PDFHuman Capital Dynamics and the U.S. Labor Market
By Jun Nie and Lei Fang
RWP 13-10, January 2014

The high U.S. unemployment rate after the Great Recession is usually considered as a result of changes in factors influencing either the demand side or the supply side of the labor market. However, no matter what factors have caused the changes in the unemployment rate, these factors should have influenced workers' and firms' decisions. Therefore, it is important to take into account workers' endogenous responses to changes in various factors when seeking to understand how these factors affect the unemployment rate. To address this issue, we estimate a Mortensen-Pissarides style labor-market matching model with endogenous separation decisions and stochastic changes in workers' human capital. We study how agents' endogenous choices vary with changes in the exogenous shocks and changes in labor-market policy in the context of human capital dynamics. There are four main findings. First, once workers have accounted for and are able to optimally respond to possible human capital loss, the unemployment rate in an economy with human capital loss during unemployment will not be higher than in an economy with no human capital loss. The reason is that the increase in the unemployment rate led by human capital loss is more than o set by workers' endogenous responses to prevent them from being unemployed. Second, human capital accumulation on the job is more important than human capital loss during unemployment for both the unemployment rate and output. Third, workers' endogenous separation rates will decline when job finding rates fall. Fourth, taking into account the endogenous responses, UI extensions contributed 0.5 percentage point to the increase in the aggregate unemployment rate in the 2008-2012 period.

PDFWealth Distribution with State-dependent Risk Aversion
By Rong-Wei Chu, Jun Nie and Bei Zhang
RWP 13-09, January 2014

A growing body of literature has suggested that agents' risk attitudes may not be constant and are correlated with factors such as wealth. We introduce state-dependent risk aversion into Aiyagari's (1994) heterogenous-agent version of standard neoclassical growth model with uninsurable idiosyncratic shocks to earning. We first quantitatively show the relationships among risk aversion, saving rate, equilibrium interest rate and wealth distribution. In particular, we show that if agent's risk aversion increases with wealth, the model predicts a larger wealth inequality, while assuming risk decreases with wealth leads to a smaller wealth inequality. We then use experimental data to estimate how risk aversion is correlated with an individual's wealth. We found that the relationship between risk aversion and wealth is hump-shaped. That is, risk aversion first increases with an individual's wealth and then decreases with it. Using the same model, we quantify the implication of this relationship between risk aversion and wealth on wealth inequality. The results show that the overall wealth inequality changes very little compared to the case with constant risk aversion. This is because, though the poorest agents save less, which increases wealth inequality, the richest agents also save less, which reduces the wealth inequality. Putting these two together, it leaves the overall wealth inequality implied by the model similar to that of the case of constant risk aversion.

PDFKinked Demand Curves, the Natural Rate Hypothesis, and Macroeconomic Stability
By Takushi Kurozumi and Willem Van Zandweghe
RWP 13-08, June 2013; updated February 2015

In the presence of staggered price setting, high trend inflation induces a large deviation of steady-state output from its natural rate and indeterminacy of equilibrium under the Taylor rule. This paper examines the implications of a ''smoothed-off'' kink in demand curves for the natural rate hypothesis and macroeconomic stability using a canonical model with staggered price setting, and sheds light on the relationship between the hypothesis and the Taylor principle. An empirically plausible calibration of the model shows that the kink in demand curves mitigates the influence of price dispersion on aggregate output, thereby ensuring that the violation of the natural rate hypothesis is minor and preventing fluctuations driven by self-fulfilling expectations under the Taylor rule.

PDFRural Wealth Creation and Emerging Energy Industries: Lease and Royalty Payments to Farm Households and Businesses
By Jeremy G. Weber, Jason P. Brown, and John Pender
RWP 13-07, June 2013

New technologies for accessing energy resources, changes in global energy markets, and government policies have encouraged growth in the natural gas and wind industries in the 2000s. The growth has offered new opportunities for wealth creation in many rural areas. At a local level, households who own land or mineral rights can benefit from energy development through lease and royalty payments. Using nationally-representative data on U.S. farms from 2011, we assess the consumption, investment, and wealth implications of the $2.3 billion in lease and royalty payments that energy companies paid to farm businesses. We estimate that the savings of current energy payments combined with the effect of payments on land values added $104,000 in wealth for the average recipient farm.

PDFCreditor Recovery: The Macroeconomic Dependence of Industry Equilibrium
By Nada Mora
RWP 13-06, June 2013; updated December 2014

This paper reconciles industry conditions with the state of the economy in driving asset liquidation values and, therefore, recovery rates on defaulted debt securities. Macroeconomic effects matter but they operate differentially at the industry level. I find that industries whose sales growth is more correlated with GDP growth recover less during recessions. And industries that are more dependent on external finance recover more when the stock market rises. Direct measures of industry distress and industry fundamental value, in addition to measures of bond market illiquidity, enter with reduced economic and statistical significance once the constraint that the macroeconomy should have a uniform effect is relaxed. The results of this paper are not incompatible with the industry-equilibrium view put forward by Shleifer and Vishny (1992) and others, but it unmasks a channel of transmission from the macroeconomy.

PDFPredicting Recessions with Leading Indicators: Model Averaging and Selection Over the Business Cycle
By Travis Berge
RWP 13-05, April 2013

This paper evaluates the ability of several commonly followed economic indicators to predict business cycle turning points. As a baseline, forecasts from univariate models are combined by taking averages or by weighting forecasts with model-implied posterior probabilities. These combined forecasts are compared to those from a sophisticated model selection algorithm that allows for nonlinear model specifications. The preferred forecasting model is one that allows for nonlinear behavior across the business cycle and combines information from the yield curve with other indicators, especially at very short and very long horizons.

PDFMonetary Policy Regime Switches and Macroeconomic Dynamics
By Andrew Foerster
RWP 13-04, June 2013; updated November 2014

This paper investigates how different monetary policy regime switching types impact macroeconomic dynamics. Policy switches that either affect the inflation target or the response to inflation deviations from target lead to different determinacy regions and different output, inflation, and interest rate distributions. With regime switching, the standard Taylor Principle breaks down in multiple ways; satisfying the Principle period-by-period is neither necessary nor sufficient for determinacy. Switching inflation targets primarily affects the economy's level, whereas switching inflation responses affects the variance. Even in periods with a fixed monetary policy rule, expectations of future policy switches produce different outcomes depending upon the switching type. Monetary authorities with given inflation objectives need to adjust their policy parameters to counteract expectations of future policy switches.

PDFRevisiting Initial Jobless Claims as a Labor Market Indicator
By John Carter Braxton
RWP 13-03, May 2013; Revised March 2014

Initial jobless claims provide a weekly snapshot of the labor market. While known for being volatile, when put into the appropriate context initial jobless claims provide valuable information on the state of the labor market. This paper introduces a threshold of initial jobless claims that serves as a basis of comparison for the weekly reading of initial jobless claims. Observed initial jobless claims above the threshold are associated with a rising unemployment rate, and vice versa. The results of an out of sample forecasting experiment show that considering the deviation of initial jobless claims from the threshold of initial claims can improve forecasting accuracy of one month ahead unemployment rate forecasts by three times more than using a conventional rule of thumb for initial jobless claims as well as outperform several time series models. The improvements in forecasting accuracy are strongest during recessions. The results of this paper suggest that there could be benefits to producing nowcasting models of the unemployment rate that incorporate initial jobless claims. Finally, as initial jobless claims are a measure of separations and are shown to aid in forecasting the unemployment rate, it appears that separations do play some role in influencing the unemployment rate.

PDFThe Settlement of the United States, 1800 to 2000: The Long Transition Toward Gibrat's Law
By Klaus Desmet and Jordan Rappaport
RWP 13-02, February 2013; updated August 2014

PDFOnline Appendix

This paper studies the long run development of U.S. counties and metro areas from 1800 to 2000. In earlier periods smaller counties converge whereas larger counties diverge. Over time, due to changes in the age composition of locations and net congestion, convergence dissipates and divergence weakens. Gibrat's law emerges gradually without fully attaining it. Our findings suggest that orthogonal growth is a consequence of reaching a steady state population distribution, rather than an explanation of that distribution. A simple one-sector model, with entry of new locations, a growth friction, and decreasing net congestion closely matches these and related dynamics.

PDFPerturbation Methods for Markov-Switching DSGE Models
By Andrew Foerster, Juan Rubio-Ramirez, Dan Waggoner, and Tao Zha
RWP 13-01, February 2013; updated November 2015

This paper develops a general perturbation methodology for constructing high-order approximations to the solutions of Markov-switching DSGE models. We introduce an important and practical idea of partitioning the Markov-switching parameter space so that a steady state is well defined. With this definition, we show that the problem of finding an approximation of any order can be reduced to solving a system of quadratic equations. We propose using the theory of Gröbner bases in searching all the solutions to the quadratic system. This approach allows us to obtain all the approximations and ascertain how many of them are stable. Our methodology is applied to three models to illustrate its feasibility and practicality.