Working Papers

Authors: Martin Ellison, Charles Brendon

Jan 2018

Abstract

This paper proposes and characterises a new normative solution concept for Kydland and Prescott problems, allowing for a commitment device. A policy choice is dominated if either (a) an alternative exists that is superior to it in a time-consistent subdomain of the constraint set, or (b) an alternative exists that Pareto-dominates it over time. Policies may be time-consistently undominated where time-consistent optimality is not possible. We derive necessary and sufficient conditions for this to be true, and show that these are equivalent to a straightforward but significant change to the first-order conditions that apply under Ramsey policy. Time-consistently undominated policies are an order of magnitude simpler than Ramsey choice, whilst retaining normative appeal. This is illustrated across a range of examples.

JEL Codes: D02, E61

Keywords: Time Consistency; Undominated Policy; Ramsey Policy

Reference: 844

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Authors: Alexander A. J. Wulfers

Jan 2018

Abstract

The Age of Mass Migration came to an end in the interwar period with new American immigration restrictions, but did this end affect some potential migrants more than others? I use previously unanalysed data from passenger lists of ships leaving Bremen, one of the major European ports of emigration, between 1920 and 1933, to identify occupations and skill levels of individual migrants. The main focus of the paper is on the role that policy played in influencing the selection of migrants. I study the American quota laws of 1921, 1924, and 1929, and find that increasingly strict quotas led to an increase in the skill level of migrants as well as a shift from agricultural to manufacturing workers first, and from manufacturing to professional workers later.

JEL Codes: J15, K37, N32, N34

Keywords: immigration policy, skill selection, quotas, United States, Bremen, interwar period

Reference: 161

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Authors: Kevin Hjortshøj O'Rourke, Alan de Bromhead, Alan Fernihough, Markus Lampe

Jan 2018

Abstract

A recent literature explores the nature and causes of the collapse in international trade during 2008 and 2009. The decline was particularly great for automobiles and industrial supplies; it occurred largely along the intensive margin; quantities fell by more than prices; and prices fell less for differentiated products. Do these stylised facts apply to trade collapses more generally? This paper uses detailed, commodity specific information on UK imports between 1929 and 1933, to see to what extent the trade collapses of the Great Depression and Great Recession resembled each other. It also compares the free trading trade collapse of 1929-31 with the protectionist collapse of 1931-3, to see to what extent protection, and gradual recovery from the Great Depression, mattered for UK trade patterns.

JEL Codes: F14, N74

Keywords: Great Depression; Great Recession; trade; protectionism

Reference: 160

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Authors: David Ronayne, Greg Taylor

Jan 2018

Abstract

We study strategic interactions in a market where producers sell to consumers directly as well as via a competitive channel (CC) such as an online marketplace or price comparison website. We show how the size of the competitive channel can influence market outcomes. Equilibrium falls into one of two regimes: either the CC charges low commission and accommodates producers, or it charges high commission and faces strong competition from producers' direct sales channel. Seemingly procompetitive developments that increase the number of prices consumers check can raise prices and reduce consumer surplus. We also use the model to study an active policy issue concerning which channels should be allowed to utilize data about consumers' past purchases.

JEL Codes: JEL D43, D83, L11, M3

Reference: 843

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Authors: Ian Crawford, Laura Blow

Jan 2018

Abstract

We investigate necessary and sufficient nonparametric conditions for mental accounting.

Reference: 842

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Abstract

A new class of marked and weighted empirical processes of residuals is introduced. The framework is general enough to accommodate both stationary and non-stationary regressions as well as a wide class of estimation procedures with applications in misspecification testing and robust statistics. Two applications are presented.

First, we analyze the relationship between truncated moments and linear statistical functionals of residuals. In particular, we show that the asymptotic behaviour of these functionals, expressed as integrals with respect to their empirical distribution functions, can be easily analyzed given the main theorems of the paper. In our context the integrands can be unbounded provided that the underlying distribution meets certain moment conditions. A general first order asymptotic approximation of the statistical functionals is derived and then applied to some cases of interest.

Second, the consequences of using the standard cumulant based normality test for robust regressions are analyzed. We show that the rescaling of the moment based statistic is case dependent, i.e., it depends on the truncation and the estimation method being used. Hence, using the standard least squares normalizing constants in robust regressions will lead to incorrect inferences. However, if appropriate normalizations, which we derive, are used then the test statistic is asymptotically chi-square.

Reference: 841

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Authors: Jonas Harnau

Dec 2017

Abstract

Despite the widespread use of chain-ladder models, so far no theory was available to test for model specification. The popular over-dispersed Poisson model assumes that the over-dispersion is common across the data. A further assumption is that accident year effects do not vary across development years and vice versa. The log-normal chain-ladder model makes similar assumptions. We show that these assumptions can easily be tested and that similar tests can be used in both models. The tests can be implemented in a spreadsheet. We show the implementation in several empirical applications. While the results for the log-normal model are valid in finite samples, those for the over-dispersed Poisson model are asymptotic. We show in a simulation study that the finite sample performance is close to the asymptotic performance.

Keywords: Bartlett test; F-test; over-dispersed Poisson; log-normal

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Authors: H Peyton Young, Mark Paddrik, Sriram Rajan

Nov 2017

Abstract

A major credit shock can induce large intra-day variation margin payments between counterparties in derivatives markets, which may force some participants to default on their payments. These payment shortfalls become amplified as they cascade through the network of exposures. Using detailed DTCC data we model the full network of exposures, the shock-induced payments, the initial margin collected, and liquidity buffers for about 900 firms operating in the U.S. credit default swaps market. We estimate the total amount of contagion, the marginal contribution of each firm to contagion, and the number of defaulting firms for credit shocks of different magnitudes. A novel feature of the model is that it allows for a range of possible responses to balance sheet stress, including delayed or partial payments. These `soft default' options distinguish our approach from conventional network models, which typically assume that full default is triggered whenever the default boundary is breached.

Revised January 2018

JEL Codes: D85, G23, L1

Keywords: Financial networks, contagion, stress testing, credit default swaps

Reference: 839

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Authors: Francesco Zanetti, Luca Gambetti, Dimitris Korobilis, John D. Tsoukalas

Sep 2017

Abstract

A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline signi ficantly, and durable spending rises signi ficantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over inflation while adopting a neutral/accommodative stance in the post-1980 period.

JEL Codes: E20, E32, E43, E52

Keywords: News shocks, Business cycles, VAR models, DSGE models

Reference: 838

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Authors: Inés Moreno de Barreda, Gilat Levy, Ronny Razin

Sep 2017

Abstract

We model the power of media owners to bias readers’ opinions. In particular we consider readers that have “correlation neglect”, i.e., fail to understand that content across news outlets might be correlated. We study how a media owner who controls several outlets can take advantage of the readers’ neglect. Specifically, we show that the owner can manipulate readers’ beliefs even when readers understand the informativeness of news outlet by outlet. The optimal strategy of the owner is to negatively correlate good news and positively correlate bad news. The owner’s power is increasing in the number of outlets she owns but is constrained by the limited attention of readers. Importantly, our analysis suggests several new insights about welfare in media markets. First, measures of media bias have to take into account the correlation between news outlets. Second, media-market competition curbs the ability of owners to bias readers’ beliefs. In particular, we show that readers always benefit from breaking conglomerates, even when all the new media owners share the same bias. Finally, we highlight a potential cost of media diversity. When readers have correlation neglect, diversity in the interests of owners might lower the informativeness of news content.

Reference: 836

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Authors: Daniel Brown, Elisabetta De Cao

Sep 2017

Abstract

In this paper, we show that unemployment increases child neglect in the United States during the period from 2004 to 2012. A one percentage point increase in the unemployment rate leads to a 20 percent increase in neglect. We identify this effect by instrumenting for the county-level unemployment rate with a Bartik instrument, which we create as the weighted average of the national-level unemployment rates across each of twenty industries, where the weights are the county-level fraction of the employed working-age population in each industry at the start of the sample period. An important mechanism behind this effect is that parents lack social and private safety nets. The effect on neglect is smaller in states that introduce longer extensions to unemployment benefits, and is greater in counties where an initially larger fraction of children are not covered by health insurance. We find no evidence that the effect is driven by alcohol consumption or divorce.

JEL Codes: I10, J12, J13, J65, K42

Keywords: child abuse and neglect, unemployment rate, recession, safety net, unemployment insurance

Reference: 837

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Authors: Martin Browning, Ian Crawford, Laura Blow

Sep 2017

Abstract

This paper provides a revealed preference characterisation of quasi-hyperbolic discounting which is designed to be applied to readily-available expenditure surveys. We describe necessary and sufficient conditions for the leading forms of the model and also explore the consequences the restrictions on preferences popularly used in empirical lifecycle consumption models. Using data from a household consumption panel dataset we explore the prevalence of time-inconsistent behaviour. The sophisticated quasi-hyperbolic model provides a signi ficantly more successful account of behaviour than the alternatives considered. We estimate the joint distribution of time preferences and the distribution of discount functions at various time horizons.

JEL Codes: D11, D12, D90

Keywords: Quasi-hyperbolic discounting, revealed preference

Reference: 835

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Authors: Kevin Hjortshøj O'Rourke

Sep 2017

Preliminary version of a paper prepared for IMF-BNM-IMFER Conference on Globalization in the Aftermath of the Crisis and the IMF Economic Review. The research on which this paper is based was in part funded by the European Research Council under the European Union's Seventh Framework Programme (FP7/2007-2013) / ERC grant agreement no. 249546. The paper draws on many collaborations, and I am extremely grateful to my co-authors: Miguel Almunia, Agustin Bénétrix, Roberto Bonfatti, Alan de Bromhead, Barry Eichengreen, Alan Fernihough, Ronald Findlay, William Hynes, David Jacks, Markus Lampe, Gisela Rua, and Jeffrey Williamson. The usual disclaimer applies.

Reference: 159

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Authors: Ferdinand Rauch, Guy Michaels, Dzhamilya Nigmatulina, Tanner Regan, Neeraj Baruah, Amanda Dahlstrand-Rudin

Sep 2017

Abstract

What are the long run consequences of planning and providing basic infrastructure in neighborhoods, where people build their own homes? We study "Sites and Services" projects implemented in seven Tanzanian cities during the 1970s and 1980s, half of which provided infrastructure in previously unpopulated areas (de novo neighborhoods), while the other half upgraded squatter settlements. Using satellite images and surveys from the 2010s, we find that de novo neighborhoods developed better housing than adjacent residential areas (control areas) that were also initially unpopulated. Specifically, de novo neighborhood are more orderly and their buildings have larger footprint areas and are more likely to have multiple stories, as well as connections to electricity and water, basic sanitation and access to roads. And though de novo neighborhoods generally attracted better educated residents than control areas, the educational difference is too small to account for the large difference in residential quality that we find. While we have no natural counterfactual for the upgrading areas, descriptive evidence suggests that they are if anything worse than the control areas.

JEL Codes: R31, O18, R14

Keywords: Urban Economics, Economic Development, Slums, Africa.

Reference: 834

Individual View

Authors: Martin Ellison, Andrew Scott

Sep 2017

Abstract

We construct a new monthly dataset for UK government debt over the period 1694 to 2017 based on price and quantity data for each individual bond issued. This enables us to examine long run fiscal sustainability using the theoretically  relevant variable of the market value of debt, and investigate the historical importance of debt management. We find the general implications of the tax smoothing literature are replicated in our data, especially around financing wars, although we find major shifts over time in how fiscal sustainability is achieved. Before the 20th century, governments continued to pay bond holders a high rate of return and achieved sustainability through running fiscal surpluses but since then governments have relied on low growth adjusted real interest rates. The optimal debt management literature tends to favour the use of long bonds but we find the government would have been better off over the 20th century issuing short bonds. The contrast with the literature occurs because of an upward sloping yield curve and long bonds rarely providing fiscal insurance. This is particularly true during periods of financial crises when falling interest rates lead to sharp rises in the price of long bonds, making them an expensive form of finance. We examine the robustness of our conclusions to liquidity e¤ects, rollover risks, buyback operations and leverage. In general, these do suggest a greater role for long bonds but do not overturn an issuance strategy based mainly on short term bonds.

JEL Codes: E43, E62, H63

Keywords: Debt Management, Fiscal Deficits, Fiscal Policy, Government Debt, Inflation, Maturity, Yield Curve

Reference: 833

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Authors: David Hendry, John Muellbauer

Sep 2017

The adoption as policy models by central banks of representative agent New Keynesian dynamic stochastic general equilibrium models has been widely criticised, including for their simplistic micro-foundations. At the Bank of England, the previous generation of policy models is seen in its 1999 medium-term macro model (MTMM). Instead of improving that model to correct its considerable flaws, many shared by other non-DSGE policy models such as the Federal Reserve’s FRB/US, it was replaced in 2004 by the DSGE-based BEQM. Though this clearly failed during and after the global financial crisis, it was replaced in 2011 by the DSGE COMPASS, complemented by a ‘suite of models’. We provide a general critique of DSGE models for explaining, forecasting and policy analyses at central banks, and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory, rather than seeking to impose simplistic and unrealistic theory.

JEL Codes: E17, E21, E44, E51, E52, E58, G01

Keywords: DSGE, central banks, macroeconomic policy models, finance and the real economy, financial crisis, consumption, credit constraints, household portfolios, asset prices

Reference: 832

Individual View

Our ability to adapt to extreme weather is increasingly relevant as the frequency and intensity of these events alters due to climate change. It is important to understand the effectiveness of adaptation given the uncertainty associated with future climate events. However, there has been little analysis of short-term adaptation efforts. We propose a novel approach of using errors from hurricane forecasts to evaluate short-term hurricane damage mitigation efforts. We construct a statistical model of damages for all hurricanes to strike the continental United States since 1955. While we allow for many possible drivers of damages, using model selection methods we find that a small subset explains most of the variation. We also find evidence supporting short-term adaptation effects prior to a hurricane landfall. Our results show that the 67 percent improvement in hurricane forecasts over the past 60 years is associated with damages being 16-63 percent lower than they otherwise would have been. Accounting for outlying observations narrows this range to 16-24 percent.

JEL Codes: C51, C52, Q51, Q54

Reference: 831

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Authors: Simon Cowan

Aug 2017

Monopoly third-degree price discrimination raises social welfare above the level with a uniform price when direct demand functions have constant curvatures that differ across markets and are below 1, and the maximum willingness to pay is identical across markets.

JEL Codes: D42, L12, L13

Reference: 829

Individual View

Authors: Robert Allen, Ekaterina Khaustova

Aug 2017

The paper measures real wages in St Petersburg, Moscow, and Kursk between 1853 and 1937 and compares them to real wages in Boston, Manchester, Bombay, and Cairo. Russian living standards grew little between 1853 and 1913 and were like Egypt and India. Wages in the UK and USA were 2.5 - 5 times greater. Real wages in Russia almost doubled between 1913 and 1928. When seen in a Russian perspective, this looks like a big advance; when seen internationally, it is much less so. Real wages dropped to their pre-War level between 1928 and 1937 during the industrialization drive.

JEL Codes: D33, J30, N93, N94, P22, P23

Keywords: Russia, real wages, economic development, inequality, revolution

Reference: 158

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Authors: David Ronayne, Daniel Sgroi

Aug 2017

We apply a classical economic categorization of preferences to identify the motivations of dual-users of electronic and traditional cigarettes. The responses of 2,406 U.S. adults (including 413 dual-users) in 2015 were collected using a novel online survey along with a follow-up in 2016 of 143 of these adults (68 dual-users). A sizeable minority of 37% of dual-users reported viewing electronic and conventional cigarettes primarily as complements. Of those who had never smoked or used electronic cigarettes, only 27% thought the complementarity motive would be primary. Dual-user motivations were associated with quit-attempt, cessation methods, gender and age. One year on, there was a positive relationship between the level of complementarity in the dual-user’s motives and their change in self-reported cigarette consumption. It is concluded that the application of a canonical economic classification of preferences may reveal important heterogeneities among the dual-user population.

JEL Codes: I12, I18, D12

Reference: 830

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Authors: John Vickers

Jun 2017

 

Abstract

The paper synthesizes and develops the welfare analysis of regulating relative prices, for example price differences, of which banning price discrimination is a special case. Welfare results are derived directly by convexity arguments using functions of welfare levels. The method is also used to obtain results about e¤ects on consumer surplus.

JEL Codes: D42, L12

Keywords: Price discrimination

Reference: 828

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Authors: Jemima Peppel-Srebrny

Jun 2017

 

Abstract

The reasons for and underlying composition of government budget deficits are often disregarded both by the academic literature about the links between fiscal policy and interest rates and by the policy debate about fiscal sustainability. However, we show that, from the perspective of financial markets, not all budget deficits are created equal: bond markets do discriminate between deficits that are the result of higher government current spending and those that stem from higher government investment, penalising the former significantly more than the latter. To do so, we apply a reduced-form regression approach to a panel of 31 OECD economies from 1960 to 2014 with data from the European Commission on the decomposition of the government budget deficit into its current spending, investment spending and revenue components. Quantitatively, based on our preferred specifications, a higher deficit solely due to higher government investment would in fact decrease long-term government bond yields. These findings suggest that austerity policies should focus more on current spending than investment spending and that fiscal rules in individual countries and monetary unions should distinguish budget deficits that are the result of investment from those that are not.

JEL Codes: E44, E62, H54, H62

Keywords: Government budget deficits, government investment, fiscal policy, longterm interest rates, OECD countries

Reference: 827

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Authors: H Peyton Young, Mark Paddrik

Jun 2017

 

Abstract

We propose a general framework for estimating the likelihood of default by central counterparties (CCP) in derivatives markets. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the credit default swaps (CDS) market under shocks that are similar in magnitude to the Federal Reserve's 2015 CCAR trading book shock. The analysis indicates that the main U.S. CCP for this market (ICE Clear Credit) could be more vulnerable than conventional stress testing approaches suggest.

JEL Codes: D85, G01, G17, L14

Keywords: Credit default swaps, central counterparties, stress testing, systemic risk, financial networks

Reference: 826

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Authors: Daniel Susskind

May 2017

In the past 15 years a ‘task-based’ literature has emerged, exploring the consequences of technological change on the labour market. This literature relies on a particular understanding of the capabilities of machines – known as the ‘ALM hypothesis’. However, this hypothesis has often led the literature to underestimate these capabilities. Tasks that were believed to be out of reach of automation can now be automated. In this paper I set out two distinct explanations for why these capabilities were underestimated – one that is explored in the recent literature and maintains the ALM hypothesis, and a new explanation that challenges it. I propose a new hypothesis that nests the ALM hypothesis as a special case.

JEL Codes: J20; J21; J23; J24; J30; J31; 031; 033

Reference: 825

Individual View

Authors: Ewout Depauw & Deborah Oxley

May 2017

Does adult stature capture conditions at birth or at some other stage in the growth cycle? Anthropometrics is lauded as a method for capturing net nutritional status over all the growing years. However, it is frequently assumed that conditions at birth were most influential. Was this true for historical populations? This paper examines the heights of Belgian men born between 1800-76 to tease apart which moments of growth were most sensitive to disruption and reflected in final heights. It exploits two proximate crises in 1846-49 and 1853-56 as shocks that permit age effects to be revealed. These are affirmed through a study of food prices and death rates. Both approaches suggest a shift of the critical moment away from the first few years of life and towards the adolescent growth spurt as the most influential on terminal stature. Furthermore, just as height is accumulated over the growing years, conditions influencing growth need to be understood cumulatively. Economic conditions at the time of birth were not explanatory, but their collective effects from ages 11 to 18 years were strongly influential. Then, both health and nutrition mattered, in shifting degrees. Teenagers, not toddlers, should be our guides to the past.

Keywords: child growth, crisis effects, early-life health, height, nutrition, prisoners, puberty

Reference: 157

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