Macroeconomics Series – Spring 2019

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This collection gathers papers presented as part of the Spring 2019 Macroeconomics Series at University of Houston


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Now showing 1 - 9 of 9
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    Mortgage Prepayment and Path-Dependent Effects of Monetary Policy
    (2019-4) Berger, David; Milbradt, Konstantin; Tourre, Fabrice; Vavra, Joseph
    How much ability does the Fed have to stimulate the economy by cutting interest rates? We argue that the presence of substantial debt in fixed-rate, prepayable mortgages means that the ability to stimulate the economy by cutting interest rates depends not just on their current level but also on their previous path. Using a household model of mortgage prepayment matched to detailed loan-level evidence on the relationship between prepayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimulus.
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    Consistency without Inference: Instrumental Variables in Practical Application
    (2019-04) Young, Alwyn
    I use Monte Carlo simulations, the jackknife and multiple forms of the bootstrap to study a comprehensive sample of 1359 instrumental variables regressions in 31 papers published in the journals of the American Economic Association. Monte Carlo simulations based upon published regressions show that non-iid error processes adversely affect the size and power of IV estimates, while increasing the bias of IV relative to OLS, producing a very low ratio of power to size and mean squared error that is almost always larger than biased OLS. Weak instrument pre-tests based upon F-statistics are found to be largely uninformative of both size and bias. In published papers, statistically significant IV results generally depend upon only one or two observations or clusters, excluded instruments often appear to be irrelevant, there is little statistical evidence that OLS is biased, and IV confidence intervals almost always include OLS point estimates.
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    Labor Market Power
    (2019-04) Berger, David; Herkenhoff, Kyle; Mongey, Simon
    What are the welfare implications of labor market power? We provide an answer to this question in two steps: (1) we develop a tractable quantitative, general equilibrium, oligopsony model of the labor market, (2) we estimate key parameters using within-firm-state, across-market differences in wage and employment responses to state corporate tax changes in U.S. Census data. We validate the model against recent evidence on productivity-wage pass-through, and new measurements of the distribution of local market concentration. The model implies welfare losses from labor market power that range from 2.9 to 8.0 percent of lifetime consumption. However, despite large contemporaneous losses, labor market power has not contributed to the declining labor share. Finally, we show that minimum wages can deliver moderate, and limited, welfare gains by reallocating workers from smaller to larger, more productive firms.
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    Inequality, Business Cycles, and Monetary-Fiscal Policy
    (2019-04) Bhandari, Anmol; Evans, David; Golosov, Mikhail; Sargent, Thomas J.
    We study optimal monetary and fiscal policy in a model with heterogeneous agents, incomplete markets, and nominal rigidities. We develop numerical techniques to approximate Ramsey plans and apply them to a calibrated economy to compute optimal responses of nominal interest rates and labor tax rates to aggregate shocks. Responses differ qualitatively from those in a representative agent economy and are an order of magnitude larger. Taylor rules poorly approximate the Ramsey optimal nominal interest rate. Conventional price stabilization motives are swamped by an across person insurance motive that arises from heterogeneity and incomplete markets.
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    Perceived FOMC: The Making of Hawks, Doves and Swingers
    (4/1/2019) Bordo, Michael D.; Istrefi, Klodiana
    Narrative records in US newspapers reveal that about 70 percent of Federal Open Market Committee (FOMC) members who served during the last 55 years are perceived to have had persistent policy preferences over time, as either inflation-fighting hawks or growth-promoting doves. The rest are perceived as swingers, switching between types, or remained an unknown quantity to markets. What makes a member a hawk or a dove? What moulds those who change their tune? We highlight ideology by education and early life economic experiences of members of the FOMC from 1960s to 2015. This research is based on an original dataset.
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    Reputation and Sovereign Default
    (2019-04) Amador, Manuel; Phelan, Christopher
    This paper presents a continuous-time model of sovereign debt. In it, a relatively impatient sovereign government's hidden type switches back and forth between a commitment type, which cannot default, and an optimizing type, which can, and where we assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. In any Markov equilibrium, the optimizing type mimics the commitment type when borrowing, revealing its type only by defaulting on its debt at random times. The equilibrium features a "graduation date"�: a finite amount of time since the last default, after which time reputation reaches its highest level and is unaffected by not defaulting. Before such date, not defaulting always increases the country's reputation. For countries that have recently defaulted, bond prices and the total amount of debt are increasing functions of the amount of time since the country's last default. For countries that have not recently defaulted (i.e., those that have graduated), bond prices are constant.
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    Firm Knowledge and International Real Business Cycles
    (2019-03) Ayres, Joao
    I quantify the flow of knowledge within U.S. multinational corporations in the United States and European Union. I use a general equilibrium model of knowledge flows within multinationals and compute the parameter values related to knowledge production such that, in steady state, the model matches the observed factor share differentials between the operations of U.S. multinationals in the United States and European Union. The main assumptions are: i) U.S. multinationals produce knowledge in the United States; ii) this knowledge is used by its subsidiaries in the European Union; and iii) investment in knowledge is either unobserved or expensed in corporate accounts. The results show that (a) the calibrated model matches the observed differentials in the rates of return of U.S. multinational investments in the U.S. and in the European Union, (b) investment in knowledge is 1.4 times larger than investment in physical capital. Furthermore, I show that the model calibrated with these parameter values has quantitative implications for international real business cycles. Accounting for the corporate sector GDP correlation, the model with knowledge flows reduces the distance between the standard international real business cycle model and data by 48%.
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    Financial constraints and economic development: the role of innovative investment
    (2019-3) Vereshchagina, Galina
    This paper argues that accounting for firms' endogenous productivity growth plays an important role in understanding the link between financial and economic development. First, using a simple analytically tractable model, it shows that incorporating endogenous investment in firm productivity into the model amplifies the negative impact of firm financing constraints on economic development, as long as the models with endogenous and exogenous productivity growth are calibrated to match the same data on firm size dynamics and firm owners' income. Second, the paper embeds productivity investment into an otherwise standard variation of the Bewley-Aiyagary-Hugget model used in the existing literature to evaluate the impact of borrowing constraints on economic development. It compares the effects of firm financing constraints in the two models, with endogenous and exogenous firm productivity growth, calibrated in such a way that they are observationally equivalent in the benchmark unconstrained environment. The main result is that the impact on financing constraints on measured TFP and GDP is significantly bigger in the model in which the evolution of firm productivity is endogenous. While measured TFP and GDP fall by 5% and 28% in the model with exogenous productivity growth, they fall by 13% and 37%, respectively, in the model in which firm productivity grows endogenously.
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    The End of the American Dream? Inequality and Segregation in US cities
    (2019-02) Fogli, Alessandra; Guerrieri, Veronica
    Since the '80s the US has experienced not only a steady increase in income inequality, but also a contemporaneous increase in residential segregation by income. Using US Census data, we document a positive correlation between income inequality and residential segregation between 1980 and 2010, both across time and across space, at the MSA level. We then develop a general equilibrium overlapping generations model where parents choose the neighborhood where to raise their children and invest in their children's human capital. In the model, segregation and inequality amplify each other because of a local spillover that affects the returns to education. We calibrate the model to 1980 using Census data and the micro estimates of the local spillover effect derived by Chetty and Hendren (2018b). We then hit the economy with a skill premium shock and show that 20% of the increase in inequality in the short run, and 29% in the long run can be attributed to the feedback effect of the local spillover.