The B.E. Journal of Macroeconomics

Consumption, Leisure and Borrowing Constraints

Juha Kilponen — Thu, 10 May 2012 05:57:09 PDT

We derive and estimate an aggregate Euler consumption equation in which non-separability between consumption and leisure and borrowing constrained households makes current consumption dependent on labour and asset (house) prices. Estimation results suggest that when labour is included in the aggregate consumption equation it proves to be more important than house prices in explaining the wide fluctuations in Finnish consumption data. Moreover, the evidence of excess sensitivity of consumption to income virtually disappears as the consumption Euler equation accounts for predictable changes in labour in the Finnish data.

Exchange Rate Uncertainty and Trade

Ching-Yi Lin — Mon, 23 Apr 2012 05:09:49 PDT

This study offers an explanation of the common empirical finding in the literature that exchange rate uncertainty only slightly or insignificantly impacts export volume. When export volume is decomposed into the extensive and intensive margins, panel regressions presented in this study reveal that exchange rate uncertainty negatively affects the extensive margin and positively affects the intensive margin, with both effects being statistically significant. These two opposing effects cancel each other out when combined, producing an insignificant effect on overall export volume. This study goes on to develop an analytically tractable monetary model of heterogeneous firms and endogenous extensive and intensive margins, which predicts these empirical results.

Interstate Banking Deregulation and Bank Loan Commitments

Ki Young Park — Fri, 23 Mar 2012 08:23:19 PDT

This paper uses the staggering timing of branching and interstate banking deregulation as a natural experiment to explore the effect of agency cost on the use of bank loan commitments. A simple inventory-based model shows that lower agency cost allows a bank to issue more loan commitments because lower agency cost alleviates the difficulty of liquidity management associated with loan commitments. Our empirical analysis confirms the model’s testable implication: Commercial banks issue more loan commitments after interstate banking deregulation, which lowers agency costs through expanded internal capital markets across states. However, the effect of branching deregulation is weak or non-existent. Considering the role of bank loan commitments, this result not only shows how banking deregulation affects bank balance sheets but also suggests one route through which interstate banking affects the real economy.

Banking Conditions and the Effects of Monetary Policy: Evidence from U.S. States

Skander J. Van den Heuvel — Thu, 22 Mar 2012 06:06:26 PDT

Using data from U.S. states, this paper examines empirically how the effects of monetary policy on output depend on banking conditions. I find that when a state’s banking sector starts out with a low capital-asset ratio, its subsequent lending and output growth are both more sensitive to changes in the federal funds rate or other indicators of monetary policy. This result is consistent with the existence of a ‘bank capital channel’ as well as a conventional bank lending channel. Other evidence favors the capital channel, as bank liquidity is not associated with variation in the impact of monetary policy on output at the state level. Consistent with the theory, the importance of state-level measures of bank capital weakens significantly after the removal of regulatory barriers to interstate banking.

Dynamics of Wealth and Consumption: New and Improved Measures for U.S. States

Xia Zhou et al. — Thu, 22 Mar 2012 06:06:24 PDT

Case, Quigley, and Shiller (2005) persuasively argue that the well-known conceptual difficulties in measuring aggregate “wealth effects” might be lessened by the use of state-level data. Unfortunately, the data required for a convincing implementation of their idea have been either virtually nonexistent (for financial wealth) or of questionable quality (for consumption). Our main contributions are to provide the first directly observed panel data on financial wealth at the state level, and to construct improved measures of state-level spending growth. Using these data, we estimate rudimentary “wealth effects” regressions that find a strong relationship between twice-lagged housing wealth growth and current spending growth, but we find no relationship between lagged financial wealth growth and current spending growth.

The Local Effects of Monetary Policy

Neville Francis et al. — Thu, 22 Mar 2012 06:06:22 PDT

Many studies have documented disparities in the regional responses to monetary policy shocks. However, because of computational issues, the literature has often neglected the richest level of disaggregation: the city. In this paper, we estimate the city-level responses to monetary policy shocks in a Bayesian SVAR. The Bayesian SVAR allows us to model the entire panel of metropolitan areas through the imposition of a shrinkage prior. We then seek the origin of the city-level asymmetric responses. We find strong evidence that the population density and the size of the local government sector mitigate the effects of monetary policy on local employment. The roles of the traditional interest rate, equity, and credit channels are marginalized relative to the previous findings based on less-granular definitions of regions. However, the relevance of the interest rate and credit channels appears to be more robust to business cycle uncertainty.

Fiscal Policy Cyclicality and Growth within the US States

Justin Svec et al. — Thu, 22 Mar 2012 06:06:20 PDT

This paper exploits differences in the stringency of balanced budget rules across US states to estimate the effect of the cyclicality of fiscal policy on state GDP growth. While most states have passed laws restricting deficits, the nature and strictness of these laws vary greatly. States with more stringent balanced budget restrictions run more procyclical fiscal policy. We use the diversity in these laws as an instrument for the cyclicality of policy. We find evidence that a more counter-cyclical primary deficit increases a state's average growth rate per capita. This effect is robust to a number of alternative specifications. One concrete policy implication of this analysis is that a state could increase its annual growth rate by relaxing its balanced budget restrictions.

Empirical Macroeconomics Using Geographical Data: Guest Editors' Introduction

Christopher L. Foote et al. — Thu, 22 Mar 2012 06:06:16 PDT

This special issue of the B. E. Journal of Macroeconomics collects papers presented at a Conference on Empirical Macroeconomics Using Geographical Data, held at the Federal Reserve Bank of San Francisco on March 18, 2011.

Openness, Imported Commodities and the Sacrifice Ratio

Andrew Pickering et al. — Tue, 20 Mar 2012 07:43:32 PDT

Romer [1993] hypothesized that the output cost of a disinflation (the sacrifice ratio) falls with trade openness. Subsequent empirical work in many instances finds the reverse. We theorize that the sacrifice ratio increases with openness in production. When the production process is more open then changes in output lead to smaller changes in marginal costs, because costs are to a greater extent driven by exogenous factors. As a result price responses to output fluctuations are dampened and the output-inflation trade-off increases. Empirical evidence supports the hypothesis that greater imported commodity intensity in production increases the sacrifice ratio. Consistent with theory this relationship is stronger in fixed exchange rate regimes. Controlling for imported commodity intensity also leads to a finding of a significant negative impact of trade openness on the sacrifice ratio, consistent with Romer's original hypothesis.

Coordination Failure in Investment, Economic Growth, and Volatility

Mei Li — Mon, 19 Mar 2012 04:46:29 PDT

This paper applies global games to the study of an economy with investment complementarities and heterogeneous private information. I establish a two-sector OLG model in which capital goods can be produced by two technologies. One is a safe technology with a publicly known constant return. The other is a risky technology exhibiting technological externalities with an uncertain return about which economic agents have heterogeneous private information. I find that coordination failure arises, and is most severe when the returns of the safe and risky technologies are close. I also find that more precise private information does not necessarily improve social welfare, while more precise public information can unambiguously improve social welfare. Moreover, risk attitudes of economic agents can affect the economy, inducing a positive relationship between economic growth and volatility. Last, I find that a subsidy on the risky technology investment can greatly alleviate coordination failure and improve social welfare.

A Dynamic Theory of Competence, Loyalty and Stability in Dictatorships

Nils-Petter Lagerlöf — Wed, 14 Mar 2012 07:31:15 PDT

This paper presents a dynamic model of power competition in a nondemocracy. In each period, a ruler from an incumbent dynasty is challenged. If he survives, he hands over power to a (biological or ideological) offspring. He can control his offspring's chances of surviving future threats, by choosing how competent and loyal administrators to hire, and how many. The society can stay for a long time on a volatile path where subsequent dynasties of rulers regularly replace one another, each purging the preceding dynasty's competent administrators, replacing them with loyalists, thus keeping competence bouncing around a low level. This may be followed by an endogenous transition to a path without such purges and a simultaneous rise in competence.

Economic Growth and Political Survival

Paul J. Burke — Wed, 14 Mar 2012 07:04:14 PDT

Using data for 162 countries for the period 1962-2006, this paper examines the importance of the national economic growth rate for the ability of a national leader to retain his or her position. To address the potential endogeneity of economic growth, I use commodity prices, export partner incomes, precipitation, and temperature to instrument for a country’s growth rate. The results indicate that faster economic growth increases the short-run likelihood that leaders will remain in office. The results are robust to controlling for a host of leader-, party-, and country-level variables. The effect of growth on the likelihood of leader exits appears to be generally similar across both democracies and autocracies. Economic growth has the largest impact on the likelihood of regular leader exits rather than irregular exits such as coups. Evidence is also presented on whether economic growth affects the likelihood that leaders employ oppressive tactics against opponents.

How Much Did the 2009 Australian Fiscal Stimulus Boost Demand? Evidence from Household-Reported Spending Effects

Andrew Leigh — Wed, 14 Mar 2012 07:04:09 PDT

Using survey evidence, I estimate the impact of $21 billion in household payments delivered in Australia between December 2008 and May 2009. Forty percent of households who said that they received a payment reported having spent it. This is a higher spending rate than has been recorded in surveys assessing the 2001 and 2008 tax rebates in the United States. One possible explanation for this is that individuals are more likely to spend “bonuses” (as the Australian payments were described) than “rebates” (as the US payments were described). Using an approach for converting spending rates into an aggregate marginal propensity to consume (MPC), the Australian results are consistent with an aggregate MPC of 0.41-0.42. Since this estimate is based largely on first-quarter spending, it may understate the longer-run impact of the package on consumer expenditure.

Sector-Specific Capital, Labor Market Distortions and Cross-Country Income Differences: A Two-Sector General Equilibrium Approach

Asad Karim Khan Priyo — Tue, 13 Mar 2012 14:17:08 PDT

This paper highlights the significance of labor market distortions in explaining cross-country income differences using a two-sector general equilibrium model that incorporates modern intermediate inputs used in agriculture together with sector-specific human and physical capital. Using the best available information, I construct new sectoral data on quality-adjusted human capital and PPP-adjusted physical capital. Although both types of capital - physical capital in particular - play important roles, using a sample of 43 countries, I find that in terms of capturing the observed disparities, either in relative labor productivity in agriculture or aggregate output per worker between the rich and the poor countries, the role of labor market distortions outweighs the role of either sectoral human or physical capital.

Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries

Thorsten Beck et al. — Tue, 13 Mar 2012 06:39:45 PDT

While theory predicts different effects of household credit and enterprise credit on the economy, the empirical literature has mainly used aggregate measures of overall bank lending to the private sector. We construct a new dataset from 45 developed and developing countries, decomposing bank lending into lending to enterprises and lending to households and assess the different effects of these two components on real sector outcomes. We find that: 1) enterprise credit is positively associated with economic growth whereas household credit is not; and 2) enterprise credit is significantly associated with faster reductions in income inequality whereas household credit is not. We also find that the share of household credit is higher in more urban societies, in countries with smaller manufacturing sectors and more market-based financial systems, while market structure and regulatory policies are not related to credit composition.

Unemployment Expectations and the Business Cycle

Daniel Louis Tortorice — Thu, 19 Jan 2012 11:35:10 PST

I compare unemployment expectations from the Michigan Survey of Consumers to VAR forecastable movements in unemployment. I document three key facts: First, one-half to one-third of the population expects unemployment to rise when it is falling at the end of a recession, even though the VAR predicts the fall in unemployment. Second, more people expect unemployment to rise when it is falling at the end of a recession than expect it to rise when it is rising at the beginning of a recession even though the VAR predicts these changes. Finally, the lag change in unemployment is almost as important as the VAR forecast in predicting the fraction of the population that expects unemployment to rise. Professional forecasters do not exhibit these discrepancies. Least squares learning or real time expectations do little to help explain these facts. However, delayed updating of expectations can explain some of these facts, and extrapolative expectations explains these facts best. Individuals with higher income or education are only slightly less likely to have expectations which differ from the VAR, and those whose expect more unemployment when the VAR predicts otherwise are 8-10 percent more likely to believe it is a bad time to make a major purchase.

The Price of Egalitarianism

Yongsung Chang et al. — Tue, 03 Jan 2012 12:21:51 PST

Using a standard incomplete-markets model, we compute the welfare of two socioeconomic systems: laissez-faire and egalitarianism. The egalitarian system (in which after-tax wages are compressed) provides insurance against income risks but at the cost of inefficiency: it undermines productive workers' incentives to work. When the stochastic process of idiosyncratic productivity shocks are calibrated to match the earnings inequality, the egalitarian society yields a much higher welfare as the insurance benefit dominates the efficiency loss. However, when the idiosyncratic productivity shocks are calibrated to capture the ex-post heterogeneity of earnings only, households are better off under laissez-faire if the labor supply is elastic enough. Transition between the two regimes is computed. When the wage compression is removed from the egalitarian steady state, the inequality emerges quickly and reaches its laissez-faire steady state in 20 years.

Interest Rates and Real Business Cycles in Emerging Markets

S. Tolga Tiryaki — Sun, 01 Jan 2012 08:33:22 PST

We study the quantitative effects of interest rates on the business cycles of emerging markets. The real business cycle model featured in Neumeyer and Perri (“Business cycles in emerging economies: The role of interest rates.” Journal of Monetary Economics, March 2005, 52 (2), 345-380.) is calibrated to match Turkish data. Fluctuations in country spread account for only less than 9 percent of output volatility, less than one-third of the value found in Neumeyer and Perri. We show that their result critically depends on the magnitude of the working capital parameter, the persistence of productivity shocks, and the factor shares. Our simulations highlight the importance of country spreads for the volatility of investment and the cyclicality of net exports. We also discuss the effect of correlated shocks on the countercyclicality of real interest rate and net exports.

News Shocks and the External Finance Premium

Shen Guo — Fri, 23 Dec 2011 14:08:58 PST

US data show that the external finance premium, measured by the high yield bond spread, moves countercyclically and leads movements in output by four quarters. This paper constructs a model with nominal rigidities and financial accelerator to explain this observation. The key finding of this paper is: it is agents' reaction on news about future technology changes that generates the observed countercyclical movement and lead-lag pattern of the external finance premium, while a contemporary technology shock generates a procyclical movement of the external finance premium. The variance decomposition based on the estimated model demonstrates that news shocks account for about 72% of fluctuations in the external finance premium.

Welfare Implications of Regional Asymmetries in a Monetary Union

Olena Mykhaylova — Fri, 23 Dec 2011 14:08:47 PST

This paper calculates welfare costs of nominal rigidities in a currency union (calibrated to the EMU) that is characterized by a rich array of regional asymmetries. I employ a two-country DSGE model that features optimizing agents, monopolistic price setting, sectoral heterogeneity, and government debt dynamics and find that these costs are virtually identical for all members of the union. The driving factor behind this result is economic integration in the Eurozone (in the form of trade openness and highly correlated technological processes), which almost compensates for idiosyncratic regional shocks and causes national and Euro-wide inflations to move together. The findings are robust to the inclusion of distortionary taxes, government indebtedness, and non-traded goods.