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Working Papers 2001: Abstracts
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01-1 Andrew B. Abel, "An Exploration of the Effects of Pessimism and Doubt on Asset Returns"
The
subjective distribution of growth rates of aggregate consumption is
characterized by pessimism if it is first-order stochastically dominated by the
objective distribution. Uniform pessimism is a leftward translation of the
objective distribution of the logarithm of the growth rate. The subjective
distribution is characterized by doubt if it is mean-preserving spread of the
objective distribution. Pessimism and doubt both reduce the riskfree rate and
thus can help resolve the riskfree rate puzzle. Uniform pessimism and doubt
both increase the average equity premium and thus can help resolve the equity
premium puzzle.
(209 KB, 30 pages)
Jim Poterba finds that consumers do not spend all of their assets during retirement, and he projects that the demand for assets will remain high when the baby boomers retire. Based on his forecast of continued high demand for capital, Poterba rejects the asset market meltdown hypothesis, which predicts a fall in stock prices when the baby boomers retire.
The author develops a
rational expectations general equilibrium model with a bequest motive and an
aggregate supply curve for capital. In this model, a baby boom generates an
increase in stock prices, and stock prices are rationally anticipated to fall
when the baby boomers retire, even though, as emphasized by Poterba, consumers
do not spend all of their assets during retirement. This finding contradicts
Poterba's conclusion that continued high demand for assets by retired baby
boomers will prevent a fall in the price of capital.
(244 KB, 18 pages)
01-3/R Loretta J. Mester, Leonard I. Nakamura, and Micheline Renault, "Checking Accounts and Bank Monitoring"
Superseded by Working Paper 05-14
(1.12 MB, 45 pages)
In this study the authors show that
during the postwar era, the United States experienced a decline in the share of
urban employment accounted for by the relatively dense metropolitan areas and a
corresponding rise in the share of relatively less dense ones. This trend,
which the authors call employment deconcentration, is distinct from the
other well-known regional trend, namely, the postwar movement of jobs and
people from the frostbelt to the sunbelt. The authors also show that
deconcentration has been accompanied by a similar trend within metropolitan
areas, wherein employment share of the denser sections of MSAs has declined and
that of the less dense sections risen. The authors provide a general
equilibrium model with density-driven congestion costs to suggest an
explanation for employment deconcentration.
(220 KB, 36 pages)
01-5 Aubhik Khan, Robert G. King, and Alexander L. Wolman, "Optimal Monetary Policy"
Optimal monetary policy maximizes welfare, given frictions in the economic environment. Constructing a model with two sets of frictions – the Keynesian friction of costly price adjustment by imperfectly competitive firms and the Monetarist friction of costly exchange of wealth for goods – the authors find optimal monetary policy is governed by two familiar principles.
First, the average level of the nominal interest rate should be sufficiently low, as suggested by Milton Friedman, that there should be deflation on average. Yet, the Keynesian frictions imply that the optimal nominal interest rate is positive.
Second, as various shocks
occur to the real and monetary sectors, the price level should be largely
stabilized, as suggested by Irving Fisher, albeit around a deflationary trend
path. (In modern language, there is only small "base drift" for the price level
path.) Since expected inflation is roughly constant through time, the nominal
interest rate must therefore vary with the Fisherian determinants of the real
interest rate – as there is expected growth or contraction of real
economic activity.
(1.90 MB, 58 pages)
The authors investigate the effects of technological
change, deregulation, and dynamic changes in competition on the performance of
U.S. banks. The authors' most striking result is that during 1991-1997, cost
productivity worsened while profit productivity improved substantially,
particularly for banks engaging in mergers. The data are consistent with the
hypothesis that banks tried to maximize profits by raising revenues as well as
reducing costs. Banks appeared to provide additional or higher quality services
that raised costs but also raised revenues by more than the cost increases. The
results suggest that methods that exclude revenues when assessing performance
may be misleading.
(455 KB, 49 pages)
From 1900 to 1935, Argentina evolved from an economy highly
dependent on external, primarily British, finance to one more nearly
self-sufficient. The authors examine the failure of domestic finance to
adequately fill the void left by the decline of London and the breakdown of the
world financial system in the interwar period, when neither the Buenos Aires
Bolsa nor the private domestic banks developed rapidly enough to fully replace
British investors as efficient channels for financing private investment. One
consequence is that Argentine investable funds were increasingly concentrated
in a single institution, the Banco de la Nacion Argentina (BNA), creating a
lopsided financial structure that was vulnerable to rent seeking and to
authoritarian capture. Nevertheless, several measures, including gold reserves,
interest rates, money supply, bank credit, and the market capitalization of
domestic corporations, attest to the very high level of financial development
achieved by Argentina.
(219 KB, 51 pages)
Until the end of 1977, the method used to measure
changes in rent of primary residence in the U.S. consumer price index (CPI)
tended to omit price changes when units changed tenants or were temporarily
vacant. Since such units typically had more rapid increases in rents than
average units, omitting them biased inflation estimates downward. Beginning in
1978, the Bureau of Labor Statistics (BLS) implemented a series of
methodological changes that reduced this bias. The authors use data from the
American Housing Survey to check the success of the corrections. They compare
estimates of the historical series adjusted for the BLS changes in methodology
with a new hedonic estimate of changes in rental rates. The authors conclude
that from 1940 to 1977 the CPI for rent would have been about 60 percent higher
if current BLS practices had been used – between 1.3 and 3.5 percentage
points. Even after the corrections have been made, the authors' hedonic
estimates suggest that the current CPI methodology may still understate the
rental inflation rate by one-half to 1 percentage point.
(108 KB, 46 pages)
Are the recessionary consequences of
oil-price shocks due to oil-price shocks themselves or to contractionary
monetary policies that arise in response to inflation concerns engendered by
rising oil prices? Can systematic monetary policy be used to alleviate the
consequences of oil shocks on the economy? This paper builds a dynamic general
equilibrium model of monopolistic competition in which oil and money matter to
study these questions. The economy's response to oil-price shocks is examined
under a variety of monetary policy rules in environments with flexible and
sticky prices. The authors find that easy-inflation policies amplify the
negative output response to positive oil shocks and that systematic monetary
policy accounts for up to two thirds of the fall in output. On the other hand,
the authors show that a monetary policy that targets the (overall) price level
substantially alleviates the impact of oil-price shocks.
(1.17 MB, 35 pages)
01-10 Tom Stark and Dean Croushore, "Forecasting with a Real-Time Data Set for Macroeconomists"
This paper discusses how forecasts are affected by the use of
real-time data rather than latest-available data. The key issue is this: In the
literature on developing forecasting models, new models are put together based
on the results they yield using the data set available to the model’s
developer. But those are not the data that were available to a forecaster in
real time. How much difference does the vintage of the data make for such
forecasts? The authors explore this issue with a variety of exercises designed
to answer this question. In particular, they find that the use of real-time
data matters for some forecasting issues but not for others. It matters for
choosing lag length in a univariate context. Preliminary evidence suggests that
the span—or number—of forecast observations used to evaluate models
may also be critical: the authors find that standard measures of forecast
accuracy can be vintage-sensitive when constructed on the short spans (five
years of quarterly data) of data sometimes used by researchers for forecast
evaluation. The differences between using real-time and latest-available data
may depend on what is being used as the “actual” or realization, and
we explore several alternatives that can be used. Perhaps of most importance,
we show that measures of forecast error, such as root-mean-squared error and
mean absolute error, can be deceptively lower when using latest-available data
rather than real-time data. Thus, for purposes such as modeling expectations or
evaluating forecast errors of survey data, the use of latest-available data is
questionable; comparisons between the forecasts generated from new models and
benchmark forecasts, generated in real time, should be based on real-time
data.
(163 KB, 55 pages)
01-11 Luca Dedola and Sylvain Leduc, "A Quantitative Welfare Analysis of the Trade-Off Between the Current Regime and Macroeconomic Stabilization"
01-12 Laurence Ball and Dean Croushoure, "Expectations and the Effects of Monetary Policy"
This paper examines the predictive power of shifts in monetary
policy, as measured by changes in the real federal funds rate, for output,
inflation, and survey expectations of these variables. The authors find that
policy shifts have larger effects on actual output than on expected output;
thus policy predicts errors in output expectations, a violation of rational
expectations. Policy shifts do not predict errors in inflation expectations.
The authors explain these results with a model in which agents systematically
underestimate the effects of policy on aggregate demand. This model helps to
explain the real effects of policy.
(75 KB, 31 pages)
01-13/R Robert M. Hunt, "Patentability, Industry Structure, and Innovation"
To
qualify for a patent, an invention must be new, useful, and nonobvious. This
paper presents a model of sequential innovation in which industry structure is
endogenous and a standard of patentability determines the proportion of all
inventions that qualify for protection. There is a unique patentability
standard, or inventive step, that maximizes the rate of innovation by
maximizing the number of firms engaged in R&D. Surprisingly, this standard
is more stringent for industries disposed to innovate rapidly. If a single
standard is applied to heterogenous industries, it will encourage entry, and
therefore innovation, in some industries while discouraging it in others. The
model suggest a number of important implications for patent policy.
(350 KB, 35 pages)
01-14 Gerald Carlino, Satyajit
Chatterjee, and Robert Hunt, "Knowledge Spillovers and the New Economy of
Cities"
Superseded by Working Paper 06-14
(1.15 MB, 48 pages)
This paper argues that the rate of intangible
investment – investment in the development and marketing of new products
– accelerated in the wake of the electronics revolution in the 1970s. The
paper presents preliminary direct and indirect empirical evidence that US
private firms currently invest at least $1 trillion annually in intangibles.
This rate of investment roughly equals US gross investment in nonresidential
tangible assets. It also suggests that the capital stock of intangibles in the
US has an equilibrium market value of at least $5 trillion.
(127 KB, 43 pages)
In a canonical staggered pricing model, monetary discretion leads
to multiple private sector equilibria. The basis for multiplicity is a form of
policy complementarity. Specifically, prices set in the current period embed
expectations about future policy, and actual future policy responds to these
same prices. For a range of values of the fundamental state variable — a
ratio of predetermined prices — there is complementarity between actual
and expected policy, and multiple equilibria occur. Moreover, this multiplicity
is not associated with reputational considerations: it occurs in a two-period
model.
(1.04 MB, 40 pages)
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