Showing papers in "National Bureau of Economic Research in 2007"

Housing and monetary policy

Abstract: Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.

Foreign Capital and Economic Growth

Abstract: Nonindustrial countries that have relied more on foreign finance have not grown faster in the long run as standard theoretical models predict. The reason may lie in these countries’ limited ability to absorb foreign capital, especially because their financial systems have difficulty allocating it to productive uses, and because their currencies are prone to appreciation (and often overvaluation) when such inflows occur. The current anomaly of poor countries financing rich countries may not really hurt the former’s growth, at least conditional on their existing institutional and financial structures. Our results do not imply that foreign finance has no role in development or that all types of capital naturally flow “uphill.” Indeed, the patterns associated with foreign direct investment flows have generally been more consistent with theoretical predictions. However, we find no evidence that providing financing in excess of domestic saving is the channel through which financial integration delivers its benefits.

The Changing Role of Family Income and Ability in Determining Educational Achievement. NBER Working Paper No. 13527.

Abstract: We use the National Longitudinal Survey of Youth 1979 and 1997 cohorts to estimate the effects of ability and family income on educational attainment in the early 1980s and early 2000s. The effects of family income on college attendance increase substantially over this period. Cognitive ability strongly affects schooling outcomes in both periods. We develop an educational choice model that incorporates both borrowing constraints and a “consumption value” of schooling. The model cannot explain the rising effects of family income on college attendance in response to rising costs and returns to college without appealing to borrowing constraints.

The Unsustainable US Current Account Position Revisited

Abstract: Keywords: US current account deficit, external imbalance, net foreign assets, real exchange rate, sustainability JEL Codes: F21, F32, F36, F41 ABSTRACT:We show that the when one takes into account the global equilibrium ramifications of an unwinding of the US current account deficit, currently running at more than 6% of GDP, the potential collapse of the dollar becomes considerably larger than our previous estimates (Obstfeld and Rogoff 2000a)—as much as 30% or even higher. It is true that global capital market deepening appears to have accelerated over the past decade (a fact documented by Lane and Milesi-Ferreti (2003, 2004) and recently emphasized by outgoing US Federal Reserve Chairman Alan Greenspan), and that this deepening may have helped allowed the United States to a recordbreaking string of deficits. Unfortunately, however, global capital market deepening turns out to be of only modest help in mitigating the dollar decline that will almost inevitably occur in the wake of global current account adjustment. As the analysis of our earlier papers (2000a,b) showed, and the model of this paper reinforces, adjustments to large current account shifts depend mainly on the flexibility and global integration of goods and factor markets. Whereas the dollar’s decline may be benign as in the 1980s, we argue that the current conjuncture more closely parallels the early 1970s, when the Bretton Woods system collapsed. Finally, we use our model to dispel some common misconceptions about what kinds of shifts are needed to help close the US current account imbalance. For example, faster growth abroad helps only if it is relatively concentrated in nontradable goods; faster productivity growth in foreign tradable goods will actually exacerbate the US adjustment problem.

Does Inflation Targeting Make a Difference

Abstract: Si, segun lo que se infiere de la evidencia de panel para paises con metas de inflacion y un grupo de control conformado por paises industriales exitosos que no usan metas de inflacion. Nuestra evidencia sugiere que las metas de inflacion ayudan a que la economia reduzca la inflacion en el largo plazo, su inflacion tenga una respuesta menor frente a perturbaciones relacionadas con el precio del petroleo y el tipo de cambio, fortalezca la independencia y aumente la eficiencia de su politica monetaria, y obtenga tasas de inflacion mas cercanas a la meta. Algunos beneficios de las metas de inflacion se acrecientan cuando quienes adoptan este esquema han logrado desinflacion y son capaces de hacer que su meta de inflacion sea estacionaria. A pesar de estos buenos resultados de adoptar metas de inflacion, en general nuestra evidencia no sugiere que los paises que adoptan un esquema de metas de inflacion muestren un mejor desempeno de su politica monetaria en comparacion con el grupo de control de paises muy exitosos con esquemas alternativos. Sin embargo, las metas de inflacion si parecen ayudar a los paises a igualar su desempeno con el del grupo de control. El desempeno logrado por los paises industriales que aplican metas de inflacion generalmente predomina sobre las economias emergentes con metas de inflacion, y es similar al de las economias industriales que no aplican este esquema.

Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand

Abstract: Understanding the sensitivity of gasoline demand to changes in prices and income has important implications for policies related to climate change, optimal taxation and national security, to name only a few. While the short-run price and income elasticities of gasoline demand in the United States have been studied extensively, the vast majority of these studies focus on consumer behavior in the 1970s and 1980s. There are a number of reasons to believe that current demand elasticities differ from these previous periods, as transportation analysts have hypothesized that behavioral and structural factors over the past several decades have changed the responsiveness of U.S. consumers to changes in gasoline prices. In this paper, we compare the price and income elasticities of gasoline demand in two periods of similarly high prices from 1975 to 1980 and 2001 to 2006. The short-run price elasticities differ considerably and range from -0.034 to -0.077 during 2001 to 2006, versus -0.21 to -0.34 for 1975 to 1980. The estimated short-run income elasticities range from 0.21 to 0.75 and when estimated with the same models are not significantly different between the two periods. One implication of these findings is that gasoline taxes would need to be significantly larger today in order to achieve an equivalent reduction in gasoline consumption. This, coupled with the political difficulties in adopting gasoline taxes, suggests that policies and technologies designed to improve fuel economy are likely becoming relatively more attractive as a means to reduce fuel consumption.

Housing is the business cycle

Abstract: Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables. Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001, nor should it have. By virtue of its prominence in our recessions, it makes sense for housing to play a prominent role in the conduct of monetary policy. A modified Taylor Rule would depend on a long-term measure of inflation having little to do with the phase in the cycle, and, in place of Taylor's output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware. This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest rate sensitive, thus making our recessions less frequent and/or less severe.(This abstract was borrowed from another version of this item.)

Taxing Corporate Income

Abstract: Following Meade (1978), we reconsider issues in the design of taxes on corporate income. We outline developments in economies and in economic thought over the last thirty years, and investigate how these developments should affect the design of taxes on corporate income. We consider a number of tax systems which have been proposed, distinguishing them in two main dimensions: the definition of what is to be taxed, and where it is to be taxed.

Sources of Growth in the Indian Economy

Abstract: This paper empirically examines India's economic growth experience during 1960-2004, focusing on the post 1973 acceleration. Careful attention is paid to data quality. The analysis focuses on two unusual dimensions of India's experience -- the concentration of growth in services production, and the modest levels of human and physical capital accumulation. A growth accounting analysis disaggregates by major sector, and highlights implications for aggregate productivity growth of the reallocation of resources out of agriculture to more productive activities in industry and services. But concerns are raised that growth in services may be overstated. India will need to broaden its current expansion to provide manufactured goods for the world market and jobs for its large pool of low-skilled workers. Increased public saving, as well as a rise in foreign saving -- particularly FDI -- could augment the rising household saving and support the increased investment necessary to sustain rapid growth.

In Search of the Transmission Mechanism of Fiscal Policy

Abstract: Most economists would agree that a hike in the federal funds rate will cause some slowdown in growth and inflation, and that the bulk of the empirical evidence is consistent with this statement. But perfectly reasonable economists can and do disagree even on the basic effects of a shock to government spending on goods and services: neoclassical models predict that private consumption and the real wage will fall, while some neo-keyenesian models predict the opposite. This paper discusses alternative time series methodologies to identify government spending shocks and to estimate their effects. Applying these methodologies to data from the US and three other OECD countries provides little evidence in favor of the neoclassical predictions. Using the US input-output tables, the paper then turns to industry-level evidence around two major military buildups to shed light on the effects of government spending shocks.

Teacher Credentials and Student Achievement in High School: A Cross-Subject Analysis with Student Fixed Effects. NBER Working Paper No. 13617.

Abstract: We use data on statewide end-of-course tests in North Carolina to examine the relationship between teacher credentials and student achievement at the high school level. We find compelling evidence that teacher credentials, particularly licensure and certification, affects student achievement in systematic ways and that the magnitudes are large enough to be policy relevant. Our findings imply that the uneven distribution of teacher credentials by race and socioeconomic status of high school students—a pattern we also document—contributes to achievement gaps in high school. In addition, some troubling findings emerge related to the gender and race of the teachers.

The Role of School Improvement in Economic Development

Abstract: The role of improved schooling, a central part of most development strategies, has become controversial because expansion of school attainment has not guaranteed improved economic conditions. This paper reviews the role of education in promoting economic well-being, with a particular focus on the role of educational quality. It concludes that there is strong evidence that the cognitive skills of the population - rather than mere school attainment - are powerfully related to individual earnings, to the distribution of income, and to economic growth. New empirical results show the importance of both minimal and high level skills, the complementarity of skills and the quality of economic institutions, and the robustness of the relationship between skills and growth. International comparisons incorporating expanded data on cognitive skills reveal much larger skill deficits in developing countries than generally derived from just school enrollment and attainment. The magnitude of change needed makes clear that closing the economic gap with developed countries will require major structural changes in schooling institutions

Inequality and Institutions in 20th Century America

Abstract: We provide a comprehensive view of widening income inequality in the United States contrasting conditions since 1980 with those in earlier postwar years. We argue that the income distribution in each period was strongly shaped by a set of economic institutions. The early postwar years were dominated by unions, a negotiating framework set in the Treaty of Detroit, progressive taxes, and a high minimum wage -- all parts of a general government effort to broadly distribute the gains from growth. More recent years have been characterized by reversals in all these dimensions in an institutional pattern known as the Washington Consensus. Other explanations for income disparities including skill-biased technical change and international trade are seen as factors operating within this broader institutional story.

The Productivity Argument for Investing in Young Children

Abstract: This paper presents a productivity argument for investing in disadvantaged young children. For such investment, there is no equity-efficiency tradeoff.

Growth, Initial Conditions, Law and Speed of Privatization in Transition Countries: 11 Years Later

Abstract: The end of the communist era brought much optimism over the growth possibilities of the economies that are now referred to as the transition countries. An inefficient system, rife with distortions and without incentives, was to be replaced by the market. Privatization, liberalization, and decentralization would bring unprecedented prosperity. To be sure, there were some worries about a short transition recession. But the only real issue was how best to secure the transition.

Understanding recent trends in house prices and homeownership

Abstract: This paper looks at a broad array of evidence concerning the recent boom in home prices, and considers what this means for future home prices and the economy. It does not appear possible to explain the boom in terms of fundamentals such as rents or construction costs. A psychological theory, that represents the boom as taking place because of a feedback mechanism or social epidemic that encourages a view of housing as an important investment opportunity, fits the evidence better.

Mental Health in Childhood and Human Capital

Abstract: Although mental disorders are common among children, we know little about their long term effects on child outcomes. This paper examines U.S. and Canadian children with symptoms of Attention Deficit Hyperactivity Disorder (ADHD), depression, conduct disorders, and other behavioral problems. Our work offers a number of innovations. First we use large nationally representative samples of children from both countries. Second, we focus on "screeners" that were administered to all children in our sample, rather than on diagnosed cases. Third, we address omitted variables bias by estimating sibling-fixed effects models. Fourth, we examine a range of outcomes. Fifth, we ask how the effects of mental health conditions are mediated by family income and maternal education. We find that mental health conditions, and especially ADHD, have large negative effects on future test scores and schooling attainment, regardless of family income and maternal education.

Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning

Abstract: This paper discusses the role of annuities in retirement planning. It begins by explaining the basic theory underlying the individual welfare gains available from annuitizing resources in retirement. It then contrasts these findings with the empirical findings that so few consumers behave in a manner that is consistent with them placing a high value on annuities. After reviewing the strengths and weaknesses of the large literature that seeks to reconcile these findings through richer extensions of the basic model, this paper turns to a somewhat more speculative discussion of potential behavioral stories that may be limiting demand. Overall, the paper argues that while further extensions to the rational consumer model of annuity demand are useful for helping to clarify under what conditions annuitization is welfare-enhancing, at least part of the answer to why consumers are so reluctant to annuitize will likely be found through a more rigorous study of the various psychological biases that individuals bring to the annuity decision.

Financial Globalization, Growth and Volatility in Developing Countries

Abstract: This paper provides a comprehensive assessment of empirical evidence about the impact of financial globalization on growth and volatility in developing countries. The results suggest that it is difficult to establish a robust causal relationship between financial integration and economic growth. Furthermore, there is little evidence that developing countries have been consistently successful in using financial integration to stabilize fluctuations in consumption growth. However, we do find that financial globalization can be beneficial under the right circumstances. Empirically, good institutions and quality of governance are crucial in helping developing countries derive the benefits of globalization. Similarly, macroeconomic stability appears to be an important prerequisite for ensuring that financial globalization is beneficial for developing countries. Finally, countries that employ relatively flexible exchange rate regimes and succeed in maintaining fiscal discipline are more likely to enjoy the potential growth and stabilization benefits of financial globalization.

Systemic Risk and Hedge Funds

Abstract: Systemic risk is commonly used to describe the possibility of a series of correlated defaults among financial institutions---typically banks---that occur over a short period of time, often caused by a single major event. However, since the collapse of Long Term Capital Management in 1998, it has become clear that hedge funds are also involved in systemic risk exposures. The hedge-fund industry has a symbiotic relationship with the banking sector, and many banks now operate proprietary trading units that are organized much like hedge funds. As a result, the risk exposures of the hedge-fund industry may have a material impact on the banking sector, resulting in new sources of systemic risks. In this paper, we attempt to quantify the potential impact of hedge funds on systemic risk by developing a number of new risk measures for hedge funds and applying them to individual and aggregate hedge-fund returns data. These measures include: illiquidity risk exposure, nonlinear factor models for hedge-fund and banking-sector indexes, logistic regression analysis of hedge-fund liquidation probabilities, and aggregate measures of volatility and distress based on regime-switching models. Our preliminary findings suggest that the hedge-fund industry may be heading into a challenging period of lower expected returns, and that systemic risk is currently on the rise.(This abstract was borrowed from another version of this item.)

The American High School Graduation Rate: Trends and Levels. NBER Working Paper No. 13670.

Abstract: This paper uses multiple data sources and a unified methodology to estimate the trends and levels of the U.S. high school graduation rate. Correcting for important biases that plague previous calculations, we establish that (a) the true high school graduation rate is substantially lower than the official rate issued by the National Center for Educational Statistics; (b) it has been declining over the past 40 years; (c) majority/minority graduation rate differentials are substantial and have not converged over the past 35 years; (d) the decline in high school graduation rates occurs among native populations and is not solely a consequence of increasing proportions of immigrants and minorities in American society; (e) the decline in high school graduation explains part of the recent slowdown in college attendance; and (f) the pattern of the decline of high school graduation rates by gender helps to explain the recent increase in male-female college attendance gaps.

New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability

Abstract: Este documento propone un nuevo enfoque para mejorar el analisis y la gestion del riesgo financiero de una economia nacional por parte del banco central. Se basa en la teoria y practica moderna del analisis de derechos contingentes (CCA, por contingent claims analysis), el que hoy utilizan con exito a nivel de banco individual los gerentes, inversionistas y autoridades. Su principal herramienta de analisis es el balance contable ajustado por riesgos, que muestra la sensibilidad de los activos y pasivos externos de la empresa frente a perturbaciones externas. A nivel nacional, los sectores de la economia se toman como carteras interconectadas de activos, pasivos y garantias, unas explicitos y otras implicitas. Los enfoques tradicionales tienen dificultades para analizar la forma en que los riesgos se pueden acumular poco a poco y de repente explotar en una crisis con todo. El analisis CCA esta preparado para capturar tales �no linealidades� y cuantificar los efectos de descalces entre activos y pasivos al interior de la organizacion y entre organizaciones. Los balances ajustados por riesgo CCA facilitan las simulaciones y los ejercicios de tension para evaluar el posible impacto de las politicas para manejar el riesgo sistemico.

Labor Market Institutions Around the World

Abstract: This paper documents the large cross-country differences in labor institutions that make them a candidate explanatory factor for the divergent economic performance of countries and reviews what economists have learned about the effects of these institutions on economic outcomes. It identifies three ways in which institutions affect economic performance: by altering incentives, by facilitating efficient bargaining, and by increasing information, communication, and trust. The evidence shows that labor institutions reduce the dispersion of earnings and income inequality, which alters incentives, but finds equivocal effects on other aggregate outcomes, such as employment and unemployment. Given weaknesses in the crosscountry data on which most studies focus, the paper argues for increased use of micro-data, simulations, and experiments to illuminate how labor institutions operate and affect outcomes.