National Bureau of Economic Research

Displaying 1-40 of 1440 results

  • White Papers // Aug 2011

    Innovation And Productivity

    What do we know about the relationship between innovation and productivity among firms? The workhorse model of this relationship is presented and the implications of analysis using this model and the usually available data on product and process innovation are derived. The recent empirical evidence on the relationship between innovation...

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  • White Papers // Aug 2011

    A Gains From Trade Perspective On Macroeconomic Fluctuations

    Business cycles reflect changes over time in the amount of trade between individuals. In this paper, the authors show that incorporating explicitly intra-temporal gains from trade between individuals into a macroeconomic model can provide new insight into the potential mechanisms driving economic fluctuations as well as modify key policy implications....

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  • White Papers // Aug 2011

    Are Corporate Default Probabilities Consistent With The Static Tradeoff Theory?

    Default probability plays a central role in the static tradeoff theory of capital structure. The authors directly test this theory by regressing the probability of default on proxies for costs and benefits of debt. Contrary to predictions of the theory, firms with higher bankruptcy costs, i.e., smaller firms and firms...

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  • White Papers // Aug 2011

    The Extensive Margin, Sectoral Shares And International Business Cycles

    This paper documents some previously neglected features of sectoral shares at business cycle frequencies in OECD economies. In particular, the authors find that the nontraded sector share of output is as volatile as aggregate GDP, and that for most countries, the nontraded sector is distinctly countercyclical. While the standard international...

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  • White Papers // Aug 2011

    Consumption Risk-sharing And The Real Exchange Rate: Why Does The Nominal Exchange Rate Make Such A Difference?

    A basic prediction of efficient risk-sharing is that relative consumption growth rates across countries or regions should be positively related to real exchange rate growth rates across the same areas. The authors investigate this hypothesis, employing a newly constructed multi-country and multi-regional data set. Within countries, they find significant evidence...

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  • White Papers // Aug 2011

    Would People Behave Differently If They Better Understood Social Security? Evidence From A Field Experiment

    This paper presents the results of a field experiment in which a sample of older workers was randomized between a treatment group that was given information about key Social Security provisions and a control group that was not. The experiment was designed to examine whether it is possible to affect...

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  • White Papers // Aug 2011

    Exam High Schools And Academic Achievement: Evidence From New York City

    Publicly funded exam schools educate many of the world's most talented students. These schools typically contain higher achieving peers, more rigorous instruction, and additional resources compared to regular public schools. This paper uses a sharp discontinuity in the admissions process at three prominent exam schools in New York City to...

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  • White Papers // Aug 2011

    Covariances Versus Characteristics In General Equilibrium

    The authors question a deep-ingrained doctrine in asset pricing: if an empirical characteristic-return relation is consistent with investor "Rationality," the relation must be "Explained" by a risk factor model. The investment approach changes the big picture of asset pricing. Factors formed on characteristics are not necessarily risk factors: characteristics-based factor...

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  • White Papers // Aug 2011

    Equilibrium Wage And Employment Dynamics In A Model Of Wage Posting Without Commitment

    A rich but tractable variant of the Burdett-Mortensen model of wage setting behavior is formulated and a dynamic market equilibrium solution to the model is defined and characterized. In the model, firms cannot commit to wage contracts. Instead, the Markov perfect equilibrium to the wage setting game, characterized by Coles...

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  • White Papers // Aug 2011

    A Simple Nonparametric Approach To Estimating The Distribution Of Random Coefficients In Structural Models

    The authors explore a nonparametric mixtures estimator for recovering the joint distribution of random coefficients in economic models. The estimator is based on linear regression subject to linear inequality constraints and is computationally attractive compared to alternative, nonparametric estimators. They provide conditions under which the estimated distribution function converges to...

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  • White Papers // Aug 2011

    Foreign Firms And Local Communities

    The literature on the effects of Foreign Direct Investment (FDI) and activities of MultiNational Enterprises (MNEs) on host-countries has been almost exclusively focused on issues of productivity, growth and wages. The authors argue that this leaves quite a bit of important unexplored areas of inquiry, particularly those connected with the...

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  • White Papers // Aug 2011

    Systemic Risk Exposures: A 10-by-10-by-10 Approach

    Here, the author presents and discuss a "10-by-10-by-10" network-based approach to monitoring systemic financial risk. Under this approach, a regulator would analyze the exposures of a core group of systemically important financial firms to a list of stressful scenarios, say 10 in number. For each scenario, about 10 such designated...

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  • White Papers // Aug 2011

    The Exact Law Of Large Numbers For Independent Random Matching

    This paper provides a mathematical foundation for independent random matching of a large population, as widely used in the economics literature. The authors consider both static and dynamic systems with random mutation, partial matching arising from search, and type changes induced by matching. Under independence assumptions at each randomization step,...

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  • White Papers // Aug 2011

    The Importance Of The Meaning And Measurement Of "Affordable" In The Affordable Care Act

    This working paper highlights the practical importance of two critical but under-explored assumptions behind existing estimates of the Affordable Care Act (ACA)'s potential impact on the mix of employees and families who may have Employer-Sponsored health Insurance (ESI) in the future or may receive subsidies in the new health insurance...

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  • White Papers // Aug 2011

    Deregulation, Consolidation, And Efficiency: Evidence From U.S. Nuclear Power

    For the first four decades of its existence the U.S. nuclear power industry was run by regulated utilities, with most companies owning only one or two reactors. Beginning in the late 1990s electricity markets in many states were deregulated and almost half of the nation's 103 reactors were sold to...

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  • White Papers // Aug 2011

    Propose With A Rose? Signaling In Internet Dating Markets

    The large literature on costly signaling and the somewhat scant literature on preference signaling had varying success in showing the effectiveness of signals. The authors use a field experiment to show that even when everyone can send a signal, signals are free and the only costs are opportunity costs, sending...

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  • White Papers // Aug 2011

    Financial Literacy, Retirement Planning, And Household Wealth

    There is sample empirical evidence documenting widespread financial illiteracy and limited pension knowledge. At the same time, the distribution of wealth is widely dispersed and many workers arrive on the verge of retirement with few or no personal assets. In this paper, the authors investigate the relationship between financial literacy...

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  • White Papers // Aug 2011

    A Model Of The Consumption Response To Fiscal Stimulus Payments

    A wide body of empirical evidence, based on randomized experiments, finds that 20-40 percent of fiscal stimulus payments (e.g. tax rebates) are spent on nondurable household consumption in the quarter that they are received. The authors develop a structural economic model to interpret this evidence. Their model integrates the classical...

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  • White Papers // Aug 2011

    Ethnic Innovation And U.S. Multinational Firm Activity

    This paper studies the impact that immigrant innovators have on the global activities of U.S. firms by analyzing detailed data on patent applications and on the operations of the foreign affiliates of U.S. multinational firms. The results indicate that increases in the share of a firm's innovation performed by inventors...

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  • White Papers // Aug 2011

    Carry Trades And Risk

    Carry trades, in which an investor borrows a low interest rate currency and lends a high interest rate currency, have been profitable historically. The risk exposure of carry traders might explain their high returns, but conventional models of risk do not work because traditional risk factors, used to price the...

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  • White Papers // Aug 2011

    The Continental Dollar: Initial Design, Ideal Performance, And The Credibility Of Congressional Commitment

    An alternative history of the Continental Dollar is constructed from the original resolutions passed by Congress. The Continental Dollar was a zero-interest bearer bond, not a fiat currency. The public could redeem it at face value in specie at fixed future dates. Being a zero-interest bearer bond, discounting must be...

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  • White Papers // Aug 2011

    Substitution Between Individual And Cultural Capital: Pre-migration Labor Supply, Culture And US Labor Market Outcomes Among Immigrant Women

    In this paper, the authors use New Immigrant Survey data to investigate the impact of immigrant women's own labor supply prior to migrating and female labor supply in their source country to provide evidence on the role of human capital and culture in affecting their labor supply and wages in...

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  • White Papers // Aug 2011

    Unemployment In Latin America And The Caribbean

    This paper constructs a new data set on unemployment rates in Latin America and the Caribbean and then explores the determinants of unemployment. The authors compare different countries, finding that unemployment is influenced by the size of the rural population and that the effects of government regulations are generally weak....

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  • White Papers // Aug 2011

    Healthy, Wealthy And Wise? Revisited: An Analysis Of The Causal Pathways From Socio-Economic Status To Health

    Much has been said about the stylized fact that the economically successful are not only wealthier but also healthier than the less affluent. There is little doubt about the existence of this socio-economic gradient in health, but there remains a vivid debate about its source. In this paper, the authors...

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  • White Papers // Aug 2011

    Country Heterogeneity And The International Evidence On The Effects Of Fiscal Policy

    This paper shows how the richer frequency and variety of fiscal policy shocks available in an international sample can be analyzed recognizing the heterogeneity that exists across different countries. The main conclusion of the authors' empirical analysis is that the question "What is the fiscal policy multiplier" is an ill-posed...

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  • White Papers // Aug 2011

    Long-term Barriers To The International Diffusion Of Innovations

    The authors document an empirical relationship between the cross-country adoption of technologies and the degree of long-term historical relatedness between human populations. Historical relatedness is measured using genetic distance, a measure of the time since two populations' last common ancestors. They find that the measure of human relatedness that is...

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  • White Papers // Aug 2011

    Employment, Wages And Voter Turnout

    This paper argues that, since activities that provide political information are complementary with leisure, increased labor market activity should lower turnout, but should do so least in prominent elections where information is ubiquitous. Using official county-level voting data and a variety of OLS and TSLS models, the authors find that...

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  • White Papers // Aug 2011

    Why Did U.S. Banks Invest In Highly-rated Securitization Tranches?

    The authors estimate holdings of highly-rated tranches of mortgage securitizations of American deposit-taking banks ahead of the credit crisis and evaluate hypotheses that have been advanced to explain these holdings. They find that holdings of highly-rated tranches were economically trivial for the typical bank, but banks with greater holdings performed...

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  • White Papers // Aug 2011

    Tax Expenditures, The Size And Efficiency Of Government, And Implications For Budget Reform

    One possible explanation for the difficulty in controlling the budget is that a major component of spending - tax expenditures - receives privileged status. It is treated as tax cuts rather than spending. This paper explores the implications of that misclassification and illustrates how it can lead to higher taxes,...

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  • White Papers // Aug 2011

    The Influence Of Irving Fisher On Milton Friedman's Monetary Economics

    This paper examines the influence of Irving Fisher's writings on Milton Friedman's work in monetary economics. The authors focus first on Fisher's influences in monetary theory (the quantity theory of money, the Fisher effect, Gibson's Paradox, the monetary theory of business cycles, and the Phillips Curve, and empirics, e.g. distributed...

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  • White Papers // Aug 2011

    Beauty Is The Promise Of Happiness?

    The authors measure the impact of individuals' looks on life satisfaction/happiness. Using five data sets, from the U.S., Canada, the U.K., and Germany, they construct beauty measures in different ways that allow placing lower bounds on the effects of beauty. Beauty raises happiness: a one standard-deviation change in beauty generates...

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  • White Papers // Aug 2011

    Cycles Of Wage Discrimination

    Using CPS data from 1979-2009 the authors examine how cyclical downturns and industry-specific demand shocks affect wage differentials between white non-Hispanic males and women, Hispanics and African-Americans. Women's and Hispanics' relative earnings are harmed by negative shocks, while the earnings disadvantage of African-Americans may drop with negative shocks. Negative shocks...

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  • White Papers // Aug 2011

    Health And Mortality Delta: Assessing The Welfare Cost Of Household Insurance Choice

    The authors develop a pair of risk measures for the universe of health and longevity products that includes life insurance, annuities, and supplementary health insurance. Health delta measures the differential payoff that a policy delivers in poor health, while mortality delta measures the differential payoff that a policy delivers at...

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  • White Papers // Aug 2011

    Organ Allocation Policy And The Decision To Donate

    Organ donations from deceased donors provide the majority of transplanted organs in the United States, and one deceased donor can save numerous lives by providing multiple organs. Nevertheless, most Americans are not registered organ donors despite the relative ease of becoming one. The authors study in the laboratory an experimental...

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  • White Papers // Aug 2011

    The Recovery Theorem

    The authors can only estimate the distribution of stock returns but they observe the distribution of risk neutral state prices. Risk neutral state prices are the product of risk aversion - the pricing kernel - and the natural probability distribution. The Recovery Theorem enables them to separate these and to...

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  • White Papers // Aug 2011

    Was What Ail'd Ya' What Kill'd Ya'?

    Making use of those Union Army veterans for whom death certificates are available, the authors compare the conditions with which they were diagnosed by Civil War pension surgeons to the causes of death on the certificates. They divide the data between those veterans who entered the pension system early because...

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  • White Papers // Aug 2011

    Implicit Guarantees And Risk Taking: Evidence From Money Market Funds

    A firm's termination generates bankruptcy costs. This may create incentives for a firm's owner to bail out a firm in bankruptcy and to curb the firm's risk taking outside bankruptcy. The authors analyze the role of such implicit guarantees in the context of financial institutions that sponsor money market mutual...

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  • White Papers // Aug 2011

    Country Size, International Trade, And Aggregate Fluctuations In Granular Economies

    This paper proposes a new mechanism by which country size and international trade affect macroeconomic volatility. The authors study a multi-country, multi-sector model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks. When the distribution of firm sizes follows a power law with an exponent close to -1, the...

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  • White Papers // Aug 2011

    Behavioral Corporate Finance: An Updated Survey

    The authors survey the theory and evidence of behavioral corporate finance, which generally takes one of two approaches. The market timing and catering approach views managerial financing and investment decisions as rational managerial responses to securities mispricing. The managerial biases approach studies the direct effects of managers' biases and nonstandard...

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  • White Papers // Aug 2011

    Asset Liquidity And International Portfolio Choice

    The authors study optimal asset portfolio choice in a two-country search-theoretic model of monetary exchange. They allow assets not only to represent claims on future consumption, but also to serve as means of payment. Assuming foreign assets trade at a cost, they characterize equilibria in which different countries' assets arise...

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  • White Papers // Aug 2010

    Solving The Multi-Country Real Business Cycle Model Using Ergodic Set Methods

    The ingredients help to reduce the cost in high-dimensional problems: an endogenous grid enclosing the ergodic set, linear approximation methods, fixed-point iteration and efficient integration methods, such as non-product monomial rules and integration combined with regression. They authors show that high accuracy in intratemporal choice is crucial for the overall...

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  • White Papers // Aug 2010

    Government Purchases Over The Business Cycle: The Role Of Economic And Political Inequality

    This paper explores the implications of economic and political inequality for the business cycle co movement of government purchases. The authors set up and compute a heterogeneous-agent neoclassical growth model, where households value government purchases which are financed by income taxes. A key feature of the model is a wealth...

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  • White Papers // Oct 2009

    Attention Allocation Over The Business Cycle

    The invisibility of information precludes a direct test of attention allocation theories. To surmount this obstacle, the authors develop a model that uses an observable variable - the state of the business cycle - to predict attention allocation. Attention allocation, in turn, predicts aggregate investment patterns. Because the theory begins...

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  • White Papers // Nov 2010

    Optimal Unemployment Insurance Over The Business Cycle

    This paper analyzes optimal unemployment insurance over the business cycle in a search model in which unemployment stems from matching frictions (in booms) and job rationing (in recessions). Job rationing during recessions introduces two novel effects ignored in previous studies of optimal unemployment insurance. First, job-search efforts have little effect...

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  • White Papers // Dec 2009

    Investment Shocks And Business Cycles

    The authors focus the driving forces of fluctuations in an estimated New Neoclassical Synthesis model of the U.S. economy with several shocks and frictions. In this model, shocks to the marginal efficiency of investment account for the bulk of fluctuations in output and hours at business cycle frequencies. Imperfect competition...

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  • White Papers // Jun 2010

    Business Cycles With A Common Trend In Neutral And Investment-Specific Productivity

    This paper identifies a new source of business-cycle fluctuations. Namely, a common stochastic trend in neutral and investment-specific productivity. The authors document that in U.S. postwar quarterly data Total Factor Productivity (TFP) and the relative price of investment are co integrated. They show theoretically that TFP and the relative price...

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  • White Papers // Jun 2010

    Interactions Between State And Federal Climate Change Policies

    The authors find that state-level policy in the presence of a federal policy can be beneficial or problematic, depending on the nature of the overlap between the two systems, the relative stringency of the efforts, and the types of policy instruments engaged. When the federal policy sets limits on aggregate...

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  • White Papers // Jun 2010

    Aggregate Risk And The Choice Between Cash And Lines Of Credit

    The authors argue that a firm's aggregate risk is a key determinant of whether it manages its future liquidity needs through cash reserves or bank lines of credit. Banks create liquidity for firms by pooling their idiosyncratic risks. As a result, firms with high aggregate risk find it costly to...

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  • White Papers // Jun 2010

    Setting The Initial Time-Profile Of Climate Policy: The Economics Of Environmental Policy Phase-Ins

    This paper considers the question of under what circumstances a new environmental regulation should "Phase in" gradually over time, rather than being immediately implemented at full force. The paper focuses particularly on climate policy, though its insights are more general. It shows that while adjustment costs provide a strong efficiency...

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  • White Papers // Jun 2010

    Buy Coal? Deposit Markets Prevent Carbon Leakage

    If a coalition of countries implements climate policies, nonparticipants tend to consume more, pollute more, and invest too little in renewable energy sources. In response, the coalition's equilibrium policy distorts trade and is not time-consistent. This paper derives conditions for when trading fossil fuel deposits increase efficiency. In isolation, a...

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  • White Papers // Jun 2010

    Measuring Business Cycles By Saving For A Rainy Day

    The authors propose a simple saving-based measure of the cyclical component in GDP. The measure is motivated by the prediction that the representative consumer changes savings in response to temporary deviations of income from its stochastic trend, while satisfying a present-value budget constraint. To evaluate the procedure, they employ the...

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  • White Papers // Jun 2010

    DSGE Models For Monetary Policy Analysis

    There has been enormous progress in recent years in the development of Dynamic, Stochastic General Equilibrium (DSGE) models for the purpose of monetary policy analysis. Monetary DSGE models are widely used because they fit the data well and they can be used to address important monetary policy questions. The authors...

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  • White Papers // Jun 2010

    Composition Of Wealth, Conditioning Information, And The Cross-Section Of Stock Returns

    The author tests conditional implications of linear asset pricing models in which variables reflecting changing composition of total wealth capture time-variation in the consumption risk exposures of asset returns. The author estimates conditional moments of returns and factor risk prices non-parametrically and show that while the consumption risk of value...

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  • White Papers // Jun 2010

    Oil, Automobiles, And The U.S. Economy: How Much Have Things Really Changed?

    This paper studies the impact of oil shocks on the U.S. economy - and on the motor vehicle industry in particular - and re-examines whether the relationship has changed over time. The authors find remarkable stability in the response of aggregate real variables to oil shocks once they account for...

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  • White Papers // Jun 2010

    Adverse Selection, Reputation And Sudden Collapses In Secondary Loan Markets

    Banks and financial intermediaries that originate loans often sell some of these loans or securitize them in secondary loan markets and hold on to others. New issuances in such secondary markets collapse abruptly on occasion, typically when collateral values used to secure the underlying loans fall. These collapses are viewed...

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  • White Papers // Jun 2010

    Do Global Banks Spread Global Imbalances? The Case Of Asset-Backed Commercial Paper During The Financial Crisis Of 2007-09

    The global imbalance explanation of the financial crisis of 2007-09 suggests that demand for riskless assets from countries with current account surpluses created fragility in countries with current account deficits, most notably, in the United States. The authors examine this explanation by analyzing the geography of Asset-Backed Commercial Paper (ABCP)...

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  • White Papers // Jun 2010

    Suburbanization, Demographic Change And The Consequences For School Finance

    The existing literature on the relationship between the share of elderly in a community and the support for local public education has led to mixed results to date. One potential reason behind this is that the share of elderly in a community is endogenous, and it is very difficult to...

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  • White Papers // Jun 2010

    GHG Targets As Insurance Against Catastrophic Climate Damages

    A critical issue in climate-change economics is the specification of the so-called "Damages function" and its interaction with the unknown uncertainty of catastrophic outcomes. This paper asks how much we might be misled by the economic assessment of climate change when we employ a conventional quadratic damages function and/or a...

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  • White Papers // Jun 2010

    Some Evidence On The Importance Of Sticky Wages

    Nominal wage stickiness is an important component of recent medium-scale structural macroeconomic models, but to date there has been little microeconomic evidence supporting the assumption of sluggish nominal wage adjustment. The authors present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program...

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  • White Papers // Jun 2010

    Dividends, Share Repurchases, And Tax Clienteles: Evidence From The 2003 Reductions In Shareholder Taxes

    This paper jointly evaluates firm-level changes in investor composition and shareholder distributions following a 2003 reduction in the dividend and capital gains tax rates for individuals. The authors find that directors and officers, but not other individual investors, rebalanced their portfolios to maximize after-tax returns in light of the new...

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  • White Papers // Jun 2010

    Uncertainty About Government Policy And Stock Prices

    The authors analyze how changes in government policy affect stock prices. The general equilibrium model features uncertainty about government policy and a government that has both economic and non-economic motives. The government tends to change its policy after performance downturns in the private sector. Stock prices fall at the announcements...

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  • White Papers // Jun 2010

    Monetary Policy In Emerging Markets: A Survey

    The characteristics that distinguish most developing countries, compared to large industrialized countries, include: greater exposure to supply shocks in general and trade volatility in particular, procyclicality of domestic fiscal policy and international finance, lower credibility with respect to both price stability and default risk, and other imperfect institutions. These characteristics...

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  • White Papers // Jun 2010

    The Performance Of Alternative Monetary Regimes

    This paper compares the performance of economies with different monetary regimes during the last quarter century. The conclusions include: There is little evidence that inflation targeting affects performance in advanced economies, but some evidence of benefits in emerging economies; Europe's monetary union has increased intra-European trade and capital flows, but...

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  • White Papers // Jun 2010

    Understanding Policy In The Great Recession: Some Unpleasant Fiscal Arithmetic

    The author uses the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008-2009, to think about fiscal pressures on US inflation, and what sequence of events might surround such inflation. The author emphasizes that a fiscal inflation can come well...

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  • White Papers // Jun 2010

    Competing For Attention In Financial Markets

    Competition for positive attention in financial markets frequently resembles a tournament, where superior relative performance and greater visibility are rewarded with convex payoffs. The authors present a rational expectations model in which firms compete for such positive attention and show that higher competition for this prize makes discretionary disclosure less...

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  • White Papers // Jun 2010

    Are Free Trade Agreements Contagious?

    This paper presents a new model of the domino effect which is used to generate an empirical index of how "Contagious" FTAs are with respect to third nations. The authors test the contagion hypothesis together with alternative specifications of interdependence and other political, economical and geographical determinants of FTA formation....

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  • White Papers // Jun 2010

    Do Sticky Prices Increase Real Exchange Rate Volatility At The Sector Level?

    The authors introduce the real exchange rate volatility curve as a useful device to understand the role of price stickiness in accounting for deviations from the Law of One Price at the sector level. In the presence of both nominal and real shocks, the theory predicts that the real exchange...

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  • White Papers // Jun 2010

    Monetary Theory From A Chinese Historical Perspective

    The authors discuss monetary thought in ancient China from the perspective of Western monetary theory. It sets out the structure of economic activity in the various dynasties of ancient China and emphasizes the differences in monetary structure from Europe (and later North America). Imperial China was a politically integrated structure...

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  • White Papers // Jun 2010

    Overborrowing, Financial Crises And 'Macro-Prudential' Taxes

    This paper studies over-borrowing, financial crises and macro-prudential policy in an equilibrium model of business cycles and asset prices with collateral constraints. Agents in a decentralized competitive equilibrium do not internalize the negative effects of asset fire-sales on the value of other agents' assets and hence they borrow "Too much"...

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  • White Papers // Jun 2010

    The Potential Global And Developing Country Impacts Of Alternative Emission Cuts And Accompanying Mechanisms For The Post Copenhagen Process

    The authors report numerical simulation results using a multiyear global multi country modeling framework which they use to assess the impacts of alternative emissions cuts which will likely come under consideration for the process to follow the December 2009 UNFCCC negotiation in Copenhagen. The Copenhagen Accord sets out prior country...

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  • White Papers // Jun 2010

    Is It Live Or Is It Internet? Experimental Estimates Of The Effects Of Online Instruction On Student Learning

    This paper presents the first experimental evidence on the effects of live versus internet media of instruction. Students in a large introductory microeconomics course at a major research university were randomly assigned to live lectures versus watching these same lectures in an internet setting, where all other factors were the...

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  • White Papers // Jun 2010

    States In Fiscal Distress

    The 2007-2010 recessions have imposed significant fiscal hardships on state and local governments. The result has been state deficits and the need to increase state taxes, cut spending, and withdraws funds from state rainy day accounts. The primary cause of state budget "Gaps" has been the rise in the level...

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  • White Papers // Jun 2010

    Income Inequality, The Median Voter, And The Support For Public Education

    Using a panel of U.S. school districts spanning 1970 - 2000, the authors examine the relationship between income inequality and fiscal support for public education. In contrast with recent theoretical and empirical work suggesting a negative relationship between inequality and public spending, they find results consistent with a median voter...

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  • White Papers // Jun 2010

    Assessing The Incidence And Efficiency Of A Prominent Place Based Policy

    This paper empirically assesses the incidence and efficiency of Round 1 of the federal urban Empowerment Zone (EZ) program using confidential microdata from the Decennial Census and the Longitudinal Business Database. To ground the welfare analysis, the authors develop a heterogeneous agent general equilibrium model in which the distortions generated...

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  • White Papers // Jun 2010

    Optimal Monetary Stabilization Policy

    This paper reviews the theory of optimal monetary stabilization policy, with an emphasis on developments since the publication of Woodford (2003). The structure of optimal policy commitments is considered, both when the objective of stabilization policy is defined by an arbitrarily specified quadratic loss function, and when the objective of...

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  • White Papers // Jun 2010

    The Dynamics Of Optimal Risk Sharing

    The authors study a dynamic-contracting problem involving risk sharing between two parties - the Proposer and the Responder - who invest in a risky asset until an exogenous but random termination time. In any time period they must invest all their wealth in the risky asset, but they can share...

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  • White Papers // Jun 2010

    The Optimal Inflation Rate In New Keynesian Models

    The authors study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. They derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and show that steady-state inflation affects welfare through three distinct channels: steady-state effects,...

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  • White Papers // Jul 2010

    Macroeconomic Conditions And The Puzzles Of Credit Spreads And Capital Structure

    The authors build a dynamic capital structure model that demonstrates how business-cycle variations in expected growth rates, economic uncertainty, and risk premia influence firms' financing and default policies. Countercyclical fluctuations in risk prices, default probabilities, and default losses arise endogenously through firms' responses to the macroeconomic conditions. These co movements...

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  • White Papers // Jul 2010

    Financial Conditions Indexes: A Fresh Look After The Financial Crisis

    This paper explores the link between financial conditions and economic activity. The authors first review existing measures, including both single indicators and composite Financial Conditions Indexes (FCIs). They then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range...

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  • White Papers // Jul 2010

    Managing Markets For Toxic Assets

    The authors present a model in which banks trade toxic assets to raise funds for investment. The toxic assets generate an adverse selection problem and, as a consequence, the interbank asset market provides insufficient liquidity to finance investment. While the best investments are fully funded, socially efficient projects with modest...

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