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Jel Classification:L10 

Working Paper
Embedded Supervision: How to Build Regulation into Blockchain Finance
The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, i.e., a regulatory framework that provides for compliance in tokenized markets to be automatically monitored by reading the market?s ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralized market is modelled that replaces today?s intermediary-based verification of legal data with blockchain-enabled data credibility based on economic consensus. The key results set out the conditions under which the market?s economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger?s data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.
AUTHORS: Auer, Raphael
DATE: 2019-10-01

Working Paper
Inflation and the Gig Economy: Have the Rise of Online Retailing and Self-Employment Disrupted the Phillips Curve?
During the recovery from the Great Recession, inflation did not reach the central bank?s 2 percent objective as quickly as many models had predicted. This coincided with increases in online shopping, which arguably made retail markets more contestable and damped retail inflation. This hypothesis is tested using data on the online share of retail sales, which are incorporated into an econometric model. Results imply that the rise of online retail has flattened the Phillips Curve, reducing the sensitivity of inflation to unemployment rate changes. Improvement in fit from just including the online share is tiny?so far. Other results indicate that market-based price indexes are more sensitive to unemployment than measures such as core PCE, which puts a sizable weight on items with imputed prices that may slowly adjust to market conditions. Further, measures of online sales that internalize substitution between online and traditional mail order sales better help track the impact of online sales on inflation dynamics. {{p}} A complementary factor is the ?gig? economy and the rise of self-employment, which by reducing the bargaining power of labor, could lower the natural rate of unemployment. Model performance and fits are improved using a hybrid approach in which the rise of online sales can flatten the slope of the Phillips Curve by reducing retail pricing power and the prevalence of gig or self-employment can lower the natural rate of unemployment. {{p}} By omitting important structural changes in both goods and labor markets, conventional Phillips Curve models have failed to track how the rise of online retailing has flattened the Phillips Curve and how the rise of the gig economy (self-employment) has lowered the natural rate of unemployment. One notable difference between the price-price and wage-price results is that the combined effects of online shopping and self-employment are more notable on wage inflation than on price inflation. This could plausibly reflect that improvements in information technology may have undermined the pricing power of workers in labor markets to a greater degree than they have affected the pricing power of producers in goods markets.
AUTHORS: Duca, John V.
DATE: 2018-11-16

Working Paper
Beyond the Doomsday Economics of “Proof-of-Work” in Cryptocurrencies
This paper discusses the economics of how Bitcoin achieves data immutability, and thus payment finality, via costly computations, i.e., ?proof-of-work.? Further, it explores what the future might hold for cryptocurrencies modelled on this type of consensus algorithm. The conclusions are, first, that Bitcoin counterfeiting via ?double-spending? attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of ?mining? income via fees as users free-ride on the fees of other transactions in a block and in the subsequent blockchain. Instead, newly minted bitcoins, known as block rewards, have made up the bulk of mining income to date. Looking ahead, these two limitations imply that liquidity is set to fall dramatically as these block rewards are phased out. Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final, unless new technologies are deployed to speed up payment finality. Second-layer solutions such as the Lightning Network might help, but the only fundamental remedy would be to depart from proof-of-work, which would probably require some form of social coordination or institutionalisation.
AUTHORS: Auer, Raphael
DATE: 2019-02-01

Working Paper
The Rise of Exporting By U.S. Firms
Although a great deal of ink has been spilled over the consequences of globalization, we do not yet fully understand the causes of increased worldwide trade. Using confidential microdata from the U.S. Census, we document widespread entry into countries abroad by U.S. firms from 1987 to 2006. We show that this extensive margin growth is unlikely to have been due to significant declines in entry costs. We instead find evidence of large roles for the development of the internet, trade agreements, and foreign income growth in driving these trends.
AUTHORS: McCallum, Andrew H.; Lincoln, William F.
DATE: 2016-02-10

Journal Article
The Visible Hand: The Role of Government in China’s Long-Awaited Industrial Revolution
China is undergoing its long-awaited industrial revolution. There is no shortage of commentary and opinion on this dramatic period, but few have attempted to provide a coherent, in-depth, politicaleconomic framework that explains the fundamental mechanisms behind China?s rapid industrialization. This article reviews the New Stage Theory of economic development put forth by Wen (2016a). It illuminates the critical sequence of developmental stages since the reforms enacted by Deng Xiaoping in 1978: namely, small-scale commercialized agricultural production, proto-industrialization in the countryside, a formal industrial revolution based on mass production of labor-intensive light consumer goods, a sustainable ?industrial trinity? boom in energy/motive power/infrastructure, and a second industrial revolution involving the mass production of heavy industrial goods. This developmental sequence follows essentially the same pattern as Great Britain?s Industrial Revolution, despite sharp differences in political and institutional conditions. One of the key conclusions exemplified by China?s economic rise is that the extent of industrialization is limited by the extent of the market. One of the key strategies behind the creation and nurturing of a continually growing market in China is based on this premise: The free market is a public good that is very costly for nations to create and support. Market creation requires a powerful ?mercantilist? state and the correct sequence of developmental stages; China has been successfully accomplishing its industrialization through these stages, backed by measured, targeted reforms and direct participation from its central and local governments.
AUTHORS: Fortier, George E.; Wen, Yi
DATE: 2016

Working Paper
Firm Dynamics and the Minimum Wage: A Putty-Clay Approach
We document two new facts about the market-level response to minimum wage hikes: firm exit and entry both rise. These results pose a puzzle: canonical models of firm dynamics predict that exit rises but that entry falls. We develop a model of firm dynamics based on putty-clay technology and show that it is consistent with the increase in both exit and entry. The putty-clay model is also consistent with the small short-run employment effects of minimum wage hikes commonly found in empirical work. However, unlike monopsony-based explanations for small short-run employment effects, the model implies that the efficiency consequences of minimum wages are potentially large.
AUTHORS: Aaronson, Daniel; French, Eric; Sorkin, Isaac
DATE: 2013-12-14

Working Paper
Firm Networks and Asset Returns
This paper argues that changes in the propagation of idiosyncratic shocks along firm networks are important to understanding variations in asset returns. When calibrated to match key features of supplier-customer networks in the United States, an equilibrium model in which investors have recursive preferences and firms are interlinked via enduring relationships generates long-run consumption risks. Additionally, the model matches cross-sectional patterns of portfolio returns sorted by network centrality, a feature unaccounted for by standard asset pricing models.
AUTHORS: Ramirez, Carlos
DATE: 2017-01

Working Paper
The Effect of Common Ownership on Profits : Evidence From the U.S. Banking Industry
Theory predicts that "common ownership" (ownership of rivals by a common shareholder) can be anticompetitive because it reduces the weight firms place on their own profits and shifts weight toward rival firms held by common shareholders. In this paper we use accounting data from the banking industry to examine empirically whether shifts in the profit weights are associated with shifts in profits. We present the distribution of a wide range of estimates that vary the specification, sample restrictions, and assumptions used to calculate the profit weights. The distribution of estimates is roughly centered around zero, but we find statistically significant estimates in either direction in some cases. Economically, most estimates are fairly small. Our interpretation of these findings is that there is little evidence for economically important effects of common ownership on profits in the banking industry.
AUTHORS: Gramlich, Jacob P.; Grundl, Serafin J.
DATE: 2018-10-03

Working Paper
Estimating the Competitive Effects of Common Ownership
If managers maximize the payoffs of their shareholders rather than firm profits, then it may be anticompetitive for a shareholder to own competing firms. This is because a manager?s objective function may place weight on profits of competitors who are held by the same shareholder. Recent research found evidence that common ownership by diversified institutional investors is anticompetitive by showing that prices in the airline and banking industries are related to generalized versions of the Herfindahl-Hirschman Index (HHI) that account for common ownership. In this paper we propose an alternative approach to estimating the competitive effects of common ownership that relates prices and quantities directly to the weights that such managers may be placing on the profits of their rivals. We argue that this approach has several advantages. First, the approach does not inherit the endogeneity problems of HHI regressions, which arise because HHI measures are functions of quantities. Second, because we treat quantities as outcomes we can look for competitive effects of common ownership on both prices and quantities. Third, while concentration measures vary only at the market-time level, the profit weights also vary at the firm level, which allows us to control for a richer set of unobservables. We apply this approach to data from the banking industry. Our empirical findings are mixed, though they?re preliminary as we investigate irregularities in ownership data (Anderson and Brockman (2016)). The sign of the estimated effect is sensitive to the specification. Economically, estimated effects on prices and quantities are fairly small.
AUTHORS: Gramlich, Jacob P.; Grundl, Serafin J.
DATE: 2017-02-19

Working Paper
Macroeconomic Implications of Uniform Pricing
We compile a new database of grocery prices in Argentina, with over 9 million observations per day. We find uniform pricing both within and across regions?i.e., product prices almost do not vary within stores of a chain. Uniform pricing implies that prices would not change with regional conditions or shocks, particularly so if chains operate in several regions. We confirm this hypothesis using employment data. While prices in stores of chains operating almost exclusively in one region do react to changes in regional employment, stores of chains that operate in many regions do not seem to react to local labor market conditions. We study the impact of uniform pricing on estimates of local and aggregate consumption elasticities in a tractable two-region model in which firms have to set the same price in all regions. The estimated model predicts an almost one-third larger elasticity of consumption to a regional than an aggregate income shock because prices adjust more in response to aggregate shocks. This result highlights that some caution may be necessary when using regional shocks to estimate aggregate elasticities, particularly when the relevant prices are set uniformly across regions.
AUTHORS: Daruich, Diego; Kozlowski, Julian
DATE: 2019-09-18


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