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2000 Working Papers

  • WP 00-16 | Is the Political Business Cycle for Real?


    Brock Blomberg Gregory Hess

    Abstract

    This paper's macroeconomic model combines features from both real and political business cycle models. It augments a standard real business cycle tax model by allowing for varying levels of government partisanship and competence in order to replicate two important empirical regularities: First, that on average the economy expands early under Democratic presidents and contracts early under Republican presidents. Second, that presidents whose parties successfully retain the presidency have stronger-than-average growth in the second half of their terms. The model generates both of these features in conformity with U.S. post-World War II data. Read More

  • WP 00-15 | On the Welfare Gains of Reducing the Likelihood of Economic Crises


    Satyajit Chatterjee Dean Corbae

    Abstract

    The authors seek to measure the potential benefit of reducing the likelihood of economic crises (defined as Depression-style collapses of economic activity). Based on the observed frequency of Depression-like events, they estimate this likelihood to be approximately one in every 83 years for the U.S. The welfare gain of reducing even this small probability of crisis to zero can range between 1.05 percent and 6.59 percent of annual consumption in perpetuity. These large gains occur because although the probability of entering a Depression-like state is small, once the state is entered it is highly persistent. The authors also find that for some calibrations of the model, uninsured unemployment risk contributes significantly to the size of the gains. Read More

  • WP 00-14 | Gross Loan Flows


    Ben R. Craig Joseph G. Haubrich

    Abstract

    We present a series of stylized facts about gross loan flows and how they vary over time, bank size, and region. We define loan creation as the sum of the change in bank loans at all banks that increased loans since last quarter. Loan destruction is similarly defined as the absolute value of the change in loans at all banks that decreased loans. The gross flow (akin to what the labor literature calls reallocation) is the sum of creation and destruction. Read More

  • WP 00-13 | Relationship Loans and Information Exploitability in a Competitive Market: Loan Commitments vs. Spot Loans


    O. Emre Ergungor

    Abstract

    Despite the numerous benefits of loan commitments, only 79% of the commercial and industrial loans are made under commitment. I show that two factors limit the use of loan commitments. First, because banks commit themselves to lend, they carry costly liquidity reserves to meet their obligations. Due to liquidity costs, the interest rate on commitment loans is high relative to spot loans. Second, high interest rates trigger moral hazard. If the bank expects a profitable relationship in the future, it can absorb a portion of the liquidity costs to reduce the interest rate and attenuate moral hazard. If not, the borrower cannot get a loan commitment. Read More

  • WP 00-12 | Implementing the Friedman Rule


    Peter Ireland

    Abstract

    In cash-in-advance models, necessary and sufficient conditions for the existence of an equilibrium with zero nominal interest rates and Pareto optimal allocations place restrictions only on the very long-run, or asymptotic, behavior of the money supply. When these asymptotic conditions are satisfied, they leave the central bank with a great deal of flexibility to manage the money supply over any finite horizon. But what happens when these asymptotic conditions fail to hold? This paper shows that the central bank can still implement the Friedman rule if its actions are appropriately constrained in the short run. Read More

  • WP 00-11 | Monetary Shocks, Agency Costs, and Business Cycles


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    This paper integrates money into a real model of agency costs. Money is introduced by imposing a cash-in-advance constraint on a subset of transactions. The underlying real model is a standard real-business-cycle model modified to include endogenous agency costs. The paper's chief contribution is to demonstrate how the monetary transmission mechanism is altered by these endogenous agency costs. In particular, do agency costs amplify and/or propagate monetary shocks? Read More

  • WP 00-10 | Money Growth Rules and Price Level Determinacy


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    The authors show that in a plausibly calibrated monetary model with explicit production, exogenous money growth rules ensure real determinacy and thus avoid sunspot fluctuations. Although it is theoretically possible to construct examples in which real indeterminacy does arise, these examples rely on implausible money-demand elasticities or ignore the effect of production on the model's dynamic Read More

  • WP 00-09 | Forward-Looking Versus Backward-Looking Taylor Rules


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    This paper analyzes the restrictions necessary to ensure that the policy rule used by the central bank does not introduce real indeterminacy into the economy. It conducts this analysis in a flexible price economy and a sticky price model. A robust conclusion is that to ensure determinacy the monetary authority should follow a backward-looking rule where the nominal interest rate responds aggressively to past inflation rates. Read More

  • WP 00-03R | Anatomy of a Fair-Lending Exam: The Uses and Limitations of Statistics


    Paul Calem Stanley Longhofer

    Abstract

    (Revised) In this paper, we consider the role of statistical analysis in fair-lending compliance examinations. We present a case study of an actual fair-lending examination of a large mortgage lender, demonstrating how statistical techniques can be a valuable tool in focusing examiner efforts to either uncover illegal discrimination or exonerate an institution so accused. Importantly, our case also highlights the limitations of such statistical techniques. The study suggests that statistical analysis combined with comparative file review offer a balanced and thorough approach to enforcement of fair-lending laws. Read More

  • WP 00-08 | What Accounts For the Decline in Crime?


    Ayse Imrohoroglu Antonio Merlo Peter Rupert

    Abstract

    The authors' dynamic equilibrium model guides their quantitative investigation of the major determinants of property-crime patterns in the U.S. The model is capable of reproducing the drop in property crime that occurred between 1980 and 1996. The most important influences on the decline are a higher probability of apprehension, a stronger economy, and the aging of the population. The effect of unemployment on crime is negligible. Increased inequality in earnings prevented an even larger decline in crime. The authors' analysis can account for the behavior of the time series of property crime rates over the past quarter-century. Read More

  • WP 00-07R | Home Production Meets Time-To-Build


    Paul Gomme Finn Kydland Peter Rupert

    Abstract

    An innovation in this paper is to introduce a time-to-build technology for the production of market capital into a model with home production. The paper's main finding is that the two anomalies that have plagued all household production models-the positive correlation between business and household investment, and household investment leading business investment over the business cycle-are resolved when time-to-build is added. Read More

  • WP 00-06 | Protectionist Demands in Globalization


    Arzu Ilhan Ozgur Kibris

    Abstract

    We analyze a small open economy. The citizens have single-peaked preferences on the tariff rate for an import good. They declare a publicly most preferred tariff rate to the government which has discretion in the choice of the implemented tariff rate. While the government has incentive not to deviate too much from the publicly chosen tariff rate, its final choice is determined by bargaining with a foreign lobby who has a much lower optimal tariff rate and offers monetary transfers to the government in return for lowered tariffs. We show that the expectation of such a foreign influence affects the citizens? voting behavior. Namely, they tend to vote for a more protectionist tariff policy. Moreover, this behavior leads to an increase in transfers by the foreign lobby. Read More

  • WP 00-05 | Generalized Search-Theoretic Models of Monetary Exchange


    Peter Rupert Martin Schindler Randall Wright

    Abstract

    We present new results on existence, the number of equilibria, and welfare for search-theoretic models of money that extend the literature in several ways. For example, we provide results for general bargaining parameters while previous papers consider only special cases. Also, we present two version of the model: in one agents holding money cannot produce, in the other they can. The former model has been used in essentially all the previous literature, although the latter seems more natural for some purposes, and avoids several undesirable implications. Since very little is known about this version, we analyze it in detail. Read More

  • WP 00-04 | The Expectations Trap Hypothesis


    Lawrence Christiano Christopher Gust

    Abstract

    We explore a hypothesis about the take-off in inflation that occurred in the early 1970s. According to the expectations trap hypothesis, the Fed was pushed into producing the high inflation out of a fear of violating the public's inflation expectations. We compare this hypothesis with the Phillips curve hypothesis, according to which the Fed produced the high inflation as an unfortunate by product of a conscious decision to jump-start a weak economy. Which hypothesis is more plausible has important implications for what needs to be done to prevent other inflation flare-ups. Read More

  • WP 00-02 | How Much Should Americans Be Saving for Retirement?


    Douglas Bernheim Lorenzo Forni Jagadeesh Gokhale Laurence Kotlikoff

    Abstract

    How much should Americans save prior to retirement? Given Social Security's shaky financial condition, this is a critical question for baby boomers. A financial planning program-ESPlanner-is applied to data from the Health and Retirement Survey (HRS) to consider the amount that households approaching retirement should save. Read More

  • WP 00-01 | Designing Stabilization Policy in a Monetary Union


    Russell Cooper Hubert Kempf

    Abstract

    In this paper, we study a two-country world economy and consider various designs of monetary union. We argue that the success of monetary union depends on: (i) the commitment ability of the single central bank, (ii) the policy flexibility of the national fiscal authorities and the central monetary authority and (iii) the cross country correlation of shocks. If, for example, the central bank moves before the fiscal authorities, then a monetary union will increase welfare as long as fiscal policy is sufficiently responsive to shocks. However, if the fiscal authorities have restricted set of tools and/or the monetary authority lacks the ability to commit to its policy, then monetary union may not be desirable. Read More