively unknown in economics, we provide a new tool for robust estimates of mean and covariance, useful both for robust estimation and for detection of unusual data points. It is relatively fast and useful for large data sets. Our performance testing indicates that our baseline method performs on par with, or better than, two of the currently best available methods, and that it works well on benchmark data sets. We also demonstrate that the issues we discuss are not merely hypothetical, by re-examining a prominent economic study and demonstrating its central results are driven by a set of unusual points.   Read More

  • WP 20-10 | Asset Prices and Unemployment Fluctuations

    Patrick Kehoe Pierlauro Lopez Virgiliu Midrigan Elena Pastorino


    Recent critiques have demonstrated that existing attempts to account for the unemployment volatility puzzle of search models are inconsistent with the procylicality of the opportunity cost of employment, the cyclicality of wages, and the volatility of risk-free rates. We propose a model that is immune to these critiques and solves this puzzle by allowing for preferences that generate time-varying risk over the cycle, and so account for observed asset pricing fluctuations, and for human capital accumulation on the job, consistent with existing estimates of returns to labor market experience. Our model reproduces the observed fluctuations in unemployment because hiring a worker is a risky investment with long-duration surplus flows. Intuitively, since the price of risk in our model sharply increases in recessions as observed in the data, the benefit from creating new matches greatly drops, leading to a large decline in job vacancies and an increase in unemployment of the same magnitude as in the data.   Read More

  • WP 20-06 | Oligopsonies over the Business Cycle

    Daniel Monte Roberto Pinheiro


    With a duopsony model, we show how the degree of labor market slack relates to earnings inequality and firm size distribution across local labor markets and the business cycle. In booms, due to the high aggregate productivity, there is fierce competition with resulting high wages and full employment. During recessions, there is labor market slack and firms enjoy local market power. In periods in which the economy is moving in or out of a recession, there is an “accommodation” phase, with firms shrinking their labor forces and paying lower wages instead of competing for poached workers. We show that the impact of economic shocks on wage dispersion and inequality may vary not only due to the nature of the shock, but also based on which equilibrium the economy may have settled in.   Read More

  • WP 20-07 | Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus

    Jorge Miranda-Pinto Daniel Murphy Kieran James Walsh Eric Young


    We document that the interest rate response to fiscal stimulus (IRRF) is lower in countries with high inequality or high household debt. To interpret this evidence we develop a model in which households take on debt to maintain a consumption threshold (saving constraint). Now debt-burdened, these households use additional income to deleverage. In economies with more debt-burdened households, increases in government spending tighten credit conditions less (relax credit conditions more), leading to smaller increases (larger declines) in the interest rate. Our theoretical framework predicts that the negative relationship between the IRRF and debt only holds when credit is not restricted. It also predicts that the consumption response to fiscal stimulus is falling in debt and inequality (only during periods of relaxed credit). We perform a series of empirical tests and find support for these predictions. In doing so, we provide context to recent evidence on the debt-dependent effects of government spending by highlighting that the relationship between debt and fiscal effects varies with credit conditions.   Read More

  • WP 20-05 | Output Gap, Monetary Policy Trade-offs, and Financial Frictions

    Francesco Furlanetto Paolo Gelain Marzie Taheri Sanjani


    This paper investigates how the presence of pervasive financial frictions and large financial shocks changes the optimal monetary policy prescriptions and the estimated dynamics in a New Keynesian model. We find that financial factors affect the optimal policy only to some extent. A policy of nominal stabilization (with a particular focus on targeting wage inflation) is still the optimal policy, although the central bank is now unable to fully stabilize economic activity around its potential level. In contrast, the presence of financial frictions and financial shocks crucially changes the size and shape of the estimated output gap and the relative importance of different shocks in driving economic fluctuations, with financial shocks absorbing explanatory power from labor supply shocks.   Read More

  • WP 20-04 | A Model of Expenditure Shocks

    Jorge Miranda-Pinto Daniel Murphy Eric Young Kieran James Walsh


    We document four features of consumption and income microdata: (1) household-level consumption is as volatile as household income on average, (2) household-level consumption has a positive but small correlation with income, (3) many low-wealth households have marginal propensities to consume near zero, and (4) lagged high expenditure is associated with low contemporaneous spending propensities. Our interpretation is that household expenditure depends on time-varying consumption thresholds where marginal utility discontinuously increases. Our model with consumption thresholds matches the four facts better than does a standard model. Poor households in our model also exhibit “excess sensitivity” to anticipated income declines.   Read More

  • WP 20-03 | Advance Layoff Notices and Labor Market Forecasting

    Pawel Krolikowski Kurt G. Lunsford


    We collect rich establishment-level data about advance layoff notices filed under the Worker Adjustment and Retraining Notification (WARN) Act since January 1990. We present in-sample evidence that the number of workers affected by WARN notices leads state-level initial unemployment insurance claims, changes in the unemployment rate, and changes in private employment. The effects are strongest at the one and two-month horizons. After aggregating state-level information to a national-level “WARN factor” using a dynamic factor model, we find that the factor substantially improves out-of-sample forecasts of changes of manufacturing employment in real time.   Read More

  • WP 20-02 | Capturing Macroeconomic Tail Risks with Bayesian Vector Autoregressions

    Andrea Carriero Todd E. Clark Massimiliano Marcellino


    A rapidly growing body of research has examined tail risks in macroeconomic outcomes. Most of this work has focused on the risks of significant declines in GDP, and has relied on quantile regression methods to estimate tail risks. In this paper we examine the ability of Bayesian VARs with stochastic volatility to capture tail risks in macroeconomic forecast distributions and outcomes. We consider both a conventional stochastic volatility specification and a specification featuring a common volatility factor that is a function of past financial conditions. Even though the conditional predictive distributions from the VAR models are symmetric, our estimated models featuring time-varying volatility yield more time variation in downside risk as compared to upside risk—a feature highlighted in other work that has advocated for quantile regression methods or focused on asymmetric conditional distributions. Overall, the BVAR models perform comparably to quantile regression for estimating tail risks, with, in addition, some gains in standard point and density forecasts.   Read More