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Working Paper
House prices and risk sharing
We show that homeowners are able to maintain a high level of consumption following job loss or disability in periods of rising house values. However, the consumption drop for consumers who simultaneously lose their job and equity in their houses is substantial. Using data from the Panel Study of Income Dynamics, we verify that homeowners smooth consumption more than renters, and that consumption smoothing improves when houses appreciate in the area of residence. We calibrate and simulate a model of endogenous homeownership and home-equity loans, and show that the model is able to reproduce the patterns in the data quite well.
AUTHORS: Hryshko, Dmytro; Luengo-Prado, Maria Jose; Bent E. Sørensen
DATE: 2009

Working Paper
The Effects of Price Endings on Price Rigidity: Evidence from VAT Changes
We document a causal role for price endings in generating micro and macro price rigidity. Based on micro price data underlying the consumer price index in Israel, we document that most stores have a favored price ending?a final digit, usually a zero or nine, used by a majority of prices in that store?and that these favored price endings are utilized extensively. Using changes to the VAT rate as exogenous cost shocks that affect prices regardless of ending, we find that the frequency of price adjustment for nonfavored endings increases by twice as much as the frequency of adjustment for favored endings in months when the VAT rate changes. In the aggregate, sluggish pass-through of VAT rate changes is due to favored endings; changes in the VAT rate are passed through fully and immediately to nonfavored endings.
AUTHORS: Knotek, Edward S.; Sayag, Doron; Snir, Avichai
DATE: 2019-11-12

Working Paper
Inequality and stability
This paper analyzes how political stability depends on economic factors. Fluctuations in groups' economic capacities and in their abilities to engage in rent-seeking or predatory behavior create periodic incentives for those groups to renege on their social obligations. A constitution remains in force so long as no party wishes to defect to the noncooperative situation, and it is reinstituted as soon as each party finds it to its advantage to revert to cooperation. Partnerships of equals are easier to sustain than are arrangements in which one party is more powerful in some economic or noneconomic trait. In this sense, inequality is bad for social welfare. Surprisingly, perhaps, it is the rich, and not the poor segments of society who in our model pose the threat to the stability of the social order. Using cross-country data, we test and confirm the prediction that most constitutional disruptions should be accompanied by increases in income inequality.
AUTHORS: A. S. Pinto Barbosa; Jovanovic, Boyan; Spiegel, Mark M.
DATE: 1996

Working Paper
Do actions speak louder than words? the response of asset prices to monetary policy actions and statements
We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor--changes in the federal funds rate target-and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with FOMC statements. We measure the effects of these two factors on bond yields and stock prices using a new intraday dataset going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.
AUTHORS: Refet Gürkaynak; Sack, Brian P.; Swanson, Eric T.
DATE: 2004

Working Paper
The Political Origin of Home Bias: The Case of Europe
We show that politics is at the root of the banks-sovereign nexus that exacerbated the Eurozone crisis. First, government-owned banks or banks with politicians in the board of directors display higher home bias in sovereign debt compared to privately-owned banks throughout the 2010-2013 period. Second, only government-owned banks increased the home bias during the sovereign crisis (moral suasion). We exploit the fact that equity injections (bail-outs) by domestic governments were not directly targeted to politically connected banks to show that, upon receiving such assistance, only government-owned banks purchase domestic debt. Moral suasion is stronger in countries under stress.
AUTHORS: Filippo De Marco; Macchiavelli, Marco
DATE: 2016-07-08

Working Paper
Securitization, risk, and the liquidity problem in banking
AUTHORS: Berger, Allen N.; Gregory F. Udell
DATE: 1991

Working Paper
Regulating two-sided markets: an empirical investigation
We study the effect of government encouraged or mandated interchange fee ceilings on consumer and merchant adoption and usage of payment cards in an economy where card acceptance is far from complete. We believe that we are the first to use bank- level data to study the impact of interchange fee regulation. We find that consumer and merchant welfare improved because of increased consumer and merchant adoption leading to greater usage of payment cards. We also find that bank revenues increased when interchange fees were reduced although these results are critically dependent on merchant acceptance being far from complete at the beginning and during the implementation of interchange fee ceilings. In addition, there is most likely a threshold interchange fee below which social welfare decreases although our data currently does not allow us to quantify it.
AUTHORS: Carbo-Valverde, Santiago; Chakravorti, Sujit; Rodriguez-Fernandez, Francisco
DATE: 2009

Working Paper
Macroeconomic derivatives: an initial analysis of market-based macro forecasts, uncertainty, and risk
In September 2002, a new market in "Economic Derivatives" was launched allowing traders to take positions on future values of several macroeconomic data releases. We provide an initial analysis of the prices of these options. We find that market-based measures of expectations are similar to survey-based forecasts, although the market-based measures somewhat more accurately predict financial market responses to surprises in data. These markets also provide implied probabilities of the full range of specific outcomes, allowing us to measure uncertainty, assess its driving forces, and compare this measure of uncertainty with the dispersion of point-estimates among individual forecasters (a measure of disagreement). We also assess the accuracy of market-generated probability density forecasts. A consistent theme is that few of the behavioral anomalies present in surveys of professional forecasts survive in equilibrium, and that these markets are remarkably well calibrated. Finally we assess the role of risk, finding little evidence that risk-aversion drives a wedge between market prices and probabilities in this market.
AUTHORS: Refet S. Gürkaynak; Wolfers, Justin
DATE: 2005

Working Paper
Monetary policy in a small open economy with a preference for robustness
We use robust control techniques to study the effects of model uncertainty on monetary policy in an estimated, semi-structural, small-open-economy model of the U.K. Compared to the closed economy, the presence of an exchange rate channel for monetary policy not only produces new trade-offs for monetary policy, but it also introduces an additional source of specification errors. We find that exchange rate shocks are an important contributor to volatility in the model, and that the exchange rate equation is particularly vulnerable to model misspecification, along with the equation for domestic inflation. However, when policy is set with discretion, the cost of insuring against model misspecification appears reasonably small.
AUTHORS: Dennis, Richard; Leitemo, Kai; Ulf Söderström
DATE: 2007

Working Paper
Terror Externalities and Trade: An Empirical Analysis
We report robust evidence of adverse cross-border externalities from terrorism on trade for over 160 countries from 1976 to 2014. Terrorism in one country spills over to reduce trade in neighboring nations. These externalities arise from higher trade costs due to trade delays and macroeconomic uncertainty.
AUTHORS: Bandyopadhyay, Subhayu; Doucouliagos, Hristos; Pham, Cong S.
DATE: 2019-05-29

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