Federal Reserve Bank of Boston

The Japanese banking crisis provides a natural experiment to test whether a loan supply shock can affect real economic activity. Because the shock was external to U.S. credit markets, yet connected through the Japanese bank penetration of U.S. markets, this event allows us to identify an exogenous loan supply shock and ultimately link that shock to construction activity in U.S. commercial real estate markets. We exploit the variation across geographically distinct commercial real estate markets to establish conclusively that loan supply shocks emanating from Japan had real effects on economic activity in the United States. (JEL E44, F36)

This paper explores a monetary-policy model with habit formation for consumers, in which consumers' utility depends in part on current consumption relative to past consumption. The empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous confidence, largely because the habit-formation model captures the gradual hump-shaped response of real spending to various shocks. The paper then embeds the habit-consumption specification in a monetary-policy model and finds that the responses of both spending and inflation to monetary-policy actions are significantly improved by this modification. (JEL D12, E52, E43)

In the late 1980s, David Aschauer (1989) triggered a long overdue dialogue among economists and political leaders when he published a study arguing that much of the decline in U.S. productivity that occurred in the 1970s was precipitated by declining rates of public capital investment. My own work confirmed these results (Munnell, 1990a). Spending advocates seized on these findings as support for increased public investment. The enthusiasm among policymakers for the early Aschauer results was matched, if not surpassed, by skepticism on the part of many economists. Critics of these studies charged that the methodology was flawed, that the direction of causation between public investment and output growth is unclear and that, even if the historical empirical relationships were estimated correctly, they provide no clear indications for current policy. Who's right? What do we know and not know about the link between public infrastructure and productivity? And what are the implications of these results for policy?

This paper demonstrates that the behavior of the conventional Phelps-Taylor model of overlapping wage contracts stands in stark contrast with important features of U. S. macro data for inflation and output. In particular, the Phelps-Taylor specification implies far too little inflation persistence. We present a new contracting model, in which agents are concerned with relative real wages, that is data-consistent. In a specification that nests both models, we resoundingly reject the conventional contracting model, but cannot reject the new contracting model.

Previous authors have documented a dramatic decline in food expenditures at the time of retirement. We show that this is matched by an equally dramatic rise in time spent shopping for and preparing meals. Using a novel data set that collects detailed food diaries for a large cross section of U.S. households, we show that neither the quality nor the quantity of food intake deteriorates with retirement status. We also show that unemployed households experience a decline in food expenditure and food consumption commensurate with the impact of job displacement on permanent income. These results highlight how direct measures of consumption distinguish between anticipated and unanticipated shocks to income whereas measures of expenditures obscure the distinction.

The Impact of Group Membership on Cooperation and Norm Enforcement: Evidence Using Random Assignment to Real Social Groups by Lorenz Goette, David Huffman and Stephan Meier. Published in volume 96, issue 2, pages 212-216 of American Economic Review, May 2006

The dramatic reduction in the growth rate of bank lending associated with the 1990-91 recession, particularly in New England, has evoked claims by many observers of a credit crunch.However, because of the difficulty in determining whether the observed slow credit growth is a demand or supply phenomenon, convincing evidence of the practical importance of credit crunches for economic activity remains elusive.We overcome this obstacle by examining a cross-section of banks in New England that have experienced the same economic downturn, effectively controlling for changes in demand.We find empirical support for a capital crunch, whereby poorly capitalized institutions shrink to satisfy capital requirements.This alone is not a sufficient condition for a credit crunch.However, we find s6me additional evidence that the ca~~ital crunch may have limited credit availability in New England.

Volunteering constitutes one of the most important pro‐social activities. Following Aristotle, helping others is the way to higher individual wellbeing. This view contrasts with the selfish utility maximizer, who avoids helping others. The two rival views are studied empirically. We find robust evidence that volunteers are more satisfied with their life than non‐volunteers. The issue of causality is studied from the basis of the collapse of East Germany and its infrastructure of volunteering. People who lost their opportunities for volunteering are compared with people who experienced no change in their volunteer status.

The seminal work of Phelps, Taylor, and Cairo developed forwardlooking models of price determination that imparted inertia to the price leveh These models incorporate expectations of future prices and excess demand by imposing constraints (typically lag-lead symmetry constrainls) that force future variables to enter the specification.In this paper, I test the empirical significance of future prices-in specifications like those of Taylor.I find that expectations of future prices are empirically unimportant in explaining price and inflation behavior.However, the dynamics of a model_that includes a purely backwardlooking inflation specification differ' significantly-and not altogether pleasingly-from those with a forward-looking specification.

We analyze the impact of classroom peers' ability (measured by their individual fixed effects) on student achievement for all Florida public school students in grades 3-10 over a 6-year period. We control for both student and teacher fixed effects, thereby alleviating biases due to endogenous assignment of both peers and teachers. Under linear-in-means specifications, estimated peer effects are small to nonexistent, but we find some sizable and significant peer effects within nonlinear models. We also find that classroom peers, as compared with the broader group of grade-level peers at the same school, exert a greater influence on individual achievement gains.

We analyse the ability of the distance-to-default and bond spreads to signal bank fragility. We show that both indicators are complete and unbiased and that spreads are non-linear in the probability of bank default. We empirically test these properties in a sample of EU banks. We find leading properties for both indicators. The distance-to-default exhibits lead times of 6 to 18 months. Spreads have signal value close to default only, in line with the theory. We also find that implicit safety nets weaken the predictive power of spreads. Further, the results suggest complementarity between both indicators, reducing type I errors. We also examine the interaction of the indicators with other bank information.

We test the hypothesis that price discrimination increases with competition in the airline market. Using a large cross section of tickets offered by several carriers on various routes, we approximate price discrimination with marginal implicit prices of ticket restrictions that carriers typically use to price discriminate: Saturday-night stayover re-quirements and advanced-purchase discounts. We find that the restrictions are associated with lower airfares, but that the discounts are smaller on routes with higher market concentration. The results suggest that price dispersion attributed to ticket restrictions increases as markets becomemore competitive.

ABSTRACT We present a model of financial crises that stem from endogenous complexity . We conceptualize complexity as banks' uncertainty about the financial network of cross exposures. As conditions deteriorate, cross exposures generate the possibility of a domino effect of bankruptcies. As this happens, banks face an increasingly complex environment since they need to understand a greater fraction of the financial network to assess their own financial health. Complexity dramatically amplifies banks' perceived counterparty risk, and makes relatively healthy banks reluctant to buy risky assets. The model also features a novel complexity externality .

Optimal monetary policy maximizes the welfare of a representative agent, given frictions in the economic environment. Constructing a model with two sets of frictions --costly price adjustment by imperfectly competitive firms and costly exchange of wealth for goods --we find optimal monetary policy is governed by two familiar principles. First, the average level of the nominal interest rate should be sufficiently low, as suggested by Milton Friedman, that there should be deflation on average. Yet, the Keynesian frictions imply that the optimal nominal interest rate is positive. Second, as various shocks occur to the real and monetary sectors, the price level should be largely stabilized, as suggested by Irving Fisher, albeit around a deflationary trend path. Since expected inflation is roughly constant through time, the nominal interest rate must therefore vary with the Fisherian determinants of the real interest rate. Although the monetary authority has substantial leverage over real activity in our model economy, it chooses real allocations that closely resemble those which would occur if prices were flexible. In our benchmark model, there is some tendency for the monetary authority to smooth nominal and real interest rates.

This paper examines the extent of interindustry wage differences for nonunion workers and finds that even after controlling for a wide range of individual characteristics and geographic location a substantial amount of individual wage variation can be accounted for by industry differences.

Dynamic Inconsistencies: Counterfactual Implications of a Class of Rational-Expectations Models by Arturo Estrella and Jeffrey C. Fuhrer. Published in volume 92, issue 4, pages 1013-1028 of American Economic Review, September 2002

We use microdata collected at the border and the store to characterize the price impact of recent US trade policy on importers, exporters, and consumers. At the border, import tariff pass-through is much higher than exchange rate pass-through. Chinese exporters did not lower their dollar prices by much, despite the recent appreciation of the dollar. By contrast, US exporters significantly lowered prices affected by foreign retaliatory tariffs. In US stores, the price impact is more limited, suggesting that retail margins have fallen. Our results imply that, so far, the tariffs’ incidence has fallen in large part on US firms. (JEL E31, F13, F14, F31, L11)

OBJECTIVE: The authors evaluated the use of conditional cash transfers as an HIV and sexually transmitted infection prevention strategy to incentivise safe sex. DESIGN: An unblinded, individually randomised and controlled trial. SETTING: 10 villages within the Kilombero/Ulanga districts of the Ifakara Health and Demographic Surveillance System in rural south-west Tanzania. PARTICIPANTS: The authors enrolled 2399 participants, aged 18-30 years, including adult spouses. INTERVENTIONS: Participants were randomly assigned to either a control arm (n=1124) or one of two intervention arms: low-value conditional cash transfer (eligible for $10 per testing round, n=660) and high-value conditional cash transfer (eligible for $20 per testing round, n=615). The authors tested participants every 4 months over a 12-month period for the presence of common sexually transmitted infections. In the intervention arms, conditional cash transfer payments were tied to negative sexually transmitted infection test results. Anyone testing positive for a sexually transmitted infection was offered free treatment, and all received counselling. MAIN OUTCOME MEASURES: The primary study end point was combined prevalence of the four sexually transmitted infections, which were tested and reported to subjects every 4 months: Chlamydia trachomatis, Neisseria gonorrhoeae, Trichomonas vaginalis and Mycoplasma genitalium. The authors also tested for HIV, herpes simplex virus 2 and syphilis at baseline and month 12. RESULTS: At the end of the 12-month period, for the combined prevalence of any of the four sexually transmitted infections, which were tested and reported every 4 months (C trachomatis, N gonorrhoeae, T vaginalis and M genitalium), unadjusted RR for the high-value conditional cash transfer arm compared to controls was 0.80 (95% CI 0.54 to 1.06) and the adjusted RR was 0.73 (95% CI 0.47 to 0.99). Unadjusted RR for the high-value conditional cash transfer arm compared to the low-value conditional cash transfer arm was 0.76 (95% CI 0.49 to 1.03) and the adjusted RR was 0.69 (95% CI 0.45 to 0.92). No harm was reported. CONCLUSIONS: Conditional cash transfers used to incentivise safer sexual practices are a potentially promising new tool in HIV and sexually transmitted infections prevention. Additional larger study would be useful to clarify the effect size, to calibrate the size of the incentive and to determine whether the intervention can be delivered cost effectively. TRIAL REGISTRATION NUMBER: NCT00922038 ClinicalTrials.gov.

This study examines the misallocation of credit in Japan associated with the perverse incentives of banks to provide additional credit to the weakest firms. Firms are far more likely to receive additional credit if they are in poor financial condition, and these firms continue to perform poorly after receiving additional bank financing. Troubled Japanese banks allocate credit to severely impaired borrowers primarily to avoid the realization of losses on their own balance sheets. This problem is compounded by extensive corporate affiliations, which provide a further incentive for banks to allocate scarce credit based on considerations other than prudent credit risk analysis.

This paper assesses the impact of the geographic diversification of bank holding company (BHC) assets across the United States on their market valuations. Using two new identification strategies based on the dynamic process of interstate bank deregulation, we find that exogenous increases in geographic diversity reduced BHC valuations. We also find that the geographic diversification of BHC assets increased insider lending and reduced loan quality. Taken together, these findings are consistent with theories predicting that geographic diversity intensifies agency problems. (JEL G34, L22, G21, G24) Does the geographic diversification of bank holding company (BHC) assets increase or decrease their corporate valuations? Geographic diversity could exert a valuation-enhancing effect by boosting economies of scale (Chandler