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2012 Working Papers

  • WP 12-40 | Can Local Housing Ordinances Prevent Neighborhood Destabilization?


    Thomas J. Fitzpatrick IV Lisa Nelson Francisca Richter Stephan D. Whitaker

    Revisions: WP 12-40R

    Abstract

    This paper assesses the ability of local housing ordinances to prevent neighborhood destabilization. We evaluate the degree to which vacancy registrations and point-of-sale inspection requirements influenced housing market outcomes following the housing crisis. With comprehensive real property data from Cuyahoga County, Ohio, we measure outcomes that characterize housing market distress including foreclosures, sales below the tax-assessed value, bulk sales, flipping, and property tax delinquency. We compare outcomes across properties in regulated and unregulated municipalities using matching procedures on linked data containing property, loan, and transaction characteristics. We find evidence that vacancy registrations substantially reduce foreclosures. Registrations are also negatively associated with tax delinquency and sales below a property's tax-assessed value in some specifications. In contrast, we find little evidence that point-of-sale inspections reduce undesirable transactions. Rather, properties in cities with inspection requirements displayed higher levels of foreclosure and tax delinquency relative to the control group during the study period. Read More

  • WP 12-39 | Privately Optimal Contracts and Suboptimal Outcomes in a Model of Agency Costs


    Charles T. Carlstrom Timothy Fuerst Matthius Paustian

    Abstract

    This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. Although privately optimal, this contract is not welfare maximizing as it leads to a sub-optimally high price of capital. The welfare cost of the privately optimal contract (when compared to the planner outcome) is significant. A menu of time-varying taxes and subsidies can decentralize the planner's allocations. Read More

  • WP 12-38 | Leverage, Investment, and Optimal Monetary Policy


    Filippo Occhino Andrea Pescatori

    Abstract

    We study optimal monetary policy in an economy where the debt overhang of firms leads to underinvestment and underproduction. The magnitude of this debt-induced distortion varies over the business cycle, rising significantly during recessions. When debt is contracted in nominal terms, this distortion gives rise to a balance sheet channel for monetary policy. In the presence of real and financial shocks, the monetary authority faces a trade-off between inflation and output gap stabilization. The optimal monetary policy rule prescribes that the anticipated component of inflation should be set equal to a target level, while the unanticipated component should rise in response to adverse shocks, smoothing the debt overhang distortion and the output gap. Read More

  • WP 12-37 | Financial Stress Index: A Lens for Supervising the Financial System


    Timothy Bianco Dieter Gramlich Mikhail V. Oet Stephen Ong

    Abstract

    This paper develops a new financial stress measure (Cleveland Financial Stress Index, CFSI) that considers the supervisory objective of identifying risks to the stability of the financial system. The index provides a continuous signal of financial stress and broad coverage of the areas that could indicate it. The construction methodology uses daily public market data collected from different sectors of financial markets. A unique feature of the index is that it employs a dynamic weighting method that captures the changing relative importance of the different sectors of the financial system. This study shows how the index can be applied to monitoring and analyzing financial system conditions. Read More

  • WP 12-36 | The Cyclical Behavior of Equilibrium Unemployment and Vacancies across OECD Countries


    Pedro Amaral Murat Tasci

    Revisions: WP 12-36R | WP 12-36R2

    Abstract

    We show that the inability of a standardly calibrated labor search-and-matching model to account for labor market volatility extends beyond the U.S. to a set of OECD countries. That is, the volatility puzzle is ubiquitous. We argue cross-country data is helpful in scrutinizing between potential solutions to this puzzle. To illustrate this, we show that the solution proposed in Hagedorn and Manovskii (2008) continues to deliver counterfactually low volatility in countries where labor-productivity persistence and/or steady-state job-finding rates are sufficiently low. Moreover, the model's ability to generate high enough volatility depends on vacancy-filling-rate levels that seem counterfactual outside the U.S. Read More

  • WP 12-35 | Fiscal Multipliers under an Interest Rate Peg of Deterministic vs. Stochastic Duration


    Charles T. Carlstrom Timothy Fuerst Matthius Paustian

    Abstract

    This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller. Our explanation rests on a Jensen's inequality type argument: the deterministic multiplier is convex in duration, and the stochastic multiplier is a weighted average of the deterministic multipliers. The quantitative difference in the two multipliers also arises in a model with capital, and in the baseline nonlinear model. However, the differences between the two is less pronounced in the nonlinear models. Read More

  • WP 12-34 | Inflation and Output in New Keynesian Models with a Transient Interest Rate Peg


    Charles T. Carlstrom Timothy Fuerst Matthius Paustian

    Abstract

    Recent monetary policy experience suggests a simple diagnostic for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be modestly inflationary, and a reasonable model should deliver such a prediction. We pursue this simple diagnostic in several variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where the effect of the interest rate peg can switch from highly inflationary to highly deflationary for only modest changes in the length of the interest rate peg. Curiously, this unusual behavior does not arise in a sticky information model of the Phillips curve. Read More

  • WP 12-32 | Bretton Woods, Swap Lines, and the Federal Reserve’s Return to Intervention


    Michael Bordo Owen F. Humpage Anna Schwartz

    Abstract

    This paper describes the United States' first line of defense against shortcomings in the Bretton Woods system, which threatened the system's continuation as early as 1960. The exposition describes the Federal Reserve's use of swap lines both to provide cover for central banks' unwanted dollar exposures, thereby forestalling claims on the U.S. gold stock, and to supply dollar liquidity to countries facing temporary balance-of-payments deficits, thereby bolstering confidence in their parities. As suggested by the expansion and growing use of the swap lines, the operations failed to distinguish between temporary and fundamental disequilibrium forces. In substituting temporary for fundamental adjustments, the lines ultimately proved inadequate. Read More

  • WP 12-31 | Measures beyond the College Degree Share to Guide Inter-regional Comparisons and Workforce Development


    Stephan D. Whitaker

    Abstract

    Raising the share of adults with college degrees in a region or jurisdiction is a nearly universal goal of regional policymakers. They believe that education, as summarized by this statistic, is the cause of increasing employment, productivity, and wages. Using statistics estimated from the decennial censuses and the American Community Survey, this analysis demonstrates how different measures would suggest different rankings of more successful versus less successful metro areas. The "place-of-birth" variable in Census data enables a disaggregation of the origins of the skilled and unskilled adult populations. This provides insight into whether high-skilled regions developed talent among natives or attracted talent nationally or globally. Read More

  • WP 12-30 | Land Bank 2.0: An Empirical Evaluation


    Thomas J. Fitzpatrick IV Stephan D. Whitaker

    Revisions: WP 12-30R

    Abstract

    In 2009, Cuyahoga County, Ohio, which contains Cleveland and 58 other municipalities, created the Cuyahoga County Land Reutilization Corporation. This land bank was established to acquire low-value properties, mitigate blighted housing, help stabilize neighborhoods, and slow the decline of property values. As of September 2013, the land bank had acquired 3,405 properties and demolished 1,853 structures. This empirical study evaluates the effectiveness of the land bank by estimating spatially corrected hedonic price models using sales near the land bank homes. In the six months before they are purchased by the land bank, the distressed properties are estimated to lower the sale price of nearby homes (within 500 feet) by 5.2 percent. The negative externality from the distressed properties decreases to 4.4 percent once the land bank takes possession. Read More

  • WP 12-29 | Bridging the Gap? Government Subsidized Lending and Access to Capital


    Josh Lerner Kristle Cortés

    Abstract

    The consequences of providing public funds to financial institutions remain controversial. We examine the Community Development Financial Institution (CDFI) Fund's impact on credit union activity, using hitherto little studied U.S. Treasury data. The CDFI Fund grants increase lending at credit unions by 3%. For every dollar awarded, 45 additional cents are loaned out to borrowers in the first year, and up to an additional $1.60 is loaned out within three years. Delinquent loan rates also increase slightly. Our panel results are supported by a broadband regression discontinuity analysis. Politics does not seem to play a role in allocating funding. Read More

  • WP 12-28 | The Panic of 1907


    Ellis W. Tallman

    Abstract

    This paper summarizes the academic literature on the Panic of 1907 in the United States. Despite over 100 years of separation, research by financial economic historians continues to uncover important data and underexploited connections between institutions to improve present day understanding of a watershed economic event—one that preceded the successful movement to establish a central bank in the United States in 1913. Read More

  • WP 12-27 | Real-Time Nowcasting with a Bayesian Mixed Frequency Model with Stochastic Volatility


    Andrea Carriero Todd E. Clark Massimiliano Marcellino

    Abstract

    This paper develops a method for producing current-quarter forecasts of GDP growth with a (possibly large) range of available within-the-quarter monthly observations of economic indicators, such as employment and industrial production, and financial indicators, such as stock prices and interest rates. In light of existing evidence of time variation in the variances of shocks to GDP, we consider versions of the model with both constant variances and stochastic volatility. We also evaluate models with either constant or time-varying regression coefficients. We use Bayesian methods to estimate the model, in order to facilitate providing shrinkage on the (possibly large) set of model parameters and conveniently generate predictive densities. We provide results on the accuracy of nowcasts of real-time GDP growth in the U.S. from 1985 through 2011. In terms of point forecasts, our proposal is comparable to alternative econometric methods and survey forecasts. In addition, it provides reliable density forecasts, for which the stochastic volatility specification is quite useful, while parameter time-variation does not seem to matter. Read More

  • WP 12-26 | Did Local Lenders Forecast the Bust? Evidence from the Real Estate Market


    Kristle Cortés

    Abstract

    This paper shows that mortgage lenders with a physical branch near the property being financed have better information about home-price fundamentals than nonlocal lenders. During the real estate run-up from 2002-06, home price growth negatively correlates with the share of loans made by local lenders, namely lenders with a branch in the respective county. Moreover, home prices fell less from 2006-09 in areas where more of the loans were made by local lenders. California foreclosure rates during the crisis are negatively correlated with local lending during the run-up. A 1 standard deviation increase in local loans is associated with 5 fewer foreclosures for every 1,000 houses. When local lenders retain loans for their portfolio rather than securitizing, the results for both home price growth and foreclosures are even stronger. Read More

  • WP 12-25 | Learning and Occupational Sorting


    Jonathan James

    Abstract

    This paper develops and estimates a model of occupational choice and learning that allows for correlated learning across occupation specific abilities. In the labor market, workers learn about their potential outcomes in all occupations, not just their current occupation. Based on what they learn, workers engage in directed search across occupations. The estimates indicate that sorting occurs in multiple dimensions. Workers discovering a low ability in their current occupation are signicantly more likely to move to a new occupation. At the same time, workers discovering a high ability in some occupations are more likely to move up the occupational ladder into managerial occupations. By age 28 this sorting process leads to an aggregate increase in wages similar to what would occur if all workers were endowed with an additional year of education. Read More

  • WP 12-24 | The Ins and Outs of Unemployment in the Long Run: Unemployment Flows and the Natural Rate


    Murat Tasci

    Abstract

    This paper proposes an empirical method for estimating a long-run trend for the unemployment rate that is grounded in the modern theory of unemployment. I write down an unobserved-components model and identify the cyclical and trend components of the underlying unemployment flows, which in turn imply a time-varying estimate of the unemployment trend, the natural rate. I identify a sharp decline in the outflow rate—the job finding rate—since 2000, which was partly offset by the secular decline in the inflow rate—the separation rate—since the 1980s, implying a relatively stable natural rate, currently at 6 percent. Read More

  • WP 12-23 | Who’s Afraid of Good Governance? State Fiscal Crises, Public Pension Underfunding, and the Resistance to Governance Reform


    Thomas J. Fitzpatrick IV Amy Monahan

    Abstract

    States' unfunded pension obligations to their current and retired employees have exploded in recent years to levels that are estimated to be between $750 billion and $4.4 trillion. In theory, this massive debt should have implications for states' ability to meet their financial obligations and a measurable impact on funding costs. Yet we find limited evidence that municipal bond markets are pricing the risks to states' fiscal health arising from these large obligations. Read More

  • WP 12-20R1 | Mortgage Companies and Regulatory Arbitrage


    Yuliya Demyanyk Elena Loutskina

    Original Paper: WP 12-20 | Revisions: WP 12-20R2 | WP 12-20R3 | WP 12-20R4

    Abstract

    Mortgage companies (MCs) do not fall under the strict regulatory regime of depository institutions. We empirically show that this gap resulted in regulatory arbitrage and allowed bank holding companies (BHCs) to circumvent consumer compliance regulations, mitigate capital requirements, and reduce exposure to loan-related losses. Compared to bank subsidiaries, MC subsidiaries of BHCs originated riskier mortgages to borrowers with lower credit scores, lower incomes, higher loan-to-income ratios, and higher default rates. Our results imply that precrisis regulations had the capacity to mitigate the deterioration of lending standards if consistently applied and enforced for all types of intermediaries. Revised April 2014. Read More

  • WP 12-12R1 | Neighborhood Dynamics and the Distribution of Opportunity


    Dionissi Aliprantis Daniel R. Carroll

    Original Paper: WP 12-12 | Revisions: WP 12-12R2

    Abstract

    This paper uses an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation to investigate the effects of neighborhood externalities. In the model, households choose where to live and how much to invest toward the production of their child's human capital. The return on parents' investment is determined in part by the child's ability and in part by an externality from the average human capital in their neighborhood. We use the model to test a prominent hypothesis about the concentration of poverty within racially-segregated neighborhoods (Wilson 1987). Read More

  • WP 12-10R | Approximating High-Dimensional Dynamic Models: Sieve Value Function Iteration


    Peter Arcidiacono Patrick Bayer Federico Bugni Jonathan James

    Original Paper: WP 12-10

    Abstract

    Many dynamic problems in economics are characterized by large state spaces, which make both computing and estimating the model infeasible. We introduce a method for approximating the value function of high-dimensional dynamic models based on sieves and establish results for the: (a) consistency, (b) rates of convergence, and (c) bounds on the error of approximation. We embed this method for approximating the solution to the dynamic problem within an estimation routine and prove that it provides consistent estimates of the model's parameters. We provide Monte Carlo evidence that our method can successfully be used to approximate models that would otherwise be infeasible to compute, suggesting that these techniques may substantially broaden the class of models that can be solved and estimated. Read More

  • WP 12-22 | Believe Only What You See: Credit Rating Agencies, Structured Finance, and Bonds


    Mahmoud Elamin

    Abstract

    This paper identifies rating verifiability as a key difference that explains why credit rating agencies (CRAs) failed to mitigate information asymmetries in the structured finance market but succeeded in the bond market. Two infinitely repeated models are analyzed. In the first, the rating is unverifiable, and there is no equilibrium where the CRA reveals its information. In the second, the rating is verified with some probability, and full information revelation is guaranteed for any verification probability, when the CRA is patient enough. The interaction between verification probability and CRA patience is also analyzed. Read More

  • WP 12-21 | Business Cycles and Financial Crises: The Roles of Credit Supply and Demand Shocks


    James Nason Ellis W. Tallman

    Revisions: WP 12-21R

    Abstract

    This paper explores the hypothesis that the sources of economic and financial crises differ from those of noncrisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and non-crisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations. (Published in Macroeconomic Dynamics, 2014.) Read More

  • WP 12-08R1 | Evidence of Neighborhood Effects from MTO: LATEs of Neighborhood Quality


    Dionissi Aliprantis Francisca Richter

    Original Paper: WP 12-08 | Revisions: WP 12-08R2

    Abstract

    This paper finds evidence of positive neighborhood effects on adult labor market outcomes using the Moving to Opportunity (MTO) housing mobility experiment. Our results stand in such sharp contrast to the current literature because our analysis focuses on outcomes of the subpopulation induced by the program to move to a higher quality neighborhood, while previous analyses have focused on outcomes of either the entire population or the subpopulation induced by the program to move to any neighborhood. We propose and implement a new strategy for identifying heterogeneous transition-specific effects that exploits the identification of the idiosyncratic component of an ordered choice model. We estimate Local Average Treatment Effects (LATEs) of the change in quality most commonly induced by MTO vouchers, between the first and second deciles of the national distribution of neighborhood quality. Although MTO vouchers induced much larger changes in neighborhood quality than standard Section 8 vouchers, these LATEs only pertain to a subpopulation representing under 10 percent of program participants. Read More

  • WP 12-01R | Community-Based Well Maintenance in Rural Haiti


    Dionissi Aliprantis

    Original Paper: WP 12-01

    Abstract

    This paper evaluates a new technology for providing water. The technology, developed by Haiti Outreach (HO), is distinguished by a program training communities to manage wells. The effects of training are identified by comparing HO's wells with wells refurbished by HO but subsequently managed under the status quo. There are large differences in functionality after only one year (8.7 percentage points). For policymakers choosing between standard and community-based interventions, I quantify the tradeoff between equity (sporadically providing water to all) and efficiency (consistently providing water to most). I interpret the estimated tradeoff to strongly favor community-based interventions. Read More

  • WP 12-20 | Mortgage Companies and Regulatory Arbitrage


    Yuliya Demyanyk Elena Loutskina

    Revisions: WP 12-20R1 | WP 12-20R2 | WP 12-20R3 | WP 12-20R4

    Abstract

    Mortgage companies (MCs) do not fall under the strict regulatory regime of depository institutions. We empirically show that this gap resulted in regulatory arbitrage and allowed bank holding companies (BHCs) to circumvent consumer compliance regulations, mitigate capital requirements, and reduce exposure to loan-related losses. Compared to bank subsidiaries, MC subsidiaries of BHCs originated riskier mortgages to borrowers with lower credit scores, lower incomes, higher loan-to-income ratios, and higher default rates. Our results imply that precrisis regulations had the capacity to mitigate the deterioration of lending standards if consistently applied and enforced for all types of intermediaries. Revised April 2014. Read More

  • WP 12-19 | A Tractable Estimator for General Mixed Multinomial Logit Models


    Jonathan James

    Abstract

    The mixed logit is a framework for incorporating unobserved heterogeneity in discrete choice models in a general way. These models are difficult to estimate because they result in a complicated incomplete data likelihood. This paper proposes a new approach for estimating mixed logit models. The estimator is easily implemented as iteratively re-weighted least squares: the well known solution for complete data likelihood logits. The main benefit of this approach is that it requires drastically fewer evaluations of the simulated likelihood function, making it signicantly faster than conventional methods that rely on numerically approximating the gradient. The method is rooted in a generalized expectation and maximization (GEM) algorithm, so it is asymptotically consistent, efficient, and globally convergent. Read More

  • WP 12-18 | The Macroeconomic Forecasting Performance of Autoregressive Models with Alternative Specifications of Time-Varying Volatility


    Todd E. Clark Francesco Ravazzolo

    Abstract

    This paper compares alternative models of time-varying macroeconomic volatility on the basis of the accuracy of point and density forecasts of macroeconomic variables. In this analysis, we consider both Bayesian autoregressive and Bayesian vector autoregressive models that incorporate some form of time-varying volatility, precisely stochastic volatility (both with constant and time-varying autoregressive coefficients), stochastic volatility following a stationary AR process, stochastic volatility coupled with fat tails, GARCH, and mixture-of-innovation models. The comparison is based on the accuracy of forecasts of key macroeconomic time series for real-time post-War-II data both for the United States and United Kingdom. The results show that the AR and VAR specifications with widely used stochastic volatility dominate models with alternative volatility specifications, in terms of point forecasting to some degree and density forecasting to a greater degree. Read More

  • WP 12-17 | Trimmed-Mean Inflation Statistics: Just Hit the One in the Middle


    Brent Meyer Guhan Venkatu

    Revisions: WP 12-17R

    Abstract

    This paper reinvestigates the performance of trimmed-mean inflation measures some 20 years since their inception, asking whether there is a particular trimmed-mean measure that dominates the median CPI. Unlike previous research, we evaluate the performance of symmetric and asymmetric trimmed-means using a well-known equality of prediction test. We find that there is a large swath of trimmed-means that have statistically indistinguishable performance. Also, while the swath of statistically similar trims changes slightly over different sample periods, it always includes the median CPI—an extreme trim that holds conceptual and computational advantages. We conclude with a simple forecasting exercise that highlights the advantage of the median CPI (and trimmed-mean estimators in general) relative to other standard measures in forecasting headline inflation. Read More

  • WP 11-11R | Search Frictions and the Labor Wedge


    Andrea Pescatori Murat Tasci

    Original Paper: WP 11-11

    Abstract

    We show that search frictions embedded in an RBC model primarily manifest themselves at the extensive margin. The ability to distinguish between the intensive and extensive margins, however, affects the measurement of the marginal rate of substitution (MRS). In fact, the correct measurement of the MRS, interms of hours per worker, implies a less variable and procyclical labor wedge than the one found in Chari et al. (2007), especially at low Frisch elasticity. Themain result is very robust to alternative wage determination mechanisms, even though implications for employment fluctuations may differ. Read More

  • WP 09-11R | Re-Examining the Role of Sticky Wages in the U.S. Great Contraction: A Multisectoral Approach


    Pedro Amaral James MacGee

    Original Paper: WP 09-11 | Revisions: WP 09-11R2

    Abstract

    We quantify the role of contractionary monetary shocks and wage rigidities in the U.S. Great Contraction. While the average economy-wide real wage varied little over 1929-33, real wages did rise signicantly in some industries. We calibrate a two-sector model with intermediates to the 1929 U.S. economy, where wages in one sector adjust slowly. We find that nominal wage rigidities can account for less than a fifth of the fall in GDP over 1929-33. Intermediate linkages play a key role, as the output decline in our benchmark is roughly half as large as in our two-sector model without intermediates. Read More

  • WP 12-16 | Estimating Contract Indexation in a Financial Accelerator Model


    Charles T. Carlstrom Timothy Fuerst Alberto Ortiz Matthius Paustian

    Revisions: WP 12-16R

    Abstract

    This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model with indexation over the frictionless model, they have remarkably similar business cycle properties for non-financial exogenous shocks. Read More

  • WP 12-15 | Fiscal Multipliers under an Interest Rate Peg of Deterministic vs. Stochastic Duration


    Charles T. Carlstrom Timothy Fuerst Matthius Paustian

    Abstract

    This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller. Read More

  • WP 12-14 | Deep Recessions, Fast Recoveries, and Financial Crises: Evidence from the American Record


    Michael Bordo Joseph G. Haubrich

    Abstract

    Do steep recoveries follow deep recessions? Does it matter if a credit crunch or banking panic accompanies the recession? Moreover, does it matter if the recession is associated with a housing bust? We look at the American historical experience in an attempt to answer these questions. The answers depend on the definition of a financial crisis and on how much of the recovery is considered. But in general recessions associated with financial crises are generally followed by rapid recoveries. We find three exceptions to this pattern: the recovery from the Great Contraction in the 1930s; the recovery after the recession of the early 1990s and the present recovery. The present recovery is strikingly more tepid than the 1990s. One factor we consider that may explain some of the slowness of this recovery is the moribund nature of residential investment, a variable that is usually a key predictor of recessions and recoveries. Read More

  • WP 12-13 | The Relationship between City Center Density and Urban Growth or Decline


    Kyle Fee Daniel Hartley

    Abstract

    In this paper we contrast the spatial patterns of population density and other demographic changes in growing versus shrinking MSAs from 1980 to 2010. We find that, on average, shrinking MSAs show the steepest drop in population density near the Central Business District (CBD). Motivated by this fact, we explore the connection between changes in population density at the core of the MSA and MSA productivity. We find that changes in near-CBD population density are positively associated with per capita income growth at the MSA-level. Read More

  • WP 12-12 | Neighborhood Dynamics and the Distribution of Opportunity


    Dionissi Aliprantis Daniel R. Carroll

    Revisions: WP 12-12R1 | WP 12-12R2

    Abstract

    This paper uses an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation to investigate the effects of neighborhood externalities. In the model, households choose where to live and how much to invest toward the production of their child's human capital. The return on parents' investment is determined in part by the child's ability and in part by an externality from the average human capital in their neighborhood. We use the model to test a prominent hypothesis about the concentration of poverty within racially-segregated neighborhoods (Wilson 1987). Read More

  • WP 12-11 | Diagnosing Labor Market Search Models: A Multiple-Shock Approach


    Kenneth Beauchemin Murat Tasci

    Abstract

    We construct a multiple shock, discrete time version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to underpredict the volatility of key labor market variables. In addition to the standard labor productivity shock, we introduce shocks to matching efficiency and job separation. We conduct two set of experiments. First, we estimate the joint probability distribution of shocks that simultaneously satisfy the observed data and the first-order conditions of the multiple-shock model, and then simulate its properties. Although the multiple-shock model generates significantly more volatility while preserving the Beveridge curve relationship, it generates counterfactual implications for the cyclicality of job separations. Using a business cycle accounting approach, we design the second set of experiments to isolate the sources of model incompleteness and show that the model requires significant procyclical and volatile matching efficiency and counterfactually procyclical job separations to render the observed data without error. We conjecture that the basic Mortensen-Pissarides model lacks mechanisms to generate sufficiently strong labor market reallocation over the business cycle, and suggest nontrivial labor force participation and job-to-job transitions as promising avenues of research. NOTE: This is a substantial revision of working paper 08-13, which is a substantial revision of working paper 07-20. Read More

  • WP 12-10 | Approximating High-Dimensional Dynamic Models: Sieve Value Function Iteration


    Peter Arcidiacono Patrick Bayer Federico Bugni Jonathan James

    Revisions: WP 12-10R

    Abstract

    Many dynamic problems in economics are characterized by large state spaces, which make both computing and estimating the model infeasible. We introduce a method for approximating the value function of high-dimensional dynamic models based on sieves and establish results for the: (a) consistency, (b) rates of convergence, and (c) bounds on the error of approximation. We embed this method for approximating the solution to the dynamic problem within an estimation routine and prove that it provides consistent estimates of the model?s parameters. We provide Monte Carlo evidence that our method can successfully be used to approximate models that would otherwise be infeasible to compute, suggesting that these techniques may substantially broaden the class of models that can be solved and estimated. Read More

  • WP 12-09 | Bank Balance Sheet Dynamics under a Regulatory Liquidity-Coverage-Ratio Constraint


    Lakshmi Balasubramanyan David VanHoose

    Abstract

    This paper presents a dynamic model of a bank’s optimal choices of imposing a binding liquidity-coverage-ratio (LCR) constraint. Our baseline balance-sheet dynamics starts with portfolio separation and no LCR constraint. Under a scenario in which regulators prohibit banks from applying securities to fulfill the LCR constraint, portfolio separation continues to hold, but deposit holdings depend on the extent to which the LCR constraint is binding. When banks are allowed to apply securities toward satisfying the constraint, portfolio separation can break down and lead to ambiguous effects on optimal dynamic loan and deposit paths. Our results indicate that under special cases in which portfolio separation holds, the LCR constraint affects bank-sheet dynamics in ways not previously recognized. As regulators move forward in implementing Basel III style LCR, it is imperative to understand the effects of the LCR constraint on bank balance-sheet dynamics. Read More

  • WP 12-08 | Evidence of Neighborhood Effects from MTO: LATEs of Neighborhood Quality


    Dionissi Aliprantis Francisca Richter

    Revisions: WP 12-08R1 | WP 12-08R2

    Abstract

    This paper finds evidence of positive neighborhood effects on adult labor market outcomes using the Moving to Opportunity (MTO) housing mobility experiment. Our results stand in such sharp contrast to the current literature because our analysis focuses on outcomes of the subpopulation induced by the program to move to a higher quality neighborhood, while previous analyses have focused on outcomes of either the entire population or the subpopulation induced by the program to move to any neighborhood. We propose and implement a new strategy for identifying heterogeneous transition-specific effects that exploits the identification of the idiosyncratic component of an ordered choice model. We estimate Local Average Treatment Effects (LATEs) of the change in quality most commonly induced by MTO vouchers, between the first and second deciles of the national distribution of neighborhood quality. Although MTO vouchers induced much larger changes in neighborhood quality than standard Section 8 vouchers, these LATEs only pertain to a subpopulation representing under 10 percent of program participants. Read More

  • WP 12-07 | Epilogue: Foreign-Exchange-Market Operations in the Twenty-First Century


    Michael Bordo Owen F. Humpage Anna Schwartz

    Abstract

    Foreign-exchange operations did not end after the United States stopped its activist approach to intervention. Japan persisted in such operations, but avoided overt conflict with its monetary policy. With the onset of the Great Recession, Switzerland has transacted in foreign exchange both for monetary and exchange-rate purposes, and key central banks have used swap facilities to extended their lender-of-last-resort functions. Developing and emerging-market economies continue to intervene, but their actions may hamper the development of their own foreign-exchange markets. China’s undervalued exchange rate is producing inflation and real appreciation, despite China’s efforts to sterilize its reserve accumulation. Read More

  • WP 12-06 | Common Drifting Volatility in Large Bayesian VARs


    Andrea Carriero Todd E. Clark Massimiliano Marcellino

    Abstract

    The estimation of large vector autoregressions with stochastic volatility using standard methods is computationally very demanding. In this paper we propose to model conditional volatilities as driven by a single common unobserved factor. This is justified by the observation that the pattern of estimated volatilities in empirical analyses is often very similar across variables. Using a combination of a standard natural conjugate prior for the VAR coefficients and an independent prior on a common stochastic volatility factor, we derive the posterior densities for the parameters of the resulting BVAR with common stochastic volatility (BVAR-CSV). Under the chosen prior, the conditional posterior of the VAR coefficients features a Kroneker structure that allows for fast estimation, even in a large system. Using US and UK data, we show that, compared to a model with constant volatilities, our proposed common volatility model significantly improves model fit and forecast accuracy. The gains are comparable to or as great as the gains achieved with a conventional stochastic volatility specification that allows independent volatility processes for each variable. But our common volatility specification greatly speeds computations. Read More

  • WP 11-26R | When Should Children Start School?


    Dionissi Aliprantis

    Original Paper: WP 11-26

    Abstract

    Kindergarten-entrance-age effects are difficult to identify due to the nonrandom allocation of entrance-age and simultaneous relative-age effects. This paper presents evidence that instrumental variable frameworks do not identify age effects for the youngest children of a cohort using the results of statistical tests for essential heterogeneity in initial enrollment decisions. Restricting attention to the oldest children in a cohort yields a sample with quasirandom variation in entrance and relative ages. This variation is used to identify the parameters of education production functions in which both entrance and relative ages are inputs for achievement. Estimates of entrance-age parameters from the ECLS-K data set are positive, large, and persist until the spring of third grade. Relative-age parameters are smaller, tend to be negative, and fade-out for math achievement by third grade. For the average child in our sample these estimates imply that both an earlier entrance cutoff date and an earlier birthdate will increase achievement if the child remains eligible. Read More

  • WP 11-23R2 | The Impact of Vacant, Tax-Delinquent, and Foreclosed Property on Sales Prices of Neighboring Homes


    Stephan D. Whitaker Thomas J. Fitzpatrick IV

    Original Paper: WP 11-23 | Revisions: WP 11-23R1

    Abstract

    In this empirical analysis, we estimate the impact of vacancy, neglect associated with property-tax delinquency, and foreclosures on the value of neighboring homes using parcel-level observations. Numerous studies have estimated the impact of foreclosures on neighboring properties, and these papers theorize that the foreclosure impact works partially through creating vacant and neglected homes. To our knowledge, this is only the second attempt to estimate the impact of vacancy itself and the first to estimate the impact of tax-delinquent properties on neighboring home sales. We link vacancy observations from Postal Service data with property-tax delinquency and sales data from Cuyahoga County (the county encompassing Cleveland, Ohio). Read More

  • WP 10-08R2 | Endogenous Gentrification and Housing-Price Dynamics


    Veronica Guerrieri Daniel Hartley Erik Hurst

    Original Paper: WP 10-08 | Revisions: WP 10-08R1 | WP 10-08R3

    Abstract

    In this paper, we begin by documenting substantial variation in house-price growth across neighborhoods within a city during citywide housing price booms. We then present a model which links house-price movements across neighborhoods within a city and the gentrification of those neighborhoods in response to a citywide housing-demand shock. A key ingredient in our model is a positive neighborhood externality: individuals like to live next to richer neighbors. This generates an equilibrium where households segregate based upon their income. In response to a citywide demand shock, higher-income residents will choose to expand their housing by migrating into the poorer neighborhoods that directly abut the initial richer neighborhoods. The in-migration of the richer residents into these border neighborhoods will bid up prices in those neighborhoods, causing the original poorer residents to migrate out. We refer to this process as “endogenous gentrification.” Using a variety of data sets and using Bartik variation across cities to identify city-level housing demand shocks, we find strong empirical support for the model’s predictions. Read More

  • WP 12-05 | Within-city Variation in Urban Decline: The Case of Detroit


    Veronica Guerrieri Daniel Hartley Erik Hurst

    Abstract

    When a city experiences a decline in income or population, do all neighborhoods within the city decline equally? Or do some neighborhoods decline more than others? What are the characteristics of the neighborhoods that decline the most? We answer these questions by looking at what happened to neighborhoods within Detroit as the city experienced a sharp decline in income and population from the 1980s to the late 2000s. We find patterns of changes in income and population that are consistent with the model and empirical patterns of gentrification presented in Guerrieri, Hartley, and Hurst (2011), only playing out in reverse. Read More

  • WP 10-08R1 | Endogenous Gentrification and Housing-Price Dynamics


    Veronica Guerrieri Daniel Hartley Erik Hurst

    Original Paper: WP 10-08 | Revisions: WP 10-08R2 | WP 10-08R3

    Abstract

    In this paper, we begin by documenting substantial variation in house-price growth across neighborhoods within a city during citywide housing price booms. We then present a model which links house-price movements across neighborhoods within a city and the gentrification of those neighborhoods in response to a citywide housing-demand shock. A key ingredient in our model is a positive neighborhood externality: individuals like to live next to richer neighbors. This generates an equilibrium where households segregate based upon their income. In response to a citywide demand shock, higher-income residents will choose to expand their housing by migrating into the poorer neighborhoods that directly abut the initial richer neighborhoods. The in-migration of the richer residents into these border neighborhoods will bid up prices in those neighborhoods, causing the original poorer residents to migrate out. We refer to this process as "endogenous gentrification." Using a variety of data sets and using Bartik variation across cities to identify city-level housing demand shocks, we find strong empirical support for the model’s predictions. Read More

  • WP 12-04 | Privately Optimal Contracts and Suboptimal Outcomes in a Model of Agency Costs


    Charles T. Carlstrom Timothy Fuerst Matthius Paustian

    Revisions: WP 12-39R

    Abstract

    This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital and household consumption. Although privately optimal, this contract is not welfare maximizing as it exacerbates fluctuations in real activity. The household’s desire to hedge business cycle risk, leads, via the financial contract, to greater business cycle risk. The welfare cost of the privately optimal contract (when compared to the planner outcome) is quite large. A countercyclical tax on lender profits comes close to achieving the planner outcome. Read More

  • WP 12-03 | The Impact of Recovery Efforts on Residential Vacancies


    O. Emre Ergungor Lisa Nelson

    Abstract

    Legislation aimed at stabilizing housing markets since the recession has focused on providing funding to acquire and remediate foreclosed and abandoned homes or providing financial assistance and incentives to purchase homes. Cuyahoga County has received over $100 million in such funds since 2008. We investigate the impact of these funds on vacancy rates. We examine neighborhoods in Cuyahoga County where National Stabilization Program dollars were spent and find that the program helped reduce vacancies in neighborhoods where properties were primarily purchased for consumption purposes. Read More

  • WP 12-02 | How Inflationary Is an Extended Period of Low Interest Rates?


    Charles T. Carlstrom Timothy Fuerst Matthius Paustian

    Abstract

    Recent monetary policy experience suggests a simple test of models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. But a monetary model should be rejected if a reasonably short nominal rate peg results in an unreasonably large inflation response. We pursue this simple test in three variants of the familiar dynamic new Keynesian (DNK) model. All of these models fail this test. Further some variants of the model produce inflation reversals where an interest rate peg leads to sharp deflations. Read More

  • WP 12-01 | Community-Based Well Maintenance in Rural Haiti


    Dionissi Aliprantis

    Revisions: WP 12-01R

    Abstract

    This paper evaluates a new technology for providing water. The technology, developed by Haiti Outreach (HO), is distinguished by a program training communities to manage wells. The effects of training are identified by comparing HO's wells with wells refurbished by HO but subsequently managed under the status quo. There are large differences in functionality after only one year (8.7 percentage points). For policymakers choosing between standard and community-based interventions, I quantify the tradeoff between equity (sporadically providing water to all) and efficiency (consistently providing water to most). I interpret the estimated tradeoff to strongly favor community-based interventions. Read More