Working Papers
Stimulating discussion and critical comment on research in progress.
1995
- WP 96-20
- Sectoral wage convergence: a nonparametric distributional analysis
- An examination of the relative shapes of the wage distribution in the U.S. goods-producing and service-producing sectors that uses a nonparametric measure of density overlap to analyze wage differences between the two sectors over time. What implications do 21st century monetary innovations bring for holdings of central bank money and standards of value? Emerging technologies such as cybercash, e-cash, and smart cards can be expected to reduce demand for central bank money, but the theoretical framework for monetary policy has not changed. (PDF)
- WP 95-19
- Does Means-Testing Welfare Discourage Saving? Evidence from the National Longitudinal Survey of Women
- This paper empirically tests whether the asset limit associated with the Aid to Families with Dependent Children (AFDC) program discourages wealth accumulation by actual and prospective participants. Prior to 198 1, the AFDC asset test varied substantially across states, and this variation can be used to identify the effect of the limit on wealth. Wealth holdings for female-headed households (the primary recipient group for AFDC) for 1978 are estimated using data from the National Longitudinal Survey of Women. A $1 difference in state limits results in an estimated $.50 difference in total net wealth holdings of female-headed households in different states. This qualitative finding of a significantly positive effect is reasonably robust with respect to a variety of specifications of the wealth equation and instrumenting of the limit to correct for the potential endogeneity of policy. After instrumenting, a $1 difference in limits implies a difference in potential AFDC recipients’ wealth holdings of $.30. (PDF)
- WP 95-18
- Understanding the postwar decline in United States saving: a cohort analysis
- An analysis of the postwar decline in U.S. national saving that decomposes changes in the net national saving rate into those due to changes in cohort-specific consumption propensities, the intergenerational distribution of resources, the rate of government spending, and demographics. A review and expansion of Calomiris, Kahn, and Longhofer’s (1994) cultural affinity theory of discrimination in the residential mortgage market, which is based on the idea that lenders find it easier or less costly to evaluate the creditworthiness of applicants with whom they have a common experiential background. (PDF)
- WP 95-17
- Some Monte Carlo results on nonparametric changepoint tests
- For long periods since 1982, core inflation has behaved as if it were generated by a process with a fixed mean and serially independent error term. Nonparametric changepoint tests proposed by Pettitt (1979) and Lombard (1987) suggest that since 1982, changes in core inflation have been infrequent and rather abrupt. However, little is known about the small-sample properties, the power of the tests, or the robustness of changepoint tests when a series is not i.i.d. This paper uses Monte Carlo analysis to investigate the probabilities of false positive tests under alternative assumptions about the time-series properties of the underlying process. (PDF)
- WP 95-16
- Fertility and Welfare Participation
- Despite the attention that the fertility of welfare recipients has received recently, surprisingly little is known about it. This paper answers some basic questions about the phenomenon of welfare births. Among the findings from the March 1987 Current Population Survey are that 13.4 percent of all births are into the 7.3 percent of families receiving Aid to Families with Dependent Children (AFDC) and that (unadjusted) fertility rates of welfare recipients exceed those of other groups. Using data from the National Longitudinal Survey of Youth, I find that nearly 60 percent of women who use AFDC in one or more years of the sample period have at least one "AFDC birth." I do not find prima facie evidence supporting the notions that women use AFDC to begin families earlier and that mothers use AFDC to realize their desires for large families. (PDF)
- WP 95-15
- Bank Capital and Equity Investment Regulations
- This paper uses an intermediation model to study the efficiency and welfare implications of both banks’ required capital-asset ratio and the regulation that limits, and in some countries forbids, banks’ investments in equity to a certain proportion of each firm’s capital. There are two sources of moral hazard in the model: one between the bank and the provider of deposit insurance, and the other between the bank and the entrepreneur who demands funds to finance an investment project. Among other things, the paper shows that capital regulation improves the bank’s stability and can also be Pareto-improving. Equity regulation is never Pareto-improving and does not increase the bank’s stability. (PDF)
- WP 95-14
- Defining the Monetary Base in a Deregulated Financial System
- The monetary base typically is defined as a measure of the money-supply "impulse" originating from the stock of high-powered, central-bank money. In addition to nonbanks’ demand for hand-to-hand currency, banks have demanded base money in the United States since 1913 to satisfy two needs. One is a reserve need, to fulfill a Federal Reserve regulatory requirement. The other is an operational need, to protect against teller shortages of coin and currency and against daylight and overnight overdrafts of banks’ accounts at Reserve Banks. As the level of reserve requirements declines, the aggregate demand for base money originating from banks reflects reserve requirements less and less, and reflects operating needs more and more. Moreover, the adjusted measure of the monetary base, combining the quantity of base money with an adjustment for changes in reserve requirements, becomes unreliable. It includes adjustments for banks that are, in fact, unaffected by changes in reserve requirements. (PDF)
- WP 95-13
- A Note on Absolute Priority Rule Violations, Credit Rationing, and Efficiency
- Violations of the absolute priority rule (APR) are commonplace in private workouts, formal business reorganizations, and personal bankruptcies. While some theorists suggest that these might arise endogenously, they are clearly magnified by the institutional structure of the bankruptcy code. This paper shows that APR violations exacerbate credit rationing problems by reducing the payment lenders receive in default states. Furthermore, APR violations make default more likely, raising the interest rate that firms must pay when borrowing. Both of these problems arise even when APR violations have no impact on the borrower’s incentive to undertake risk-shifting behavior. (PDF)
- WP 95-12
- The role of warrants in corporate reorganizations
- That a firm’s initial equityholders often emerge from Chapter 11 bankruptcy proceedings with more value than the absolute priority rule would suggest is now a generally accepted fact. The form in which this value is distributed, however, is less well understood. In particular, why do the original shareholders of some firms emerge from Chapter 11 bankruptcy with stock in the reorganized firm, while others receive warrants? This essay proposes that informational asymmetries provide the answer to this question. By proposing a reorganization plan in which they receive warrants, the original stockholders of a firm with good future prospects can signal their superior information to the creditors in a way that firms with poor prospects will not wish to mimic. (PDF)
- WP 95-11
- Voting on social security: evidence from OECD countries
- This article tests the subset of public choice models for social security that have empirical implications. The data, collected from OECD countries for the years 1960, 1970, 1980, and 1990, provide some support for each of the theories. Higher median voter age, more income heterogeneity, greater similarity in family size, and variables that make a public pension program more profitable are all associated with a larger program. However, none of the theories explains why the shape of the age distribution and the time trend are so important. The results are robust under both fixed-effects and random-effects estimation. (PDF)
- WP 95-10
- Optimal taxation of capital income in a growth model with monopoly profits
- This paper shows that the optimal steady-state tax on capital income in a neoclassical growth model can be positive, negative, or zero, depending crucially on the level of monopoly profits and the degree to which profits can be taxed. With an empirically plausible level of profits, the model implies that the optimal steady-state tax on capital can range between -6 percent and 24 percent, depending on the structure of dividend taxation. Similarly, we find that the available welfare gain of switching from the existing U.S. tax policy to a revenue-neutral optimal tax policy can range between 0.8 percent and 3.9 percent of steady-state output. (PDF)
- WP 95-09
- Optimal Fiscal Policy, Public Capital, and the Productivity Slowdown
- This paper develops a quantitative theoretical model for the optimal provision of public capital. We show that the ratio of public to private capital in the U.S. economy from 1925 to 1992 evolves in a manner that is generally consistent with an optimal transition path derived from the model. The model is also used to quantify the conditions under which an increase in the stock of public capital is desirable and to investigate the effects of hypothetical nonoptimal fiscal policies on productivity growth. (PDF)
- WP 95-08
- Marginal tax rates and income inequality: a quantitative-theoretic analysis
- An Auerbach-Kotlikoff (AK) overlapping-generations model is used to examine how changes in marginal income-tax rate structures affect the distribution of income, drawing on actual changes to the U.S tax code. This approach builds on AK by allowing for many different cohort types, and hence for a nontrivial endogenous distribution of income. (PDF)
- WP 95-07
- Optimal Fiscal Policy when Public Capital is Productive: A Business Cycle Perspective
- This paper develops a dynamic general-equilibrium model with productive public capital to help account for differences in the business cycle characteristics of public- versus private-sector expenditures in postwar U.S. data. A specification that allows for multiple stochastic shocks (to technology and depreciation rates) can reproduce a number of features describing the cyclical behavior of U.S. public investment and public consumption as well as other fiscal variables, such as average marginal tax rates and the government debt-to-output ratio. The model also delivers reasonable predictions for the behavior of private-sector aggregates. It is less successful, however, in capturing the large variability of public consumption expenditures in U.S. data, and it overpredicts the variability of the capital tax relative to the labor tax. (PDF)
- WP 95-06
- Imperfect state verification and financial contracting
- Standard work on costly state verification, monitoring, and auditing generally assumes perfect signals about the underlying state, especially in questions about financial contracting. Relaxing that assumption has several intriguing consequences. Most imperfect audits turn out to be useless, and those that are useful cannot be ranked by conventional criteria such as Blackwell’s information measure. Thus, the notion of "more" or "less" information becomes problematic. (PDF)
- WP 95-05
- Debt and Equity as Optimal Contracts
- The model presented in this paper is a particular case of the principal-agent problem. An entrepreneur has an investment project whose returns depend on his effort, which is not observable by the financier. After determining the optimal contract that is used to finance such a project, I show that this contract can be replicated by a unique combination of debt and equity, which proves the op optimality of these financial instruments. (PDF)
- WP 95-04
- Interest rate rules vs. money growth rules: a welfare comparison in a cash-in-advance economy
- This paper considers the welfare consequences of two particularly simple rules for monetary policy: an interest rate peg and a money growth peg. The model economy consists of a real side that is the standard real business cycle model, and a monetary side that amounts to imposing cash-in-advance constraints on certain market transactions. The paper also considers the effect of assuming a rigidity in the typical household’s cash savings choice. The competitive equilibrium of the economy is not Pareto efficient, partly because of two intertemporal distortions: a distortion on the capital accumulation decision, and a distortion on portfolio choice that arises from the assumed rigidity. The principal result of the paper is that the interest rate rule (but not the money growth rule) entirely eliminates these two intertemporal distortions and is thus the benevolent central banker’ s policy choice. (PDF)
- WP 95-03
- Computable general-equilibrium models and monetary policy advice
- An argument that variations of extant general-equilibrium monetary models can generate real-time economic forecasts comparable in accuracy to those contained in the Federal Reserve Board’s "Greenbook" briefing documents. (PDF)
- WP 95-02
- The changing role of banks and the changing value of deposit guarantees
- This article develops a model for pricing deposit guarantees. The model treats the bank’s investments as a portfolio of default-free bonds and risky loans. The risk of the loans is determined by individual firms’ financing and investment decisions. Pushing back risk to the level of the borrowing firms allows us to link deposit guarantees to specific characteristics of these loans, such as their durations, and to correlations between business risk and interest rates. Since the nature of bank loans has been changing over time, our model should predict the accompanying change in value of the government guarantees. (PDF)
- WP 95-01
- More on the Differences between Reported and Actual U.S. Central Bank Foreign Exchange Intervention
- It is unclear whether the distinction between U.S. foreign exchange intervention and newspaper reports of such activity is important. Dominguez and Frankel (1993) argue that unreported intervention has a weaker impact on the market. In this paper, we ask the empirical question: If intervention is reported (was actual), does it matter whether it occurred (was reported)? For a subsample for both the yen-to-dollar and Deutschemark-to-dollar exchange rates, we reject the hypothesis that the impact of intervention on the variance does not depend on whether it was reported. We also find that the sign of the impact depends on whether the intervention was reported. In addition, we uncover some evidence for impacts of false reports of intervention. We suggest that remaining concerns about these distinctions should be focused on the market microstructure surrounding the actual intervention operations. (PDF)