Showing papers by "National Bureau of Economic Research published in 2011"

Climate Trends and Global Crop Production Since 1980

Abstract: Efforts to anticipate how climate change will affect future food availability can benefit from understanding the impacts of changes to date. We found that in the cropping regions and growing seasons of most countries, with the important exception of the United States, temperature trends from 1980 to 2008 exceeded one standard deviation of historic year-to-year variability. Models that link yields of the four largest commodity crops to weather indicate that global maize and wheat production declined by 3.8 and 5.5%, respectively, relative to a counterfactual without climate trends. For soybeans and rice, winners and losers largely balanced out. Climate trends were large enough in some countries to offset a significant portion of the increases in average yields that arose from technology, carbon dioxide fertilization, and other factors.

When Is the Government Spending Multiplier Large

Abstract: We argue that the government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds. The larger the fraction of government spending that occurs while the nominal interest rate is zero, the larger the value of the multiplier. After providing intuition for these results, we investigate the size of the multiplier in a dynamic, stochastic, general equilibrium model. In this model the multiplier effect is substantially larger than one when the zero bound binds. Our model is consistent with the behavior of key macro aggregates during the recent financial crisis.

Killing Me Softly: The Fetal Origins Hypothesis.

Abstract: In the epidemiological literature, the fetal origins hypothesis associated with David J. Barker posits that chronic, degenerative conditions of adult health, including heart disease and type 2 diabetes, may be triggered by circumstance decades earlier, in utero nutrition in particular. Economists have expanded on this hypothesis, investigating a broader range of fetal shocks and circumstances and have found a wealth of later-life impacts on outcomes including test scores, educational attainment, and income, along with health. In the process, they have provided some of the most credible observational evidence in support of the hypothesis. The magnitude of the impacts is generally large. Thus, the fetal origins hypothesis has not only survived contact with economics, but has flourished.

Uncertainty about Government Policy and Stock Prices

Abstract: We analyze how changes in government policy affect stock prices. Our general equilibrium model features uncertainty about government policy and a government whose decisions have both economic and non-economic motives. The model makes numerous empirical predictions. Stock prices should fall at the announcements of policy changes, on average. The price fall should be large if uncertainty about government policy is large, and also if the policy change is preceded by a short or shallow economic downturn. Policy changes should increase volatilities and correlations among stocks. The jump risk premium associated with policy decisions should be positive, on average.

The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation

Abstract: In 2003, a new law required that 40 percent of Norwegian firms’ directors be women – at the time only nine percent of directors were women. We use the pre-quota cross-sectional variation in female board representation to instrument for exogenous changes to corporate boards following the quota. We find that the constraint imposed by the quota caused a significant drop in the stock price at the announcement of the law and a large decline in Tobin’s Q over the following years, consistent with the idea that firms choose boards to maximize value. The quota led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performance, consistent with less capable boards.

The Network Origins of Aggregate Fluctuations

Abstract: This paper argues that in the presence of intersectoral input-output linkages, microeconomic idiosyncratic shocks may lead to aggregate fluctuations. In particular, it shows that, as the economy becomes more disaggregated, the rate at which aggregate volatility decays is determined by the structure of the network capturing such linkages. Our main results provide a characterization of this relationship in terms of the importance of different sectors as suppliers to their immediate customers as well as their role as indirect suppliers to chains of downstream sectors. Such higher-order interconnections capture the possibility of “cascade effects” whereby productivity shocks to a sector propagate not only to its immediate downstream customers, but also indirectly to the rest of the economy. Our results highlight that sizable aggregate volatility is obtained from sectoral idiosyncratic shocks only if there exists significant asymmetry in the roles that sectors play as suppliers to others, and that the “sparseness” of the input-output matrix is unrelated to the nature of aggregate fluctuations.

Capital Flow Waves: Surges, Stops, Flights and Retranchment

Abstract: This paper analyzes the drivers of international waves in capital flows. We build on the literature on “sudden stops” and “bonanzas” to develop a new methodology for identifying episodes of extreme capital flow movements using quarterly data on gross inflows and gross outflows, differentiating activity by foreigners and domestics. We identify episodes of “surge”, “stop”, “flight”, and “retrenchment” and show how our approach yields fundamentally different results than the previous literature that used measures of net flows. Global factors, especially global risk, are the most important determinants of these episodes. Contagion, especially through trade and the bilateral exposure of banking systems, is important in determining stop and retrenchment episodes. Domestic macroeconomic characteristics are generally less important, although changes in domestic economic growth influence episodes caused by foreigners. We find little role for capital controls in reducing capital flow waves. The results help provide insights for different theoretical approaches explaining crises and capital flow volatility.

Time Series Momentum

Abstract: We document significant “time series momentum” in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for 1 to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial under-reaction and delayed over-reaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors and performs best during extreme markets. Examining the trading activities of speculators and hedgers, we find that speculators profit from time series momentum at the expense of hedgers.

Globalization, structural change and productivity growth

Abstract: One of the earliest and most central insights of the literature on economic development is that development entails structural change. The countries that manage to pull themselves out of poverty and get richer are those that are able to diversify away from agriculture and other traditional products. As labour and other resources move from agriculture into modern economic activities, overall productivity rises and incomes expand. The speed with which this structural transformation takes place is the key factor that differentiates successful countries from unsuccessful ones.

How Does Your Kindergarten Classroom Affect Your Earnings? Evidence from Project Star

Abstract: In Project STAR, 11,571 students in Tennessee and their teachers were randomly assigned to classrooms within their schools from kindergarten to third grade. This article evaluates the long-term impacts of STAR by linking the experimental data to administrative records. We first demonstrate that kindergarten test scores are highly correlated with outcomes such as earnings at age 27, college attendance, home ownership, and retirement savings. We then document four sets of experimental impacts. First, students in small classes are significantly more likely to attend college and exhibit improvements on other outcomes. Class size does not have a significant effect on earnings at age 27, but this effect is imprecisely estimated. Second, students who had a more experienced teacher in kindergarten have higher earnings. Third, an analysis of variance reveals significant classroom effects on earnings. Students who were randomly assigned to higher quality classrooms in grades K–3—as measured by classmates' end-of-class test scores—have higher earnings, college attendance rates, and other outcomes. Finally, the effects of class quality fade out on test scores in later grades, but gains in noncognitive measures persist.

Financial Literacy Around the World: An Overview

Abstract: In an increasingly risky and globalized marketplace, people must be able to make well-informed financial decisions. Yet new international research demonstrates that financial illiteracy is widespread when financial markets are well developed as in Germany, the Netherlands, Sweden, Japan, Italy, New Zealand, and the United States, or when they are changing rapidly as in Russia. Further, across these countries, we show that the older population believes itself well informed, even though it is actually less well informed than average. Other common patterns are also evident: women are less financially literate than men and are aware of this shortfall. More educated people are more informed, yet education is far from a perfect proxy for literacy. There are also ethnic/racial and regional differences: city-dwellers in Russia are better informed than their rural counterparts, while in the U.S., African Americans and Hispanics are relatively less literate than others. Moreover, the more financially literate are also those most likely to plan for retirement. In fact, answering one additional financial question correctly is associated with a 3-4 percentage point higher chance of planning for retirement in countries as diverse as Germany, the U.S., Japan, and Sweden; in the Netherlands, it boosts planning by 10 percentage points. Finally, using instrumental variables, we show that these estimates probably underestimate the effects of financial literacy on retirement planning. In sum, around the world, financial literacy is critical to retirement security.

Neighborhoods, Obesity, and Diabetes — A Randomized Social Experiment

Abstract: ference of 4.61 percentage points (95% confidence interval (CI), −8.54 to −0.69), 3.38 percentage points (95% CI, −6.39 to −0.36), and 4.31 percentage points (95% CI, −7.82 to −0.80), respectively. The differences between the group receiving traditional vouchers and the control group were not significant. CONCLUSIONS The opportunity to move from a neighborhood with a high level of poverty to one with a lower level of poverty was associated with modest but potentially important reductions in the prevalence of extreme obesity and diabetes. The mechanisms under - lying these associations remain unclear but warrant further investigation, given their potential to guide the design of community-level interventions intended to improve health. (Funded by HUD and others.)

How Does Your Kindergarten Classroom Affect Your Earnings? Evidence from Project Star

Abstract: In Project STAR, 11,571 students in Tennessee and their teachers were randomly assigned to classrooms within their schools from kindergarten to third grade This article evaluates the long-term impacts of STAR by linking the experimental data to administrative records We first demonstrate that kindergarten test scores are highly correlated with outcomes such as earnings at age 27, college attendance, home ownership, and retirement savings We then document four sets of experimental impacts First, students in small classes are significantly more likely to attend college and exhibit improvements on other outcomes Class size does not have a significant effect on earnings at age 27, but this effect is imprecisely estimated Second, students who had a more experienced teacher in kindergarten have higher earnings Third, an analysis of variance reveals significant classroom effects on earnings Students who were randomly assigned to higher quality classrooms in grades K–3—as measured by classmates' end-of-class test scores—have higher earnings, college attendance rates, and other outcomes Finally, the effects of class quality fade out on test scores in later grades, but gains in noncognitive measures persist

On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms

Abstract: We propose several connectedness measures built from pieces of variance decompositions, and we argue that they provide natural and insightful measures of connectedness among fi nancial asset returns and volatilities. We also show that variance decompositions define weighted, directed networks, so that our connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, we track both average and daily time-varying connectedness of major U.S. financial institutions' stock return volatilities in recent years, including during the financial crisis of 2007-2008.

Ideological Segregation Online and Offline

Abstract: We use individual and aggregate data to ask how the Internet is changing the ideological segregation of the American electorate. Focusing on online news consumption, offline news consumption, and face-to-face social interactions, we define ideological segregation in each domain using standard indices from the literature on racial segregation. We find that ideological segregation of online news consumption is low in absolute terms, higher than the segregation of most offline news consumption, and significan tly lower than the segregation of face-to-face interactions with neighbors, co-workers, or family members. We find no evidence that the Internet is becoming more segregated over time.

Gender and Competition

Abstract: Laboratory studies have documented that women often respond less favorably to competition than men. Conditional on performance, men are often more eager to compete, and the performance of men tends to respond more positively to an increase in competition. This means that few women enter and win competitions. We review studies that examine the robustness of these differences as well the factors that may give rise to them. Both laboratory and field studies largely confirm these initial findings, showing that gender differences in competitiveness tend to result from differences in overconfidence and in attitudes toward competition. Gender differences in risk aversion, however, seem to play a smaller and less robust role. We conclude by asking what could and should be done to encourage qualified males and females to compete.

Fiscal Volatility Shocks and Economic Activity

Abstract: We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fiscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, we first estimate tax and spending processes for the U.S. that allow for time-varying volatility. We then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. We find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate.

The great retrenchment: international capital flows during the global financial crisis

Abstract: The current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first, across time, being especially dramatic in the wake of the Lehman Brothers’ failure; secondly, across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception; and thirdly, across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature – with countries relying on bank flows being the hardest hit – as well as domestic macroeconomic conditions and their connection to world trade flows. — Gian-Maria Milesi-Ferretti and Cedric Tille

Common Risk Factors in Currency Markets

Abstract: We identify a ‘slope’ factor in exchange rates. High interest rate currencies load more on this slope factor than low interest rate currencies. This factor accounts for most of the cross-sectional variation in average excess returns between high and low interest rate currencies. A standard, no-arbitrage model of interest rates with two factors – a country-specific factor and a global factor – can replicate these findings, provided there is sufficient heterogeneity in exposure to global or common innovations. We show that our slope factor identifies these common shocks, and we provide empirical evidence that it is related to changes in global equity market volatility. By investing in high interest rate currencies and borrowing in low interest rate currencies, US investors load up on global risk.

The real effects of debt

Abstract: At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging. When does debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Our examination of other types of debt yields similar conclusions. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.

A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk

Abstract: We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy by ameliorating the under-investment problem of the financial sector. However, increasing taxation of the non-financial sector to fund the bailout may be inefficient since it weakens its incentive to invest, decreasing growth. Instead, the sovereign may choose to fund the bailout by diluting existing government bondholders, resulting in a deterioration of the sovereign's creditworthiness. This deterioration feeds back onto the financial sector, reducing the value of its guarantees and existing bond holdings and increasing its sensitivity to future sovereign shocks. We provide empirical evidence for this two-way feedback between financial and sovereign credit risk using data on the credit default swaps (CDS) of the Eurozone countries for 2007-10. We show that the announcement of financial sector bailouts was associated with an immediate, unprecedented widening of sovereign CDS spreads and narrowing of bank CDS spreads; however, post-bailouts there emerged a significant co-movement between bank CDS and sovereign CDS, even after controlling for banks' equity performance, the latter being consistent with an effect of the quality of sovereign guarantees on bank credit risk.

Goodbye Pareto Principle, Hello Long Tail: The Effect of Search Costs on the Concentration of Product Sales

Abstract: Many markets have historically been dominated by a small number of best-selling products. The Pareto principle, also known as the 80/20 rule, describes this common pattern of sales concentration. However, information technology in general and Internet markets in particular have the potential to substantially increase the collective share of niche products, thereby creating a longer tail in the distribution of sales. This paper investigates the Internet's “long tail” phenomenon. By analyzing data collected from a multichannel retailer, it provides empirical evidence that the Internet channel exhibits a significantly less concentrated sales distribution when compared with traditional channels. Previous explanations for this result have focused on differences in product availability between channels. However, we demonstrate that the result survives even when the Internet and traditional channels share exactly the same product availability and prices. Instead, we find that consumers' usage of Internet search and discovery tools, such as recommendation engines, are associated with an increase the share of niche products. We conclude that the Internet's long tail is not solely due to the increase in product selection but may also partly reflect lower search costs on the Internet. If the relationships we uncover persist, the underlying trends in technology portend an ongoing shift in the distribution of product sales. This paper was accepted by Ramayya Krishnan, information systems.

The Long-Term Impacts of Teachers: Teacher Value-Added and Student Outcomes in Adulthood

Abstract: Are teachers' impacts on students' test scores ("value-added") a good measure of their quality? This question has sparked debate largely because of disagreement about (1) whether value-added (VA) provides unbiased estimates of teachers' impacts on student achievement and (2) whether high-VA teachers improve students' long-term outcomes We address these two issues by analyzing school district data from grades 3-8 for 25 million children linked to tax records on parent characteristics and adult outcomes We find no evidence of bias in VA estimates using previously unobserved parent characteristics and a quasi-experimental research design based on changes in teaching staff Students assigned to high-VA teachers are more likely to attend college, attend higher- ranked colleges, earn higher salaries, live in higher SES neighborhoods, and save more for retirement They are also less likely to have children as teenagers Teachers have large impacts in all grades from 4 to 8 On average, a one standard deviation improvement in teacher VA in a single grade raises earnings by about 1% at age 28 Replacing a teacher whose VA is in the bottom 5% with an average teacher would increase the present value of students' lifetime income by more than $250,000 for the average class- room in our sample We conclude that good teachers create substantial economic value and that test score impacts are helpful in identifying such teachers

Creditor Control Rights, Corporate Governance, and Firm Value

Abstract: We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the SEC filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10 percent and 20 percent of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately with a decline in acquisitions and capital expenditures, a sharp reduction in leverage and shareholder payouts, and an increase in CEO turnover. The changes in the investment and financing behavior of violating firms coincide with amended credit agreements that contain stronger restrictions on firm decision-making; changes in the management of violating firms suggest that creditors also exert informal influence on corporate governance. Finally, we show that firm operating and stock price performance improve following a violation. We conclude that actions taken by creditors increase the value of theaverage violating firm.

Untangling the Origins of Competitive Advantage

Abstract: This paper begins to reconcile competing perspectives on the origins of competitive advantage by examining the adoption of ‘science-driven’ drug discovery, a performance-enhancing organizational practice. Science-driven drug discovery diffused slowly, allowing us to disentangle alternative theories of organizational heterogeneity. Adoption is driven by initial conditions, time-varying internal and external environmental conditions, and convergence (firms positioned least favorably adopt most aggressively). While accounting for initial conditions is critical, managers are sensitive to idiosyncratic environmental cues. The origins of competitive advantage may therefore lie in the ability to identify and respond to environmental cues well in advance of observing performance-oriented pay-offs. Copyright © 2000 John Wiley & Sons, Ltd.

Job duration, seniority, and earnings

Abstract: The stylized fact that seniority and earnings in a cross-section are positively related, even after controlling for total labor market experience, has served as the basis for theoretical analyses of implicit labor contracts suggesting that workers post bonds in the form of deferred compensation in order to ensure their continued performance at an adequate level. An alternative interpretation is that good workers or workers in good jobs or good matches both earn more throughout the job and have longer job durations. Another stylized fact, that labor market experience and earnings in a cross section are positively related, has been taken as evidence of the importance of general human capital accumulation. An alternative interpretation of this evidence is that workers with more experience have had more time to find good jobs and/or good matches, resulting in higher earnings. Earnings functions are estimated including a measure of the completed duration of jobs in order to distinguish between the competing hypotheses regarding both seniority and experience. These yield three main results. First, workers in longer jobs earn significantly more in every year of the job than do workers in shorter jobs. Second, controlling for completed job duration eliminates most of the apparent return to seniority found in standard cross-section models. Thus, it appears that implicit contracts that provide for workers posting bonds through deferred wage payments are less important than has been believed. Third, for blue collar workers there is evidence thata part of the small observed (cross-sectional) return to labor market experience is due to sorting of workers into better jobs over time. There is no evidence of sorting for white collar workers.

The Empirics of Firm Heterogeneity and International Trade

Abstract: This paper reviews the empirical evidence on firm heterogeneity in international trade. A first wave of empirical findings from micro data on plants and firms proposed challenges for existing models of international trade and inspired the development of new theories emphasizing firm heterogeneity. Subsequent empirical research has examined additional predictions of these theories and explored other dimensions of the data not originally captured by them. These other dimensions include multi-product firms, offshoring, intra-firm trade and firm export market dynamics.