We explore the term structures of claims to a variety of cash flows: US government bonds (claims to dollars), foreign government bonds (claims to foreign currency), inflation-adjusted bonds (claims to the price index), and equity (claims to future equity indexes or dividends). Average term structures reflect the dynamics of the dollar pricing kernel, of cash flow growth, and of their interaction. We use simple models to illustrate how relations between the two components can deliver term structures with a wide range of levels and shapes.
Term Structures of Asset Prices and Returns -- by David Backus, Nina Boyarchenko, Mikhail Chernov
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Coordinated Noise Trading: Evidence from Pension Fund Reallocations -- by Zhi Da, Borja Larrain, Clemens Sialm, Jose Tessada
We document a novel channel through which coordinated noise trading exerts externalities on financial markets dominated by institutional investors. We exploit a unique set of events where Chilean pension fund investors followed an influential financial advisory firm that recommended frequent switches between equity and bond funds. The recommendations, which mostly followed short-term trends, generated large and coordinated fund flows. These flows resulted in substantial price pressure and increased volatility in financial markets. Pension funds increased cash holdings as a response. Our findings suggest that giving retirement savers unconstrained reallocation opportunities may exert negative externalities on financial markets.
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The Impact of Innovation in the Multinational Firm -- by L. Kamran Bilir, Eduardo Morales
When firms operate production plants in multiple countries, technological improvements developed in one country may be shared with firm sites abroad for efficiency gain. We develop a dynamic model that allows for such intrafirm transfer, and apply it to measure the impact of innovation on performance for a panel of U.S. multinationals. Our estimates indicate U.S. parent R&D raises performance significantly at firm locations abroad, and also complements R&D by affiliates. Parent R&D is a substantially more important determinant of firm performance than affiliate R&D. We identify these R&D effects using variation in location-specific innovation policies.
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Temporary Migration and Endogenous Risk Sharing in Village India -- by Melanie Morten
When people can self-insure via migration, they may have less need for informal risk sharing. At the same time, informal insurance may reduce the need to migrate. To understand the joint determination of migration and risk sharing I study a dynamic model of risk sharing with limited commitment frictions and endogenous temporary migration. First, I characterize the model. I demonstrate theoretically how migration may decrease risk sharing. I decompose the welfare effect of migration into the change in income and the change in the endogenous structure of insurance. I then show how risk sharing alters the returns to migration. Second, I structurally estimate the model using the new (2001-2004) ICRISAT panel from rural India. The estimation yields: (1) improving access to risk sharing reduces migration by 21 percentage points; (2) reducing the cost of migration reduces risk sharing by 8 percentage points; (3) contrasting endogenous to exogenous risk sharing, the consumption-equivalent gain from reducing migration costs is 18.9 percentage points lower. Third, I introduce a rural employment scheme. The policy reduces migration and decreases risk sharing. The welfare gain of the policy is 55-70% lower after household risk sharing and migration responses are considered
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Paving the Way to Development: Costly Migration and Labor Market Integration -- by Melanie Morten, Jaqueline Oliveira
How integrated are labor markets within a country? Labor mobility is key to the integration of local labor markets and therefore to understanding the efficacy of policies to reduce regional inequality. We present a comprehensive framework for understanding migration decisions, focusing on the costs of migrating. We construct and then estimate a spatial equilibrium model where mobility is determined not only by idiosyncratic tastes, but also by moving costs that are origin-destination dependent. We use rich data on the inter-municipality moves of 18 million people together with exogenous variation in the road network caused by the construction of a capital city to identify the bilateral costs of moving between two regions. The mean observed migration cost is between 0.8-1.2 times the mean wage. 84% of the migration cost is a fixed cost, 3.5% depends on the distance between locations, and 9.6% is dependent on the travel time on the road. This imperfect integration of labor markets has two key implications. First, costly migration generates heterogeneity in regional responses to economic shocks. A region 10% more connected will have a 5.6 percentage point higher population elasticity to wage shocks. Second, costly migration changes the incidence of regional shocks. We estimate that 37% of the total incidence of a shock falls on residents, compared to 1% in a model where migration is costless. Our results have important implications for understanding the impact of economic development as well as the impact of place-based development policies.
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Can Currency Competition Work? -- by Jesus Fernandez-Villaverde, Daniel Sanches
Can competition among privately issued fiat currencies such as Bitcoin or Ethereum work? Only sometimes. To show this, we build a model of competition among privately issued fiat currencies. We modify the current workhorse of monetary economics, the Lagos-Wright environment, by including entrepreneurs who can issue their own fiat currencies in order to maximize their utility. Otherwise, the model is standard. We show that there exists an equilibrium in which price stability is consistent with competing private monies, but also that there exists a continuum of equilibrium trajectories with the property that the value of private currencies monotonically converges to zero. These latter equilibria disappear, however, when we introduce productive capital. We also investigate the properties of hybrid monetary arrangements with private and government monies, of automata issuing money, and the role of network effects.
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Optimal Contracting with Subjective Evaluation: The Effects of Timing, Malfeasance and Guile -- by W. Bentley MacLeod, Teck Yong Tan
We introduce a general Principal-Agent model with subjective evaluation and malfeasance characterized by two-sided asymmetric information on performance that allows for an arbitrary information structure. Two generic contract forms are studied. An authority contract has the Principal reveal his information before the Agent responds with her information. Under such a contract, the Agent's compensation varies only with the Principal's information, while her information is used to punish untruthful behavior by the Principal. Conversely, a sales contract has the Agent reveal her information first. In this case, the Agent's performance incentives are affected by the information revealed by both parties. Because the Agent's information affects her compensation, the information revelation constraints are more complex under a sales contract, and provide a way to integrate Williamson's (1975) notion of guile into agency theory. We find that designing sales contracts for expert agents, such as physicians and financial advisors, are significantly more complex than designing optimal authority contracts.
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Canary in a Coal Mine: Infant Mortality, Property Values, and Tradeoffs Associated with Mid-20th Century Air Pollution -- by Karen Clay, Joshua Lewis, Edson Severnini
Pollution is a common byproduct of economic activity. Although policymakers should account for both the benefits and the negative externalities of polluting activities, it is difficult to identify those who are harmed and those who benefit from them. To overcome this challenge, our paper uses a novel dataset on the mid-20th century expansion of the U.S. power grid to study the costs and the benefits of coal-fired electricity generation. The empirical analysis exploits the timing of coal-fired power plant openings and annual variation in plant-level coal consumption from 1938 to 1962, when emissions were virtually unregulated. Pollution from the burning of coal for electricity generation is shown to have quantitatively important and nonlinear effects on county-level infant mortality rates. By 1962, it was responsible for 3,500 infant deaths per year, over one death per thousand live births. These effects are even larger at lower levels of coal consumption. We also find evidence of clear tradeoffs associated with coal-fired electricity generation. For counties with low access to electricity in the baseline, increases in local power plant coal consumption reduced infant mortality and increased housing values and rental prices. For counties with near universal access to electricity in the baseline, increases in coal consumption by power plants led to higher infant mortality rates, and lower housing values and rental prices. These results highlight the importance of considering both the costs and benefits of polluting activities, and suggest that demand for policy intervention may emerge only when the negative externalities are significantly larger than the perceived benefits.
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Differences in Quarterly Utilization-Adjusted TFP by Vintage, with an Application to News Shocks -- by Eric R. Sims
This paper documents large differences across vintages in the properties of the widely-used quarterly utilization-adjusted TFP series produced by Fernald (2014), who provides updated data each quarter on his website. The most recent vintage of the adjusted TFP series has correlations with earlier vintages of the series that are less than 0.6. Compared to earlier vintages, the most recent vintage of the adjusted TFP data is more weakly correlated with output and more strongly negatively correlated with hours worked. I revisit the empirical analysis from Barsky and Sims (2011), who use an earlier vintage of Fernald's adjusted TFP data to identify impulse responses to news shocks about future productivity in a structural VAR. The vintage of adjusted TFP data matters for their estimated impulse responses, and in some specifications the differences using the most recent vintage of the adjusted TFP data are qualitatively large in a way that is more favorable to theories of news-driven business cycles.
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Corporate Resilience to Banking Crises: The Roles of Trust and Trade Credit -- by Ross Levine, Chen Lin, Wensi Xie
Are firms more resilient to systemic banking crises in economies with higher levels of social trust? Using firm-level data in 34 countries from 1990 through 2011, we find that liquidity-dependent firms in high-trust countries obtain more trade credit and suffer smaller drops in profits and employment during banking crises than similar firms in low-trust economies. The results are consistent with the view that when banking crises block the normal banking-lending channel, greater social trust facilitates access to informal finance, cushioning the effects of these crises on corporate profits and employment.
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The Deposits Channel of Monetary Policy -- by Itamar Drechsler, Alexi Savov, Philipp Schnabl
We propose and test a new channel for the transmission of monetary policy. We show that when the Fed funds rate increases, banks widen the interest spreads they charge on deposits, and deposits flow out of the banking system. We present a model in which imperfect competition among banks gives rise to these relationships. An increase in the nominal interest rate increases banks' effective market power, inducing them to increase deposit spreads. Households respond by substituting away from deposits into less liquid but higher-yielding assets. Using branch-level data on all U.S. banks, we show that following an increase in the Fed funds rate, deposit spreads increase by more, and deposit supply falls by more, in areas with less deposit competition. We control for changes in banks' lending opportunities by comparing branches of the same bank. We control for changes in macroeconomic conditions by showing that deposit spreads widen immediately after a rate change, even if it is fully expected. Our results imply that monetary policy has a significant impact on how the financial system is funded, on the quantity of safe and liquid assets it produces, and on its lending to the real economy.
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Learning, Career Paths, and the Distribution of Wages -- by Santiago Caicedo, Robert E. Lucas, Jr., Esteban Rossi-Hansberg
We develop a theory of career paths and earnings in an economy in which agents organize in production hierarchies. Agents climb these organizational hierarchies as they learn stochastically from other individuals. Earnings grow over time as agents acquire knowledge and occupy positions with larger numbers of subordinates. We contrast these and other implications of the theory with U.S. census data for the period 1990 to 2010. The model matches well the Lorenz curve of earnings as well as the observed mean experience-earnings profiles. We show that the increase in wage inequality over this period can be rationalized with a shift in the distribution of the complexity and profitability of technologies relative to the distribution of knowledge in the population.
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Levered Returns -- by Ivo Welch
Do financial markets properly reflect leverage? Unlike Gomes and Schmid (2010) who examine this question with a structural approach (using long-term monthly stock characteristics), my paper examines it with a quasi-experimental approach (using short-term a discrete event). After a firm has declared a dividend (i.e., after the news release), but in the few days that precede the payment date, an investor in the traded equity owns a claim to the dividend cash plus the remaining firm equity within the corporate shell. After the payment date, the shell contains only the dividend-sans-cash firm equity. The empirical evidence confirms rational increases in volatilities but shows unexpected decreases in average returns. The best explanation is behavioral.
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Faculty Preferences over Unionization: Evidence from Open Letters at Two Research Universities -- by Joel Waldfogel
What determines employee preferences for unionizing their workplaces? A substantial literature addresses this question with surveys on worker attitudes and pay. Unionization drives at the Universities of Minnesota and Washington have given rise to open letters of support or opposition from over 1,000 faculty at Washington and support from over 200 at Minnesota. Combining these expressions with publicly available data on salary, job titles, department affiliation, research productivity, teaching success, and political contributions from over 5,000 faculty, we provide new estimates of the determinants of faculty preferences for unionization at research universities. We find that faculty with higher pay and greater research productivity are less supportive of unionization, even after controlling for job title and department. Attitudes matter as well: after accounting for pay and productivity, faculty in fields documented elsewhere to have more politically liberal participants are more likely to support unionization.
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The Real Effects of Liquidity During the Financial Crisis: Evidence from Automobiles -- by Efraim Benmelech, Ralf R. Meisenzahl, Rodney Ramcharan
Illiquidity in short-term credit markets during the financial crisis might have severely curtailed the supply of non-bank consumer credit. Using a new data set linking every car sold in the United States to the credit supplier involved in each transaction, we find that the collapse of the asset-backed commercial paper market reduced the financing capacity of such non-bank lenders as captive leasing companies in the automobile industry. As a result, car sales in counties that traditionally depended on non-bank lenders declined sharply. Although other lenders increased their supply of credit, the net aggregate effect of illiquidity on car sales is large and negative. We conclude that the decline in auto sales during the financial crisis was caused in part by a credit supply shock driven by the illiquidity of the most important providers of consumer finance in the auto loan market. These results also imply that interventions aimed at arresting illiquidity in short-term credit markets might have helped to contain the real effects of the crisis.
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Measuring Openness to Trade -- by Michael E. Waugh, B. Ravikumar
In this paper we derive a new measure of openness--the trade potential index--that quantifies the potential gains from trade as a simple function of data. Using a standard multicountry trade model, we measure openness by a country's potential welfare gain from moving to a world with frictionless trade. In this model, a country's trade potential depends on only the trade elasticity and two observable statistics: the country's home trade share and its income level. Quantitatively, poor countries have greater potential gains from trade relative to rich countries, while their welfare costs of autarky are similar. This leads us to infer that rich countries are more open to trade. Our trade potential index correlates strongly with estimates of trade costs, while both the welfare cost of autarky and the volume of trade exhibit correlate weakly with trade costs. Thus, our measure of openness is informative about the underlying trade frictions.
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Uninformative Feedback and Risk Taking: Evidence from Retail Forex Trading -- by Itzhak Ben-David, Justin Birru, Viktor Prokopenya
We document evidence consistent with retail day traders in the Forex market attributing random success to their own skill and, as a consequence, increasing risk taking. Although past performance does not predict future success for these traders, traders increase trade sizes, trade size variability, and number of trades with gains, and less with losses. There is a large discontinuity in all of these trading variables around zero past week returns: e.g., traders increase their trade size dramatically following winning weeks, relative to losing weeks. The effects are stronger for novice traders, consistent with more intense "learning" in early trading periods.
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The Global Spatial Distribution of Economic Activity: Nature, History, and the Role of Trade -- by J. Vernon Henderson, Adam Storeygard, Tim L. Squires, David N. Weil
We study the distribution of economic activity, as proxied by lights at night, across 250,000 grid cells of average area 560 square kilometers. We first document that nearly half of the variation can be explained by a parsimonious set of physical geography attributes. A full set of country indicators only explains a further 10%. When we divide geographic characteristics into two groups, those primarily important for agriculture and those primarily important for trade, we find that the agriculture variables have relatively more explanatory power in countries that developed early and the trade variables have relatively more in countries that developed late, despite the fact that the latter group of countries are far more dependent on agriculture today. We explain this apparent puzzle in a model in which two technological shocks occur, one increasing agricultural productivity and the other decreasing transportation costs, and in which agglomeration economies lead to persistence in urban locations. In countries that developed early, structural transformation due to rising agricultural productivity began at a time when transport costs were still relatively high, so urban agglomerations were localized in agricultural regions. When transport costs fell, these local agglomerations persisted. In late developing countries, transport costs fell well before structural transformation. To exploit urban scale economies, manufacturing agglomerated in relatively few, often coastal, locations. With structural transformation, these initial coastal locations grew, without formation of more cities in the agricultural interior.
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A Conceptual Framework for Understanding Critical Transitions -- by Lee J. Alston, Marcus Andre Melo, Bernardo Mueller, Carlos Pereira
Critical transitions for a country are historical periods when the powerful organizations in a country shift from one set of beliefs about how institutions (the formal and informal rules of the game) will affect outcomes to a new set of beliefs. Critical transitions can lead a country toward more openness politically and economically or toward a more exclusionary society. Economic and political development is contextual; that is, there is no recipe. Periods of relative persistence are the norm with changes in institutions at the margin. We develop a framework consisting of several interconnected relatively unexplored concepts that we first define in a static context and then utilize to show how they produce a dynamic of institutional change or persistence. The key concepts include: windows of opportunity, beliefs, and leadership. Our major contribution is wedding the concepts of windows of opportunity, beliefs, and leadership to the dominant network, institutions, and economic and political outcomes to form a dynamic. We apply the framework illustratively to understand economic and political development in Argentina over the past 100 years.
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Crash Beliefs From Investor Surveys -- by William N. Goetzmann, Dasol Kim, Robert J. Shiller
Historical data suggest that the base rate for a severe, single-day stock market crash is relatively low. Surveys of individual and institutional investors, conducted regularly over a 26 year period in the United States, show that they assess the probability to be much higher. We examine the factors that influence investor responses and test the role of media influence. We find evidence consistent with an availability bias. Recent market declines and adverse market events made salient by the financial press are associated with higher subjective crash probabilities. Non-market-related, rare disasters are also associated with higher subjective crash probabilities.
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