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Newsletter
Interest-only mortgages and speculation in hot housing markets
Even as housing markets have temporarily shut down across the U.S. during the Covid-19 pandemic, housing remains a key sector that contributes disproportionately to fluctuations in overall economic activity and that will likely play an important role as the economy reopens. Interest in this market among research economists and policymakers intensified after the exceptional boom and bust in housing between 2003 and 2008. In this Chicago Fed Letter, we describe research in Barlevy and Fisher (2020)1 that examined patterns in the kinds of mortgages homebuyers took out in different cities during ...
Newsletter
Unit Labor Costs and Inflation in the Non-Housing Service Sector
Inflation remains high, and it is critical to understand the components of inflation. Inflation in core goods has declined over much of the past year. Inflation in housing services remains high, but the growth in rental rates of units available for rent has fallen in recent months. This suggests measured inflation in housing services, which includes rents on both occupied and vacant units, is likely to moderate over the coming year as rents on occupied units catch up to those of vacant units.
Journal Article
Bubbles and Fools
This article reviews the literature on greater-fool theories of bubbles, which argue that bubbles can arise if traders are willing to buy assets they know to be overvalued because they hope to later sell them at a profit to others. The author discusses two approaches that attempt to model this phenomenon and what these approaches imply for economic policy.
Journal Article
Economic theory and asset bubbles
The author summarizes what economic theory tells us about when asset price bubbles can occur and what the welfare implications are from bursting them. In some cases, bursting a bubble may make society worse off by exacerbating the market distortions that give rise to the bubble in the first place.
Working Paper
Characterizations in a random record model with a non-identically distributed initial record
We consider a sequence of random length M of independent absolutely continuous observations Xi, 1 = i = M, where M is geometric, X1 has cdf G, and Xi, i = 2, have cdf F. Let N be the number of upper records and Rn, n = 1, be the nth record value. We show that N is free of F if and only if G(x) = G0(F (x)) for some cdf G0 and that if E (|X2|) is finite so is E |Rn|) for n = 2 whenever N = n or N = n. We prove that the distribution of N along with appropriately chosen subsequences of E(Rn) characterize F and G, and along with subsequences of E Rn - Rn-1) characterize F and G up to a common ...
Working Paper
On Speculative Frenzies and Stabilization Policy
This paper examines whether tasking central banks with leaning against asset booms can conflict with their existing mandates to stabilize goods prices and output. The paper embeds the Harrison and Kreps (1978) model of speculative booms in a monetary model based on Rocheteau, Weill, and Wong (2018). In the model, a speculation shock that generates an asset boom is associated with higher output but a lower price level, unlike aggregate demand shocks that raise both output and prices. This creates a trilemma for central banks in that contemporaneous monetary policy cannot simultaneously ...
Newsletter
Why don't recessions encourage more R&D spending?
Economists sometimes argue that recessions promote activities that ultimately contribute to long-run growth. But evidence suggests research and development, one important source of economic growth, falls rather than rises during recessions, even for firms that do not appear to be credit constrained. The author discusses an alternative explanation for this pattern.
Working Paper
Information acquisition in financial markets: a correction
This note provides a proper example for the mechanism of strategic complementarities proposed in our paper. ; Original paper in Review of Economic Studies, January 2000, v. 67, no.1, p. 79?90.
Working Paper
A Comment on Monetary Policy and Rational Asset Price Bubbles
Galí (2014) showed that a monetary policy rule that raises interest rates in response to bubbles can paradoxically lead to larger bubbles. This comment shows that a central bank that wants to dampen bubbles can always do so by raising interest rates aggressively enough. This result is different from the Miao, Shen and Wang (2019) comment on Galí’s paper. They argue Galí’s model contains additional equilibria in which more aggressive rules dampen bubbles. We show that for these equilibria, more aggressive rules involve threats to raise interest rates more than actual rate increases.
Working Paper
On the timing of innovation in stochastic Schumpeterian growth models
Recent work has revived the Schumpeterian hypothesis that recessions facilitate innovation and growth. But a major source of productivity growth, research and development, is actually procyclical. This paper argues that while it is optimal to concentrate growth enhancing activities in downturns, dynamic spillovers inherent to the R&D process lead private agents to concentrate too much of their R&D activity in booms, precisely when its social cost is highest. Thus, while previous literature has argued recessions promote growth and intertemporal substitution is a desirable consequence of ...