Working Papers
Stimulating discussion and critical comment on research in progress.
2009
- WP 09-13
- The Long Run Effects of Changes in Tax Progressivity
- This paper compares the steady state outcomes of revenue-neutral changes to the progressivity of the tax schedule. Our economy features heterogeneous households who differ in their preferences and permanent labor productivities, but it does not have idiosyncratic risk. We find that increases in the progressivity of the tax schedule are associated with long-run distributions with greater aggregate income, wealth, and labor input. Average hours generally declines as the tax schedule becomes more progressive implying that the economy substitutes away from less productive workers toward more productive workers. Finally, as progressivity increases, income inequality is reduced and wealth inequality rises. Many of these results are qualitatively different than those found in models with idiosyncratic risk, and therefore suggest closer attention should be paid to modeling the insurance opportunities of households. (PDF)
- WP 09-11R
- Re-Examining the Role of Sticky Wages in the U.S. Great Contraction: A Multi-Sectoral Approach
- 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. (PDF)
- WP 09-10
- Job Separations, Heterogeneity, and Earnings Inequality
- Changes in the fraction of workers experiencing job separations can account for most of the increase in earnings dispersion that occurred both between, as well as within educational groups in the United States from the mid-1970s to the mid-1980s. This is not true of changes in average earnings losses following job separations. A search model with exogenous human capital accumulation calibrated to match some selected moments of the U.S. labor market is used to measure the effects of changes in the fraction of workers experiencing job separations (extensive margin) versus changes in average earnings losses following job separations (intensive margin). While both margins do well in accounting for the increase in the college premium, only the changes in the extensive margin do well in accounting for the increases in the variance of both the permanent and transitory components of earnings. (PDF)
- WP 09-09R
- Competition or Collaboration? The Reciprocity Effect in Loan Syndication
- It is well recognized that loan syndication generates a moral hazard problem by diluting the lead arranger’s incentive to monitor the borrower. This paper proposes and tests a novel view that reciprocal arrangements among lead arrangers serve as an effective mechanism to mitigate this agency problem. Lender arrangements in about seven out of ten syndicated loans are reciprocal in the sense that lead arrangers also participate in loans that are led by their participant lenders. Syndicate lenders share reciprocity through such arrangements as they can mutually benefifit from each other’s monitoring effort. In fear of losing this reciprocity, lead arrangers will dutifully monitor their borrowers. Loans arranged in such a reciprocal way thus feature reduced moral hazard. I find strong empirical evidence that is consistent with the reciprocity effect. Controlling for lender, borrower, and loan characteristics, I show that: (i) lead arrangers retain on average 4.3% less of the loans with reciprocity than those without reciprocity, (ii) the average interest spread over LIBOR on drawn funds is 11 basis points lower on loans with reciprocity, and (iii) the default probability is 4.7% lower among loans with reciprocity. These results indicate a cooperative equilibrium in loan syndication and have important implications to lending institutions, borrowing firms, and regulators. (PDF)
- WP09-08
- Credit Crises, Money, and Contractions: A Historical View
- The relatively infrequent nature of major credit distress events makes a historical approach particularly useful. Using a combination of historical narrative and econometric techniques, we identify major periods of credit distress from 1875 to 2007, examine the extent to which credit distress arises as part of the transmission of monetary policy, and document the subsequent effect on output. Using turning points defined by the Harding-Pagan algorithm, we identify and compare the timing, duration, amplitude, and comovement of cycles in money, credit, and output. Regressions show that financial distress events exacerbate business cycle downturns both in the nineteenth and twentieth centuries and that a confluence of such events makes recessions even worse. (PDF)
- WP 09-07
- Entry, Exit and the Determinants of Market Structure
- Market structure is determined by the entry and exit decisions of individual producers. These decisions are driven by expectations of future profits which, in turn, depend on the nature of competition within the market. In this paper we estimate a dynamic, structural model of entry and exit in an oligopolistic industry and use it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. We find that entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all important determinants of long run firm values and market structure. As the number of firms in the market increases, the value of continuing in the market and the value of entering the market both decline, the probability of exit rises, and the probability of entry declines. The magnitude of these effects differ substantially across markets due to differences in exogenous cost and demand factors and across the dentist and chiropractor industries. Simulations using the estimated model for the dentist industry show that pressure from both potential entrants and incumbent ?rms discipline long-run profits. We calculate that a seven percent reduction in the mean sunk entry cost would reduce a monopolist’s long-run profits by the same amount as if the firm operated in a duopoly. (PDF)
- WP 09-06
- A Note on Sunspots with Heterogeneous Agents
- This paper studies sunspot fluctuations in a model with heterogeneous households. We find that wealth inequality reduces the degree of increasing returns needed to produce indeterminacy, while wage inequality increases it. When the model is calibrated to match the joint distribution of hours, income, and wealth, the required degree of increasing returns to scale is still much too high to be supported empirically (although smaller than similar homogeneous agent economies). We also find that the model robustly predicts only one sunspot, despite having 1,262 predetermined state variables. (PDF)
- WP09-05R
- Deposit Market Competition, Costs of Funding and Bank Risk
- In this paper we revisit the long debate on the risk effects of bank competition and propose a new approach to the empirical estimation of the relation between deposit market competition and bank risk. Our approach accounts for the opportunity of banks to shift to wholesale funding when deposit market competition is intense. The analysis is based on a unique comprehensive dataset which combines retail deposit rates data with data on bank characteristics and with data on local deposit market features for a sample of 589 U.S. banks. Our results support the notion of a risk-enhancing effect of deposit market competition. (PDF)
- WP09-04R
- Financial Crises and Bank Failures: A Review of Prediction Methods
- In this article we provide a summary of empirical results obtained in several economics and operations research papers that attempt to explain, predict, or suggest remedies for financial crises or banking defaults; we also outline the methodologies used in them. We analyze financial and economic circumstances associated with the U.S. subprime mortgage crisis and the global financial turmoil that has led to severe crises in many countries. The intent of this article is to promote future empirical research for preventing bank failures and financial crises. (PDF)
- WP 09-03
- A Brief Empirical History of U.S. Foreign-Exchange Intervention: 1973-1995
- This working paper has been revised. The new version is WP 11-18.
- WP09-01
- A Monetary Approach to Asset Liquidity
- This paper offers a monetary theory of asset liquidity—one that emphasizes the role of assets in payment arrangements—and it explores the implications of the theory for the relationship between assets’ intrinsic characteristics and liquidity, and the effects of monetary policy on asset prices and welfare. The environment is a random-matching economy where fiat money coexists with a real asset, and no restrictions are imposed on payment arrangements. The liquidity of the real asset is endogenized by introducing an informational asymmetry in regard to its fundamental value. The model delivers the following insights. A monetary equilibrium exists irrespective of the per capita supply of the real asset, provided that inflation is not too high. The illiquidity premium paid to the real asset tends to increase as the asset becomes riskier and more abundant. Monetary policy affects the real asset’s return when its quantity is not too large and inflation is in some intermediate range. The model predicts a negative relationship between inflation and the real asset’s expected return. (PDF)
- WP09-02
- Information and Liquidity: A Discussion
- I extend and discuss the model of asset liquidity by Lester, Postlewaite, and Wright (2007, 2008). I consider a model with decentralized trades in which claims on a real and divisible asset serve as means of payment. A recognizability problem is introduced by assuming that the claims on the asset can be counterfeited at a positive cost. This formalization nests the models by Lagos and Rocheteau (2008) and Geromichalos, Licari, and Suarez-Lledo (2007), in which there is no recognizability problem, and Lester, Postlewaite, and Wright (2007), in which counterfeits can be produced at no cost. Even though no counterfeiting occurs in equilibrium, the recognizability problem affects the composition of trades: Buyers consume less and spend a lower fraction of their asset holdings in matches where sellers are uninformed. Both the asset’s price and its liquidity (as measured by its transaction velocity) depend on the recognizability of the asset. The asset is more liquid and its return is lower if either the sellers’ ability to recognize counterfeits or the cost of producing counterfeits increases. (PDF)