The Impact of Hurricanes on Housing Prices: Evidence from U.S. Coastal Cities
Anthony Murphy and Eric Strobl
Abstract: We investigate the effect of hurricane strikes on housing prices in U.S. coastal cities. To this end, we construct a new index of hurricane destruction which varies over time and space. Using this index and an annual, two equation, dynamic equilibrium correction panel model with area and time fixed effects, we model the effects of hurricanes on real house process and real incomes. In our model hurricanes have a direct effect on house prices and an indirect effect via a fall in local incomes. Our results show that the typical hurricane strike raises real house prices for a number of years, with a maximum effect of between 3% to 4% three years after occurrence. There is also a small negative effect on real incomes. These results are stable across models and subsamples.


Yield Spreads As Predictors of Economic Activity: A Real-Time VAR Analysis
N. Kundan Kishor and Evan F. Koenig
Published as: N. Kundan Kishor and Evan F. Koenig (2014), "Credit Indicators as Predictors of Economic Activity: A Real–Time VAR Analysis," Journal of Money, Credit and Banking 46 (2-3): 545-564.
Abstract: We undertake a real-time VAR analysis of the usefulness of the term spread, the junk-bond spread, the ISM's New Orders Index, and broker/dealer equity for predicting growth in non-farm employment. To get around the "apples and oranges" problem described by Koenig, Dolmas and Piger (2003), we augment each VAR we consider with a flexible state-space model of employment revisions. This methodology produces jobs forecasts consistently superior to those obtained using conventional VAR analysis. They are also superior to Federal Reserve Greenbook forecasts and to median forecasts from the Survey of Professional Forecasters. The junk-bond spread is by far the best single predictor of future jobs growth. However, the term spread has some incremental predictive power at medium-to-long horizons. The incremental predictive power of broker/dealer equity, while small, exceeds that of the ISM index at every horizon.


Do Remittances Boost Economic Development? Evidence From Mexican States
Pia M. Orrenius, Madeline Zavodny, Jesús Cañas and Roberto Coronado
Published as: Orrenius, Pia M., Madeline Zavodny, Jesús Cañas and Roberto Coronado (2010), "Do Remittances Boost Economic Development? Evidence From Mexican States," Law and Business Review of the Americas 16 (4): 803-822.
Abstract: Remittances have been promoted as a development tool because they can raise incomes and reduce poverty rates in developing countries. Remittances may also promote development by providing funds that recipients can spend on education or health care or invest in entrepreneurial activities. From a macroeconomic perspective, remittances can boost aggregate demand and thereby GDP as well as spur economic growth. However, remittances may also have adverse macroeconomic impacts by increasing income inequality and reducing labor supply among recipients. We use state-level data from Mexico during 2003–07 to examine the aggregate effect of remittances on employment, wages, unemployment rates, the wage distribution, and school enrollment rates. While employment, wages and school enrollment have risen over time in Mexican states, these trends are not accounted for by increasing remittances. However, two-stage least squares specifications among central Mexican states suggest that remittances shift the wage distribution to the right, reducing the fraction of workers earning the minimum wage or less.


The Impact of LIHTC Program on Local Schools
Wenhua Di and James C. Murdoch
Published as: Di, Wenhua and James C. Murdoch (2013), "The Impact of LIHTC Program on Local Schools," Journal of Housing Economics 22 (4): 308-320.
Abstract: The low-income housing tax credit (LIHTC) program has developed over two million rental homes for low-income households since 1986. The perception of deterioration in school quality has been a main reason for community opposition to LIHTC projects in middle-and upper-income areas. In this paper, we examine the impact of LIHTC projects on the nearby school performance. The LIHTC projects tend to have positive and statistically significant impacts on school performance the year they are placed in service and this finding is robust to various specifications. Offsetting these, the one year lag effects are negative and of similar or smaller magnitude.


Rationally Inattentive Macroeconomic Wedges
Antonella Tutino
Published as: Tutino, Antonella (2011), "Rationally Inattentive Macroeconomic Wedges," Journal of Economic Dynamics and Control 35 (3): 344-362.
Abstract: This paper argues that the solution to a dynamic optimization problem of consumption and labor under finite information-processing capacity can simultaneously explain the intertemporal and intratemporal labor wedges. It presents a partial equilibrium model, where a representative risk adverse consumer chooses information about wealth with limited attention. The paper compares ex-post realizations of models with finite and infinite capacity. The model produces macroeconomic wedges and measures of elasticity consistent with the literature. These findings suggest that a consumption-labor model with information-processing constraints can explain the difference between predicted and observed consumption and employment behavior.


The Labor Wedge as a Matching Friction
Anton A. Cheremukhin and Paulina Restrepo-Echavarria
Published as: Cheremukhin, Anton A. and Paulina Restrepo-Echabarria (2014), "The Labor Wedge as a Matching Friction," European Economic Review 68: 71-92.
Abstract: The labor wedge accounts for a large fraction of business cycle fluctuations. This paper uses a search and matching model to decompose the labor wedge into three classes of labor market frictions and evaluate their role. We find that frictions to job destruction and bargaining commonly considered in the search literature are not helpful in explaining the labor wedge. We also identify an asymmetric effect of separation, bargaining and matching frictions on unemployment, as well as a potential solution to Shimer's puzzle.


Oil Price Shocks and U.S. Economic Activity: An International Perspective
Nathan S. Balke, Stephen P.A. Brown and Mine K. Yücel
Abstract: Oil price shocks are thought to have played a prominent role in U.S. economic activity. In this paper, we employ Bayesian methods with a dynamic stochastic general equilibrium model of world economic activity to identify the various sources of oil price shocks and economic fluctuation and to assess their effects on U.S. economic activity. We find that changes in oil prices are best understood as endogenous. Oil price shocks in the 1970s and early 1980s and the 2000s reflect differing mixes of shifts in oil supply and demand, and differing sources of oil price shocks have differing effects on economic activity. We also find that U.S. output fluctuations owe mostly to domestic shocks, with productivity shocks contributing to weakness in the 1970s and 1980s and strength in the 2000s.


Credit, Housing Collateral and Consumption: Evidence from the U.K., Japan and the U.S.
Janine Aron, John V. Duca, John Muellbauer, Keiko Murata and Anthony Murphy
Published as: Aron, Janine, John V. Duca, John Muellbauer, Keiko Murata and Anthony Murphy (2012), "Credit, Housing Collateral and Consumption: Evidence from the U.K., Japan and the U.S.," Review of Income and Wealth 58 (3): 397-423.
Abstract: The consumption behaviour of U.K., U.S. and Japanese households is examined and compared using a modern Ando-Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for U.K. and U.S. but not Japanese households has undergone large shifts since 1980. The average consumption-to-income ratio shifted up in the U.K. and U.S. as mortgage downpayment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is roughly similar in the U.S. and U.K., while land prices in Japan still have a negative effect on consumer spending. Together with evidence for negative real interest rate effects in the U.K. and U.S. and positive ones in Japan, this suggests important differences in the transmission of monetary and credit shocks between Japan and the U.S., U.K. and other credit-liberalized economies.


An Analysis of the Neighborhood Impacts of a Mortgage Assistance Program: A Spatial Hedonic Model
Wenhua Di, Jielai Ma, James C. Murdoch
Published as: Di, Wenhua, Jielai Ma and James C. Murdoch (2010), "An Analysis of the Neighborhood Impacts of a Mortgage Assistance Program: A Spatial Hedonic Model," Journal of Policy Analysis and Management 29 (4): 682-697.
Abstract: Down-payment or closing-cost assistance is an effective program in addressing the wealth constraints of low- and moderate-income homebuyers. However, the spillover effect of such programs on the neighborhood is unknown. This paper estimates the impact of the City of Dallas Mortgage Assistance Program (MAP) on nearby home values using a hedonic model of home sales from 1990 to 2006. We define neighborhoods of 1,000 feet around each sale and estimate the average differences in sales prices between neighborhoods with various numbers of MAP properties before and after their appearance. We find that MAP properties tend to locate in neighborhoods with lower property values; however, unless a concentration of MAP properties forms, the infusion of MAP properties has little detrimental impact on neighboring property values. Moreover, low concentration of MAP properties has a modest positive impact on surrounding property values.

Globalization Institute Working Papers

Globalization Institute No. 66

The Adverse Feedback Loop and the Effects of Risk in Both the Real and Financial Sectors 

Scott Davis

Abstract: Recessions that are accompanied by financial crises tend to be more severe and are followed by slower recoveries than ordinary recessions. This paper introduces a new Keynesian model with financial frictions on both the demand and supply side of the credit markets that can explain this empirical finding. Following a shock that leads to a decline in economic activity, an adverse feedback loop arises where falling profits and asset values lead to increased defaults in the real sector, and these increased defaults lead to increased loan losses in the banking sector. Following this increase in loan losses, financial frictions in the banking sector imply that the banking sector itself may face difficulty obtaining funds. This disruption in the intermediation process leads to a further decline in output and asset prices in the real sector. In simulations of the model it is found that this feedback loop operating through the balance sheets of financial intermediaries can lead to as much as a 20 percent increase in business cycle volatility, and impulse response analysis shows that in the presence of financial frictions the path back to the steady state after a shock is much slower.

Globalization Institute No. 64

The Effects of News About Future Productivity on International Relative Prices: An Empirical Investigation 

Deokwoo Nam and Jian Wang

Abstract: In this paper, we find that expected (news) and unexpected (contemporaneous) components of productivity changes have opposite effects on the U.S. real exchange rate. Following Barsky and Sims' (2010) identification method, we decompose U.S. total factor productivity (TFP) into news and contemporaneous productivity changes. The U.S. real exchange rate appreciates following a favorable news shock to TFP, while it depreciates in response to a positive contemporaneous shock. In addition, the identified news TFP shocks play a much more important role than the identified contemporaneous TFP shocks in driving the U.S. real exchange rate. These findings provide empirical guidance to important international macroeconomic issues, such as the international transmission of productivity shocks and the modeling of exchange rate volatility.

Globalization Institute No. 61

Understanding the Effect of Productivity Changes on International Relative Prices: The Role of News Shocks 

Deokwoo Nam and Jian Wang

Abstract: The terms of trade and the real exchange rate of the U.S. appreciate when the U.S. labor productivity increases relative to the rest of the world. This finding is at odds with predictions from standard international macroeconomic models. In this paper, we find that incorporating news shocks to total factor productivity (TFP) in an otherwise standard dynamic stochastic general equilibrium (DSGE) model with variable capital utilization can help the model replicate the above empirical finding. Labor productivity increases in our model after a positive news shock to TFP because of an increase in capital utilization. Under some plausible calibrations, the wealth effect of good news about future productivity can increase domestic demand strongly and induce an increase in home prices relative to foreign prices.

Globalization Institute No. 60

International Real Business Cycles with Endogenous Markup Variability 

Scott Davis and Kevin X.D. Huang
Published as: Davis, Scott and Kevin X.D. Huang (2011), "International Real Business Cycles with Endogenous Markup Variability," Journal of International Economics 85 (2): 302-316.

Abstract: The aggregate impact of decisions made at the level of the individual firm has recently attracted a lot of attention in both the macro and trade literatures. We adapt the benchmark international real business cycle model to a game-theoretic environment to add a channel for the strategic interaction among domestic and foreign firms. We show how the sum of strategic pricing decisions made at the level of the individual firm can have significant effects on the volatility and cross country co-movement of GDP and its components. Specifically we show that the addition of this one channel for strategic interaction leads to a significant increase in the cross-country co-movement of production and investment, as well as a significant decrease in the volatility of investment and the trade balance over the benchmark IRBC model.

Globalization Institute No. 53

Trends in U.S. Hours and the Labor Wedge 

Simona E. Cociuba and Alexander Ueberfeldt

Abstract: From 1980 until 2007, U.S. average hours worked increased by 13 percent, due to a large increase in female hours. At the same time, the U.S. labor wedge, measured as the discrepancy between a representative household's marginal rate of substitution between consumption and leisure and the marginal product of labor, declined substantially. We examine these trends in a model with heterogeneous households: married couples, single males and single females. Our quantitative analysis shows that the shrinking gender wage gaps and increasing labor income taxes observed in U.S. data are key determinants of hours and the labor wedge. Changes in our model's labor wedge are driven by distortionary taxes and non-distortionary factors, such as cross-sectional differences in households' labor supply and productivity. We conclude that the labor wedge measured from a representative household model partly reflects imperfect household aggregation.

Globalization Institute No. 47

The Quantitative Role of Capital-Goods Imports in U.S. Growth 

Michele Cavallo and Anthony Landry
Published as: Cavallo, Michele and Anthony Landry (2010), "The Quantitative Role of Capital-Goods Imports in U.S. Growth," American Economic Review 100 (2): 78-82.

Abstract: Over the last 40 years, an increasing share of U.S. aggregate E&S investment expenditure has been allocated to capital-goods imports. While capital-goods imports were only 3.5 percent of E&S investment in 1967, by 2008 their share had risen tenfold to 36 percent. The goal of this paper is to measure the contribution of capital-goods imports to growth in U.S. output per hour using a simple growth accounting exercise. We find that capital-goods imports have contributed 20 to 30 percent to growth in U.S. output per hour between 1967 and 2008. More importantly, we find that capital-goods imports have been an increasing source of growth for the U.S. economy: the average contribution of capital-goods imports to growth in U.S. output per hour has increased noticeably since 1967.

Globalization Institute No. 43

Transitional Dynamics of Output and Factor Income Shares: Lessons from East Germany 

Simona E. Cociuba

Abstract: I evaluate the quantitative implications of technology change and government policies for output and factor income shares during East Germany's transition since 1990. I model an economy that gains access to a high productivity technology embodied in new plants. As existing low productivity plants decrease production, the capital income share varies due to variation in the profit share of these plants. Two policies—transfers and governmentmandated wage increases—have opposite effects on output growth, but both contribute to reducing the capital share during the transition. The model's output and capital share line up with counterparts in East German data.