Showing papers in "National Bureau of Economic Research in 2009"

Causes and Consequences of the Oil Shock of 2007–08

Abstract: This paper explores similarities and differences between the run-up of oil prices in 2007–08 and earlier oil price shocks, looking at what caused these price increases and what effects they had on the economy. Whereas previous oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007–08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been similar to those observed in earlier episodes, with significant effects on consumption spending and purchases of domestic automobiles in particular. Absent those declines, it is unlikely that the period 2007Q4–2008Q3 would have been characterized as one of recession for the United States. This episode should thus be added to the list of U.S. recessions to which oil prices appear to have made a material contribution.

The Financing of R&D and Innovation

Abstract: Evidence on the "funding gap" for investment innovation is surveyed. The focus is on financial market reasons for underinvestment that exist even when externality-induced underinvestment is absent. We conclude that while small and new innovative firms experience high costs of capital that are only partly mitigated by the presence of venture capital, the evidence for high costs of R&D capital for large firms is mixed. Nevertheless, large established firms do appear to prefer internal funds for financing such investments and they manage their cash flow to ensure this. Evidence shows that there are limits to venture capital as a solution to the funding gap, especially in countries where public equity markets for VC exit are not highly developed. We conclude by suggesting areas for further research.

The Unofficial Economy and Economic Development

Abstract: In developing countries, informal firms account for up to about half of all economic activity. Using data from World Bank firm-level surveys, we find that informal firms are small and extremely unproductive compared with even the small formal firms in the sample, and especially relative to the larger formal firms. Formal firms are run by much better educated managers than informal ones and use more capital, have different customers, market their products, and use more external finance. Few formal firms have ever operated informally. This evidence supports the dual economy (“Wal-Mart”) theory of development, in which growth comes about from the creation of highly productive formal firms. Informal firms keep millions of people alive but disappear as the economy develops.

The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong

Abstract: This paper is an empirical investigation of the role of government actions and interventions in the financial crisis that flared up in August 2007. It integrates and summarizes several ongoing empirical research projects with the aim of learning from past policy. The evidence is presented in a series of charts which are backed up by statistical analysis in these research projects.

Teaching Students and Teaching Each Other: The Importance of Peer Learning for Teachers. NBER Working Paper No. 15202.

Abstract: Using longitudinal elementary school teacher and student data, we document that students have larger test score gains when their teachers experience improvements in the observable characteristics of their colleagues. Using within-school and within-teacher variation, we further show that a teacher's students have larger achievement gains in math and reading when she has more effective colleagues (based on estimated value-added from an out-of-sample pre-period). Spillovers are strongest for less-experienced teachers and persist over time, and historical peer quality explains away about twenty percent of the own-teacher effect, results that suggest peer learning.

By How Much Does GDP Rise If the Government Buys More Output

Abstract: During World War II and the Korean War, real GDP grew by about half the increase in government purchases. With allowance for other factors holding back GDP growth during those wars, the multiplier linking government purchases to GDP may be in the range of 0.7 to 1.0, a range generally supported by research based on vector autoregressions that control for other determinants, but higher values are not ruled out. New Keynesian macroeconomic models yield multipliers in that range as well. Neoclassical models produce much lower multipliers, because they predict that consumption falls when government purchases rise. Models that deliver higher multipliers feature a decline in the markup ratio of price over cost when output rises, and an elastic response of employment to increased demand. These characteristics are complementary to another Keynesian feature, the linkage of consumption to current income. The GDP multiplier is higher—perhaps around 1.7—when the nominal interest rate is at its lower bound of zero.

The Economics and Psychology of Inequality and Human Development. NBER Working Paper No. 14695.

Abstract: Recent research on the economics of human development deepens understanding of the origins of inequality and excellence. It draws on and contributes to personality psychology and the psychology of human development. Inequalities in family environments and investments in children are substantial. They causally affect the development of capabilities. Both cognitive and noncognitive capabilities determine success in life but to varying degrees for different outcomes. An empirically determined technology of capability formation reveals that capabilities are self-productive and cross-fertilizing and can be enhanced by investment. Investments in capabilities are relatively more productive at some stages of a child's life cycle than others. Optimal child investment strategies differ depending on target outcomes of interest and on the nature of adversity in a child's early years. For some configurations of early disadvantage and for some desired outcomes, it is efficient to invest relatively more in the later years of childhood than in the early years.

The Complementarity between Cities and Skills

Abstract: There is a strong connection between per worker productivity and metropolitan area population, which is commonly interpreted as evidence for the existence of agglomeration economies. This correlation is particularly strong in cities with higher levels of skill and virtually non-existent in less skilled metropolitan areas. This fact is particularly compatible with the view that urban density is important because proximity spreads knowledge, which either makes workers more skilled or entrepreneurs more productive. Bigger cities certainly attract more skilled workers, and there is some evidence suggesting that human capital accumulates more quickly in urban areas.

Into College, Out of Poverty? Policies to Increase the Postsecondary Attainment of the Poor

Abstract: We review the experimental and quasi-experimental research evidence on the causal relationship between college costs and educational attainment, with a particular focus on low-income populations. The weight of the evidence indicates that reducing college costs can increase college entry and persistence. Simple and transparent programs appear to be most effective. Programs that link money to incentives and/or the takeup of academic support services appear to be particularly effective.

Putting Tasks to the Test: Human Capital, Job Tasks and Wages. NBER Working Paper No. 15116.

Abstract: Using original, representative survey data, we document that analytical, routine, and manual job tasks can be measured with high validity, vary substantially within and between occupations, are significantly related to workers’ characteristics, and are robustly predictive of wage differences between occupations and among workers in the same occupation. We offer a conceptual framework that makes explicit the causal links between human capital endowments, occupational assignment, job tasks, and wages, which motivate a Roy model of the allocation of workers to occupations. We offer two simple tests of the model’s gross predictions for the relationship between tasks and wages, both of which receive qualified empirical support.

The Role of Simplification and Information in College Decisions: Results from the H&R Block FAFSA Experiment

Abstract: Growing concerns about low awareness and take-up rates for government support programs like college financial aid have spurred calls to simplify the application process and enhance visibility. This project examines the effects of two experimental treatments designed to test of the importance of simplification and information using a random assignment research design. H&R Block tax professionals helped low- to moderate-income families complete the FAFSA, the federal application for financial aid. Families were then given an estimate of their eligibility for government aid as well as information about local postsecondary options. A second randomly-chosen group of individuals received only personalized aid eligibility information but did not receive help completing the FAFSA. Comparing the outcomes of participants in the treatment groups to a control group using multiple sources of administrative data, the analysis suggests that individuals who received assistance with the FAFSA and information about aid were substantially more likely to submit the aid application, enroll in college the following fall, and receive more financial aid. These results suggest that simplification and providing information could be effective ways to improve college access. However, only providing aid eligibility information without also giving assistance with the form had no significant effect on FAFSA submission rates.

The Impact of No Child Left Behind on Student Achievement. NBER Working Paper No. 15531.

Abstract: The No Child Left Behind (NCLB) Act compelled states to design schoolaccountability systems based on annual student assessments. The effect of this Federal legislation on the distribution of student achievement is a highly controversial but centrally important question. This study presents evidence on whether NCLB has influenced student achievement based on an analysis of state-level panel data on student test scores from the National Assessment of Educational Progress (NAEP). The impact of NCLB is identified using a comparative interrupted time series analysis that relies on comparisons of the test-score changes across states that already had school-accountability policies in place prior to NCLB and those that did not. Our results indicate that NCLB generated statistically significant increases in the average math performance of 4 graders (effect size = 0.22 by 2007) as well as improvements at the lower and top percentiles. There is also evidence of improvements in 8 grade math achievement, particularly among traditionally low-achieving groups and at the lower percentiles. However, we find no evidence that NCLB increased reading achievement in either 4 or 8 grade. * We would like to thank Rob Garlick, Elias Walsh, Nathaniel Schwartz and Erica Johnson for their research assistance. We would also like to thank Kerwin Charles, Robert Kaestner, Ioana Marinescu and seminar participants at the Harris School of Public Policy and at the NCLB: Emerging Findings Research Conference for helpful comments. An earlier version of this work was also presented by Jacob as the David N. Kershaw Lecture at the Annual meeting of the Association of Public Policy and Management (November 2008). All errors are our own.

Understanding Inflation-Indexed Bond Markets

Abstract: This paper explores the history of inflation-indexed bond markets in the United States and the United Kingdom. It documents a massive decline in long-term real interest rates from the 1990s until 2008, followed by a sudden spike during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation-indexed and nominal government bond yields, were stable from 2003 until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments that followed. Low yields and high short-term volatility of returns do not invalidate the basic case for inflation-indexed bonds, which is that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing in the future, even though they have offered high returns over the past decade. ********** In recent years government-issued inflation-indexed bonds have become available in a number of countries and have provided a fundamentally new instrument for use in retirement saving. Because expected inflation varies over time, conventional, nonindexed (nominal) Treasury bonds are not safe in real terms; and because short-term real interest rates vary over time, Treasury bills are not safe assets for long-term investors. Inflation-indexed bonds fill this gap by offering a truly riskless long-term investment (Campbell and Shiller 1997; Campbell and Viceira 2001, 2002; Brennan and Xia 2002; Campbell, Chan, and Viceira 2003; Wachter 2003). The U.K. government first issued inflation-indexed bonds in the early 1980s, and the U.S. government followed suit by introducing Treasury inflation-protected securities (TIPS) in 1997. Inflation-indexed government bonds are also available in many other countries, including Canada, France, and Japan. These bonds are now widely accepted financial instruments. However, their history creates some new puzzles that deserve investigation. First, given that the real interest rate is determined in the long run by the marginal product of capital, one might expect inflation-indexed bond yields to be extremely stable over time. But whereas 10-year annual yields on U.K. inflation-indexed bonds averaged about 3.5 percent during the 1990s (Barr and Campbell 1997), and those on U.S. TIPS exceeded 4 percent around the turn of the millennium, by the mid-2000s yields on both countries' bonds averaged below 2 percent, bottoming out at around 1 percent in early 2008 before spiking to near 3 percent in late 2008. The massive decline in long-term real interest rates from the 1990s to the 2000s is one puzzle, and the instability in 2008 is another. Second, in recent years inflation-indexed bond prices have tended to move opposite to stock prices, so that these bonds have a negative "beta" with the stock market and can be used to hedge equity risk. This has been even more true of prices on nominal government bonds, although these bonds behaved very differently in the 1970s and 1980s (Campbell, Sunderam, and Viceira 2009). The reason for the negative beta on inflation-indexed bonds is not well understood. Third, given integrated world capital markets, one might expect that inflation-indexed bond yields would be similar around the world. But this is not always the case. During the first half of 2000, the yield gap between U.S. and U.K. inflation-indexed bonds was over 2 percentage points, although yields have since converged. In January 2008, 10-year yields were similar in the United States and the United Kingdom, but elsewhere yields ranged from 1.1 percent in Japan to almost 2.0 percent in France (according to Bloomberg data). Yield differentials were even larger at long maturities, with U.K. yields well below 1 percent and French yields well above 2 percent. To understand these phenomena, it is useful to distinguish three major influences on inflation-indexed bond yields: current and expected future short-term real interest rates; differences in expected returns on long-term and short-term inflation-indexed bonds caused by risk premiums (which can be negative if these bonds are valuable hedges); and differences in expected returns on long-term and short-term bonds caused by liquidity premiums or technical factors that segment the bond markets. …

Screening in New Credit Markets: Can Individual Lenders Infer Borrower Creditworthiness in Peer-to-Peer Lending?

Abstract: The current banking crisis highlights the challenges faced in the traditional lending model, particularly in terms of screening smaller borrowers. The recent growth in online peer-to-peer lending marketplaces offers opportunities to examine different lending models that rely on screening by multiple peers. While these market-based, non-hierarchical structures potentially offer screening advantages, especially in utilizing soft information, individual lenders likely lack financial expertise and lending experience. This paper evaluates whether lenders in such peer-to-peer markets are able to use borrower information to infer creditworthiness. We examine this ability in one such online market using a methodology that takes advantage of lenders not observing a borrower’s true credit score but only seeing an aggregate credit category. We find that lenders are able to use available information to infer a third of the variation in creditworthiness that is captured by a borrower’s credit score. This inference is economically significant and allows lenders to lend at a 140-basis-points lower rate for borrowers with (unobserved to lenders) better credit scores within a credit category. While lenders infer the most from standard banking "hard" information, they also use non-standard (subjective) information. Our methodology shows, without needing to code information contained in the pictures or personal descriptions posted by borrowers, that lenders learn even from such "softer" information, particularly when it is likely to provide credible signals regarding borrower creditworthiness. Our findings highlight the screening ability of peer-to-peer markets and suggest that these emerging markets may provide a viable complement to traditional lending markets, especially for smaller borrowers.

Learning about Academic Ability and the College Drop-Out Decision. NBER Working Paper No. 14810.

Abstract: We use unique data to examine how college students from low income families form expectations about academic ability and to examine the role that learning about ability and a variety of other factors play in the college drop-out decision. From the standpoint of satisfying a central implication from the theory of drop-out, we find that self-reported expectations data perform well relative to standard assumptions employed in empirical work when it is necessary to explicitly characterize beliefs. At the time of entrance, students tend to substantially discount the possibility of bad grade performance, with this finding having implications for understanding the importance of the option value of schooling. After entrance, students update their beliefs in a manner which takes into account both initial beliefs and new information, with heterogeneity in weighting being broadly consistent with the spirit of Bayesian updating. Learning about ability plays a very prominent role in the drop-out decision. Among other possible factors of importance, while students who find school to be unenjoyable are unconditionally much more likely to leave school, this effect arises to a large extent because these students also tend to receive poor grades. We end by examining whether students whose grades are lower than expected understand the underlying reasons for their poor grade performance.

The Internet and Job Search

Abstract: This paper examines how the Internet has impacted job search behavior. Examining those who use the Internet for job seeking purposes, I show that the vast majority are currently employed. These employed job seekers are more likely to leave their current employer and are more likely to make an employment-to-employment transition. Examining the unemployed, I find that over the past ten years the variety of job search methods used by the unemployed has increased and job search behavior has become more extensive. Furthermore, the Internet has led to reallocation of effort among various job search activities.(This abstract was borrowed from another version of this item.)

Preferences for redistribution

Abstract: This paper discusses what determines the preferences of individuals for redistribution. We review the theoretical literature and provide a framework to incorporate various effects previously studied separately in the literature. We then examine empirical evidence for the US, using the General Social Survey, and for a large set of countries, using the World Values Survey. The paper reviews previously found results and provides several new ones. We emphasize, in particular, the role of historical experiences, cultural factors and personal history as determinants of preferences for equality or tolerance for inequality. JEL codes are: H10, Z1

Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation

Abstract: Though overall bank performance from July 2007 to December 2008 was the worst since at least the Great Depression, there is significant variation in the cross-section of stock returns of large banks across the world during that period. We use this variation to evaluate the importance of factors that have been discussed as having contributed to the poor performance of banks during the credit crisis. More specifically, we investigate whether bank performance is related to bank-level governance, country-level governance, country-level regulation, and bank balance sheet and profitability characteristics before the crisis. Banks that the market favored in 2006 had especially poor returns during the crisis. Using conventional indicators of good governance, banks with more shareholder-friendly boards performed worse during the crisis. Banks in countries with stricter capital requirement regulations and with more independent supervisors performed better. Though banks in countries with more powerful supervisors had worse stock returns, we provide some evidence that this may be because these supervisors required banks to raise more capital during the crisis and that doing so was costly for shareholders. Large banks with more Tier 1 capital and more deposit financing at the end of 2006 had significantly higher returns during the crisis. After accounting for country fixed effects, banks with more loans and more liquid assets performed better during the month following the Lehman bankruptcy, and so did banks from countries with stronger capital supervision and more restrictions on bank activities.

Financial Crash, Commodity Prices, and Global Imbalances

Abstract: In this paper we argue that the persistent global imbalances, the subprime crisis, and the volatile oil and asset prices that followed it, are tightly interconnected. They all stem from a global environment where sound and liquid financial assets are in scarce supply. Our story goes as follows: Global asset scarcity led to large capital flows toward the U.S. and to the creation of asset bubbles that eventually crashed. The crash in the real estate market was particularly complex from the point of view of asset shortages since it compromised the whole financial sector, and by so doing, closed many of the alternative saving vehicles. Thus, in its first phase, the crisis exacerbated the shortage of assets in the world economy, which triggered a partial recreation of the bubble in commodities and oil markets in particular. The latter led to an increase in petrodollars seeking financial assets in the U.S. Thus, rather than the typical destabilizing role played by capital outflows during financial crises, petrodollar flows became a source of stability for the U.S. The second phase of the crisis is more conventional and began to emerge toward the end of the summer of 2008. It became apparent then that the financial crisis would permeate the real economy and sharply slow down global growth. This slowdown worked to reverse the tight commodity market conditions required for a bubble to develop, ultimately destroying the commodity bubble.

How Far Are We From The Slippery Slope? The Laffer Curve Revisited

Abstract: We compare Laffer curves for labor and capital taxation for the US, the EU-14 and individual European countries, using a neoclassical growth model featuring "constant Frisch elasticity" (CFE) preferences. We provide new tax rate data. The US can increase tax revenues by 30% by raising labor taxes and by 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Dynamic scoring for the EU-14 shows that 54% of a labor tax cut and 79% of a capital tax cut are self-financing. The Laffer curve in consumption taxes does not have a peak. Endogenous growth and human capital accumulation locates the US and EU-14 close to the peak of the labor tax Laffer curve. We derive conditions under which household heterogeneity does not matter much for the results. By contrast, transition effects matter: a permanent surprise increase in capital taxes always raises tax revenues.

Into College, out of Poverty? Policies to Increase the Postsecondary Attainment of the Poor. NBER Working Paper No. 15387.

Abstract: We review the experimental and quasi-experimental research evidence on the causal relationship between college costs and educational attainment, with a particular focus on low-income populations. The weight of the evidence indicates that reducing college costs can increase college entry and persistence. Simple and transparent programs appear to be most effective. Programs that link money to incentives and/or the takeup of academic support services appear to be particularly effective.

Birth Cohort and the Black-White Achievement Gap: The Roles of Access and Health Soon after Birth. NBER Working Paper No. 15078.

Abstract: One literature documents a significant, black-white gap in average test scores, while another finds a substantial narrowing of the gap during the 1980's, and stagnation in convergence after. We use two data sources – the Long Term Trends NAEP and AFQT scores for the universe of applicants to the U.S. military between 1976 and 1991 – to show: 1) the 1980's convergence is due to relative improvements across successive cohorts of blacks born between 1963 and the early 1970's and not a secular narrowing in the gap over time; and 2) the across-cohort gains were concentrated among blacks in the South. We then demonstrate that the timing and variation across states in the AFQT convergence closely tracks racial convergence in measures of health and hospital access in the years immediately following birth. We show that the AFQT convergence is highly correlated with post-neonatal mortality rates and not with neonatal mortality and low birth weight rates, and that this result cannot be explained by schooling desegregation and changes in family background. We conclude that investments in health through increased access at very early ages have large, long-term effects on achievement, and that the integration of hospitals during the 1960's affected the test performance of black teenagers in the 1980's.

Why Have College Completion Rates Declined? An Analysis of Changing Student Preparation and Collegiate Resources. NBER Working Paper No. 15566.

Abstract: Rising college enrollment over the last quarter century has not been met with a proportional increase in college completion. Comparing the high school classes of 1972 and 1992, we show declines in college completion rates have been most pronounced for men who first enroll in less selective public universities and community colleges. We decompose the decline into the components due to changes in preparedness of entering students and due to changes in collegiate characteristics, including type of institution and resources per student. While both factors play some role, the supply-side characteristics are most important in explaining changes in college completion. (JEL I23).

Financial crises and economic activity

Abstract: We study the output costs of 40 systemic banking crises since 1980. Most, but not all, crises in our sample coincide with a sharp contraction in output from which it took several years to recover. Our main findings are as follows. First, the current financial crisis is unlike any others in terms of a wide range of economic factors. Second, the output losses of past banking crises were higher when they were accompanied by a currency crisis or when growth was low at the onset of the crisis. When accompanied by a sovereign debt default, a systemic banking crisis was less costly. And, third, there is a tendency for systemic banking crises to have lasting negative output effects.

Three Epochs of Oil

Abstract: We test for changes in price behavior in the longest crude oil price series available (1861-2008). We find strong evidence for changes in persistence and in volatility of price across three well defined periods. We argue that historically, the real price of oil has tended to be highly persistent and volatile whenever rapid industrialization in a major world economy coincided with uncertainty regarding access to supply. We present a modified commodity storage model that fully incorporates demand, and further can accommodate both transitory and permanent shocks. We show that the role of storage when demand is subject to persistent growth shocks is speculative, instead of its classic mitigating role. This result helps to account for the increased volatility of oil price we observe in these periods.

Fear of Fire Sales and the Credit Freeze

Abstract: Is there any need to "clean" up a banking system in the midst of a crisis, by closing or recapitalizing weak banks and taking bad assets off bank balance sheets, or can one wait till the crisis is over? We argue that an "overhang" of impaired banks that may be forced to sell assets soon can reduce the current price of illiquid assets sufficiently that weak banks have no interest in selling them. Anticipating a potential future fire sale, cash rich buyers have high expected returns to holding cash, which also reduces their incentive to lock up money in term loans. The potential for a worse fire sale than necessary, as well as the associated decline in credit origination, could make the crisis worse, which is one reason it may make sense to clean up the system even in the midst of the crisis. We discuss alternative ways of cleaning up the system, and the associated costs and benefits.

History without Evidence: Latin American Inequality since 1491

Abstract: Most analysts of the modern Latin American economy hold to a pessimistic belief in historical persistence -- they believe that Latin America has always had very high levels of inequality, suggesting it will be hard for modern social policy to create a more egalitarian society. This paper argues that this conclusion is not supported by what little evidence we have. The persistence view is based on an historical literature which has made little or no effort to be comparative. Modern analysts see a more unequal Latin America compared with Asia and the rich post-industrial nations and then assume that this must always have been true. Indeed, some have argued that high inequality appeared very early in the post-conquest Americas, and that this fact supported rent-seeking and anti-growth institutions which help explain the disappointing growth performance we observe there even today. This paper argues to the contrary. Compared with the rest of the world, inequality was not high in pre-conquest 1491, nor was it high in the postconquest decades following 1492. Indeed, it was not even high in the mid-19th century just prior Latin America's belle epoque. It only became high thereafter. Historical persistence in Latin American inequality is a myth.