As the nation's economy goes, so goes Minnesota's
Time to plan and aggregate fluctuations
This article investigates the business cycle implications of the planning phase of business investment projects. Time to plan is built into a Kydland-Prescott time-to-build model, which assumes that investment projects take four periods to complete. In the Kydland-Prescott time-to-build model, resources for these projects flow uniformly across the four periods; in the time-to-plan model, few resources are used in the first period. The investigation determines that incorporating time to plan in this way improves the model's ability to account for three key features of U.S. business cycles: ...
Algorithms for explaining forecast revisions
Forecasts are routinely revised, and these revisions are often the subject of informal analysis and discussion. This paper argues (1) that forecast revisions are analyzed because they help forecasters and forecast users to evaluate forecasts and forecasting procedures, and (2) that these analyses can be sharpened by using the forecasting model to systematically express its forecast revision as the sum of components identified with specific subsets of new information, such as data revisions and forecast errors. An algorithm for this purpose is explained and illustrated.
More growth ahead for Ninth District states
Vector autoregression evidence on monetarism: another look at the robustness debate
This paper is a case study of the use of vector autoregression (VAR) models to test economic theories. It focuses on the work of Christopher A. Sims, who in 1980 found that relationships in economic data generated by a small VAR model were inconsistent with those implied by a simple form of monetarist theory. The paper describes the work of researchers who criticized Sims' results as not robust and Sims' response to these critics. The paper reexamines all of this work by estimating hundreds of variations of Sims' model. The paper concludes that both Sims and his critics are right: Sims' ...
Thoughts on the Fed's role in the payments system
2000 Annual Report Essay
The role of damage-contingent contracts in allocating the risks of natural catastrophes
The distinguishing feature of natural-catastrophe risk is claimed to be aggregate risk. Because such risk is encompassed in the general competitive model, it seems to pose no new theoretical challenge. However, that model has markets contingent on exogenous events, while the actual economy seems to be developing mainly markets contingent on the level of total damage. In the context of a model with aggregate risk and endogenous total damage, a notion of competitive markets contingent on total damage is formulated. That notion implies that such markets achieve the same (efficient) risk sharing ...
The role of non-owner-occupied homes in the current housing and foreclosure cycle
Non-occupant homeowners differ from owner occupants in that they tend to have lower-risk credit characteristics, such as higher credit scores, but may also have weaker incentives to maintain mortgage payments when housing values fall. During the recent housing boom, the share of mortgage borrowing by non-occupant owners was relatively high in states where home values appreciated relatively rapidly. After the housing boom, foreclosures on non-occupant mortgages in several Midwestern and Northeastern states reflected primarily a high rate of foreclosure per mortgage, not a high volume of ...
Accounting for regional migration patterns and homeownership disparities in the Hmong-American refugee community, 1980-2000
Hmong refugees began arriving in significant numbers in the United States in the late 1970s. Compared to typical immigrants, Hmong-Americans came with few financial, labor market, or co-ethnic support factors in favor of their economic success in the United States. Focusing on homeownership as an indicator of economic assimilation, we show that indeed the overall Hmong-American homeownership rate was initially very low but had converged, by 2000, to a level typical for U.S. immigrants of equivalent time in country. Over the same period, however, wide regional gaps in Hmong-American ...
The economics of catastrophe risks are fundamentally different from those of risks covered by standard insurance contracts. Size alone is not necessarily the critical difference, nor is the sporadic and unpredictable nature of catastrophes. The key unconventional features needed to deal with the large, time-varying, asymmetric risks inherent in catastrophes are: - between-group trades across time, not just within-group, pay-as-you-go risk pooling; - in normal times, payments by the risk-prone group to the relatively safe group; - when catastrophe strikes, large payments to the risk-prone ...