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Bank:Federal Reserve Bank of Cleveland 

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
On the Optimality of Differential Asset Taxation
How should a utilitarian government balance redistributive concerns with the need to provide incentives for business creation and investment? Should they tax business profits, the (risk-free) savings of owners, or some combination of both? To address this question, this paper presents a model in which the desirability of differential asset taxation emerges endogenously from the presence of agency frictions. I consider an environment in which entrepreneurs hire workers and rent capital to produce output subject to privately observed shocks and have the ability to both divert capital to private consumption and abscond with a fraction of assets. To provide incentives to invest, the wealth of an agent must depend on the performance of his/her firm, leading to ex-post inequality in all efficient allocations. I show that the efficient stationary distribution of wealth exhibits a thick right (Pareto) tail, with the degree of inequality monotonically increasing in the number of workers per entrepreneur. The efficient allocation is then implemented in a general equilibrium model using history-independent linear taxes on risk-free savings and (reported) business profits. The tax on entrepreneurs? savings may be positive or negative, while the tax on business profits depends solely upon the degree of private information and is independent of all technological and preference parameters.
AUTHORS: Phelan, Tom
DATE: 2019-08-29

Working Paper
The Optimal Taxation of Business Owners
Business owners in the United States are disproportionately represented among the very wealthy and are exposed to substantial idiosyncratic risk. Further, recent evidence indicates business income primarily reflects returns to the human (rather than financial) capital of the owner. Motivated by these facts, this paper characterizes the optimal taxation of income and wealth in an environment where business income depends jointly on innate ability, luck, and the accumulated past effort exerted by the owner. I show that in (constrained) efficient allocations, more productive entrepreneurs typically bear more risk and that the associated stationary distributions of income, wealth, and firm size exhibit the thick right (Pareto) tails observed in the data. Finally, when owners may save in a risk-free bond and trade shares of their business, I show that the optimal linear taxes in this environment call for double taxation of firm profits, at both the firm and the personal income level, and for a tax/subsidy on wealth that may assume either sign.
AUTHORS: Phelan, Tom
DATE: 2019-11-19

Working Paper
Disadvantaged business enterprise goals in government procurement contracting: an analysis of bidding behavior and costs
Programs that encourage the participation of disadvantaged business enterprises (DBE) as subcontractors have been a part of government procurement auctions for over three decades. In this paper, we examine the impact of a program that requires prime contractors to subcontract out a portion of a highway procurement project to DBE firms. We study how DBE subcontracting requirements affect bidding behavior in federally funded projects. Within a symmetric independent private value framework, we use the equilibrium bidding function to obtain the cost distribution of firms undertaking projects either with or without subcontracting goals. We then use nonparametric estimation methodsto uncover and compare the cost of firms bidding on a class of asphalt projects related to surface treatment in Texas. The analysis shows little differences in the cost structure between auctions that have subcontracting goals and those that do not.
AUTHORS: Dakshina G. De Silva; Dunne, Timothy; Kosmopoulou, Georgia; Lamarche, Carlos
DATE: 2011

Working Paper
Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation
We study the implications of multiperiod mortgage loans for monetary policy, considering several realistic modifications?fixed interest rate contracts, a lower bound constraint on newly granted loans, and the possibility of the collateral constraint to become slack?to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective and may lead to asymmetric responses to positive and negative monetary shocks.
AUTHORS: Bluwstein, Kristina; Brzoza-Brzezina, Michal; Gelain, Paolo; Kolasa, Marcin
DATE: 2019-05-03

Journal Article
A hitchhiker’s guide to the U.S. current account problem
The United States has run a current account deficit for the past 20 years, and, as a consequence, foreigners now hold unprecedented financial claims on the United States. At some point, foreigners will become reluctant to hold these claims and will set into motion a series of corrective economic adjustments. This Economic Commentary describes the interaction between our current account deficits and the broader economy and explains the problem that continued deficits pose.
AUTHORS: Humpage, Owen F.
DATE: 2004

Journal Article
Reforming the over-the-counter derivatives market: what’s to be gained?
While derivative financial instruments have made the hedging and exchange of risk more efficient, the recent crisis showed that they also pose a substantial threat to financial stability in times of systemic turmoil. Underlying much of this threat is the lack of transparent reporting in the over-the-counter market for these instruments. This Commentary discusses the advantages of one solution to the transparency proble: moving the settlement or trading of derivatives to exchanges or clearinghouses.
AUTHORS: Craig, Ben R.; Cherny, Kent
DATE: 2010

Journal Article
CRR and monetary control
A review of the history of the lagged reserve requirements- contemporaneous reserve requirements controversy and a discussion of the relative importance of reserve timing under various operating procedures.
AUTHORS: Pakko, Michael R.
DATE: 1985

Journal Article
Does the Fed cause Christmas?
A discussion of the relationship between money and output, with emphasis on the possibility that changes in output precede changes in money.
AUTHORS: Gamber, Edward N.; Carlstrom, Charles T.
DATE: 1990

Journal Article
Measuring Inflation Forecast Uncertainty
AUTHORS: Knotek, Edward S.; Clark, Todd E.; Zaman, Saeed
DATE: 2015

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