This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance. It employs a Bayesian structural VAR model that requires imposing only a minimum of economically meaningful sign restrictions. We find that equity market shocks and housing price shocks have been major determinants of the US current account in the past, accounting for up to 32% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been much less relevant, explaining less than 7% and exerting a more temporary effect on the US trade balance. Our findings suggest that sizeable exchange rate movements may not necessarily be a key element of an adjustment of today's large current account imbalances, and that in particular relative global asset price changes could be a more potent source of adjustment.

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Asset Prices, Exchange Rates and the Current Account

/pdf/2001-2-time-use-and-college-outcomes-2dee8yhu4x.pdf

2001-2 Time Use and College Outcomes

Do asset prices affect real activity? This question has taken on a new importance in recent years, as asset values first surged at the end of 1990s and, thereafter, dramatically retreated. This report reviews the available theoretical and empirical evidence regarding asset price and wealth effects in Europe and some other major economies. The main focus of this report is on consumption effects via the wealth channel, reflecting the bulk of literature on the effects of asset prices. However, asset price effects on investment via the Tobin’s-Q channel, balance sheet and confidence channels are also reviewed. The available evidence supports the view that the wealth channel is the most important of various channels. There is little empirical evidence indicating that the Tobin’s-Q, balance-sheet and confidence channels play any major independent role in the transmission of asset price effects to economic activity.

Wealth and asset price effects on economic activity

Issues related to schooling attainment of children from low-income families arise frequently in current education policy debates. There has been a specific interest in understanding why a very high percentage of children from low-income families do not graduate from college and why the college graduation rates of children from low-income families are substantially lower than those of children from other families. Using unique new data obtained directly from a high-quality liberal arts college that maintains a full tuition subsidy program (and large room and board subsidies) for all students, this paper provides direct evidence that reasons unrelated to the direct costs of college are very important in explaining these realities.

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Understanding Educational Outcomes of Students from Low-Income Families Evidence from a Liberal Arts College with a Full Tuition Subsidy Program

https://www.nber.org/system/files/working_papers/w13657/w13657.pdf

Health, Economic Resources and the Work Decisions of Older Men.

Many studies relate real nondurables and services consumption to real income and wealth, with the latter measures obtained by deflating with a price index for total consumption expenditures. This procedure is appropriate only if real nondurables and services consumption is a constant multiple of aggregate real consumption outlays, which is not the case in U.S. data. We develop an alternative approach that exploits the fact that the ratio of these series has historically been stable in nominal terms, and demonstrate that the choice of deflation methodology has important implications for wealth effect estimation and tests of the permanent income hypothesis.

/pdf/on-the-relationships-between-real-consumption-income-and-1u3vp7wkjb.pdf

On the Relationships between Real Consumption, Income, and Wealth

We use simulation methods to impute missing data. First we suggest how one can iteratively estimate a large number of parameters associated with a joint normal distribution function fof latent variable associated with the data. We suggest a way to test the joint normality assumption next. Finally, we propose a method to use draws from the estimated distribution efficiently in a method of simulated moments or simulated maximum likelihood procedure. In the second half of the paper, we apply the proposed methods ot two data sets from Jamaica with significant missing data problems. We find that the procedure provides better parameter estimates in simple models than present popular methods

Simulation of multinomial probit probabilities and imputation of missing data

The existence of durable goods implies that the welfare flow from consumption cannot be directly associated with total consumption expenditures. As a result, tests of standard theories of consumption (such as the Permanent Income Hypothesis, or PIH) typically focus on nondurable goods and services. Specifically, these studies generally relate real consumption of nondurable goods and services to measures of real income and wealth, where the latter are deflated by a price index for total consumption expenditures. This paper demonstrates that this procedure is only valid under the assumption that real consumption of nondurables and services is a constant multiple of aggregate real consumption outlays - an assumption that represents a very poor description of U.S. data. The paper develops an alternative approach that is based on the observation that the ratio of these series has historically been stable in nominal terms, and uses this approach to examine two basic predictions of the PIH. We obtain significantly different results relative to the traditional approach.

Michael Palumbo

Papers

On the Relationships between Real Consumption, Income, and Wealth

Simulation of multinomial probit probabilities and imputation of missing data

On the relationships between real consumption, income, and wealth

Simulation of Multinomial Probit Probabilities and Imputation of Missing Data