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Working Papers

Working Papers

  • WP 21-23 | A Unified Framework to Estimate Macroeconomic Stars

    Saeed Zaman


    We develop a flexible semi-structural time-series model to estimate jointly several macroeconomic "stars" — i.e., unobserved long-run equilibrium levels of output (and growth rate of output), the unemployment rate, the real rate of interest, productivity growth, the price inflation, and wage inflation. The ingredients of the model are in part motivated by economic theory and in part by the empirical features necessitated by the changing economic environment. Following the recent literature on inflation and interest rate modeling, we explicitly model the links between long-run survey expectations and stars to improve the stars' econometric estimation. Our approach permits time variation in the relationships between various components, including time variation in error variances. To tractably estimate the large multivariate model, we use a recently developed precision sampler that relies on Bayesian methods. The by-products of this approach are the time-varying estimates of the wage and price Phillips curves, and the pass-through between prices and wages, both of which provide new insights into these empirical relationships' instability in US data. Generally, the contours of the stars echo those documented elsewhere in the literature — estimated using smaller models — but at times the estimates of stars are different, and these differences can matter for policy. Furthermore, our estimates of the stars are among the most precise. Lastly, we document the competitive real-time forecasting properties of the model and, separately, the usefulness of stars' estimates if they were used as steady-state values in external models.   Read More

  • WP 21-22 | Migration as a Vector of Economic Losses from Disaster-Affected Areas in the United States

    Jack DeWaard Elizabeth Fussell Katherine Curtis Stephan D. Whitaker Kathryn McConnell Kobie Price Catalina Castro Michael Soto


    In this paper, we infuse consideration of migration into research on economic losses from extreme weather disasters. Taking a comparative case study approach and using data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel, we document the size of economic losses via migration from 23 disaster-affected areas in the United States after the most damaging hurricanes, tornadoes, and wildfires on record. We then employ demographic standardization and decomposition to determine if these losses primarily reflect changes in out-migration or changes in the economic resources that migrants take with them (greater economic losses per migrant). Finally, we consider the implications of these losses for changing spatial inequality in the United States. While disaster-affected areas and those living in them differ in their experiences of and responses to extreme weather disasters, we generally find that, relative to the year before an extreme weather disaster, economic losses via migration from disaster-affected areas increase the year of and after the disaster, that these changes primarily reflect changes in out-migration (vs. the economic resources that migrants take with them), and that these losses briefly disrupt the status quo by temporarily reducing spatial inequality.   Read More

  • WP 21-21 | The Macroeconomic Effects of Universal Basic Income Programs

    André Victor D. Luduvice


    What are the consequences of a nationwide reform of a transfer system based on means-testing toward one of unconditional transfers? I answer this question with a quantitative model to assess the general equilibrium, inequality, and welfare effects of substituting the current US income security system with a universal basic income (UBI) policy. To do so, I develop an overlapping generations model with idiosyncratic income risk that incorporates intensive and extensive margins of the labor supply, on-the-job learning, and child-bearing costs. The tax-transfer system closely mimics the US design. I calibrate the model to the US economy and conduct counterfactual analyses that implement reforms toward a UBI. I find that an expenditure-neutral reform has moderate impacts on agents’ labor supply response but induces aggregate capital and output to grow due to larger precautionary savings. A UBI of $1,000 monthly requires a substantial increase in the tax rate of consumption used to clear the government budget and leads to an overall decrease in the macroeconomic aggregates, stemming from a drop in the labor supply. In both cases, the economy has more equally distributed disposable income and consumption. The UBI economy constitutes a welfare loss at the transition if it is expenditure-neutral and results in a gain in the second scenario.   Read More

  • WP 21-20 | Recourse as Shadow Equity: Evidence from Commercial Real Estate Loans

    Lara Loewenstein David Glancy Robert Kurtzman Joseph Nichols


    We study the role that recourse plays the in commercial real estate loan contracts in the portfolios of the largest US banks. We find that recourse is valued by lenders and is treated as a substitute for conventional equity. At origination, recourse loans receive loan rate spreads that are at least 20 basis points lower and loan-to-value ratios that are at least 3 percentage points higher. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Loans with recourse were half as likely to receive accommodation during the COVID-19 pandemic, and the modifications that did occur entailed a relatively smaller reduction in payments.   Read More

  • WP 21-19 | Average Inflation Targeting: Time Inconsistency And Intentional Ambiguity

    Chengcheng Jia Jing Cynthia Wu


    We study the implications of the Fed's new policy framework of average inflation targeting (AIT) and its ambiguous communication. We show that AIT improves the trade-off between inflation and real activity by tilting the Phillips curve in a favorable way. To fully utilize this feature and maximize social welfare, the central bank has the incentive to deviate from AIT and implement inflation targeting ex post. Next, we rationalize the central bank's ambiguous communication about the horizon over which it averages inflation. Ambiguous communication, together with uncertainty about economic fundamentals, helps the central bank to gain credibility and improve welfare in the long run, in spite of the time-inconsistent nature of AIT.   Read More

  • WP 21-18 | IT and Urban Polarization

    Jan Eeckhout Christoph Hedtrich Roberto Pinheiro


    We show that differential IT investment across cities has been a key driver of job and wage polarization since the 1980s. Using a novel data set, we establish two stylized facts: IT investment is highest in firms in large and expensive cities, and the decline in routine cognitive occupations is most prevalent in large and expensive cities. To explain these facts, we propose a model mechanism where the substitution of routine workers by IT leads to higher IT adoption in large cities due to a higher cost of living and higher wages. We estimate the spatial equilibrium model to trace out the effects of IT on the labor market between 1990 and 2015. We find that the fall in IT prices explains 50 percent of the rising wage gap between routine and non-routine cognitive jobs. The decline in IT prices also accounts for 28 percent of the shift in employment away from routine cognitive towards non-routine cognitive jobs. Moreover, our estimates show that the impact of IT is uneven across space. Expensive locations have seen a stronger displacement of routine cognitive jobs and a larger widening of the wage gap between routine and non-routine cognitive jobs.   Read More

  • WP 21-17 | The Real Effects of Monetary Shocks: Evidence from Micro Pricing Moments

    Gee Hee Hong Matthew Klepacz Ernesto Pasten Raphael Schoenle


    This paper evaluates the informativeness of eight micro pricing moments for monetary non-neutrality. Frequency of price changes is the only robustly informative moment. The ratio of kurtosis over frequency is significant only because of frequency, and insignificant when non-pricing moments are included. Non-pricing moments are additionally informative about monetary non-neutrality, indicating potential omitted variable bias and the inability of pricing moments to serve as sufficient statistics. In contrast to existing theoretical work, this ratio has an ambiguous relationship with monetary non-neutrality in a quantitative menu cost model. We show which modeling ingredients explain this discrepancy, providing guidance on modeling choices.   Read More

  • WP 19-27R | Job Displacement and Job Mobility: The Role of Joblessness

    Bruce Fallick John Haltiwanger Erika McEntarfer Matthew Staiger

    Original Paper: WP 19-27


    Who is harmed by and who benefits from worker reallocation? We investigate the earnings consequences of changing jobs and find a wide dispersion in outcomes. This dispersion is driven not by whether the worker was displaced, but by the duration of joblessness between job spells. Job movers who experience joblessness suffer a persistent reduction in earnings and tend to move to lower-paying firms, suggesting that job ladder models offer a useful lens through which to understand the negative consequences of job separations.   Read More

  • WP 21-16 | Welfare Implications of Asset Pricing Facts: Should Central Banks Fill Gaps or Remove Volatility?

    Pierlauro Lopez


    More than 20 years of financial market data suggest a term structure of the welfare cost of economic uncertainty that is downward-sloping on average, especially during downturns. This evidence offers guidance in selecting a model to study the benefits of macroeconomic stabilization from a structural perspective. The addition of nonlinear external habit formation to a textbook monetary model can rationalize the evidence. The model is observationally equivalent in its quantity implications to a standard New Keynesian model with CRRA utility, but the optimal policy prescription is overturned. In the model the central bank should prioritize removing consumption volatility (a targeting of risk premia) over filling the gap between consumption and its flexible-price counterpart (inflation targeting).   Read More

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

    Andrea Carriero Todd E. Clark Massimiliano Marcellino Elmar Mertens

    Original Paper: WP 21-02


    The COVID-19 pandemic has led to enormous movements in economic data that strongly affect parameters and forecasts obtained from standard VARs. One way to address these issues is to model extreme observations as random shifts in the stochastic volatility (SV) of VAR residuals. Specifically, we propose VAR models with outlier-augmented SV that combine transitory and persistent changes in volatility. The resulting density forecasts for the COVID-19 period are much less sensitive to outliers in the data than standard VARs. Evaluating forecast performance over the last few decades, we find that outlier-augmented SV schemes do at least as well as a conventional SV model. Predictive Bayes factors indicate that our outlier-augmented SV model provides the best data fit for the period since the pandemic’s outbreak, as well as for earlier subsamples of relatively high volatility.   Read More