Economic models
Views among Economists: Professional Consensus or Point-Counterpoint?
Roger Gordon & Gordon Dahl
NBER Working Paper, January 2013
Abstract:
To what degree do economists disagree about key economic questions? To provide evidence, we make use of the responses to a series of questions posed to a distinguished panel of economists put together by the Chicago School of Business. Based on our analysis, we find a broad consensus on these many different economic issues, particularly when the past economic literature on the question is large. Any differences are unrelated to observable characteristics of the Panel members, other than men being slightly more likely to express an opinion. These differences are idiosyncratic, with no support for liberal vs. conservative camps.
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The Failure of Private Regulation: Elite Control and Market Crises in the Manhattan Banking Industry
Lori Qingyuan Yue, Jiao Luo & Paul Ingram
Administrative Science Quarterly, March 2013, Pages 37-68
Abstract:
In this paper, we develop an account of the failure of private market-governance institutions to maintain market order by highlighting how control of their distributional function by powerful elites limits their regulatory capacity. We examine the New York Clearing House Association (NYCHA), a private market-governance institution among commercial banks in Manhattan that operated from 1853 to 1913. We find that the NYCHA, founded to achieve coordinating benefits among banks and to limit the effect of financial panics, evolved at the turn of the twentieth century into a device for large, elite market players to promote their own interests to the disadvantage of rival groups that were not members. Elites prevented the rest of the market from having equal opportunities to participate in emergency loan programs during bank panics. The elites' control not only worsened the condition of the rest of the market by allowing non-member banks to fail; it also diminished the influence of the NYCHA and escalated market crises as bank failures spread to member banks. As a result, crises developed to an extent that exceeded the control of the NYCHA and ended up hurting even elites' own interests. This paper suggests that institutional stability rests on a deliberate balance of interests between different market sectors and that, without such a balance, the distributional function of market-governance institutions plants the seeds of institutional destruction.
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Employment effects of Thanksgiving timing
R. Urbatsch
Economics Letters, forthcoming
Abstract:
In the United States, the period between Thanksgiving and Christmas has long seen the most intense consumer sales and hence the most active economy. This period varies in length depending on the date of Thanksgiving. Years where it is longer see detectably larger seasonal increases in national employment figures, so that an earlier Thanksgiving appears to serves as economic stimulus in the labor market.
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Shopping Externalities and Self-Fulfilling Unemployment Fluctuations
Greg Kaplan & Guido Menzio
NBER Working Paper, February 2013
Abstract:
We propose a novel theory of self-fulfilling fluctuations in the labor market. A firm employing an additional worker generates positive externalities on other firms, because employed workers have more income to spend and have less time to shop for low prices than unemployed workers. We quantify these shopping externalities and show that they are sufficiently strong to create strategic complementarities in the employment decisions of different firms and to generate multiple rational expectations equilibria. Equilibria differ with respect to the agents' (rational) expectations about future unemployment. We show that negative shocks to the agents' expectations lead to fluctuations in vacancies, unemployment, labor productivity and the stock market that closely resemble those observed in the US during the Great Recession.
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The impact of TARP on bank efficiency
Oneil Harris, Daniel Huerta & Thanh Ngo
Journal of International Financial Markets, Institutions and Money, April 2013, Pages 85-104
Abstract:
This paper examines the impact of the Troubled Asset Relief Program (TARP) capital injections on the operational efficiency of commercial banks. Using a nonparametric Data Envelopment Analysis to measure bank efficiency, we document a deteriorating pattern in the operating efficiency for banks that received the capital injection from TARP funds that is not evident in non-TARP banks. We test the impact of TARP on the change in bank efficiency as well as the abnormal change in bank efficiency; yet, our results continue to hold. We attribute the decrease in the operating efficiency of TARP funded banks to the abated incentives of bank managers to adopt best practices that improve asset quality, and the moral hazard associated with bailouts.
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Stock Returns and Monetary Policy: Are There Any Ties?
Hafedh Bouakez, Badye Essid & Michel Normandin
Journal of Macroeconomics, forthcoming
Abstract:
This paper empirically investigates the following three questions: (i) Do stock returns respond to monetary policy shocks? (ii) Do stock returns alter the transmission mechanism of monetary policy? and (iii) Does monetary policy systematically react to stock returns? Unlike existing empirical research on these topics, we use a structural vector auto-regression that relaxes the restrictions commonly imposed in earlier studies and identify monetary policy shocks by exploiting the conditional heteroskedasticity of the structural innovations. Applying this method to U.S. data, we find that the interaction between monetary policy and stock returns is much weaker than suggested by earlier empirical studies.
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Forecasting the Recovery from the Great Recession: Is This Time Different?
Kathryn Dominguez & Matthew Shapiro
NBER Working Paper, February 2013
Abstract:
This paper asks whether the slow recovery of the US economy from the trough of the Great Recession was anticipated, and identifies some of the factors that contributed to surprises in the course of the recovery. It constructs a narrative using news reports and government announcements to identify policy and financial shocks. It then compares forecasts and forecast revisions of GDP to the narrative. Successive financial and fiscal shocks emanating from Europe, together with self-inflicted wounds from the political stalemate over the US fiscal situation, help explain the slowing of the pace of an already slow recovery.
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Michael Owyang, Valerie Ramey & Sarah Zubairy
NBER Working Paper, February 2013
Abstract:
A key question that has arisen during recent debates is whether government spending multipliers are larger during times when resources are idle. This paper seeks to shed light on this question by analyzing new quarterly historical data covering multiple large wars and depressions in the U.S. and Canada. Using an extension of Ramey's (2011) military news series and Jordà's (2005) method for estimating impulse responses, we find no evidence that multipliers are greater during periods of high unemployment in the U.S. In every case, the estimated multipliers are below unity. We do find some evidence of higher multipliers during periods of slack in Canada, with some multipliers above unity.
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Growth Forecast Errors and Fiscal Multipliers
Olivier Blanchard & Daniel Leigh
NBER Working Paper, February 2013
Abstract:
This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.
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National Banking's Role in U.S. Industrialization, 1850-1900
Matthew Jaremski
NBER Working Paper, February 2013
Abstract:
The passage of the National Banking Acts stabilized the existing financial system and encouraged the entry of 729 banks between 1863 and 1866. The national banks not only attracted more deposits than previous state banks, but also concentrated in the area that would eventually become the Manufacturing Belt. Using a new bank census, the paper shows that these changes to the financial system were a major determinant of the geographic distribution of manufacturing. The sudden entry not only resulted in more manufacturing capital and output at the county-level, but also more steam engines and value added at the establishment-level.
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Harvests and Financial Crises in Gold-Standard America
Christopher Hanes & Paul Rhode
NBER Working Paper, December 2012
Abstract:
Most American financial crises of the postbellum gold-standard era were caused by fluctuations in the cotton harvest due to exogenous factors such as weather. The transmission channel ran through export revenues and financial markets under the pre-1914 monetary regime. A poor cotton harvest depressed export revenues and reduced international demand for American assets, which depressed American stock prices, drained deposits from money-center banks and precipitated a business-cycle downturn -- conditions that bred financial crises. The crises caused by cotton harvests could have been prevented by an American central bank, even under gold-standard constraints.
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Jaromir Nosal & Guillermo Ordoñez
NBER Working Paper, February 2013
Abstract:
Time-inconsistency of no-bailout policies can create incentives for banks to take excessive risks and generate endogenous crises when the government cannot commit. However, at the outbreak of financial problems, usually the government is uncertain about their nature, and hence it may delay intervention to learn more about them. We show that intervention delay leads to strategic restraint banks endogenously restrict the riskiness of their portfolio relative to their peers in order to avoid being the worst performers and bearing the cost of such delay. These novel forces help to avoid endogenous crises even when the government cannot commit. We analyze the effect of government policies from the perspective of this new result.
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On Financing Retirement with an Aging Population
Ellen McGrattan & Edward Prescott
NBER Working Paper, February 2013
Abstract:
A problem facing the United States is financing retirement consumption as its population ages. Policy analysts increasingly advocate savings-for-retirement systems, but are concerned with insufficient savings opportunities with limited government debt. This concern is unwarranted. First, there is more productive capital than commonly assumed in macroeconomic modeling. Second, if the policy reform subsumes the elimination of capital income taxes, then the value of business equity increases relative to the capital stock. Phasing in a switch from the current U.S. system to a savings-for-retirement system without capital income taxes increases welfare of all current and future cohorts.
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The Missing Transmission Mechanism in the Monetary Explanation of the Great Depression
Christina Romer & David Romer
NBER Working Paper, January 2013
Abstract:
This paper examines an important gap in the monetary explanation of the Great Depression: the lack of a well-articulated and documented transmission mechanism of monetary shocks to the real economy. It begins by reviewing the challenge to Friedman and Schwartz's monetary explanation provided by the decline in nominal interest rates in the early 1930s. We show that the monetary explanation requires not just that there were expectations of deflation, but that those expectations were the result of monetary contraction. Using a detailed analysis of Business Week magazine, we find evidence that monetary contraction and Federal Reserve policy contributed to expectations of deflation during the central years of the downturn. This suggests that monetary shocks may have depressed spending and output in part by raising real interest rates.
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Is Knowledge of the Tax Law Socially Desirable?
David Weisbach
American Law and Economics Review, forthcoming
Abstract:
This paper considers whether knowledge of the tax law is socially desirable. Unlike other laws, which most often attempt to channel behavior, revenue-raising taxes attempt to avoid changing behavior; so, it is not obvious whether or when knowledge of the tax law is desirable. I argue that whether knowledge of the tax law is desirable depends on three factors: expectations about the tax in the absence of knowledge, the type of tax, and the quality of the tax. These factors may often be hard to observe, which leads to the conclusion that it may often not be desirable to try to manipulate knowledge of the tax law.
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Government investment and the stock market
Frederico Belo & Jianfeng Yu
Journal of Monetary Economics, forthcoming
Abstract:
High rates of government investment in public sector capital forecast high risk premiums both at the aggregate and firm-level. This result is in sharp contrast with the well-documented negative relationship between the private sector investment rate and risk premiums. To explain the empirical findings, we extend the neoclassical q-theory model of investment and specify public sector capital as an additional input in the firm's technology. We show that the model can quantitatively replicate the empirical facts with reasonable parameter values if public sector capital increases the marginal productivity of private inputs.
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Decision Heuristics And Tax Perception - An Analysis Of A Tax-Cut-Cum-Base-Broadening Policy
Kay Blaufus et al.
Journal of Economic Psychology, April 2013, Pages 1-16
Abstract
In this paper, both a conjoint analysis and a lab experiment are conducted to analyze the influence of changes in the tax rate and the tax base on the perceived tax burden. Our results show that the majority of individuals do not make rational tax decisions based on the actual tax burden but rather use simple decision heuristics. This leads to an irrationally high impact of changes in nominal tax rates on the perceived tax burden. Taxpayers favor tax options that apply a lower tax rate on their gross income over a higher tax rate applied on their net income despite the lower actual tax burden of the latter option. This result suggests that politicians could combine increasing fiscal revenues and decreasing subjects' tax perception. Furthermore, overestimation of tax rate changes increases considerably when information on tax rate is considered first (framing effect).
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Incentive Effects of Inheritances and Optimal Estate Taxation
Wojciech Kopczuk
NBER Working Paper, February 2013
Abstract:
I consider nonlinear taxation of income and bequests with a joy-of-giving bequest motive and explicitly characterize the estate tax rate structure that maximizes social planner's welfare function. The solution trades off correction of externality from giving and discouraging effort of children due to income effect generated by bequests. The analysis shows that optimality of a positive tax on bequests in this context rests on the strength of the effect of bequests on behavior of future generations, and suggests that inheritance rather than estate tax is better suited to implement the corresponding policy.
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Fiscal Decentralization and Economic Growth: Spending versus Revenue Decentralization
Norman Gemmell, Richard Kneller & Ismael Sanz
Economic Inquiry, forthcoming
Abstract:
This article examines whether the efficiency gains accompanying fiscal decentralization generate higher growth in more decentralized economies, applying pooled-mean group techniques to a panel dataset of 23 Organization for Economic Co-operation and Development (OECD) countries, 1972-2005. We find that spending decentralization has tended to be associated with lower economic growth while revenue decentralization has been associated with higher growth. Since OECD countries are substantially more spending than revenue decentralized, this is consistent with Oates' (1972) hypothesis that maximum efficiency gains require a close match between spending and revenue decentralization. It suggests reducing expenditure decentralization, and simultaneously increasing the fraction financed locally, would be growth-enhancing.
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Nonlinear Growth Effects of Taxation: A Semi-Parametric Approach Using Average Marginal Tax Rates
Peren Arin et al.
Journal of Applied Econometrics, forthcoming
Abstract:
One of the major challenges of empirical tax research is the identification and calculation of appropriate tax data. While there is consensus that average marginal tax rates are most suitable for studying the effects of tax policy on economic growth, because of data limitations the calculation of marginal tax rates has been limited to the USA and the UK. This paper provides calculations of average marginal tax rates for the four Scandinavian countries using the methodologies of Seater (1982,1985) and Barro and Sahasakul (1983, 1986). Then, by pooling the newly calculated tax rates for the Scandinavian countries with the data for the USA and the UK, we investigate the effects of tax policy shocks on the per capita GDP growth rate. Our results suggest that an increase in average marginal tax rates has a negative impact on economic growth. Employing additive mixed panel models with penalized splines as estimation approach, we show that changes in tax rates have nonlinear effects. Increasing average marginal tax rates turn out to be the most distorting at relatively moderate tax rates.
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U.S. Farm Prosperity: The New Normal or Reversion to the Mean
Michael Boehlje, Brent Gloy & Jason Henderson
American Journal of Agricultural Economics, January 2013, Pages 310-317
"In 2011, farm commodity prices reached all-time highs and net returns for crop and livestock producers were expected to rise, despite surging production costs. In fact, USDA projected real net farm income to exceed $100 billion dollars, which is the highest inflation adjusted income since 1974. Since 2005, real farmland values have soared 5.6 percent per year, with more recent Federal Reserve and university land value surveys pointing to increases of 20 percent or more during 2011 (Henderson and Akers 2011; Duffy 2011). With rising land values, USDA forecasts that farmers' equity climbed to a record high of $1.8 trillion in 2011. Farmers are enjoying a boom in real farm income and wealth."
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Reference Dependent Preferences, Hedonic Adaptation and Tax Evasion: Does the Tax Burden Matter?
Michele Bernasconi, Luca Corazzini & Raffaello Seri
Journal of Economic Psychology, forthcoming
Abstract:
We study the effects of the tax burden on tax evasion both theoretically and experimentally. We develop a theoretical framework of tax evasion decisions that is based on two behavioral assumptions: 1) taxpayers are endowed with reference dependent preferences that are subject to hedonic adaptation; and 2) in making their choices, taxpayers are affected by ethical concerns. The model generates new predictions on how a change in the tax rate affects the decision to evade taxes. Contrary to the classical expected utility theory, but in line with previous applications of reference dependent preferences to taxpayers' decisions, an increase in the tax rate increases tax evasion. Moreover, as taxpayers adapt to the new legal tax rate, the decision to evade taxes becomes independent of the tax rate. We present results from a laboratory experiment that support the main predictions of the model.
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Pension reform, employment by age, and long-run growth
Tim Buyse, Freddy Heylen & Renaat Van de Kerckhove
Journal of Population Economics, April 2013, Pages 769-809
Abstract:
We study the effects of pension reform on hours worked by three active generations, education of the young, the retirement decision of older workers, and aggregate growth in a four-period OLG model. The model explains important facts well for many OECD countries. Our simulation results prefer an intelligent pay-as-you-go system above a fully funded private system. Positive effects on employment and growth are the strongest when the pay-as-you-go system includes a tight link between individual labor income and the pension, and when it attaches a high weight to labor income earned as an older worker to compute the pension assessment base.
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Daniel Jubinski & Marc Tomljanovich
Review of Financial Economics, forthcoming
Abstract:
This paper examines the 2006 to 2007 time period to determine the extent to which the release of the Federal Reserve minutes affects equity volatility and returns for 2,832 individual firms. Using intraday data, we find equity returns are essentially unaffected by FOMC minutes releases. We do find evidence of volatility effects, in that conditional volatility is lower prior to the minutes release and higher after the minutes release on release days, relative to a "control" day one week prior to the release date. These differences manifest at the 2:00-2:05 pm interval, and generally dissipate within 15 minutes. Consistent with previous literature, we also find evidence of both industry-specific and firm size effects in our data. Finally, we see that volatility is higher (lower) when the minutes are released after the Federal Reserve engages in restrictive (expansionary) monetary policy. Our results are robust to a variety of different definitions of the "control" dates, as well as differing industry definitions.
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Labor Income Responds Differently to Income-Tax and Payroll-Tax Reforms
Etienne Lehmann, François Marical & Laurence Rioux
Journal of Public Economics, forthcoming
Abstract:
We estimate the responses of gross labor income with respect to marginal and average net-of-tax rates in France over the period 2003-2006. We exploit a series of reforms to the income-tax and payroll-tax schedules affecting individuals who earn less than twice the minimum wage. Our estimate for the elasticity of gross labor income with respect to the marginal net-of-income-tax rate is around 0.2, while we find no response to the marginal net-of-payroll-tax rate. The elasticity with respect to the average net-of-tax rate is not significant for the income-tax schedule, while it is close to -1 for the payroll-tax schedule. A plausible explanation is the existence of significant labor supply responses to the income-tax schedule, combined with sticky posted wages (i.e., the gross labor income minus payroll taxes divided by hours worked). Finally, the effect of the net-of-income-tax rate seems to be driven by participation decisions, in particular those of married women.
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Deepankar Basu & Panayiotis Manolakos
Review of Radical Political Economics, March 2013, Pages 76-95
Abstract:
The law of the tendential fall in the rate of profit has been at the center of theoretical and empirical debates within Marxian political economy since the publication of volume III of Capital. An important limitation of this literature is the relative paucity of modern econometric investigations of the behavior of the rate of profit. The central objective of this paper is to remedy this lacuna. We investigate the properties of the profit rate series utilizing the methods of time series econometrics. The evidence suggests that the rate of profit is non-stationary. We also specify a test of Marx's law of the tendential fall in the rate of profit with a novel econometric model that explicitly accounts for the counter-tendencies and their time series properties. We find weak evidence of a long-run downward trend in the general profit rate for the U.S. economy for the period 1948-2007.
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Andrew Hayashi, Brent Nakamura & David Gamage
Public Finance Review, March 2013, Pages 203-226
Abstract:
Recent research in marketing and public economics suggests that consumers underestimate the effects of taxes and surcharges on total purchase prices when taxes and surcharges are made less salient. The leading explanation is that consumers anchor on base prices and underadjust for surcharges. We perform experiments that (1) extend the tax salience and price partitioning literatures to the labor supply context, (2) test the anchoring hypothesis by examining the effects of positive and negative wage surcharges on willingness to work, and (3) test whether responses to price partitioning result from imperfect calculation of all-inclusive prices or from deeper preferences. We reject the anchoring hypothesis and find that subjects are less willing to work both when their wages are partitioned with positive and with negative surcharge components. We also find evidence that partitioned pricing effects result from cognitive limitations and possibly from responses to complexity.
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Policy Announcements and Welfare
Vadym Lepetyuk & Christian Stoltenberg
Economic Journal, forthcoming
Abstract:
We show that in the presence of idiosyncratic risk, the public revelation of information about risky aggregate outcomes such as policy choices can have a welfare-reducing effect. By announcing information on non-insurable aggregate risk, the policy maker distorts households' incentives for insurance of idiosyncratic risk and increases the riskiness of the optimal self-enforceable allocation. The negative effect of distorted insurance incentives can be quantitatively important for a monetary authority that reveals changes in its shortrun inflation target. We characterize parameters for which the effect dominates conventional effects that favour releasing better information.