Research publications and papers from the Federal Reserve Bank of Boston http://www.bostonfed.org/economic/index.htm en Wed, 15 May 2013 19:25:50 -0400 bos.webmaster@bos.frb.org Wed, 15 May 2013 19:24:58 -0400 bos.webmaster@bos.frb.org FeedForAll v2.0 (2.0.4.0) http://www.feedforall.com Research papers and publications from the Federal Reserve Bank of Boston en Boston Fed Research http://www.bostonfed.org/images/frblogo2a.gif http://www.bostonfed.org/economic/index.htm We explore several different explanations of the effect of foreclosures on neighboring properties using a dataset of transactions in Boston, for which we have rich data on the size and location of condominium associations. There is compelling evidence against a supply effect—nearby condo foreclosures in different associations, and even those within the same association but at different physical addresses, have little impact on condo sale prices. However, condos transact at average discounts of 2.4 percent when a foreclosure shares the same physical address. We view the results as indicating that investment externalities drive foreclosures' impacts on neighboring house prices. http://www.bostonfed.org/economic/ppdp/2013/ppdp1302.htm?wt.src=rss http://www.bostonfed.org/economic/ppdp/2013/ppdp1302.htm?wt.src=rss Wed, 15 May 2013 19:24:58 -0400 This policy brief presents some basic facts about the retention of recent college graduates and changes in retention over time. It considers how New England compares with other divisions, what factors affect its ability to retain graduates, and the reasons why recent college graduates choose to leave New England. It also highlights a Boston-area initiative to promote internships as a retention tool. http://www.bostonfed.org/economic/neppc/briefs/2013/pb132.htm?wt.src=rss http://www.bostonfed.org/economic/neppc/briefs/2013/pb132.htm?wt.src=rss Thu, 9 May 2013 16:12:20 -0400 The terms "window shopping" and "showrooming" refer to the activity in which potential buyers visit a brick-and-mortar store to examine a product but end up either not buying it or buying the product from an online retailer. This paper analyzes potential buyers who differ in their preference for after-sale service that is not offered by online retailers. For some buyers, making a trip to the brick-and-mortar store is costly; however, going to the store to examine the product has the advantage of mitigating the uncertainty as to whether the product will suit the buyer's needs. The model shows that the number of buyers engaged in window shopping behavior exceeds the optimal number, both under duopoly and under joint ownership of the online and walk-in store outlets. http://www.bostonfed.org/economic/wp/wp2013/wp1304.htm?wt.src=rss http://www.bostonfed.org/economic/wp/wp2013/wp1304.htm?wt.src=rss Wed, 8 May 2013 18:12:04 -0400 Research released between July 2012 and December 2012 http://www.bostonfed.org/economic/ResearchReview/index.htm?wt.src=rss http://www.bostonfed.org/economic/ResearchReview/index.htm Mon, 8 Apr 2013 17:39:14 -0400 Studies of foreclosure externalities have overwhelmingly focused on the impact of forced sales on the value of nearby properties, typically finding modest evidence of foreclosure spillovers. However, many quality-of-life issues posed by foreclosures may not be reflected in nearby sale prices. This paper uses new data from Boston on constituent complaints and requests for public services made to City government departments, matched with loan-level data, to examine the timing of foreclosure externalities. I find evidence that property conditions suffer most while homes are bank owned, although reduced maintenance is also common earlier in the foreclosure process. Since short sales prevent bank ownership, they should result in fewer neighborhood disamenities than foreclosures. http://www.bostonfed.org/economic/ppdp/2013/ppdp1301.htm?wt.src=rss http://www.bostonfed.org/economic/ppdp/2013/ppdp1301.htm?wt.src=rss Thu, 28 Mar 2013 15:59:47 -0400 Using U.S. real-time data, we show that changes in the unemployment rate unexplained by Okun's Law have significant predictive power for GDP data revisions. A positive (negative) error in Okun's Law in real time implies that GDP will be later revised to show less (more) growth than initially estimated by the statistical agency. The information in Okun's Law errors about the true state of real economic activity also helps to improve GDP forecasts in the near term. Our findings add a new dimension to the interpretation of real-time Okun's Law errors, as they show that these errors can convey information other than a change in potential GDP, the equilibrium unemployment rate, or the use of labor's intensive margin. http://www.bostonfed.org/economic/wp/wp2013/wp1303.htm?wt.src=rss http://www.bostonfed.org/economic/wp/wp2013/wp1303.htm?wt.src=rss Wed, 27 Mar 2013 09:39:12 -0400 The authors show how the influence of extrinsic random signals depends on the noise structure of these signals. They present an experiment on a coordination game in which extrinsic random signals may generate sunspot equilibria. They measure how these signals affect behavior. Sunspot equilibria emerge naturally if there are salient public signals. Highly correlated private signals may also cause sunspot-driven behavior, even though this is no equilibrium. The higher the correlation of signals and the more easily these can be aggregated, the more powerful these signals are in moving actions way from the risk-dominant equilibrium. http://www.bostonfed.org/economic/wp/wp2013/wp1302.htm?wt.src=rss http://www.bostonfed.org/economic/wp/wp2013/wp1302.htm?wt.src=rss Fri, 22 Mar 2013 17:55:16 -0400 n the aftermath of the Great Recession, many local governments have experienced significant financial strain. Local governments’ financial challenges are likely to continue in the foreseeable future, as federal deficit-reducing measures trigger cuts in state and local aid and as all levels of government struggle to fund their medical and retirement obligations. In an effort to maintain service provision without significant tax increases, many cities and towns will be forced to consider a variety of cost-cutting measures, including joint service provision with other localities. http://www.bostonfed.org/economic/neppc/researchreports/2013/rr1301.htm?wt.source=rss http://www.bostonfed.org/economic/neppc/researchreports/2013/rr1301.htm?wt.source=rss Thu, 14 Feb 2013 09:40:43 -0500 Important differences in labor market characteristics suggest that men and women physicians may be viewed as imperfect substitutes in the labor market. Concerns about efficiency and cost-cutting, which have led to the adoption of managed care practices, may have (unintentionally) favored female physicians. Using data from the Young Physicians Survey, the author compares changes in the gender earnings gap for physicians in states with high versus low managed care growth during the 1980s. She finds that the gender gap in hourly earnings among physicians in states with high managed care growth narrowed by 10 percentage points relative to states with low managed care growth. Moreover, Census data show that this finding holds only for physicians and not for other professions requiring advanced degrees. Further analysis shows that managed care appears to affect the relative earnings of male and female physicians by compressing the overall distribution of physician earnings. Together, these results suggest that the spread of managed care has been a factor in improving the relative earnings of female physicians. More broadly, these results suggest that market changes can have important consequences for the gender earnings gap when there are large pre-existing differences between men and women within a profession. http://www.bostonfed.org/economic/wp/wp2013/wp1301.htm?wt.source=rss http://www.bostonfed.org/economic/wp/wp2013/wp1301.htm?wt.source=rss Thu, 7 Feb 2013 11:34:07 -0500 Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced large rate reductions over the past years and are largely immune to these selection concerns. We show that interest rate changes dramatically affect repayment behavior. Our estimates imply that cutting a borrower’s payment in half reduces his hazard of becoming delinquent by about two-thirds, an effect that is approximately equivalent to lowering the borrower’s combined loan-to-value ratio from 145 to 95 (holding the payment fixed). These findings shed light on the driving forces behind default behavior and have important implications for public policy. http://www.bostonfed.org/economic/ppdp/2012/ppdp1210.htm http://www.bostonfed.org/economic/ppdp/2012/ppdp1210.htm Fri, 21 Dec 2012 09:35:09 -0500 Recent legislation and court settlements in the United States allow merchants to use price discounts to steer customers to pay with means of payment that are less costly to merchants. This paper suggests one method of calculating merchants’ change in profit associated with giving price discounts to buyers who pay with debit cards and cash. We use data from the pilot of the Boston Fed’s Diary of Consumer Payment Choice to compute rough estimates of the expected net cost reduction by merchant type that may result from debit card and cash price discounts. We find that steering consumers to debit and cash via price discounts reduces some merchants’ card costs. However, this cost reduction may be insufficient to offset the cost increase of administering price menus that vary by payment instrument. In addition, rewards buyers receive on credit card transactions may exceed the price discounts that merchants can provide. These factors may explain why steering via price discounts is not widely observed. http://www.bostonfed.org/economic/ppdp/2012/ppdp1209.htm http://www.bostonfed.org/economic/ppdp/2012/ppdp1209.htm Fri, 21 Dec 2012 09:35:08 -0500 This paper examines the implications of changing the expectations assumption that is embedded in nearly all current macroeconomic models. The paper substitutes measured or "real" expectations for rational expectations in an array of standard macroeconomic relationships, as well as in a DSGE model. The author finds that the use of survey measures of expectations--for near-term inflation, long-term inflation, unemployment, and short-term interest rates--improves performance along a variety of dimensions. Survey expectations exhibit strong correlations to key macroeconomic variables. Those correlations may be given a structural interpretation in a DSGE context. Including survey expectations helps to identify key slope parameters in standard relationships, and eliminates the need for having lagged dependent variables in structural models that is often motivated by indexation for prices and habit formation for consumption. Including survey expectations also obviates the need for autocorrelated structural shocks in the key equations. In a head-to-head empirical test, the weight placed on the DSGE model's rational expectations is essentially zero and the weight on survey expectations is one. The paper also discusses the modeling complications that arise once the rational expectations assumption is abandoned, and proposes methods for endogenizing survey expectations in a general equilibrium macro model. http://www.bostonfed.org/economic/wp/wp2012/wp1219.htm http://www.bostonfed.org/economic/wp/wp2012/wp1219.htm Fri, 21 Dec 2012 09:35:07 -0500 This paper attempts to identify how monetary policy shocks affect stock prices by using Mundell and Fleming's theory of the "Impossible Trinity." According to this theory, it is impossible to simultaneously have a fixed exchange rate, free capital movement (an absence of capital controls), and an independent monetary policy. The authors present evidence that Hong Kong's monetary policy is heavily dependent on the monetary policy of the United States, a stance which is consistent with this theory because the HK dollar has been pegged to the U.S. dollar since 1983 and Hong Kong does not impose any capital controls. As a result, the Federal Reserve's monetary policy actions can be considered as exogeneous shocks to the Hong Kong economy. Recognizing this relationship helps us solve the endogeneity problem inherent in the studies examining the relationship between stock prices and monetary policy shocks. This is the first paper that presents evidence of severe omitted variable bias in the event studies focusing on the relationship between monetary policy and stock returns. The authors also suggest a way to remedy this bias. http://www.bostonfed.org/economic/wp/wp2012/wp1218.htm http://www.bostonfed.org/economic/wp/wp2012/wp1218.htm Fri, 21 Dec 2012 09:35:07 -0500 Using data from the Panel Study of Income Dynamics, this paper examines the flow of U.S. households within and between two distinct segments of the housing market—renter-occupied properties and owner-occupied properties. The paper provides relevant empirical moments for microfounded models of the housing sector. In particular, net flows in the housing market are substantially smaller than the gross flows, as is the case in the literature on labor market flows. Housing market turnover also exhibits substantial heterogeneity in household moving rates, the long-run moving trends, and the cyclical patterns of household moving decisions. Moves by renters tend to lead movements in real GDP, while moves by homeowners are procyclical and/or slightly lag the cycle. The paper further shows that the secular decline in household moves over time is driven by reduced within-sector moves. Taken together, the paper's results imply that models aiming to describe housing market flows will have to feature substantial nonlinearities and/or multiple sector-specific (owner versus renter) shocks. http://www.bostonfed.org/economic/wp/wp2012/wp1217.htm http://www.bostonfed.org/economic/wp/wp2012/wp1217.htm Fri, 21 Dec 2012 09:35:06 -0500 We present new evidence on the relationship between health behaviors and experimental measures of risk and time preferences and introduce evidence that perceived control--a measure incorporated from the health psychology literature--is a stronger and more consistent predictor of health behaviors than economic preferences. http://www.bostonfed.org/economic/wp/wp2012/wp1216.htm http://www.bostonfed.org/economic/wp/wp2012/wp1216.htm Fri, 21 Dec 2012 09:35:06 -0500 This paper examines the role of uncertainty shocks in a one-sector, representative-agent dynamic stochastic general equilibrium model. When prices are flexible, uncertainty shocks are not capable of producing business cycle comovements among key macro variables. With countercyclical markups through sticky prices, however, uncertainty shocks can generate fluctuations that are consistent with business cycles. Monetary policy usually plays a key role in offsetting the negative impact of uncertainty shocks. If the central bank is constrained by the zero lower bound, then monetary policy can no longer perform its usual stabilizing function and higher uncertainty has even more negative effects on the economy. Calibrating the size of uncertainty shocks using fluctuations in the VIX, the authors find that increased uncertainty about the future may indeed have played a significant role in worsening the Great Recession, which is consistent with statements by policymakers, economists, and the financial press. http://www.bostonfed.org/economic/wp/wp2012/wp1215.htm http://www.bostonfed.org/economic/wp/wp2012/wp1215.htm Fri, 21 Dec 2012 09:35:05 -0500 We use the cross-state, cross-time variation in bank deregulation across the U.S. states to assess how improvements in banking systems affected the labor market opportunities of black workers. Bank deregulation from the 1970s through the 1990s improved bank efficiency, lowered entry barriers facing nonfinancial firms, and intensified competition for labor throughout the economy. Consistent with Becker’s (1957) seminal theory of racial discrimination, we find that deregulation-induced improvements in the banking system boosted blacks’relative wages by facilitating the entry of new firms and reducing the manifestation of racial prejudices in labor markets. http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1205.htm http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1205.htm Wed, 12 Dec 2012 16:20:33 -0500 During the last few decades, labor markets in advanced economies have become "polarized" as relative labor demand grows for high- and low-skill workers while it declines for middle-skill workers. This paper explores how polarization has interacted with the U.S. business cycle since the late 1970s. Consistent with previous work, the authors find that recessions are strongly synchronized across workers with different skills. Even high-skill workers favored by polarization suffer during recessions; this is particularly true during the last two downturns. Additionally, there is no evidence that polarization is driving the recent drop in the job-finding rate that has caused an adverse shift in the Beveridge curve. With this synchronization in mind, the authors then investigate the labor-market transitions of unemployed workers during recessions. When job-finding rates fall in recessions, middle-skill workers appear no more apt to leave the labor force or take low- or high-skill jobs than they are during booms. All in all, the results imply that current distress in the U.S. labor market extends far beyond middle-skill workers, and that recessions in general do not induce reallocation of middle-skill workers to jobs with better long-term outlooks. http://www.bostonfed.org/economic/ppdp/2012/ppdp1208.htm http://www.bostonfed.org/economic/ppdp/2012/ppdp1208.htm Mon, 10 Dec 2012 17:13:18 -0500 In spite of large number of financial crises, often depicted as episodes of financial panic, the notion of panic in financial markets is not very well understood. Many have argued that in order to understand financial crises, and in particular panic events, we need to go beyond classic economic arguments. This paper is an effort in that direction, in which we attempt to give a psychological account of panic and of panic in financial markets in particular, by discussing uncertainty, the desire for predictability and control, the illusion of control, and confidence. We suggest how one might incorporate these psychological insights into existing economic models. http://www.bostonfed.org/economic/ppdp/2012/ppdp1207.htm http://www.bostonfed.org/economic/ppdp/2012/ppdp1207.htm Tue, 4 Dec 2012 17:00:05 -0500 The Beveridge curve--the empirical relationship between unemployment and job vacancies--is thought to be an indicator of the efficiency of the functioning of the labor market. Normally, when job vacancies rise, unemployment falls, following a curved path that typically remains stable over long periods of time. When vacancies rise and unemployment does not fall (or falls too slowly) this may be an indication of problems of structural mismatch in the labor market leading to an increase in the lowest unemployment rate that can be maintained without increasing inflation (the NAIRU or nonaccelerating inflation rate of unemployment). Such a change in the vacancy-unemployment relationship occurred once in the 1970s and persisted through the late 1980s, and we have recently observed a similar change. This policy brief explores the nature of the recent change in the vacancy-unemployment relationship by disaggregating the data by industry, age, education, and duration of unemployment, and by examining blue- and white-collar groups separately. The plots presented here reveal a similar pattern of increasing vacancies with little or no change in unemployment in the recovery from the most recent recession across all categories except one: short-term unemployment. The relationship between short-term unemployment and vacancies is unchanged. Thus, all of the increase in vacancies relative to unemployment has taken place among the long-term unemployed. This situation contrasts with the change in the Beveridge curve relationship in the 1970s, when an increase in the level of vacancies without a decline in unemployment affected both the long- and short-term unemployed. Further, in the 1970s the outward shift of the Beveridge curve was largely concentrated among blue-collar workers, whereas the recent shift seems to have affected both blue- and white-collar workers. Finally, the shift in the 1970s took place over several years, while the current shift seems to have taken less than six months. Thus, there is reason to believe that the current shift may not have the persistence or the effects on the NAIRU that the shift of the 1970s had. Considering all the evidence together, we conclude that the current outward shift of the Beveridge curve is likely being driven by something other than a mismatch between workers’ skills and the demands of available jobs. http://www.bostonfed.org/economic/ppb/2012/ppb123.htm http://www.bostonfed.org/economic/ppb/2012/ppb123.htm Fri, 30 Nov 2012 13:58:49 -0500 In October 2011, new rules governing debit card interchange fees became effective in the United States. These rules limit the maximum permissible interchange fee that an issuer can charge merchants for a debit card transaction. This paper provides simple calculations that identify the transaction values for which merchants pay higher and lower interchange fees under the new rules. The paper then uses new data from the Boston Fed’s 2010 and 2011 Diary of Consumer Payment Choice to identify the types of merchants who are likely to pay higher and lower interchange fees under the new rules. http://www.bostonfed.org/economic/ppdp/2012/ppdp1206.htm http://www.bostonfed.org/economic/ppdp/2012/ppdp1206.htm Fri, 9 Nov 2012 14:37:09 -0500 The way that consumers make payments is changing rapidly and attracts important current policy interest. This paper develops and estimates a structural model of adoption and use of payment instruments by U.S. consumers. We use a cross-section of data from the Survey of Consumer Payment Choice, a new survey of consumer behavior. We evaluate substitution and income effects. Our simulations shed light on the consumer response to the 2011 regulation of interchange fees on debit cards imposed by the Dodd-Frank Act, as well as the proposed settlement between Visa and MasterCard and the Department of Justice that would allow merchants to surcharge the use of payment cards. http://www.bostonfed.org/economic/wp/wp2012/wp1214.htm http://www.bostonfed.org/economic/wp/wp2012/wp1214.htm Fri, 9 Nov 2012 14:37:08 -0500 This study uses Japanese data to address an important shortcoming of most of the existing literature on credit availability by including a set of unlisted firms (which are the firms most likely to be bank dependent) in the analysis, and by investigating differences between the treatment of listed and unlisted firms by their lenders. While we find evidence consistent with evergreening behavior by banks toward listed firms, whereby banks continue to lend to weak firms so they can continue making interest payments on existing loans and put off bankruptcy, the more striking result is that banks appear to be much less willing to engage in evergreening behavior toward the smaller, unlisted firms. Moreover, among listed firms, for which data on ownership by banks are available, a higher concentration of ownership of the firm by either the main bank or the firm's top three lenders increases the likelihood of the firm obtaining increased loans, suggesting that bank ownership of the firm stimulates evergreening behavior to a greater degree. However, the difference in treatment of unlisted firms relative to listed firms does not appear to be related simply to systematic differences in size between the two groups of firms. Thus, it appears that the distinguishing characteristic that determines whether a bank might evergreen loans to a firm is whether or not the firm is listed. Furthermore, this effect appears to be stronger for those firms listed on the more prestigious Tokyo Stock Exchange than for firms listed on other exchanges: being on the list (being listed) matters, and being on the A-list matters even more, consistent with a Too Connected To Fail phenomenon for nonfinancial firms in Japan. http://www.bostonfed.org/economic/wp/wp2012/wp1213.htm http://www.bostonfed.org/economic/wp/wp2012/wp1213.htm Fri, 9 Nov 2012 14:37:07 -0500 Almost all jobs require a combination of cognitive effort and labor effort. This paper focuses on the effect that competitive incentive schemes have on the chosen combination of these two types of efforts. We use an experimental approach to show that competitive incentives may induce agents to work harder but not necessarily smarter. This effect was stronger for women. http://www.bostonfed.org/economic/wp/wp2012/wp1212.htm http://www.bostonfed.org/economic/wp/wp2012/wp1212.htm Fri, 26 Oct 2012 09:23:22 -0400 This paper studies how foreign investors' concerns about model misspecification affect sovereign bond spreads. We develop a general equilibrium model of sovereign debt with endogenous default wherein investors fear that the probability model of the underlying state of the borrowing economy is misspecified. Consequently, investors demand higher returns on their bond holdings to compensate for the default risk in the context of uncertainty. In contrast with the existing literature on sovereign default, we explain the bond spreads dynamics observed in the data as well as other business cycle features for Argentina, while preserving the default frequency at historical low levels. http://www.bostonfed.org/economic/wp/wp2012/wp1211.htm http://www.bostonfed.org/economic/wp/wp2012/wp1211.htm Thu, 18 Oct 2012 17:27:41 -0400 The authors show that even when the exchange rate cannot be devalued, a small set of conventional fiscal policy instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a standard New Keynesian open economy environment. They perform the analysis under alternative pricing assumptions--producer or local currency pricing along with nominal wage stickiness, under alternative asset market structures, and for anticipated and unanticipated devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation: one, a uniform increase in the import tariff and export subsidy, and two, an increase in the value-added tax and a uniform reduction in the payroll tax. When the devaluations are anticipated, these policies need to be supplemented with a reduction in the consumption tax and an increase in income taxes. These policies have zero impact on fiscal revenues. In certain cases equivalence requires in addition a partial default on foreign bondholders. They discuss the issues regarding implementation of these policies, in particular in the case of a currency union. http://www.bostonfed.org/economic/wp/wp2012/wp1210.htm http://www.bostonfed.org/economic/wp/wp2012/wp1210.htm Thu, 18 Oct 2012 17:25:20 -0400 The effect of the Great Recession on the U.S. labor market will likely persist even after economic output has recovered. Although the recession did not greatly change the relative probabilities of job loss for different types of workers, the long-run impact will vary by worker characteristics. Workers who lost long-term jobs during the Great Recession are at increased risk of future job loss due to the loss of protection afforded by long-term job tenure, and older displaced workers are at a relatively high risk of prolonged spells of unemployment and premature retirement. The recent increase in the job vacancy rate with relatively little change in the unemployment rate suggests a decrease in the efficiency of job matching and an increase in the NAIRU. However, this phenomenon may pass once aggregate demand has increased enough to bring vacancy rates back within their normal range and extended unemployment insurance programs have expired. http://www.bostonfed.org/economic/wp/wp2012/wp1209.htm http://www.bostonfed.org/economic/wp/wp2012/wp1209.htm Mon, 15 Oct 2012 12:45:39 -0400 Deleveraging is the process by which households decide that their level of debt is inconsistent with their revised economic outlook and adjust their leverage accordingly, primarily by substituting debt repayment for consumption. Household deleveraging is a commonly cited reason for the sluggish consumption growth experienced during the current economic recovery from the Great Recession. This policy brief analyzes the impact of household debt repayment on consumer spending during and after the Great Recession by using aggregate and household-level data. Overall, the data show little evidence that deleveraging affected household consumption. Rather, movements in consumption prior to, during, and following the Great Recession are consistent with the standard relationships implied by fluctuations in household income and net worth. http://www.bostonfed.org/economic/ppb/2012/ppb122.htm http://www.bostonfed.org/economic/ppb/2012/ppb122.htm Fri, 12 Oct 2012 09:30:36 -0400 We develop a matching model of foreign direct investment to study how multinational firms choose between greenfield investment, acquisitions, and joint ownership. Firms must invest in a continuum of tasks to bring a product to market. Each firm possesses a core competency in the task space, but the firms are otherwise identical. For acquisitions and joint ownership, a multinational enterprise (MNE) must match with a local partner that may provide complementary expertise within the task space. However, under joint ownership, investment in tasks is shared by multiple owners and hence is subject to a holdup problem that varies with contract intensity. In equilibrium, ex ante identical multinationals enter the local matching market, and ex post, three different types of heterogeneous firms arise. Specifically, the worst matches are forgone and the MNEs invest greenfield; the middle matches operate under joint ownership; and the best matches integrate via full acquisition. We link the firm-level model to cross-country and industry predictions related to development and contract intensity, respectively, where greater contract intensity and a relatively more developed target market yield a higher share of full acquisitions. Using data on partial and full acquisitions across industries and countries, we find robust support for both predictions.We develop a matching model of foreign direct investment to study how multinational firms choose between greenfield investment, acquisitions, and joint ownership. Firms must invest in a continuum of tasks to bring a product to market. Each firm possesses a core competency in the task space, but the firms are otherwise identical. For acquisitions and joint ownership, a multinational enterprise (MNE) must match with a local partner that may provide complementary expertise within the task space. However, under joint ownership, investment in tasks is shared by multiple owners and hence is subject to a holdup problem that varies with contract intensity. In equilibrium, ex ante identical multinationals enter the local matching market, and ex post, three different types of heterogeneous firms arise. Specifically, the worst matches are forgone and the MNEs invest greenfield; the middle matches operate under joint ownership; and the best matches integrate via full acquisition. We link the firm-level model to cross-country and industry predictions related to development and contract intensity, respectively, where greater contract intensity and a relatively more developed target market yield a higher share of full acquisitions. Using data on partial and full acquisitions across industries and countries, we find robust support for both predictions. http://www.bostonfed.org/economic/wp/wp2012/wp1208.htm http://www.bostonfed.org/economic/wp/wp2012/wp1208.htm Wed, 10 Oct 2012 18:07:41 -0400 Using the most recent data available, the Berkshire Regional labor market profile provides a detailed picture of the region’s current and future labor supply. For context, it also provides detailed information on labor demand in the region over the past decade. This profile is designed to help guide workforce development professionals, policy makers, and civic, education, and business leaders as they make decisions about education and training opportunities. http://www.bostonfed.org/economic/neppc/labor-market-trends-in-massachusetts-regions/berkshire/index.htm http://www.bostonfed.org/economic/neppc/labor-market-trends-in-massachusetts-regions/berkshire/index.htm Thu, 27 Sep 2012 08:30:35 -0400 In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in "above average" condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices. http://www.bostonfed.org/economic/ppdp/2012/ppdp1205.htm http://www.bostonfed.org/economic/ppdp/2012/ppdp1205.htm Thu, 6 Sep 2012 15:23:17 -0400 The bursting of the housing price bubble during 2007 and 2008 was accompanied by high interbank spreads, and a partial breakdown of interbank lending. This paper theoretically models how Knightian uncertainty over banks risk exposures may have contributed to the breakdown. The paper shows: 1) the two-tier structure of the U.S. Fed Funds market makes it robust to uncertainty, but the market may nevertheless collapse — and private incentives to restart it may be insufficient. 2) In some circumstances government bank audits and information releases about exposures that resemble a stress test can restart markets and improve welfare by internalizing an externality associated with economy-wide uncertainty reduction. 3) Collapses due to uncertainty are less likely ex-ante and less costly to fix ex-post when there is better publicly available information on core banks aggregate risk exposures. Based on 2) and 3), ex-ante and ex-post "transparency initiatives" are proposed. Their success depends on the financial architecture of bank interlinkages. http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1204.htm http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1204.htm Thu, 16 Aug 2012 15:46:57 -0400 It is commonly noted that in the history of the Money Market Mutual Fund (MMMF) industry only two MMMFs have “broken the buck,” or had the net asset value per share (NAV) at which they transact fall below $1. While this statement is true, it is useful to consider the role that non-contractual support has played in the maintenance of this strong track record. Such support, which has served to obscure the credit risk taken by these funds, has been a common occurrence over the history of MMMFs. This paper presents a detailed view of the non-contractual support provided to MMMFs by their sponsors during the recent financial crisis based on an in depth review of public MMMF annual SEC financial statement filings (form N-CSR) with fiscal year-end dates falling between 2007 and 2011. According to our conservative interpretation of this data, we find that at least 21 prime MMMFs would have broken the buck absent a single identified support instance during the most recent financial crisis. Further, we identify repeat instances of support (or significant outflows) for some MMMFs during this period such that a total of at least 31 prime MMMFs would have broken the buck when considering the entirety of support activity over the full period. http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1203.htm http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1203.htm Mon, 13 Aug 2012 15:03:57 -0400 The authors study the responses to several questions related to real estate that were added to the Michigan Survey of Consumers in July and August 2011. In particular, they asked about attitudes toward renting versus buying a home, about commuting, and about how much to spend on a mortgage. By matching the results to data (at the ZIP-code level) about relative house price declines during the recent crisis, they can study the relationship between the U.S. housing crash and the attitudes of individual consumers. They find that younger respondents are relatively less confident about homeownership after larger price declines, while older respondents are relatively more confident. In both cases, this is observed only for those with direct experience of loss (via themselves or someone close) during the crash. They find no effect on attitudes towards commuting, and they find that people who live in the high-decline areas believe it is appropriate to spend more on a mortgage. http://www.bostonfed.org/economic/ppdp/2012/ppdp1204.htm http://www.bostonfed.org/economic/ppdp/2012/ppdp1204.htm Tue, 17 Jul 2012 13:53:52 -0400 We designed and fielded an experimental module in the American Life Panel (ALP) where we ask individuals to report the number of their purchases and the amount paid by debit cards, cash, credit cards, and personal checks. The design of the experiment features several stages of randomization. First, three different groups of sample participants are randomly assigned to an entry month (July, August, or September, 2011) and are to be interviewed four times during a year, once every quarter. Second, for each method of payment a sequence of questions elicits spending behavior during a day, week, month, and year. At the time of the first interview, this sequence is randomly assigned to refer to “specific” time spans or to “typical” time spans. In all subsequent interviews, a “specific” sequence becomes a “typical” sequence and vice versa. In this paper, we analyze the data from the first wave of the survey. We show that the type— specific or typical— and length of recall periods greatly influence household reporting behavior. http://www.bostonfed.org/economic/wp/wp2012/wp1207.htm http://www.bostonfed.org/economic/wp/wp2012/wp1207.htm Tue, 17 Jul 2012 13:53:52 -0400 The authors use a labor supply; relative pay; experimental economics laboratory experiment to examine the impact of relative wages on labor supply. They test the hypothesis that, ceteris paribus, making a given wage high (low) relative to other wage levels will lead to an increase (decrease) in labor supply. They find that labor supply does respond significantly to relative pay, and in the expected direction. However, when a strong enough reason is given for the relative low pay, this difference disappears. http://www.bostonfed.org/economic/wp/wp2012/wp1206.htm http://www.bostonfed.org/economic/wp/wp2012/wp1206.htm Tue, 17 Jul 2012 13:53:51 -0400 The authors extend the standard public goods game in a variety of ways, in particular by allowing for endogenous preference over institutions and by studying the relationship between individual types, their preferences, and later behavior within the various institutional environments. They collect individual data on a variety of demographic factors, in addition to measuring levels of risk aversion and ambiguity aversion (over both gains and losses). The authors then elicit preferences in an incentive-compatible manner over voluntary contribution mechanisms with and without reward and punishment options. Finally, they randomly assign subjects to one of the four institutions and observe repeated play. They find that payoffs are significantly greater when punishment is allowed but that only a small minority of participants prefers such an environment. There is at most a weak link between individual characteristics and elicited preferences over environments. On the other hand, institutional preferences, as well as individual characteristics, are more strongly predictive of behavior in the public goods game. For instance, loss averse individuals preemptively reward more often when that option is available. This result suggests that when studying social interactions, especially if people can choose whether to participate in a sanctions-and-rewards mechanism, it is important to consider individual attitudes toward risk and uncertainty. http://www.bostonfed.org/economic/wp/wp2012/wp1205.htm http://www.bostonfed.org/economic/wp/wp2012/wp1205.htm Mon, 2 Jul 2012 10:55:48 -0400 The profile of the Metro South/West reveals that the region's residents and its workforce have remarkably high levels of education, but looking forward, the region faces the demographic challenges of an aging population. Released at June 26, 2012 summit in Framingham, the profile includes detailed data about Metro South/West's current and future labor supply, as well as information about labor demand in the region over the past decade. http://www.bostonfed.org/economic/neppc/labor-market-trends-in-massachusetts-regions/metro-west-south/index.htm http://www.bostonfed.org/economic/neppc/labor-market-trends-in-massachusetts-regions/metro-west-south/index.htm Wed, 27 Jun 2012 09:15:52 -0400 Over the past 20 years, the Supplemental Security Income Program (SSI), which provides federally funded income support for disabled individuals, has become one of the most important means‐tested cash aid programs in the United States. However, little research has examined the determinants of growth in SSI caseloads across states and over time. In this paper I use state panel data, exploiting variation both across states and over time, to determine what factors determine SSI disabled caseloads. I examine the relative importance of a number of factors, including economic conditions, health conditions, relative program generosity, and state fiscal situations. I then examine the effect of welfare reform as well as the effect of variation across states in welfare policies. Given previous research that provides evidence of interactions between the SSI program and other welfare programs that provide income support to single‐mother families, I also examine how the effects of the factors listed above have changed since the passage of major welfare reform in 1996. Results suggest that both economic conditions and welfare reform have significant effects on SSI participation and that the SSI program has become more responsive to business cycles since welfare reform. http://www.bostonfed.org/economic/ppdp/2012/ppdp1203.htm http://www.bostonfed.org/economic/ppdp/2012/ppdp1203.htm Thu, 14 Jun 2012 16:26:15 -0400 This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly. http://www.bostonfed.org/economic/ppdp/2012/ppdp1202.htm http://www.bostonfed.org/economic/ppdp/2012/ppdp1202.htm Thu, 3 May 2012 09:46:09 -0400 We investigate how costly acquisition and exchange of customer-specific information affects industry profit and consumer welfare. Consumers differ in their preferences for competing brands and in their switching costs between brands. Brand-producing firms use their acquired knowledge of customer-specific preferences to differentiate prices. We show that consumers are worse off when firms acquire information about their preferences and that information sharing between firms further magnifies their losses. No information sharing supports a subgame perfect equilibrium that is also efficient. Finally, equilibrium investments in customer information may be excessive if firms bear low costs of acquiring customer-specific information. http://www.bostonfed.org/economic/wp/wp2012/wp1204.htm payments http://www.bostonfed.org/economic/wp/wp2012/wp1204.htm Thu, 26 Apr 2012 16:53:26 -0400 This brief investigates the mobility and income situation of family heads and spouses who have low long-term incomes, where long-term refers to average family income over a 10-year period. The data show that most of those in the poorest one-fifth of the long-term income distribution during the 1996-2006 period spent all or nearly all of the period's years in the poorest fifth of the single-year income distribution, and those who escaped did not move far. Moreover, this situation has worsened over time, with the long-term poor more "stuck" at the bottom in the 1996-2006 period than they were in 1976-1986 and 1986-1996. At the same time, the real incomes of the long-term poorest fifth have not grown as fast as the incomes of those in higher fifths, both from year-to-year within a period and from one period to the next. While it is well known that income inequality has risen in the United States in terms of single-year incomes, this brief documents that limited mobility has led to an increase in the inequality of long-term incomes as well. http://www.bostonfed.org/economic/ppb/2012/ppb121.htm http://www.bostonfed.org/economic/ppb/2012/ppb121.htm Tue, 24 Apr 2012 17:12:51 -0400 The unemployment insurance (UI) program is a federal-state program aiming to: (1) provide temporary, partial compensation for the lost earnings of individuals who become unemployed through no fault of their own and (2) serve as a stabilizer during economic downturns by injecting additional resources into the economy in the form of benefit payments. Each state, plus the District of Columbia, Puerto Rico, and the Virgin Islands, operates its own UI program within federal guidelines. Since the onset of the Great Recession in late 2007, two-thirds of state UI programs depleted their trust funds and borrowed from the federal government in order to continue paying benefits to unemployed workers. This research examines why some state UI programs experienced insolvency during the Great Recession or in its aftermath while others did not. It places special emphasis on New England, describing the key features of the region’s UI programs and examining the solvency of their trust funds over time, as well reforms enacted in these states that impact solvency. It concludes by offering policy options for strengthening UI trust fund solvency in the future. http://www.bostonfed.org/economic/neppc/researchreports/2012/rr1201.htm http://www.bostonfed.org/economic/neppc/researchreports/2012/rr1201.htm Tue, 17 Apr 2012 15:35:32 -0400 This paper studies how a bank’s diversification affects its own risk taking behavior and the risk taking of competing, nondiversified banks. By combining theories of bank organization, market structure and risk taking, I show that greater geographic diversification of banks changes a bank’s lending behavior and market interest rates, which also has ramifications for nondiversified competitors due to interactions in the banking market. Empirical results obtained from the U.S. commercial banking sector support this relationship as they indicate that a bank’s risk taking is lower when its competitors have a more diversified branch network. By utilizing the state-specific timing of a removal of intrastate branching restrictions in two identification strategies, I further pin down a causal relationship between the diversification of competitors and a bank’s risk taking behavior. These findings indicate that a bank’s diversification also impacts the risk taking of competitors, even if these banks are not diversifying their activities. http://www.http://bostonfed.org/bankinfo/qau/wp/2012/qau1202.htm http://www.http://bostonfed.org/bankinfo/qau/wp/2012/qau1202.htm Thu, 29 Mar 2012 16:23:42 -0400 Intuitively, we expect that players who are allowed to engage in costless communication before playing a game would be foolish to agree on an inefficient equilibrium. At the same time, however, such preplay communication has been suggested as a rationale for expecting Nash equilibrium in general. This paper presents a plausible formal model of cheap talk that distinguishes and resolves these possibilities. Players are assumed to have an unlimited opportunity to send messages before playing an arbitrary game. Using an extension of fictitious play beliefs, minimal assumptions are made concerning which messages about future actions are credible and hence contribute to final beliefs. In this environment it is shown that meaningful communication among players leads to a Nash equilibrium (NE) of the action game. Within the set of NE, efficiency then turns out to be a consequence of imposing optimality on the cheap talk portion of the extended game. This finding contrasts with previous “babbling” results. http://www.bostonfed.org/economic/wp/wp2012/wp1203.htm http://www.bostonfed.org/economic/wp/wp2012/wp1203.htm Tue, 20 Mar 2012 11:46:33 -0400 Using data from a nationally representative survey on consumer payment behavior, we estimate Heckman two-stage regressions on the adoption and use of seven different payment instruments. We find that the characteristics of payments are important in determining consumer payment behavior, even when controlling for demographic and financial attributes: setup and record keeping are especially important in explaining adoption, while security is important in explaining which methods consumers use for transactions. For the first time, we estimate the number of payment methods adopted by consumers conditional on having access to a bank account, as the unbanked consumers’ payment choices are much more limited than those of consumers with bank accounts. This paper follows the analysis in Schuh and Stavins (2010), but with improved data, allowing us to estimate a better model of payment behavior. As in the previous study, cost is found to significantly affect payment use, indicating that the recent increase in the cost of debit cards issued by some banks may lead to a reduction in U.S. consumers’ reliance on debit cards for transactions. http://www.bostonfed.org/economic/wp/wp2012/wp1202.htm payments http://www.bostonfed.org/economic/wp/wp2012/wp1202.htm Wed, 29 Feb 2012 10:24:43 -0500 Recent standard-setting activity related to fair value accounting has injected new life into questions of whether fair value provides information useful for decision-making, and whether there might be unintended consequences on financial stability. This discussion paper provides insight into these questions by performing a holistic evaluation of fair value accounting’s usefulness, the potential impacts it may have on financial institutions and any broader macroeconomic effects. Materials reviewed as part of this analysis include public bank regulatory filings, financial statements, and fair value research. The bank supervisory rating approach referred to as CAMELS is used as an organizing principle for the paper. CAMELS serves as a convenient way to both categorize potential impacts of fair value on financial institutions, as well as provide a bank supervisory perspective alongside the more traditional investor’s views on decision usefulness. The overall conclusion based on the evidence presented is that implementing fair value accounting more broadly may not necessarily provide financial statement users with more transparent and useful reporting. Additionally, financial stability may be negatively impacted by fair value accounting due to the interconnectedness of financial institutions, markets and the broader economy. The analysis suggests that the current direction in which accounting standard setters and bank regulators are moving may represent a possible solution to address these concerns. U.S. accounting standard setters have recently proposed that fair value, along with enhanced disclosures, be applied in a more targeted manner. Bank regulators are developing new supervisory tools and approaches which may alleviate some of the potential negative impact of fair value on financial stability. Additional policy implications and areas for future study are suggested. http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1201.htm http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1201.htm Mon, 27 Feb 2012 14:56:26 -0500 This paper investigates the effects of credit scores on consumer payment behavior, especially on debit and credit card use. Anecdotally, a negative relationship between debit card use and credit score has been reported; however, it is not clear whether that relationship is related to other factors, such as education or income, or whether it is a mere correlation. We use a new consumer survey dataset to examine whether this negative relationship holds after controlling for various consumer characteristics, including demographic and financial characteristics, consumers' perceptions toward payment methods, and card reward status. The results based on a single-year survey as well as on panel data suggest that there is a significant negative relationship between debit card use and credit score even after controlling for various characteristics. We supplement the analysis with evidence from Equifax data. The results indicate that an increase in consumers' cost of debit cards--in response to regulatory changes, for example--would have an adverse effect on low-credit-score consumers (typically those with lower incomes and less education). We then investigate what credit score implies. If credit score significantly influences consumer access to credit cards, credit limits, or the cost of credit cards, then the negative relationship likely results from supply-side constraints. If a lower credit score is associated with differences in underlying preferences, then the negative relationship is likely due to demand-side effects. Preliminary evidence strongly suggests that supply-side factors play an important role in the cost of credit and in access to credit. http://www.bostonfed.org/economic/ppdp/2012/ppdp1201.htm http://www.bostonfed.org/economic/ppdp/2012/ppdp1201.htm Mon, 13 Feb 2012 10:07:34 -0500 U.S. policymakers are concerned that negative home equity arising from the severe housing market decline may be constraining geographic mobility and consequently serving as a factor in the nation's persistently high unemployment rate. Indeed, the widespread drop in house prices since 2007 has increased the share of homeowners who are underwater on their mortgages. At the same time, migration across states and among homeowners has fallen sharply. Using a logistic regression framework to analyze data from the Internal Revenue Service on state-to-state migration between 2006 and 2009, the authors discover evidence that "house lock" decreases mobility but find it has a negligible impact on the national unemployment rate. A one-standard deviation increase in the share of underwater nonprime households in the origin state reduces the outflow of migrants from the origin to the destination state by 2.9 percent. When aggregated across the United States, this decrease in mobility reduces the national state-to-state migration rate by 0.05 percentage points, resulting in roughly 110,000 to 150,000 fewer individuals migrating across state lines in any given year. Assuming that all of these discouraged migrants were job-seekers who were previously unemployed before relocating and then found a job in their new state would reduce the nation's unemployment rate by at most one-tenth of a percentage point in a given year. The cumulative effect over this period would yield an unemployment rate of 9.0 percent versus 9.3 percent in 2009. Recognizing that not all state-to-state migrants are job-seekers, not all job-seekers were previously unemployed, and not all previously unemployed job-seekers will successfully find work in their new location yields an unemployment rate that is virtually unchanged from the actual one that prevailed from 2006 to 2009. http://www.bostonfed.org/economic/wp/wp2012/wp1201.htm http://www.bostonfed.org/economic/wp/wp2012/wp1201.htm Wed, 8 Feb 2012 11:28:30 -0500 This paper discusses the likely evolution of U.S. inflation in the near and medium term on the basis of (1) past U.S. experience with very low levels of inflation, (2) the most recent Japanese experience with deflation, and (3) recent U.S. micro evidence on downward nominal wage rigidity. Our findings question the view that stable long-run inflation expectations and downward nominal wage rigidity will provide sufficient support to prices such that deflation can be avoided. We show that an inflation model fitted on Japanese data over the past 20 years, which accounts for both short- and long-run inflation expectations, matches the recent U.S. inflation experience quite well. While the model indicates that U.S. inflation might be subject to a lower bound, it does not rule out a prolonged period of mild deflation going forward. In addition, our micro evidence on wages suggests no obvious downward rigidity in the firm's wage costs, downward rigidity in individual wages notwithstanding. As a consequence, downward nominal wage rigidity may provide little offset to deflationary pressures in the current U.S. situation, despite some circumstantial evidence that this channel might have been at work in the past. http://www.bostonfed.org/economic/wp/wp2011/wp1117.htm http://www.bostonfed.org/economic/wp/wp2011/wp1117.htm Wed, 28 Dec 2011 09:54:21 -0500 This paper investigates whether small firms have experienced worse tightening of credit conditions during the Great Recession than large firms. To structure the empirical analysis, the paper first develops a simple model of bank loan pricing that derives both the interest rates on loans actually made and the marginal condition for loans that would be rationed in the event of an economic downturn. Empirical estimations using loan-level data find evidence that, once we account for the contractual features of business loans made under formal commitments to lend, interest rate spreads on small loans have declined on average relative to spreads on large loans during the Great Recession. Quantile regressions further reveal that the relative decline in average spread is entirely accounted for by loans to the riskier borrowers. These findings are consistent with the pattern of differentially more rationing of credit to small borrowers in recessions as predicted by the model. This suggests that policy measures that counter this effect by encouraging lending to small businesses may be effective in stimulating their recovery and, in turn, job growth. http://www.bostonfed.org/economic/wp/wp2011/wp1116.htm http://www.bostonfed.org/economic/wp/wp2011/wp1116.htm Wed, 21 Dec 2011 11:26:21 -0500 This paper reviews recent developments in online and mobile banking in the United States that provide bank account holders with low-cost interfaces to manage account-to-account electronic money transfers. The paper analyzes the emerging decentralized market in which A2A money transfers are becoming available in the United States and compares it with the A2A market in other countries. The paper constructs analytical examples to explain and evaluate the structure of the emerging U.S. market and discusses possible policy actions that may enhance the use of A2A money transfers in the United States. http://www.bostonfed.org/economic/ppdp/2011/ppdp1110.htm http://www.bostonfed.org/economic/ppdp/2011/ppdp1110.htm Tue, 13 Dec 2011 11:56:58 -0500 The authors evaluate laws designed to protect borrowers from foreclosure. They find that these laws delay but do not prevent foreclosures. They first compare states that require lenders to seek judicial permission to foreclose with states that do not. Borrowers in judicial states are no more likely to cure and no more likely to renegotiate their loans, but the delays lead to a buildup in these states of persistently delinquent borrowers, the vast majority of whom eventually lose their homes. They next analyze a "right-to-cure" law instituted in Massachusetts on May 1, 2008. Using a difference-in-differences approach to evaluate the effect of the policy, they compare Massachusetts with neighboring states that did not adopt similar laws. They find that the right-to-cure law lengthens the foreclosure timeline but does not lead to better outcomes for borrowers. http://www.bostonfed.org/economic/ppdp/2011/ppdp1109.htm http://www.bostonfed.org/economic/ppdp/2011/ppdp1109.htm Thu, 8 Dec 2011 10:04:59 -0500 In economic situations a player often has preferences regarding not only his or her own outcome but also regarding what happens to fellow players, concerns that are entirely apart from any strategic considerations. While this can be modeled directly by simply writing down a player's final preferences, these are commonly unknown a priori. In many cases it is therefore both helpful and instructive to explicitly model these interactions. This paper, building on a model due to Bergstrom (1989, 1999), presents a simple structure in the context of game theory that incorporates the "synergies" between players. It is powerful enough to cover a wide range of such interactions and model many disparate experimental and empirical results, yet it is straightforward enough to be used in many applied situations where altruism, or a baser motive, is implied http://www.bostonfed.org/economic/wp/wp2011/wp1115.htm http://www.bostonfed.org/economic/wp/wp2011/wp1115.htm Wed, 7 Dec 2011 10:23:17 -0500 Evidence from social psychology suggests that agents process information about their own ability in a biased manner. This evidence has motivated exciting research in behavioral economics, but also garnered critics who point out that it is potentially consistent with standard Bayesian updating. We implement a direct experimental test. We study a large sample of 656 undergraduate students, tracking the evolution of their beliefs about their own relative performance on an IQ test as they receive noisy feedback from a known data-generating process. Our design lets us repeatedly measure the complete relevant belief distribution incentive-compatibly. We find that subjects (1) place approximately full weight on their priors, but (2) are asymmetric, over-weighting positive feedback relative to negative, and (3) conservative, updating too little in response to both positive and negative signals. These biases are substantially less pronounced in a placebo experiment where ego is not at stake. We also find that (4) a substantial portion of subjects are averse to receiving information about their ability, and that (5) less confident subjects are more likely to be averse. We unify these phenomena by showing that they all arise naturally in a simple model of optimally biased Bayesian information processing. http://www.bostonfed.org/economic/wp/wp2011/wp1114.htm http://www.bostonfed.org/economic/wp/wp2011/wp1114.htm Wed, 7 Dec 2011 10:23:17 -0500 We develop a matching model of foreign direct investment to study how multinational firms choose between Greenfield investment, acquisitions, and joint ventures. For all entry modes, firms must invest in a continuum of tasks to bring a product to market. Each firm possesses a core competency in the task space, though firms are otherwise identical. For acquisitions and joint ventures, a multinational enterprise (MNE) must match with a local partner, where the local partner may provide complementary expertise within the task space. However, for joint ventures, investment in tasks is shared by multiple owners, and hence is subject to a holdup problem. In equilibrium, ex-ante identical multinational enter the local matching market, and ex post, three different types of ownership within a heterogeneous group of firms arise. Specifically, the worst matches dissolve and the MNEs invest greenfield, the middle matches form joint ventures, and the best matches integrate via mergers and acquisitions. We also show that joint ventures are more common when the host country produces products that are inferior to those produced in the source country, which explains why MNEs use joint ventures more frequently in less-developed countries. Finally, we extend the model to a simple two-period context to provide a rationale for one of the more salient features of joint ventures, namely, their instability. http://www.bostonfed.org/economic/wp/wp2011/wp1113.htm http://www.bostonfed.org/economic/wp/wp2011/wp1113.htm Wed, 7 Dec 2011 10:23:16 -0500 Local governments in New England rely on state aid to finance the provision of essential public services. Yet in response to the recent and ongoing fiscal crisis, state governments across the region have cut local aid deeply, often by the same percentage in each community. This across-the-board approach ignores differences in underlying local fiscal health and places a larger burden on many resource-poor communities. To address this concern, this policy brief provides a new, more equitable approach that allocates smaller aid cuts to communities that are in worse underlying fiscal health and received less existing aid. We use a "need-capacity gap" to represent underlying fiscal health, which is measured based on local economic and social characteristics outside the direct control of local officials. While we use Massachusetts data on non-school aid to conduct policy simulations, the approach is applicable to many states and aid categories. http://www.bos.frb.org/economic/neppc/briefs/2011/pb112.htm http://www.bos.frb.org/economic/neppc/briefs/2011/pb112.htm Wed, 30 Nov 2011 13:42:45 -0500 Keys, Mukherjee, and Vig (2010a) argue that the evidence presented in Bubb and Kaufman (2009) is based on an inappropriate pooling of loans sold to private-label securitizers with loans sold to the government sponsored enterprises (GSEs). In this paper we investigate the issues raised by the authors and conclude that they do not change our basic analytical approach or conclusions. We examine samples that do not pool together loans sold to these two types of purchasers--a sample of loans bought by the GSEs, a sample of loans originated in 2008-2009 after the private-label market collapsed, and a sample of jumbo loans--and find discontinuities in the number and default rate of loans at credit score cutoffs in the absence of corresponding discontinuities in the securitization rate. We also examine a key assumption underlying their estimates-that no loans are both at risk of being sold to the GSEs and at risk of being sold to private-label securitizers--and show that the data are inconsistent with that assumption. We find that 18 percent of conforming loans in our sample at some time switched between GSE and private-label ownership, demonstrating that the GSEs and private-label securitizers competed for the same loans. Additionally, we show that lender screening cutoffs grew steadily over the period 1997-2010 during which the private-label market rose and collapsed. http://www.bostonfed.org/economic/wp/wp2011/wp1112.htm http://www.bostonfed.org/economic/wp/wp2011/wp1112.htm Mon, 28 Nov 2011 13:33:44 -0500 We present new experimental evidence on heterogeneity in the formation of inflation expectations and relate the variation to economic literacy and demographics. The experimental design allows us to investigate two channels through which expectations-formation may vary across individuals: (1) the choice of information and (2) the use of given information. Subjects who are more economically literate perform better along both dimensions--they choose more-relevant information and make better use of given information. Compared with survey data on inflation expectations, fewer demographic factors are associated with variation in inflation expectations, and economic literacy in most cases accounts for demographic variation in expectations. http://www.bostonfed.org/economic/ppdp/2011/ppdp1108.htm http://www.bostonfed.org/economic/ppdp/2011/ppdp1108.htm Fri, 18 Nov 2011 10:00:24 -0500 A growing body of literature examines alternatives to the rational expectations hypothesis in applied macroeconomics. This paper continues this strand of research by examining the role survey expectations play in the inflation process and reports three principal findings. One, short-run inflation expectations appear to play a significant role in explaining U.S. inflation over the past 20–25 years. Two, long-run expectations generally do not appear to have a direct influence on U.S. inflation over the same period, although these longer expectations enter indirectly as a key determinant of the short-run expectations. The restrictions implied by "trend inflation" models of inflation are generally rejected in the data. Three, by employing a "survey operator," this paper develops a first pass at a structural model that incorporates the features discussed above and assesses its performance in explaining inflation in the postwar period. http://www.bostonfed.org/economic/wp/wp2011/wp1111.htm http://www.bostonfed.org/economic/wp/wp2011/wp1111.htm Thu, 10 Nov 2011 11:59:10 -0500 Much recent commentary has centered on the importance of well-anchored inflation expectations serving as the foundation of a well-behaved inflation rate. But the difficulty in relying on this principle is that inflation expectations are not directly observable, and thus it is hard to know whether expectations truly play such an anchoring role in the evolution of inflation. In the current circumstances this question is of much more than academic interest, as widely used measures suggest the coincidence of a large unemployment gap and muted production costs with fairly stable long-run inflation expectations. While a high unemployment rate would tend to depress inflation, lower production costs may serve as a counterweight to downward pressure. Which effect will prevail? This brief examines the role of expectations and anchoring by employing expectations proxies derived from surveys of professional forecasters. The brief concludes that there is some evidence that stable long-run expectations have an indirect anchoring effect on inflation, but that to date the effect on resource slack remains considerable. http://www.bostonfed.org/economic/ppb/2011/ppb114.htm http://www.bostonfed.org/economic/ppb/2011/ppb114.htm Thu, 10 Nov 2011 11:59:10 -0500 Much of America's promise is predicated on economic mobility--the idea that people are not limited or defined by where they start, but can move up the economic ladder based on their efforts and accomplishments. Family income mobility--changes in individual families' income positions over time--is one indicator of the degree to which the eventual economic wellbeing of any family is tethered to its starting point. In the United States, family income inequality has risen from year to year since the mid-1970s; given this rising cross-sectional inequality, changes over time in mobility determine the degree to which long-term income is also increasingly unequally distributed. Using data from the Panel Study of Income Dynamics and a number of mobility concepts and measures drawn from the literature, this paper examines family income mobility levels and trends for U.S. working-age family heads and spouses during the time span 1969-2006, based on a post-tax, post-transfer concept of income adjusted for family size. By most measures, mobility is lower in more recent periods (1995-2005) than in the late seventies and the eighties (the 1977-1987 or 1981-1991 periods). Comparing results based on pre-government income suggests that an increasingly redistributive tax and transfer system contributed to rising mobility into the 1980s, but that its impact has since waned. Overall, the evidence indicates that over the 1969-to-2006 time span, family income mobility across the distribution decreased, families' later-year incomes increasingly depended on their starting place, and the distribution of families' lifetime incomes became less equal. http://www.bostonfed.org/economic/wp/wp2011/wp1110.htm http://www.bostonfed.org/economic/wp/wp2011/wp1110.htm Thu, 3 Nov 2011 09:33:12 -0400 Latest economic data for New England. http://www.bostonfed.org/economic/neei payments http://www.bostonfed.org/economic/neei Thu, 11 Aug 2011 13:14:22 -0400 Income inequality has risen dramatically in the United States since at least 1980. This paper quantifies the role that the tax policies of the federal and state governments have played in mitigating this income inequality. The analysis, which isolates the contribution of federal taxes and state taxes separately, employs two approaches. First, cross-sectional estimates compare before-tax and after-tax inequality across the 50 states and the District of Columbia. Second, inequality estimates across time are calculated to assess the evolution of the effects of tax policies. The results from the first approach indicate that the tax code reduces income inequality substantially in all states, with most of the compression of the income distribution attributable to federal taxes. Nevertheless, there is substantial cross-state variation in the extent to which state tax policies compress the income distribution attributable to federal taxes. Cross-state differences in gasoline taxes have a surprisingly large impact on income compression, as do sales tax exemptions for food and clothing. The results of the second approach indicate that there has been little change since the early 1980s in the impact of tax policy on income inequality across almost all states. http://www.bostonfed.org/economic/ppdp/2011/ppdp1107.htm http://www.bostonfed.org/economic/ppdp/2011/ppdp1107.htm Thu, 20 Oct 2011 14:50:30 -0400 Housing foreclosure activity in the United States and New England increased dramatically at the beginning of the housing crisis in 2006 and remains elevated. Given their economic and social costs, policymakers have developed a number of policies designed to prevent foreclosures. In recent years, state and local policymakers in New England have implemented two major foreclosure prevention policies: foreclosure mediation programs and financial assistance programs. This report reviews these two foreclosure prevention programs in the New England region. It explores how they are funded, weighs their benefits and challenges, and discusses their effectiveness at preventing foreclosures. The report concludes with policy recommendations for current and future foreclosure prevention programs. http://www.bostonfed.org/economic/neppc/researchreports/2011/rr1103.htm http://www.bostonfed.org/economic/neppc/researchreports/2011/rr1103.htm Thu, 29 Sep 2011 12:13:37 -0400 Recently announced changes to debit card interchange fees could lead to an increase in the cost of debit cards to consumers. This brief analyzes the potential effects of an increase in debit card fees or in bank account fees by using the results of the 2008 and 2009 Survey of Consumer Payment Choice (SCPC). The main findings are that: 1) consumers with the least amount of education (less than a high school diploma), the lowest annual income (below $25,000), and the youngest age (under 25 years) consider cost to be the most important payment characteristic. It is probable that these consumers would be most affected by an increase in debit card fees, and most likely to change their payment behavior in response; 2) the cost of debit seems to be an important factor affecting consumer payment decisions: consumers who rated the cost of debit cards as low relative to the cost of other payment methods were significantly more likely to adopt and to use debit cards; 3) credit cards were viewed as the closest substitute for debit cards. If the cost of using debit cards rises, consumers are more likely to substitute credit cards for some of their debit card transactions; 4) consumer reaction depends on the type of fee increases: an increase in the cost of debit cards specifically is expected to have a greater effect on debit card use than a broader increase in the cost of maintaining bank accounts; and 5) an increase in the one-time cost of debit card setup could lead to a substantial decrease in the rate of debit adoption. http://www.bostonfed.org/economic/ppb/2011/ppb113.htm http://www.bostonfed.org/economic/ppb/2011/ppb113.htm Thu, 22 Sep 2011 18:25:14 -0400 Mortgage originators use credit score cutoff rules to determine how carefully to screen loan applicants. Recent research has hypothesized that these cutoff rules result from a securitization rule of thumb. Under this theory, an observed jump in defaults at the cutoff would imply that securitization led to lax screening. We argue instead that originators adopted credit score cutoff rules in response to underwriting guidelines from Fannie Mae and Freddie Mac and offer a simple model that rationalizes such an origination rule of thumb. Under this alternative theory, jumps in default are not evidence that securitization caused lax screening. We examine loan-level data and find that the evidence is inconsistent with the securitization rule-of-thumb theory but consistent with the origination rule-of-thumb theory. There are jumps in the number of loans and in their default rate at credit score cutoffs in the absence of corresponding jumps in the securitization rate. We conclude that credit score cutoff rules provide evidence that large securitizers were to some extent able to regulate originators' screening behavior. http://www.bostonfed.org/economic/ppdp/2011/ppdp1106.htm http://www.bostonfed.org/economic/ppdp/2011/ppdp1106.htm Tue, 13 Sep 2011 16:16:35 -0400 In this paper we analyze the impact of classroom peers' ability on individual student achievement with a unique longitudinal data set covering all Florida public school students in grades 3-10 over a five-year period. Unlike many data sets used to study peer effects in education, ours identifies each member of a student's classroom peer group in elementary, middle, and high school as well as the classroom teacher responsible for instruction. As a result, we can control for student fixed effects simultaneously with teacher fixed effects, thereby alleviating biases due to endogenous assignment of both peers and teachers, including some dynamic aspects of assignment. Our estimation strategy, which measures the influence on individual test scores of peers' fixed characteristics (including unobserved components), also alleviates potential bias due to measurement error in peer ability. Under linear-in-means specifications, estimated peer effects are small to nonexistent, but we find sizable and significant peer effects in nonlinear models. We find that peer effects depend on an individual student's own ability and on the relative ability level of peers, results suggesting that some degree of tracking by ability may raise aggregate achievement. Estimated peer effects tend to be smaller when teacher fixed effects are included than when they are omitted, a result that emphasizes the importance of controlling for teacher inputs. We also find that classroom peers exert a greater influence on individual achievement than the broader group of grade-level peers at the same school. http://www.bostonfed.org/economic/ppdp/2011/ppdp1105.htm http://www.bostonfed.org/economic/ppdp/2011/ppdp1105.htm Tue, 13 Sep 2011 16:16:34 -0400 The authors empirically characterize the mechanics of trade adjustment during the Argentine crisis using detailed firm-level customs data covering the universe of import transactions made during 1996–2008. Their main findings are as follows: First, the extensive margin defined as the entry and exit of firms or of products (at the country level) plays a small role during the crisis. Second, the sub-extensive margin defined as the churning of inputs within firms plays a sizeable role in aggregate adjustment. This implies that the true increase in input costs exceeds that imputed from conventional price indices. Third, the relative importance of these margins and of overall trade adjustment varies with firm size. Motivated by these facts, we build a model of trade in intermediate inputs with heterogeneous firms, fixed import costs, and round-about production to evaluate the channels through which a collapse in imports affects TFP (total factor productivity) in manufacturing. Measured aggregate productivity in the sector depends on within-firm adjustments to the varieties imported as well as the joint distribution of each firm's technology and the share of imports in its total spending on inputs. We simulate an imported input cost shock and show that these mechanisms can deliver quantitatively significant declines in manufacturing TFP. http://www.bostonfed.org/economic/wp/wp2011/wp1109.htm http://www.bostonfed.org/economic/wp/wp2011/wp1109.htm Tue, 13 Sep 2011 16:16:33 -0400 t is now widely accepted that childhood exposure to even low levels of lead can adversely affect neurodevelopment, behavior, and cognitive performance. Using individual-level data on childhood lead levels and test scores in Massachusetts, this paper investigates the link between lead levels in early childhood in the 1990s and student test scores in elementary school in the 2000s. Elevated levels of blood lead in early childhood are shown to adversely impact standardized test performance, even when controlling for community and school characteristics. Accordingly, public health policy that reduced childhood lead levels in the 1990s was responsible for modest but statistically significant improvements in test performance in the 2000s, with particular benefits for children in low-income communities. http://www.bostonfed.org/economic/neppc/wp/2011/neppcwp113.htm http://www.bostonfed.org/economic/neppc/wp/2011/neppcwp113.htm Mon, 29 Aug 2011 09:40:44 -0400 Local governments depend on state aid to provide residents and businesses with vital public services, such as education, police and fire protection, and safe public roads. However, in response to the recent fiscal crisis, many states are quickly and deeply cutting local aid. The Congressional Budget Office reported that 22 states reduced aid to local governments in FY 2010, and 20 states have proposed additional cuts in FY 2011.States tend to cut aid either on an ad hoc basis or across the board, with every community receiving the same percent aid cut. This paper proposes a new, more equitable approach to distributing reductions in state aid. It develops a framework that distributes reductions in state aid based on underlying local fiscal health whereby communities that are in worse underlying fiscal health and receive less existing aid experience smaller aid cuts. The framework can also apply to aid increases, giving policymakers a single tool to accommodate any change in state aid. The paper uses Massachusetts data on unrestricted municipal aid to simulate the impact of the proposed framework. The framework can be used to distribute cuts or increases in school aid or non-school aid, and is potentially applicable to all states. http://www.bostonfed.org/economic/neppc/wp/2011/neppcwp112.htm http://www.bostonfed.org/economic/neppc/wp/2011/neppcwp112.htm Thu, 18 Aug 2011 09:32:25 -0400 This paper presents a dynamic model of the decision to pursue a college education in which students face uncertainty about their future income stream after graduation due to unobserved heterogeneity in their innate scholastic ability. After students matriculate and start taking exams, they reevaluate their expectations about succeeding in college and may find it optimal to drop out and join the workforce without completing an undergraduate degree. The model shows that, in accordance with the data, poorer students are less likely to graduate and are more apt to drop out earlier than are wealthier students. Our model generates these results without introducing credit constraints. Conditioning on measures of innate ability, in the data we find that poor students are at least 27 percent more likely to drop out of college and they do so sooner than wealthier students. http://www.bostonfed.org/economic/wp/wp2011/wp1108.htm http://www.bostonfed.org/economic/wp/wp2011/wp1108.htm Mon, 25 Jul 2011 15:27:03 -0400 We introduce three types of consumer recognition: identity recognition, asymmetric preference recognition, and symmetric preference recognition. We characterize price equilibria and compare profits, consumer surplus, and total welfare. Asymmetric preference recognition enhances profits compared with identity recognition, but firms have no incentive to exchange information regarding customer-specific preferences (symmetric preference recognition). Consumers would benefit from a policy panning information exchange regarding individual consumer preferences. Our welfare analysis shows that the gains to firms from uniform pricing (no recognition) are larger than the associated harm to consumers, regardless of which regime of customer recognition serves as the basis for comparison. http://www.bostonfed.org/economic/wp/wp2011/wp1107.htm http://bostonfed.org/economic/wp/wp2011/wp1107.htm Fri, 15 Jul 2011 16:36:26 -0400 In 2010, the Department of Justice (DOJ) filed a lawsuit against the credit card networks American Express, MasterCard, and Visa for alleged antitrust violations. We evaluate the extent to which the recently proposed settlement between the DOJ and Visa and MasterCard (henceforth, "Proposed Settlement") is likely to achieve its central objective: "...to allow Merchants to attempt to influence the General Purpose [Credit] Card or Form of Payment Customers select by providing choices and information in a competitive market." In word and spirit, the Proposed Settlement represents a significant step toward promoting competition in the credit card market. However, we find that merchants are unlikely to be able to take full advantage of the Proposed Settlement's new freedoms because they currently lack comprehensible and complete information on the full and exact merchant discount fees for their customers' credit cards. We analyze the likely consequences of this information problem, and consider ways in which it could be remedied. We also evaluate the probable welfare consequences of allowing merchants to impose surcharges to reflect the fees associated with the use of payment cards. http://www.bostonfed.org/economic/ppdp/2011/ppdp1104.htm payments http://www.bostonfed.org/economic/ppdp/2011/ppdp1104.htm Tue, 12 Jul 2011 14:53:50 -0400 This paper examines whether rising house prices immediately prior to children entering their college years impacts their intergenerational earnings mobility and/or educational outcomes. Higher house prices provide homeowners, especially liquidity constrained ones, with additional funding to invest in their children's human capital. The results show that a 1 percentage point increase in house prices, when children are 17-years-old, results in roughly 0.8 percent higher annual income for the children of homeowners, and 1.2 percent lower annual income for the children of renters. Additional analysis shows that the children who benefit the most from rising house prices are those whose parents are liquidity constrained homeowners. Rising house prices also make homeowners' children more likely to graduate from college and have less noncollateralized debt when young adults. Both of these results are consistent with rising house prices enabling parents to invest more in their children. http://www.bostonfed.org/economic/wp/wp2011/wp1106.htm http://www.bostonfed.org/economic/wp/wp2011/wp1106.htm Fri, 8 Jul 2011 16:53:26 -0400 This paper studies the effects of foreign competition on self-employment levels. We begin by pointing out a previously unknown fact: the greater the exposure to foreign competition, the smaller the fraction of self-employed people. This fact holds across very different countries, across relatively similar countries like European Union members, and across industries within the United States. We develop a model where heterogeneous agents select themselves into being either employees or self-employed in the spirit of Lucas (1978). This, in turn, translates into intra-industry firm heterogeneity as in Melitz (2003). Self-employed agents (firms) can also decide to enter into the export markets, subject to fixed and variable trade costs. The model delivers three basic predictions: (1) domestic self-employment increases with the trade costs of exporting from a foreign country to the home country, (2) domestic self-employment increases with the trade costs of exporting to the foreign country, and (3) higher levels of self-employment are associated with a lower fraction of exporting firms. Our empirical work on inter-industry data for the United States confirms these predictions of the model. http://www.bostonfed.org/economic/wp/wp2011/wp1105.htm http://bostonfed.org/economic/wp/wp2011/wp1105.htm Thu, 30 Jun 2011 16:52:43 -0400 The distribution of unrestricted municipal aid has been a major policy concern in many states. Using Massachusetts as a case study, this paper examines the extent to which unrestricted municipal aid is responsive to the variation in the underlying fiscal health of municipalities. The paper uses a measure of "municipal gap"--based on local economic and social characteristics outside the direct control of local officials--to indicate the underlying fiscal health of cities and towns. The analysis finds large disparities in municipal gaps among Massachusetts cities and towns, and that those disparities have increased in recent years. However, unrestricted municipal aid has not been highly correlated with municipal gaps. This pattern is partly due to large ad hoc cuts in state aid over the past 20 years. This paper suggests that the state consider adopting a gap-based formula that provides more aid to communities facing larger municipal gaps. Policymakers should carefully readjust policy parameters in the formula over time to maintain the political feasibility of the approach. The gap-based framework and policy suggestions are potentially applicable to other states. http://www.bostonfed.org/economic/neppc/wp/2011/neppcwp111.htm http://www.bostonfed.org/economic/neppc/wp/2011/neppcwp111.htm Tue, 28 Jun 2011 10:29:30 -0400 In their 2010 comment (which we refer to as CS10), Cogley and Sbordone argue that: (1) our estimates are not entirely closed form, and hence are arbitrary; (2) we cannot guarantee that our estimates are valid, while their estimates (Cogley and Sbordone 2008, henceforth CS08) always are; and (3) the estimates in CS08, in terms of goodness of fit, are just as good as other, much different estimates in our paper. We show in this reply that the exact closed-form estimates are virtually the same as the "quasi" closed-form estimates. Our estimates are consistent with the implicit assumptions underlying the first-stage VAR used to form expectations, while the estimates in CS08 are not. As a result, the estimates in CS08 point towards model misspecification. We also rebut the goodness of fit comparisons in CS10, and provide a more credible exercise that illustrates that our estimates outperform CS08's estimates. http://www.bostonfed.org/economic/wp/wp2011/wp1104.htm http://www.bostonfed.org/economic/wp/wp2011/wp1104.htm Fri, 17 Jun 2011 11:29:28 -0400 We illustrate the importance of placing model-consistent restrictions on expectations in the estimation of forward-looking Euler equations. In two-stage limited-information settings where first-stage estimates are used to proxy for expectations, parameter estimates can differ substantially, depending on whether these restrictions are imposed or not. This is shown in an application to the New Keynesian Phillips Curve (NKPC), first in a Monte Carlo exercise, and then on actual data. The closed-form (CF) estimates require by construction that expectations of inflation be model-consistent at all points in time, while the difference-equation (DE) estimates impose no model discipline on expectations. Between those two polar extremes there is a wide range of alternative DE specifications based on the same dynamic relationship that explicitly imposes model restrictions on expectations for a finite number of periods. In our application, these last estimates quickly converge to the CF estimates and illustrate that the DE estimates in Cogley and Sbordone (2008) are not robust to imposing modest model requirements on expectations. In particular, our estimates show that the NKPC is not purely forward-looking, and thus that time-varying trend inflation is insufficient to explain inflation persistence. http://www.bostonfed.org/economic/wp/wp2011/wp1103.htm http://www.bostonfed.org/economic/wp/wp2011/wp1103.htm Fri, 17 Jun 2011 11:28:51 -0400 Analysis of oil-price movements is once again an important feature of economic policy discussions. To provide some background for this analysis, this paper summarizes a conference on the oil market held at the Federal Reserve Bank of Boston in June 2010. Four cross-cutting themes emerged from this symposium, which included scientific experts, market participants, business leaders, academics, and policymakers. First, the decline in real oil prices that followed the 1970s' oil shocks is unlikely to be repeated today, because there are fewer ways in which oil-importing countries can reduce oil demand or expand domestic supplies in response to higher prices. The second lesson of the conference, however, is that any prediction about oil markets is highly uncertain, a fact illustrated by the wide confidence intervals that result when futures-market data are used to quantify forecast uncertainty. Third, there is little consensus on whether new financial investment in commodity index funds has increased the volatility of oil prices. Finally, changes in oil prices still have large effects on the economy. Some research suggests that the rapid run-up in oil prices in 2007–08 may have significantly weakened the U.S. economy in the early stages of the Great Recession. http://www.bostonfed.org/economic/ppdp/2011/ppdp1103.htm http://www.bostonfed.org/economic/ppdp/2011/ppdp1103.htm Wed, 8 Jun 2011 18:17:39 -0400 Policymakers have an interest in identifying the differences in behavior patterns—namely, habitual caloric intake and physical activity levels—that contribute to demographic variation in body mass index (BMI) and obesity risk. While disparities in mean BMI and obesity rates between whites (non-Hispanic) and African-Americans (non-Hispanic) are well-documented, the behavioral differences that underlie these gaps have not been carefully identified. Moreover, the female-specificity of the black-white obesity gap has received relatively little attention. In the National Health and Nutrition Examination Surveys (NHANES) data, we initially observe a very weak relationship between self-reported measures of caloric intake and physical activity and either BMI or obesity risk, and these behaviors appear to explain only a small fraction of the black-white BMI gap (or obesity gap) among women. These unadjusted estimates echo previous findings from large survey datasets such as the NHANES. Using an innovative method to mitigate the widely recognized problem of measurement error in self-reported behaviors—proxying for measurement errors using the ratio of reported caloric intake to estimated true caloric needs—we obtain much stronger relationships between behaviors and BMI (or obesity risk). Behaviors can in fact account for a significant share of the BMI gap (and the obesity gap) between black women and white women and are consistent with the presence of much smaller gaps between black men and white men. The analysis also shows that the effects smoking has on BMI and obesity risk are small-to-negligible when measurement error is properly controlled. http://www.bostonfed.org/economic/wp/wp2011/wp1102.htm http://www.bostonfed.org/economic/wp/wp2011/wp1102.htm Wed, 1 Jun 2011 17:37:17 -0400 The report provides an in-depth examination of the only state-owned bank in the nation, the Bank of North Dakota (BND). It discusses BND’s history and current operations, and analyzes the degree to which the bank stabilizes the state economy, provides local businesses improved access to credit, augments the lending capacity of private banks, and contributes revenues to the state government. The authors conclude that, in recent years, BND’s most important role has been to serve as a lending partner for North Dakota’s numerous small banks, but that its willingness and capacity to offset a serious credit crunch has not been shown, owing to the comparatively limited stresses on North Dakota banks in the recent national crisis and economic downturn. The report estimates that the potential costs of starting up a state-owned bank in Massachusetts could be significant. http://www.bostonfed.org/economic/neppc/researchreports/2011/rr1102.htm http://www.bostonfed.org/economic/neppc/researchreports/2011/rr1102.htm Wed, 25 May 2011 14:08:19 -0400 This paper uses data from the 2008 Survey of Consumer Payment Choice to discuss the adoption, use, and discarding of various common payment instruments. Using a nationally representative sample of individual-level data, it presents evidence in unparalleled detail about how consumers use different payment instruments. Most interestingly, it displays robust evidence of significant age- and race-related differences in payments choices. Among other things, it suggests that the range of payment instruments adopted and regularly used by blacks is narrower than that chosen by whites, presumably because of relatively limited access to financial institutions. With regard to age, it documents pervasive (and complex) age-related patterns at every step of the decisions to adopt, use, and discard payment instruments. http://www.bostonfed.org/economic/ppdp/2011/ppdp1102.htm payments http://www.bostonfed.org/economic/ppdp/2011/ppdp1102.htm Wed, 25 May 2011 11:19:36 -0400 This brief examines an issue of current importance to the conduct of U.S. economic policy: how has the Federal Open Market Committee (FOMC) plan to purchase up to $600 billion of Treasury securities by June 30, 2011 affected the movement of inflation, GDP, and employment to more desirable medium-term and long-term levels? Following the FOMC's announcement of the plan on November 3, 2010, other events that potentially influence Treasury yields have been at play. To estimate the effects that the FOMC Treasury purchases may have on the goal of achieving more desirable levels of inflation and employment, the authors make use of different models to gauge the likely effect upon interest rates, the interest rate effects on real spending (GDP), and how changes in GDP may be affecting the employment rate. http://www.bostonfed.org/economic/ppb/2011/ppb112.htm http://www.bostonfed.org/economic/ppb/2011/ppb112.htm Fri, 20 May 2011 13:13:35 -0400 This public policy brief examines the relationship between trend inflation and commodity price increases and finds that evidence from recent decades supports the notion that commodity price changes do not affect the long-run inflation rate. Evidence from earlier decades suggests that effects on inflation expectations and wages played a key role in whether commodity price movements altered trend inflation. This brief is based on a memo to the president of the Federal Reserve Bank of Boston as background to a meeting of the Federal Open Market Committee. http://www.bostonfed.org/economic/ppb/2011/ppb111.htm http://www.bostonfed.org/economic/ppb/2011/ppb111.htm Wed, 4 May 2011 07:31:10 -0400 Recent evidence suggests that a mismatch between the skills demanded by employers and the skills supplied by the population may be underway, particularly for "middle-skill" workers who possess some college education or an associate’s degree. This policy brief examines the middle-skill mismatch in New England, comparing recent labor market trends and future projections for the northern versus southern subregions. The analysis finds that the nature of the mismatch varies within the region, indicating that policymakers should tailor their potential responses as opposed to taking a uniform approach. This brief expands on the NEPPC research report 10-2: Mismatch in the Labor Market: Measuring the Supply of and Demand for Skilled Labor in New England. http://www.bostonfed.org/economic/neppc/briefs/2011/pb111.htm http://www.bostonfed.org/economic/neppc/briefs/2011/pb111.htm Tue, 3 May 2011 11:20:28 -0400 This paper presents results of the 2009 Survey of Consumer Payment Choice (SCPC), along with revised 2008 SCPC data. In 2009, the average U.S. consumer held 5.0 of the nine payment instruments available, including cash, and used 3.8 of them during a typical month. Between the 2008 and 2009 surveys, a period that includes the trough of the latest recession, consumers significantly increased their use of cash and close substitutes for cash, such as money orders and prepaid cards. At the same time, consumers reduced their use of credit cards and (to a lesser extent) debit cards, as well as payments made using a bank account number. Weaker economic conditions, new government regulations, and bank pricing of payment card services all likely contributed to the shift back toward cash. However, it is difficult to determine how much each of these factors contributed, and whether the shift is transitory or permanent, without more data and research on consumer payment choice. In 2009, one in three consumers had a prepaid card and nearly as many had a nonbank payment account online, while 3 percent made a mobile payment. By focusing on payments by consumers only, the SCPC complements the recent 2010 Federal Reserve Payment Study, which describes the entire noncash payments economy. http://www.bostonfed.org/economic/ppdp/2011/ppdp1101.htm payments http://www.bostonfed.org/economic/ppdp/2011/ppdp1101.htm Thu, 7 Apr 2011 14:45:58 -0400 This report seeks to understand how New Hampshire has avoided a broad-based income or sales tax by examining the factors that drive the state’s lower-than-average per capita spending and the revenue sources the state relies on to pay for that spending in lieu of an income or sales tax. It presents comparative data for the six New England states and discusses some of the impediments faced by other states in the region interested in emulating New Hampshire's fiscal model. http://www.bostonfed.org/economic/neppc/researchreports/2011/rr1101.htm public policy http://www.bostonfed.org/economic/neppc/researchreports/2011/rr1101.htm Thu, 7 Apr 2011 14:44:38 -0400 The measurement of bank output, a difficult and contentious issue, has become even more important in the aftermath of the devastating financial crisis of recent years. In this paper, we argue that models of banks as processors of information and transactions imply a quantity measure of bank service output based on transaction counts instead of balances of loans and deposits. Compiling new and comparable output measures for the United States and a range of European countries, we show that our counts-based output series exhibit significantly different growth patterns from those of our balances-based output series over the years 1997 to 2009. Since the U.S. official statistics rely on counts while European statistics rely on balances, this implies a potentially considerable bias in the estimate of bank output growth in Europe vis-a -vis that in the United States. http://www.bostonfed.org/economic/wp/wp2011/wp1101.htm banking http://www.bostonfed.org/economic/wp/wp2011/wp1101.htm Mon, 14 Feb 2011 15:26:17 -0500 This policy brief evaluates the distribution of municipal aid in Massachusetts in FY 2011 and suggests an approach for reforming municipal aid without redistributing current aid. We use the “municipal gap,” a measure that is outside the control of local officials, to determine a community’s need for municipal aid. To show the general pattern of municipal gaps across the state, we compare five prototype communities-- large cities, job-center suburbs, higher-income residential suburbs, rural towns, and resort towns. The analysis shows that the distribution of FY 2011 municipal aid does not closely relate to municipal gaps. A 10-year simulation from FY 2012 to FY 2021 shows that with only modest increases to the aid pool, a gap-based formula can significantly improve the distribution of municipal aid in just a few years. This brief summarizes analysis in NEPPC working paper 10-4: Does Springfield Receive Its Fair Share of Municipal Aid? Implications for Aid Formula Reform in Massachusetts. http://www.bostonfed.org/economic/neppc/briefs/2010/pb102.htm public policy http://www.bostonfed.org/economic/neppc/briefs/2010/pb102.htm Tue, 4 Jan 2011 17:16:47 -0500 Using the Kauffman Firm Survey, we examine how characteristics of a startup's assets, information about the startup, and entrepreneur attributes relate to financial structure at inception. Startups with more physical assets or those where the entrepreneurs have other similar businesses are more likely to use external debt in the financial structure since these assets have a high liquidation value. Startups with human capital embodied in the entrepreneur or intellectual property assets have a lower probability of using debt, consistent with the higher asset specificity and lower collateral value of these assets. Startups characterized as small, unincorporated, solo, first-time, or home-office-based are more likely to be financed by self, family and friends, and importantly through credit cards, as these have both highly specific assets and information opacity. More educated founders and non-African American founders are more likely to be financed by external sources. Controlling for other attributes of the startup, the financial structure of women-owned startups does not differ from that of other startups. Hi-tech startups' financial structure differs significantly from that of startups in other business sectors. http://www.bostonfed.org/economic/wp/wp2010/wp1017.htm http://www.bostonfed.org/economic/wp/wp2010/wp1017.htm Thu, 30 Dec 2010 16:23:19 -0500 Optimism bias is inconsistent with the independence of decision weights and payoffs found in models of choice under risk, such as expected utility theory and prospect theory. Hence, to explain the evidence suggesting that agents are optimistically biased, we propose an alternative model of risky choice, affective decision making, where decision weights—which we label affective or perceived risk—are endogenized. Affective decision making (ADM) is a strategic model of choice under risk where we posit two cognitive processes—the "rational" and the "emotional" process. The two processes interact in a simultaneous-move intrapersonal potential game, and observed choice is the result of a pure Nash equilibrium strategy in this game. We show that regular ADM potential games have an odd number of locally unique pure strategy Nash equilibria, and demonstrate this finding for ADM in insurance markets. We prove that ADM potential games are refutable by axiomatizing the ADM potential maximizers. http://www.bostonfed.org/economic/wp/wp2010/wp1016.htm http://www.bostonfed.org/economic/wp/wp2010/wp1016.htm Thu, 23 Dec 2010 16:08:15 -0500 The rising stockpile of cash as a share of total assets at U.S. firms has intrigued economists since at least the paper of Bates, Kahle, and Stulz (2006), yet there has been relatively little work on where this cash has come from and how it is related to investment performance. We exploit Statement of Cash Flows data from Compustat to decompose firms' cash stocks and show that the rise in cash holdings has coincided with an increased willingness to save internally generated cash. We show that although investment is normally sensitive to externally generated cash, the increased sensitivity of investment to cash during the Great Recession is driven by cash from internal sources. Smaller firms were also more affected by the recent downturn than larger firms. Our results agree with the findings of Almeida, Campello, and Weisbach (2004) on cash hoarding and financial constraints, as well as the estimates in Duchin, Ozbas, and Sensoy (2010) on the important role of saved cash during the financial crisis. http://www.bostonfed.org/economic/wp/wp2010/wp1015.htm http://www.bostonfed.org/economic/wp/wp2010/wp1015.htm Wed, 22 Dec 2010 15:31:05 -0500 This paper introduces the concept of categorizing the amount and speed of a discounting procedure in order to generate well-characterized families of procedures for use in social project evaluation. Exponential discounting isolates the concepts of amount and speed into a single parameter that must be disaggregated in order to characterize nonconstant rate procedures. The inverse of the present value of a unit stream of benefits provides a natural measure of the amount a procedure discounts the future. We propose geometrical- and time horizon-based measures of how rapidly a procedure acquires its ultimate present value, and we prove these values are the same. This equivalency provides an unambiguous measure of the speed of discounting, with values between 0 (slow) and 2 (fast). Exponential discounting has a speed of 1. A commonly proposed approach to aggregating individual discounting procedures into a social one for project evaluation averages the individual functions. We point to a serious shortcoming with this approach and propose an alternative for which the amount and time horizon of the social procedure are the average values of the amounts and time horizons of the individual procedures. We further show that this social procedure will in general be slower than the average of the individual procedures' speeds. We then characterize three families of two-parameter discounting procedures—hyperbolic, gamma, and Weibull—in terms of their discount functions, discount rate functions, amounts, speeds, and time horizons. (The appendix characterizes additional families, including the quasi-hyperbolic procedure.) A one-parameter version of hyperbolic discounting, d(t)=(1+rt)-2, has amount r and speed 0. We argue that this zero-speed hyperbolic procedure is a good candidate for use in social project evaluation, although additional empirical work is needed to fully justify a one-parameter simplification of the more general procedure. http://www.bostonfed.org/economic/wp/wp2010/wp1014.htm http://www.bostonfed.org/economic/wp/wp2010/wp1014.htm Wed, 22 Dec 2010 14:34:46 -0500 Fama and French (1992) suggest that the positive value premium results from risk of financial distress. However, recent empirical research has found that financially distressed firms have lower stock returns, using empirical estimates of default probabilities. This paper reconciles the positive value premium and the negative distress premium in a model that decouples actual and risk-neutral default probabilities. Moreover, in agreement with the data, firms with higher bond yields have higher stock returns in the model. The model also captures the fact that book-to-market value dominates financial leverage in explaining stock returns. Finally, the model predicts that firms with higher risk-neutral default probabilities should have higher stock returns, a hypothesis that can be tested using credit default swap premiums. http://www.bostonfed.org/economic/wp/wp2010/wp1013.htm http://www.bostonfed.org/economic/wp/wp2010/wp1013.htm Wed, 22 Dec 2010 11:21:45 -0500 This policy brief summarizes the findings of the Survey of Community Banks conducted by the Federal Reserve Bank of Boston in May 2010. This survey seeks to understand how the supply of, and demand for, bank business loans changed in the period following the financial crisis. The survey design focuses on assessing how much community banks were willing and able to lend to local businesses that used to be customers of large banks but lost access to credit in the aftermath of the financial crisis. The survey responses provide some evidence that lending standards for commercial loans have tightened moderately at community banks since late 2008, with the tightening being more severe for new customers than for those that already had a relationship with the respondent bank. The survey also reveals that expansions of several SBA guarantee programs since the crisis have ameliorated possible credit constraints on small businesses. http://www.bostonfed.org/economic/ppb/2010/ppb103.htm http://www.bostonfed.org/economic/ppb/2010/ppb103.htm Thu, 16 Dec 2010 19:05:03 -0500 Foote discusses the housing bubble, the consequences for output, employment, and inflation, the fiscal and monetary policy responses, and the Great Recession in context. http://www.bostonfed.org/videos/index.htm http://www.bostonfed.org/videos/index.htm Wed, 15 Dec 2010 18:04:56 -0500 http://www.bostonfed.org/economic/wp/wp2010/wp1012.htm http://www.bostonfed.org/economic/wp/wp2010/wp1012.htm Fri, 10 Dec 2010 15:24:41 -0500 This paper proposes a novel explanation for the decline in unions in the United States since the late 1970s: state-by-state removal of geographical restrictions on branching of banks. Bank branch deregulation reduces union membership in the non-banking sectors by intensifying entry of new firms, especially in sectors with high dependence on external finance. New firm entry, in turn, is associated with a reduction in union wage premium, and subsequently leads to adverse union voting. I provide empirical evidence for these channels using repeated cross-sectional and panel data of U.S. workers and union representation election outcomes. http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1007.htm http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1007.htm Mon, 6 Dec 2010 17:32:04 -0500 This report examines the potential mismatch between the supply of and demand for skilled labor in New England. It explores changes in the balance between labor supply and labor demand at multiple skill levels across the New England region and the nation and examines both historical trends as well as future projections in the supply of and demand for skilled labor. http://www.bostonfed.org/economic/neppc/researchreports/2010/rr1002.htm http://www.bostonfed.org/economic/neppc/researchreports/2010/rr1002.htm Tue, 30 Nov 2010 17:03:45 -0500 This paper exploits the differential financing needs across industrial sectors and provides strong empirical evidence that financing constraints of small businesses are important in explaining the unemployment dynamics around the Great Recession. In particular, we show that workers in small firms are more likely to become unemployed during the 2007-2009 financial crisis if they work in industries with high external financing needs. According to our estimates, eliminating financial constraints of small firms could add up to 850,000 jobs to the economy. We suggest that policies aimed at making credit available to small businesses would significantly help stabilize the labor markets and economic activity in the U.S. http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1006.htm http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1006.htm Wed, 13 Oct 2010 18:27:39 -0400 We introduce a modification to the two-timescale games studied in the evolution of preferences (EOP) literature. In this modification, the strategic process occurring on the long timescale is learning by an individual across his or her lifetime, not natural selection operating on genomes over multiple generations. This change to the longer timescale removes many of the formal difficulties of EOP models and allows us to show how two-timescale games can provide endogenous explanations for why humans sometimes adopt interdependent preferences and sometimes exhibit logit quantal response functions. In particular, we show that our modification to EOP explains experimental data in the Traveler’s Dilemma. We also use our modification to show how cooperation can arise in nonrepeated versions of the Prisoner’s Dilemma (PD). We then show that our modification to EOP predicts a “crowding out” phenomenon in the PD, in which introducing incentives to cooperate causes players to stop cooperating instead. We also use our modification to predict a tradeoff between the robustness and the benefit of cooperation in the PD. http://www.bostonfed.org/economic/wp/wp2010/wp1010.htm%5C http://www.bostonfed.org/economic/wp/wp2010/wp1010.htm%5C Mon, 27 Sep 2010 17:27:26 -0400 This paper starts by unveiling a new empirical regularity: multinational corporations systematically tend to exhibit higher stock market returns and earnings yields than non-multinational firms. Within non-multinationals, exporters tend to exhibit higher earnings yields and returns than firms selling only in their domestic market. To explain this pattern, we develop a real option value model where firms are heterogeneous in productivity, and have to decide whether and how to sell in a foreign market where demand is risky. Firms can serve the foreign market through trade or foreign direct investment, thus becoming multinationals. Multinational firms are more exposed to risk: following a negative shock, they are reluctant to exit the foreign market because they would forgo the sunk cost that they paid to start investing abroad. We calibrate the model to match U.S. export and FDI dynamics, and use it to explain cross-sectional differences in earnings yields and returns. http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1005.htm http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1005.htm Thu, 23 Sep 2010 15:52:21 -0400 The pro-cyclical effect of bank capital requirements has attracted much attention in the post-crisis discussion of how to make the financial system more stable. This paper investigates and calibrates a dynamic provision as an instrument for addressing pro-cyclicality. The model for the dynamic provision is adopted from the Spanish banking regulatory system. We argue that, had U.S. banks set aside general provisions in positive states of the economy, they would have been in a better position to absorb their portfolios’ loan losses during the recent financial turmoil. The allowances accumulated by means of the hypothetical dynamic provision during the cyclical upswing would have reduced by half the amount of TARP funds required. However, the cyclical buffer for the aggregate U.S. banking system would have been depleted by the first quarter of 2009, which suggests that the proposed provisioning model for expected losses might not entirely solve situations as severe as the one experienced in recent years. http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1004.htm http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1004.htm Thu, 23 Sep 2010 15:44:31 -0400 This paper assesses the impact of the mortgage crisis on Chelsea, Massachusetts, a low-and moderate income community of 35,000 adjacent to Boston. After years of rapid growth, house prices started falling in 2005. According to our repeat-sales indices, by the end of 2009 prices had fallen by as much as 50 percent from their peak. Foreclosures have soared and lenders have repossessed or allowed short sales on more than 330 homes, resulting in a forced exit of at least one in 30 of the town’s households. A large fraction of the foreclosed properties were two- or three-family homes, so the number of households affected by the crisis undoubtedly extends beyond the number of foreclosures. But there is some positive news. After a slow start, servicers appear to have become far more efficient at selling foreclosed properties, so the stock of real estate owned properties has been falling since 2008. For the most part, homeowners who bought prior to the peak of the boom have so far avoided selling in the moribund market and thus are poised to gain if and when the market recovers. In addition, the crisis has not prevented homeowners from maintaining and improving their properties: both the number and the dollar value of building permits have held up well even for those homeowners who have bought recently and likely have negative equity in their homes. http://www.bostonfed.org/economic/ppdp/2010/ppdp1006.htm http://www.bostonfed.org/economic/ppdp/2010/ppdp1006.htm Tue, 7 Sep 2010 17:06:18 -0400 Understanding the evolution of real-time beliefs about house price appreciation is central to understanding the U.S. housing crisis. At the peak of the recent housing cycle, both borrowers and lenders appealed to optimistic house price forecasts to justify undertaking increasingly risky loans. Many observers have argued that these rosy forecasts ignored basic theoretical and empirical evidence that pointed to a massive overvaluation of housing and thus to an inevitable and severe price decline. We revisit the boom years and show that the economics profession provided little such countervailing evidence at the time. Many economists, skeptical that a bubble existed, attempted to justify the historic run-up in housing prices based on housing fundamentals. Other economists were more uncertain, pointing to some evidence of bubble-like behavior in certain regional housing markets. Even these more skeptical economists, however, refused to take a conclusive position on whether a bubble existed. The small number of economists who argued forcefully for a bubble often did so years before the housing market peak, and thus lost a fair amount of credibility, or they make arguments fundamentally at odds with the data even ex post. For example, some economists suggested that cities where new construction was limited by zoning regulations or geography were particularly “bubble-prone,” yet the data shows that the cities with the biggest gyrations in house prices were often those at the epicenter of the new construction boom. We conclude by arguing that economic theory provides little guidance as to what should be the “correct” level of asset prices —including housing prices. Thus, while optimistic forecasts held by many market participants in 2005 turned out to be inaccurate, they were not ex ante unreasonable. http://www.bostonfed.org/economic/ppdp/2010/ppdp1005.htm http://www.bostonfed.org/economic/ppdp/2010/ppdp1005.htm Mon, 16 Aug 2010 14:01:14 -0400 This paper measures the effects on the primary U.S. mortgage market of the large-scale asset purchase (LSAP) program in which the Federal Reserve bought $1.25 trillion of mortgage-backed securities in 2009 and 2010. We use an event-study approach and measure the movements in both prices and quantities around the initial announcement of the LSAP and subsequent changes to the program. We use a new dataset to document the changes in the menu of rates and points offered to borrowers and show that there was wide dispersion in the rate changes generated by the announcement of the LSAP program, with some borrowers seeing immediate rate reductions of up to 40 basis points and other borrowers confronting rate increases. We show that the LSAP program led to a substantial boost in market activity, with discontinuous increases in searches, applications and originations for refinance mortgages, but not purchase mortgages. Finally, we show that more creditworthy borrowers were significantly more likely to benefit from the improved credit availability. http://www.bostonfed.org/economic/ppdp/2010/ppdp1004.htm http://www.bostonfed.org/economic/ppdp/2010/ppdp1004.htm Tue, 10 Aug 2010 10:11:26 -0400 The closed and open economy literatures both work on evaluating the role of real rigidities, but in parallel. This paper brings the two literatures together. We use international price data and exchange rate shocks to evaluate the importance of real rigidities in price setting. We show that, consistent with the presence of real rigidities, the response of reset-price inflation to exchange rate shocks exhibits significant persistence. Individual import prices, conditional on changing, respond to exchange rate shocks prior to the last price change. At the same time, aggregate reset-price inflation for imports, like that for consumer prices, exhibits little persistence. Competitor prices affect firm pricing, and exchange rate pass-through into import prices is greater in response to trade-weighted, as opposed to bilateral, exchange rate shocks. We quantitatively evaluate sticky-price models (Calvo and menu cost) with variable markups at the wholesale level and constant markups at the retail level, consistent with empirical evidence. Variable markups alone generate price sluggishness at the aggregate level, while they fall short of matching price persistence at the micro level. Finally, variable markups magnify the size of the contract multiplier, but their absolute effects are modest unless they are coupled with exogenous sources of persistence. http://www.bostonfed.org/economic/wp/wp2010/wp1009.htm http://www.bostonfed.org/economic/wp/wp2010/wp1009.htm Thu, 29 Jul 2010 17:35:53 -0400 Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year. We build and calibrate a model of consumer payment choice to compute the effects of merchant fees and card rewards on consumer welfare. Reducing merchant fees and card rewards would likely increase consumer welfare. http://www.bostonfed.org/economic/ppdp/2010/ppdp1003.htm consumer payments http://www.bostonfed.org/economic/ppdp/2010/ppdp1003.htm Mon, 26 Jul 2010 10:20:46 -0400 This paper examines the distribution of unrestricted municipal aid in Massachusetts, which has been a major concern to civic leaders and elected officials of many communities, including Springfield. The paper develops a measure of the municipal fiscal gap indicating the relative need of municipalities for state aid. The analysis shows that in recent years, unrestricted municipal aid has not been distributed in proportion to the gap measure among the 10 largest cities in Massachusetts. For example, despite having the largest municipal gap, Springfield received almost the lowest per capita amount of Additional Assistance—a key component of municipal aid. This pattern is the result of deep and uneven aid cuts in the past that distorted the distribution of municipal aid. This paper therefore suggests that state government consider adopting a formula that provides more aid to communities facing larger municipal gaps. To avoid disrupting local budgets, the state could consider holding existing aid harmless, and using the gap-based formula to distribute new aid. The simulations show that if the state commits to reasonably large increases in municipal aid, this new approach can be both equalizing and beneficial to a majority of municipalities in the Commonwealth within a relatively short time period. The paper provides various formula evaluations and policy recommendations that could support efforts to reform state aid in Massachusetts. http://www.bostonfed.org/economic/neppc/wp/2010/neppcwp104.htm http://www.bostonfed.org/economic/neppc/wp/2010/neppcwp104.htm Thu, 15 Jul 2010 13:01:07 -0400 Systematic differences in the timing of wage setting decisions among industrialized countries provide an ideal framework to study the importance of wage rigidity in the transmission of monetary policy. The Japanese Shunto presents the best-known case of bunching in wage setting decisions: From February to May, most firms set wages that remain in place until the following year; wage rigidity, thus, is relatively higher immediately after the Shunto. Similarly, in the United States, a large fraction of firms adjust wages in the last quarter of the calendar year. In contrast, wage agreements in Germany are well spread within the year, implying a relatively uniform degree of rigidity. We exploit variation in the timing of wage setting decisions within the year in Japan, the United States, Germany, the United Kingdom, and France to investigate the effects of monetary policy under different degrees of effective wage rigidity. Our findings lend support to the long-held, though scarcely tested, view that wage rigidity plays a key role in the transmission of monetary policy. http://www.bostonfed.org/economic/wp/wp2010/wp1008.htm http://www.bostonfed.org/economic/wp/wp2010/wp1008.htm Wed, 30 Jun 2010 16:53:56 -0400 Refet Gürkaynak, Brian Sack, and Eric Swanson (2005) provide empirical evidence that long forward nominal rates are overly sensitive to monetary policy shocks, and that this is consistent with a model where long-term inflation expectations are not anchored because agents must infer the central bank’s inflation target from noisy interest rate movements. Using the same data, methodology, and model, we show that their empirical results are neither persistent nor robust to small changes in sample period or methodology. In addition, their theoretical results rely mainly on an ad hoc law of motion for the inflation target—imperfect information about the target plays only a small role in un-anchoring expectations in their model. http://www.bostonfed.org/economic/wp/wp2010/wp1007.htm http://www.bostonfed.org/economic/wp/wp2010/wp1007.htm Wed, 30 Jun 2010 16:53:16 -0400 Given the substantial amount of resources currently invested in microcredit programs, it is more important than ever to accurately assess the extent to which peer monitoring by borrowers faced with group liability contracts actually reduces moral hazard. We conduct a field experiment with women about to enter a group loan program in Paraguay and then gather administrative data on the members’ repayment behavior in the six-month period following the experiment. In addition to the experiment which is designed to measure individual propensities to monitor under incentives similar to group liability, we collect a variety of the other potential correlates of borrowing behavior and repayment. Controlling for other factors, we find a very strong causal relationship between the monitoring propensity of one’s loan group and repayment. Our lowest estimate suggests that borrowers in groups with above median monitoring are 36 percent less likely to have a problem repaying their portion of the loan. Besides confirming a number of previous results, we also find some evidence that risk preferences, social preferences, and cognitive skills affect repayment. http://www.bostonfed.org/economic/wp/wp2010/wp1006.htm http://www.bostonfed.org/economic/wp/wp2010/wp1006.htm Wed, 30 Jun 2010 16:52:41 -0400 This paper experimentally examines whether looking at other people’s pricing decisions is a type of heuristic—a decisionmaking rule—that people use even when it is not applicable, as in the case of clearly private value goods. We find evidence that this is indeed the case—an individual’s valuation of a purely subjective experience under full information, elicited using an incentive compatible mechanism, is highly influence by valuations made by others. This result can shed light on price behavior, price rigidities, and rents. http://www.bostonfed.org/economic/wp/wp2010/wp1005.htm http://www.bostonfed.org/economic/wp/wp2010/wp1005.htm Wed, 30 Jun 2010 16:52:05 -0400 This Research Report analyzes the features of the New England state pension plans in the context of the region's changing demographic environment. The first section of the report documents key demographic developments: the aging of the Baby Boom generation and increasing life expectancies. Key features of the primary state pension plan in each New England state are then compared, focusing in particular on the age-specific characteristics of the plans. A third section analyzes the labor market implications of the plans' formulas, such as how they apply to workers choosing retirement at different ages. The fourth focuses on recently enacted reforms in New England states and alternative approaches to reform. An appendix provides a more detailed state-by-state mapping of benefit accrual patterns in the plans, based on illustrative employees hired at different ages. http://www.bostonfed.org/economic/neppc/researchreports/2010/rr1001.htm http://www.bostonfed.org/economic/neppc/researchreports/2010/rr1001.htm Wed, 30 Jun 2010 15:30:55 -0400 This brief examines two issues of current interest concerning inflation: (1) whether “well-anchored” expectations will help to restrain inflation’s decline and whether an “un-anchoring” of expectations could lead to undesirably high inflation and (2) to what extent output (or utilization) gaps are useful components of empirical models of inflation and, if they are useful, to what extent current gaps might counterbalance the effect of expectations on inflation. The goals of conducting this examination are to articulate a reasonably coherent framework for the discussion, highlight the key areas of uncertainty, and provide new empirical evidence that sheds some light on these areas. http://www.bostonfed.org/economic/ppb/2010/ppb102.htm http://www.bostonfed.org/economic/ppb/2010/ppb102.htm Mon, 28 Jun 2010 18:39:35 -0400 This paper studies the effects of tariffs on intra-firm trade. Building on the Antràs and Helpman (2004) North-South theoretical framework, I show that higher Northern tariffs reduce the incentives for outsourcing and offshoring, while higher Southern tariffs have the opposite effects. I also show that increased offshoring and outsourcing imply an increase in the ratio of Northern intra-firm imports to total imports, which is an empirically testable prediction. Using a highly disaggregated dataset of U.S. (the North) imports and relevant tariffs, I find robust evidence to support the model's predictions. http://www.bostonfed.org/economic/wp/wp2010/wp1004.htm http://www.bostonfed.org/economic/wp/wp2010/wp1004.htm Thu, 17 Jun 2010 18:11:19 -0400 This discussion paper updates the Center's 2006 housing affordability working paper, drawing on housing market data through 2008 to provide an in-depth analysis of housing affordability after the recent housing market bust. The paper looks at affordability in the New England states, their largest metropolitan areas, competitor metropolitan areas, and for the nation. The results show that as New England's housing prices have declined, affordability has been returning to the pre-housing crisis levels of the early 2000s. However, declining prices nationwide continue to make owner-occupied housing in most New England states less affordable than in the nation. At the same time more of the region’s households are becoming cost-burdened, particularly low- and middle-income homeowners. In contrast, New England has maintained its advantage in rental affordability relative to the nation and renters in the region are far less likely than their national counterparts to face cost burdens. http://www.bostonfed.org/economic/neppc/dp/2010/dp1001.htm http://www.bostonfed.org/economic/neppc/dp/2010/dp1001.htm Tue, 8 Jun 2010 14:24:56 -0400 Although mobile payments are increasingly used in some countries, they have not been adopted widely in the United States so far, despite their potential to add value for consumers and streamline the payments system. After describing a few countries’ experiences, we analyze the prospects for the U.S. market for mobile payments in retail payments, particularly the use of contactless and near-field communication technologies. We identify conditions that have facilitated some success in other countries and barriers to the adoption of mobile payments in the United States. On the demand side, consumers and merchants are well served by the current card system, and face a low expected benefit-cost ratio, at least in the short run. On the supply side, low market concentration and strong competitive forces of banks and mobile carriers make coordination of standards difficult. Furthermore, mobile payments are characterized by a network effects problem: consumers will not demand them until they know that enough merchants accept them, and merchants will not implement the technology until a critical mass of consumers justifies the cost of doing so. We present some policy recommendations that the Federal Reserve should consider. http://www.bostonfed.org/economic/ppdp/2010/ppdp1002.htm http://www.bostonfed.org/economic/ppdp/2010/ppdp1002.htm Mon, 24 May 2010 11:01:35 -0400 Following the failure of Lehman Brothers in September 2008, short-term credit markets were severely disrupted. In response, the Federal Reserve implemented new and unconventional facilities to help restore liquidity. Many existing analyses of these interventions are confounded by identification problems because they rely on aggregate data. Two unique micro datasets allow us to exploit both time series and cross-sectional variation to evaluate one of the most unusual of these facilities—the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). The AMLF extended collateralized loans to depository institutions that purchased asset-backed commercial paper (ABCP) from money market funds, helping these funds meet the heavy redemptions that followed Lehman’s bankruptcy. The program, which lent $150 billion in its first 10 days of operation, was wound down with no credit losses to the Federal Reserve. Our findings indicate that the facility was effective as measured against its dual objectives: it helped stabilize asset outflows from money market mutual funds, and it improved liquidity in the ABCP market. Using a differences-in-differences approach we show that after the facility was implemented, money market fund outflows decreased more for those funds that held more eligible collateral. Similarly, we show that yields on AMLF-eligible ABCP decreased significantly relative to those on otherwise comparable AMLF-ineligible commercial paper. http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1003.htm http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1003.htm Fri, 30 Apr 2010 13:34:19 -0400 Updated interactive graphic shows foreclosure rates moderated somewhat in 2009 in hardest-hit MA cities and towns http://www.bostonfed.org/economic/dynamicdata/module1/bmap.html http://www.bostonfed.org/economic/dynamicdata/module1/bmap.html Mon, 26 Apr 2010 14:54:19 -0400 This paper surveys a variety of topics related to network economics. Topics covered include: consumer demand under network effects, compatibility decisions and standardization, technology advances in network industries, two-sided markets, information networks and intellectual property, and social influence. http://www.bostonfed.org/economic/wp/wp2010/wp1003.htm http://www.bostonfed.org/economic/wp/wp2010/wp1003.htm Mon, 5 Apr 2010 15:31:18 -0400 In this note we discuss the findings in Piskorski, Seru, and Vig (2010), as well as the authors’ interpretation of their results. First, we find that small changes to the set of covariates used by PSV significantly reduce the magnitude of the differences in foreclosure rates between securitized and nonsecuritzed loans. Second, we argue that early payment defaults (EPD) are not a valid instrument for the securitization status of the loans and that the empirical implementation chosen by the authors for using EPD is not a valid instrumental variables approach. Finally, we discuss the use of foreclosure rates as a measure of renegotiation and argue that explicitly using modification rates of delinquent mortgages is a better way of studying renegotiation activity. On balance, the evidence in PSV indicates that there are at most small differences in the outcomes of delinquent loans, but whether those differences reflect accounting issues, willingness to renegotiate, or unobserved heterogeneity remains an open question. http://www.bostonfed.org/economic/wp/wp2010/wp1002.htm http://www.bostonfed.org/economic/wp/wp2010/wp1002.htm Tue, 23 Mar 2010 10:21:10 -0400 We study a model of portfolio choice, in which housing prices are predictable and adjustment costs must be paid when there is a housing transaction. We show that two state variables affect the agent’s decisions: (i) his wealth-house ratio; and (ii) the time-varying expected growth rate of housing prices. The agent buys (sells) his housing assets only when the wealth-house ratio reaches an optimal upper (lower) boundary. These boundaries are time-varying and depend on the expected growth rate of housing prices. Finally, we use household level data from the PSID and SIPP surveys to test and support the main implications of the model, as well as portfolio rules and holdings of housing asset. http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1002.htm http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1002.htm Wed, 10 Mar 2010 15:54:11 -0500 Shiller (2003) and others have argued for the creation of financial instruments that allow households to insure risks associated with their lifetime labor income. In this paper, we argue that while the purpose of such assets is to smooth consumption across states of nature, one must also consider the assets’ effects on households’ ability to smooth consumption over time. We show that consumers in a realistically calibrated life-cycle model would generally prefer income-linked loans (with a rate positively correlated with income shocks) to an income-hedging instrument (a limited liability asset whose returns correlate negatively with income shocks) even though the assets offer identical opportunities to smooth consumption across states. While for some parameterizations of our model the welfare gains from the presence of income-linked assets can be substantial (above 1 percent of certainty-equivalent consumption), the assets we consider can only mitigate a relatively small part of the welfare costs of labor income risk over the life cycle. http://www.bostonfed.org/economic/wp/wp2010/wp1001.htm http://www.bostonfed.org/economic/wp/wp2010/wp1001.htm Tue, 2 Mar 2010 18:01:40 -0500 The paper investigates the reasons why person-to-person electronic funds transfers are still not very common in the United States compared with practices in many other countries. The paper also describes recent enhancements to online and mobile banking that provide account holders with low-cost interfaces to manage person-to-person electronic funds transfers via automated clearing house (ACH). On the theoretical side, the paper characterizes the critical mass levels needed for payment instruments to become widely adopted. Given the Fed's long-term heavy involvement in check clearing, the paper concludes with policy discussions of whether intervention is needed. http://www.bostonfed.org/economic/ppdp/2010/ppdp1001.htm http://www.bostonfed.org/economic/ppdp/2010/ppdp1001.htm Tue, 23 Feb 2010 10:45:08 -0500 State and local governments, with revenues reduced sharply by the recession, are responding by cutting services, increasing tax rates, and drawing down reserves; they are also receiving some relief in the form of stimulus funds provided by the federal government. The stimulus funds legislated in the American Recovery and Reinvestment Act only partly offset the recession-induced shortfalls and are scheduled to phase out before most analysts believe state and local governments will see fiscal recovery well underway. Thus, observers are concerned that the state-local sector will create a substantial drag on the overall economy during fiscal year 2011 and into 2012. This brief compiles data on state gaps, responses, and stimulus funding nationwide and discusses potential implications for the national economy. http://www.bostonfed.org/economic/ppb/2010/ppb101.htm http://www.bostonfed.org/economic/ppb/2010/ppb101.htm Tue, 23 Feb 2010 10:44:33 -0500 This paper examines the potential impact of local-option taxes on meals, general sales, income, and payroll on revenue-raising capacity in Massachusetts municipalities. It finds that, while new local-option taxes would generate considerable additional revenues from untapped sources, revenue capacity is not evenly distributed across municipalities. Indeed, local-option taxes are likely to exacerbate fiscal disparities, because municipalities with low existing revenue-raising capacity often lack the tax bases for new local-option taxes. Policymakers could consider increasing equalizing state aid to offset these fiscal disparities. If more aid is not forthcoming, this paper proposes that the state change aid formulas to reflect differences across municipalities in local-option tax capacity, and to better target fiscally distressed communities. These strategies—explored in the Massachusetts context—could also be useful in other states. http://www.bostonfed.org/economic/neppc/wp/2010/neppcwp102.htm http://www.bostonfed.org/economic/neppc/wp/2010/neppcwp102.htm Thu, 4 Feb 2010 16:48:44 -0500 There is a popular belief that the confluence of bank capital rules and fair value accounting helped trigger the recent financial crisis. The claim is that questionable valuations of long term investments based on prices obtained from illiquid markets created a pro-cyclical effect whereby mark to market adjustments reduced regulatory capital forcing banks to sell off investments which further depressed prices. This ultimately led to bank instability and the credit effects that reached a peak late in 2008. This paper analyzes a sample of large banks to attempt to measure the strength of the link between fair value accounting, regulatory capital rules, pro-cyclicality and financial contagion. The focus is on large banks because they value a significant portion of their balance sheets using fair value. They also hold investment portfolios that contain illiquid assets in large enough volumes to possibly affect the market in a pro-cyclical fashion. The analysis is based on a review of recent historical financial data. The analysis does not reveal a clear link for most banks in the sample, but rather suggests that there may have been other more significant factors putting stress on bank regulatory capital. http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1001.htm http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1001.htm Mon, 1 Feb 2010 14:03:02 -0500 Book based on Boston Fed's 2007 conference "Implications of Behavioral Economics for Economic Policy" http://www.bostonfed.org/economic/conf/BehavioralPolicy2007/index.htm http://www.bostonfed.org/economic/conf/BehavioralPolicy2007/index.htm Mon, 1 Feb 2010 18:20:10 -0500 This paper investigates competition between jurisdictions in the context of cross-border shopping for state lottery tickets. We first develop a simple theoretical model in which consumers choose between state lotteries and face a trade-off between travel costs and the price of a fair gamble, which is declining in the size of the jackpot and the odds of winning. Given this trade-off, the model predicts that per-resident sales should be more responsive to prices in small states with densely populated borders, relative to large states with sparsely populated borders. Our empirical analysis focuses on the multi-state games of Powerball and Mega Millions, and the identification strategy is based upon high-frequency variation in prices due to the rollover feature of lottery jackpots. The empirical results support the predictions of the model. The magnitude of these effects is large, suggesting that states do face competitive pressures from neighboring lotteries, but the effects vary significantly across states. http://www.bostonfed.org/economic/neppc/wp/2010/neppcwp101.htm http://www.bostonfed.org/economic/neppc/wp/2010/neppcwp101.htm Thu, 21 Jan 2010 18:08:02 -0500 As part of the Federal Reserve Bank of Boston’s commitment to supporting efforts to revitalize the economy of Springfield, Massachusetts, this paper explores the causes of and potential remedies for the city’s low resident employment rates. When compared to the state as a whole and to other midsize New England cities, the share of employed city residents is low, particularly for residents of downtown Springfield and its nearby neighborhoods. By analyzing the availability of jobs across Springfield’s various neighborhoods and in nearby towns and cities, this paper’s goal is to learn why so few Springfield residents are employed, and thus to identify policy priorities to increase employment. This study finds that solving Springfield’s low resident employment rates will require a combination of new job creation, improved informational and physical access to jobs, and strengthening the citizenry’s job skills. http://www.bostonfed.org/economic/ppdp/2009/ppdp0911.htm http://www.bostonfed.org/economic/ppdp/2009/ppdp0911.htm Wed, 30 Dec 2009 14:58:16 -0500 The public phase of a capital campaign is typically launched with the announcement of a large seed donation. Andreoni (1998) argues that such a fundraising strategy may be particularly effective when funds are being raised for projects that have fixed production costs. The reason is that the introduction of fixed costs may give rise to both positive and zero provision outcomes, and absent announcements of a large seed gift, donors may get stuck in an equilibrium that fails to provide a desirable public project. Interestingly, Andreoni (1998) demonstrates that announcing seed money can help eliminate such inferior outcomes. We investigate this model experimentally to determine whether announcements of seed money eliminate the inefficiencies that may result under fixed costs and simultaneous provision. To assess the strength of the theory we examine the effect of announcements in both the presence and absence of fixed costs. Our findings are supportive of the theory for projects with sufficiently high fixed costs. http://www.bostonfed.org/economic/wp/wp2009/wp0921.htm http://www.bostonfed.org/economic/wp/wp2009/wp0921.htm Wed, 30 Dec 2009 16:12:08 -0500 This paper analyzes optimal monetary policy under precommitment in a state-dependent pricing (SDP) environment. Under SDP, monopolistically competitive firms are allowed to endogenously change the timing of price adjustments. I show that this endogenous timing of price adjustment alters the tradeoff and the cost of inflation variation faced by the monetary authority in comparison to the standard time-dependent pricing (TDP) assumption. In particular, it is desirable to let inflation vary more under SDP. Despite the change in the policy tradeoff, however, the optimal response under SDP to either a productivity shock or a government purchase shock under the timeless perspective (long-run) policy can still be characterized as an approximate price stability rule. In addition to a standard first-order approximation to the equilibrium solution, this paper also computes a second-order solution where the effect of state-dependence can play a central role. The policy response under SDP exhibits some degree of nonlinearity, especially in the presence of larger shocks and when the state of the economy is farther away from the steady state. Finally, this paper also studies the optimal policy start-up problem related to the cost of adopting the timeless perspective policy instead of the true Ramsey policy. The SDP assumption leads to different start-up dynamics compared to the dynamics under the TDP assumption in several interesting ways. In particular, the change in the policy tradeoff gives rise to much higher start-up inflation under SDP. http://www.bostonfed.org/economic/wp/wp2009/wp0920.htm http://www.bostonfed.org/economic/wp/wp2009/wp0920.htm Wed, 30 Dec 2009 15:30:24 -0500 We propose that individuals consider future versions of themselves to truly be separate persons, not simply as a convenient modeling device but in terms of actual brain systems and decision-making processes. Intertemporal choices are thus quite literally strategic interactions between multiple agents. Previous neuroscientific studies have found evidence that systems involved with Theory of Mind (that is, mentalizing other agents) are similar to those involved with prospection (imagining oneself in the future). We provide a conceptual framework for this work and suggest that, instead of prospection, a more analogous future task is one that concerns intertemporal choice and time preferences, since these involve implicit prediction of future actions. Recent functional imaging studies appear to confirm such a link. Additional studies—behavioral, clinical, and neuroimaging—are proposed in order to confirm the specific nature of the correspondence and to elucidate the underlying mechanisms. Finally, given that society may have a vested interest in promoting the welfare of future selves, we discuss possible policy implications of departing from the standard framework in which individuals act in their own best interests as defined over the entire lifetime. http://www.bostonfed.org/economic/wp/wp2009/wp0917.htm http://www.bostonfed.org/economic/wp/wp2009/wp0917.htm Mon, 28 Dec 2009 13:04:27 -0500 International financial integration has greatly increased the scope for changes in a country's net foreign asset position through the "valuation channel" of external adjustment, namely capital gains and losses on the country's external assets and liabilities. We examine this valuation channel theoretically in a dynamic equilibrium portfolio model with international trade in equity that encompasses complete and incomplete asset market scenarios. By separating asset prices and quantities in the definition of net foreign assets, we can characterize the first-order dynamics of both valuation effects and net foreign equity holdings. First-order excess returns are unanticipated and i.i.d. in our model, but capital gains and losses on equity positions feature persistent, anticipated dynamics in response to productivity shocks. The separation of prices and quantities in net foreign assets also enables us to characterize fully the role of capital gains and losses versus the current account in the dynamics of macroeconomic aggregates. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete, showing how these different channels contribute to dampening (or amplifying) the impact response of the cross-country consumption differential to shocks and to keeping it constant in subsequent periods. http://www.bostonfed.org/economic/wp/wp2009/wp0918.htm http://www.bostonfed.org/economic/wp/wp2009/wp0918.htm Mon, 28 Dec 2009 13:03:47 -0500 This paper presents the 2008 version of the Survey of Consumer Payment Choice (SCPC), a nationally representative survey developed by the Consumer Payments Research Center of the Federal Reserve Bank of Boston and implemented by the RAND Corporation with its American Life Panel. The survey fills a gap in knowledge about the role of consumers in the transformation of payments from paper to electronic by providing a broad‐based assessment of U.S. consumers’ adoption and use of nine payment instruments, including cash. The average consumer has 5.1 of the nine instruments, and uses 4.2 in a typical month. Consumers make 53 percent of their monthly payments with a payment card (credit, debit, and prepaid). More consumers now have debit cards than credit cards, and consumers use debit cards more often than cash, credit cards, or checks individually. Cash, checks, and other paper instruments are still popular and account for 37 percent of consumer payments. Most consumers have used newer electronic payments, such as online banking bill payment, but they account for only 10 percent of consumer payments. Security and ease of use are the characteristics of payment instruments that consumers rate as the most important. http://www.bostonfed.org/economic/ppdp/2009/ppdp0910.htm payments http://www.bostonfed.org/economic/ppdp/2009/ppdp0910.htm Wed, 23 Dec 2009 17:43:23 -0500 We prove that the change in welfare of a representative consumer is summarized by the current and expected future values of the standard Solow productivity residual. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies total factor productivity (TFP) as the right summary measure of welfare (even in situations where it does not properly measure technology) and makes it possible to calculate the contributions of disaggregated units (industries or firms) to aggregate welfare using readily available TFP data. Based on this finding, we compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, and Spain), using industry-level (EU-KLEMS) and firm-level (Amadeus) data. After adding further assumptions about technology and market structure (firms minimize costs and face common factor prices), we show that changes in welfare can be decomposed into three components that reflect, respectively, technological change, aggregate distortions, and allocative efficiency. Then, using appropriate firm-level data, we assess the importance of each of these components as sources of welfare improvement in the same set of European countries. http://www.bostonfed.org/economic/wp/wp2009/wp0919.htm http://www.bostonfed.org/economic/wp/wp2009/wp0919.htm Mon, 28 Dec 2009 11:23:00 -0500 In this paper, we emphasize that choice sets generated by a search process have two properties: first, they are limited; second, they are endogenous to preferences. Both factors lead to biased estimates in a static demand framework that takes choice sets as given. To correct for this bias, we estimate a structural model of search for differentiated products, using a unique dataset of consumer online search for hotels. Within a nested logit utility model, we show that the mean utility function and the search cost distribution of a representative consumer are non-parametrically identified, given our data. Using our model’s estimates, we quantify both sources of bias: they lead to overestimation of price elasticity by a factor of five and four, respectively. The median search cost is about 38 dollars per 15 hotels; we also present some evidence on multi-modality of search cost distribution. http://www.bostonfed.org/economic/wp/wp2009/wp0916.htm http://www.bostonfed.org/economic/wp/wp2009/wp0916.htm Fri, 18 Dec 2009 15:37:42 -0500 We compare estimates of the New Keynesian Phillips Curve (NKPC) when the curve is specified in two different ways. In the standard difference equation (DE) form, current inflation is a function of past inflation, expected future inflation, and real marginal costs. The alternative closed form (CF) specification explicitly solves the DE form to express inflation as a function of past inflation and a present-discounted value of current and expected future marginal costs. The CF specification places model-consistent constraints on expected future inflation that are not imposed in the DE form. In a Monte Carlo exercise, we show that estimating the CF version of the NKPC gives estimates that are much more efficient than the estimates obtained from the DE specification. We then compare DE and CF estimates of the NKPC with time-varying trend inflation on actual data. The data and estimation methodology are the same as in Cogley and Sbordone (2008). We show that DE and CF estimates differ substantially and have very different implications for inflation dynamics. As in Cogley and Sbordone, it is possible to estimate DE specifications of the NKPC where lagged inflation plays no role once trend inflation is taken into account. The CF estimates of the NKPC, however, typically imply as large a role for lagged inflation as for expected future inflation. These estimates thus suggest that trend inflation is not in itself sufficient to explain the persistent dynamics of inflation. http://www.bostonfed.org/economic/wp/wp2009/wp0915.htm http://www.bostonfed.org/economic/wp/wp2009/wp0915.htm Fri, 18 Dec 2009 15:36:27 -0500 This paper examines the concept of inflation persistence in macroeconomic theory. It begins with a definition of persistence, emphasizing the difference between reduced-form and structural persistence. It then examines a number of empirical measures of reduced-form persistence, considering the possibility that persistence may have changed over time. The paper then examines the theoretical sources of persistence, distinguishing “intrinsic” from “inherited” persistence, and deriving a number of analytical results on persistence. It summarizes the implications for persistence from the literatures on “sticky-information” models, learning models, and so-called “trend inflation models,” providing some new results throughout. http://www.bostonfed.org/economic/wp/wp2009/wp0914.htm http://www.bostonfed.org/economic/wp/wp2009/wp0914.htm Fri, 18 Dec 2009 15:35:06 -0500 State governments commonly use business tax credits to promote economic development. Whether these incentives are successful at generating new economic activity - and whether they do so in a cost-effective manner - are important concerns, particularly in times of fiscal and economic stress. This paper explores the use and effectiveness of a selected group of incentives, namely tax credits geared toward capital investment, research and development, job creation, and film production. The paper examines the various credits offered by New England states and their structural features, and reviews and analyzes the available evidence on the effectiveness and cost-effectiveness of these types of incentives. The analysis reveals the challenges entailed in measuring the impact of business tax credits and the need for both analysts and policymakers to consider those challenges carefully when using existing studies to inform the tax credit debate. http://www.bostonfed.org/economic/neppc/dp/2009/dp093.htm http://www.bostonfed.org/economic/neppc/dp/2009/dp093.htm Thu, 3 Dec 2009 17:39:53 -0500 Using data from the Panel Study of Income Dynamics, this paper considers the mechanism by which changing house values impact U.S. household spending. The results suggest that house values affect consumption by serving as collateral for households to borrow against to smooth their spending. The results show that the consumption of households who need to borrow against their home equity increases by roughly 11 cents per $1.00 increase in their housing wealth. Changing house values, however, have little effect on the expenditures of households who do not need to borrow to finance their consumption. Based on these results, the paper further finds that declining housing wealth has a relatively small implied negative impact on aggregate consumption expenditures. http://www.bostonfed.org/economic/ppdp/2009/ppdp0909.htm http://www.bostonfed.org/economic/ppdp/2009/ppdp0909.htm Wed, 18 Nov 2009 17:50:01 -0500 This paper presents a dynamic model of the firm with risk-free debt contracts, investment irreversibility, and debt restructuring costs. The model fits several stylized facts of corporate finance and asset pricing: First, book leverage is constant across different book-to-market portfolios, whereas market leverage differs significantly. Second, changes in market leverage are mainly caused by changes in stock prices rather than by changes in debt. Third, when the model is calibrated to fit the cross-sectional distribution of book-to-market ratios, it explains the return differences across different firms. The model also shows that investment irreversibility alone cannot generate the cross-sectional patterns observed in stock returns and that leverage is the main source of the value premium. http://www.bostonfed.org/economic/wp/wp2009/wp0913.htm http://www.bostonfed.org/economic/wp/wp2009/wp0913.htm Wed, 18 Nov 2009 17:49:39 -0500 This paper describes an equilibrium life-cycle model of housing where nonconvex adjustment costs lead households to adjust their housing choice infrequently and by large amounts when they do so. In the cross-sectional dimension, the model matches the wealth distribution; the age profiles of consumption, homeownership, and mortgage debt; and data on the frequency of housing adjustment. In the time-series dimension, the model accounts for the procyclicality and volatility of housing investment, and for the procyclical behavior of household debt. The authors use a calibrated version of their model to ask the following question: what are the consequences for aggregate volatility of an increase in household income and a decrease in downpayment requirements? They distinguish between an early period, the 1950s though the 1970s, when household income risk was relatively small and loan-to-value ratios were low, and a late period, the 1980s through today, with high household income risk and high loan-to-value ratios. In the early period, precautionary saving is small, wealth-poor people are close to their maximum borrowing limit, and housing investment, homeownership, and household debt closely track aggregate productivity. In the late period, precautionary saving is larger, wealth-poor people borrow less than the maximum and become more cautious in response to aggregate shocks. As a consequence, the correlation between debt and economic activity on the one hand, and the sensitivity of housing investment to aggregate shocks on the other, are lower, as found in the data. Quantitatively, this model can explain: (1) 45 percent of the reduction in the volatility of household investment; (2) the decline in the correlation between household debt and economic activity; and (3) about 10 percent of the reduction in the volatility of GDP. http://www.bostonfed.org/economic/wp/wp2009/wp0912.htm http://www.bostonfed.org/economic/wp/wp2009/wp0912.htm Wed, 18 Nov 2009 17:48:30 -0500 Some papers and presentations from the Boston Fed's 54th Economic Conference are now available. http://www.bostonfed.org/economic/conf/conf54/index.htm http://www.bostonfed.org/economic/conf/conf54/index.htm Mon, 26 Oct 2009 11:14:47 -0400