a model of housing and credit cycles with imperfect market knowledge abstract the paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion contraction positive negative development in house prices fuels optimism pessimism and credit expansion contraction which in turn boost dampen housing demand and house prices and reinforce agents optimism pessimism bayesian learning about house prices can endogenously generate self reinforcing booms and busts in house prices and significantly strengthen the role of collateral constraints in aggregate fluctuations the model can quantitatively account for the 2001 2008 u s boom bust cycle in house prices and associated household debt and consumption dynamics it also demonstrates that allowing for imperfect knowledge of agents a higher leveraged economy is more prone to self reinforcing fluctuations

policy watch the marriage penalty many government programs have implicit penalties or subsidies for marriage for example many couples pay higher income taxes when married than their combined tax liabilities as single filers while many other couples receive a marriage subsidy because their joint taxes fall with marriage likewise most low income couples are eligible for higher welfare benefits if they are separated rather than married this article discusses the marriage penalty with a particular focus on tax and transfer programs why does it exist who faces it to what extent does it affect marriage and labor market behavior what tradeoffs are involved in reducing it

widows waiting to wed re marriage and economic incentives in social security widow benefits in this paper we focus on an age restriction for remarriage in the social security system to determine if individuals respond to economic incentives for marriage aged widow er benefits are paid by the federal government to persons whose deceased spouses worked in social security covered employment a widow er is eligible to receive benefits if she or he is at least age 60 if a widow er remarries before age 60 he or she forfeits the benefit and therefore faces a marriage penalty under current law there is no penalty if the remarriage occurs at 60 years of age or later we investigate whether this rule affects the marriage behavior of widows specifically we examine the rates of remarriage of women around age 60 under current as well as past social security eligibility rules using data from the vital statistics our results provide compelling evidence that this group of women respond to economic incentives when considering the decision to remarry first the 1979 law change that eliminated the marriage penalty for those at least age 60 resulted in a large increase in the marriage rate for widows at

efficiency wages and the business cycle puzzle abstract the main thrust of this work is to open the real business cycle rbc methodology to non walrasian considerations and reciprocally to submit some non walrasian models to the discipline of the rbc approach in doing so we provide a first rbc model with involuntary unemployment and a suboptimal equilibrium path we also demonstrate the promise and difficulty of resolving the business cycle puzzle by appealing to quantity rationing in the labor market

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

measuring permanent responses to capital gains tax changes in panel data the authors use panel data and information about differences in state tax rates to separate the effects of transitory and permanent tax rate changes on capital gains realizations behavior the estimated effect of permanent change is substantially smaller than the effect of transitory change the difference is even larger than differences between estimates from past micro data studies which have primarily measured the transitory effect and time series studies which have primarily measured the permanent effect the authors results resolve a long standing conflict between micro data and time series studies of how marginal tax rates affect capital gains realizations behavior copyright 1994 by american economic association

for love or money the impact of income taxes on marriage higher sometimes lower than their combined single income tax obligations in this paper we explore the impact of the federal individual income tax as well as other economic and demograplhic variables on the marriage decisionis of individuals using longitudinal data from the panel study on income dynamics for the period 1968 92 we estimate a discrete time hazard model of the time to first marriage we find that the probability of marriage is significantly affected by a range of economic and demographic variables importantly we find that an increase in total income taxes paid by married versus single women has a negative effect on the likelihood of marriage and that the change in the marginal tax rate is also a significant determinant of marriage in some cases in contrast the tax effects are rarely significant in determining marriage probabilities among men although there are some differential responses by race in general the impacts of the income tax variables even when statistically significant are small

labor market dynamics with search frictions and fair wage considerations fairness considerations in wage setting can improve the ability of the diamond mortensen pissarides search and matching model to account for u s labor market dynamics firms production is influenced by workers effort input which depends on whether workers consider the employment relation as fair a typical worker s effort is determined in a comparison of individual current wage with wage norms including the outside option the individual past wage and the wage level in the steady state the fairness considerations in the search framework give rise to endogenous real wage rigidity and realistic volatilities of unemployment vacancies and labor market tightness jel e24 e32 j64

effort and comparison income experimental and survey evidence the authors test the hypothesis that individual effort on the job depends both on one s own income and on the individual s position in the relevant income distribution combining experimental evidence from a gift exchange game with multi country issp survey data they analyze the extent to which relative income affects an individual s effort finding that an individual s rank in the income distribution more strongly determines effort than does others average income which suggests that comparisons are more ordinal than cardinal their experiment also reveals that comparisons over time affect effort individuals who received higher income offers or enjoyed higher income rank in the past exerted lower levels of effort for a given current income and rank

habit formation in consumption and its implications for monetary policy models 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 condence 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 specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

private information wage bargaining and employment fluctuations shimer 2005 pointed out that although we have a satisfactory theory of why some workers are unemployed at any given time we don t know why the number of unemployed workers varies so much over time the basic mortensen pissarides 1994 model does not generate nearly enough volatility in unemployment for plausible parameter values this paper extends the mortensen pissarides model to allow for informational rents productivity is subject to publicly observed aggregate shocks and to idiosyncratic shocks that are seen only by the employer it is shown that there is a unique equilibrium provided that the idiosyncratic shocks are not too large the main result is that small fluctuations in productivity that are privately observed by employers can give rise to a kind of wage stickiness in equilibrium and the informational rents associated with this stickiness are sufficient to generate relatively large unemployment fluctuations

taxes and the timing of births because the tax savings of having a child are a realized only if the birth takes place before midnight january 1 the incentives for the marginal birth are substantial using a sample of children from the national longitudinal survey of youth we find that the probability that a child is born in the last week of december rather than the first week of january is positively correlated with tax benefits we estimate that increasing the tax benefit of having a child by 500 raises the probability of having the child in the last week of december by 26 9 percent

employment fluctuations with downward wage rigidity the role of moral hazard we study the cyclical dynamics of job creation and destruction when workers effort is not perfectly observable the no shirking constraint may amplify fluctuations in hiring by making firms surplus share procyclical and may cause a burst of inefficient firing when a downturn begins but quantitatively it mainly raises the cost of motivating marginal workers in booms since firms cannot commit to keep them in recessions and thereby strongly damps the countercyclical fluctuations in the separation rate this implies a robust beveridge curve but casts doubt on ramey and watson s 1997 contractual fragility mechanism and worsens shimer s 2005a volatility puzzle

taxes and transfers their effects on the decision to end a marriage abstract the transfer system typically has large marriage disincentives while the income tax system is likely to subsidize marriage for many low income families in other words the tax system may offset an increase in transfer benefits associated with marital separation the interaction of the transfer system with the income tax system has largely been overlooked the income tax system has become more relevant for low income families with the recent expansion of the earned income tax credit which filers may be eligible for even if their tax liability is zero this paper uses family level measures of the change in transfer benefits and tax liability associated with a change in family structure to consider the effect of these financial incentives on separation decisions

do taxes matter lessons from the 1980 s the response of the economy to two major although in important respects offsetting tax reforms has been much smaller than ardent supply side revolutionaries expected thus suggesting that a reassessment of the grounds for revolt is in order this paper offers such a reassessment by first discussing how the evidence from the tax reforms of 1981 and 1986 reflects on our understanding of the response to taxation with particular reference to savings and capital gains realizations i then reconstruct a 1992 view about how taxes affect behavior a unifying theme is that the tax system does much more than alter the relative prices of real variables it also provides incentives to misreport income restructure financial claims time transactions change the legal form of organization and so on for this reason observed low tax elasticities of real variables may be due to either low elasticities of substitution or the fact that tax policy changes opportunity sets in complex ways disentangling these explanations requires an emphasis on the transaction based nature of the tax system and the administration and enforcement of tax laws this abstract was borrowed from another version of this item

labor market dynamics under long term wage contracting abstract recent research seeking to explain the strong cyclicality of us unemployment emphasizes the role of wage rigidity this paper proposes a micro founded model of wage rigidity an equilibrium business cycle model of job search where risk neutral firms post optimal long term contracts to attract risk averse workers equilibrium contracts feature wage smoothing limited by the inability of parties to commit to contracts the model is consistent with aggregate wage data if neither worker nor firm can commit producing too rigid wages otherwise wage rigidity does not lead to a substantial increase in the cyclical volatility of unemployment

why not cut pay abstract i interviewed over 300 business people labor leaders business consultants and counselors of unemployed people all in the northeast of the united states during the recession of the early 1990 s in order to learn why wages and salaries declined in only a few firms employers were reluctant to cut pay because they believed doing so would hurt employee morale leading to lower productivity and current or future difficulties with hiring and retention it was thought that these effects would in the end cost more than the savings from lower pay there were few indications that unemployed people had excessive wage expectations on the contrary many unemployed were too flexible and found themselves rejected by firms as overqualified in most companies pay cuts were not a useful alternative to layoffs because pay cuts would not make it worthwhile to retain many employees and because layoffs harmed morale less than would pay cuts the findings support none of the theories of wage rigidity except those of solow and akerlof that emphasize morale

the macroeconomics of labor and credit market imperfections labour market frictions are not the only possible source of high unemployment credit market imperfections driven by microeconomic frictions and influenced by macroeconomic factors could also be to blame to develop this idea in a simple and tractable macroeconomic model we treat credit and labour market imperfections in a symmetrical way accordingly we introduce specificity in credit relationships and assume that credit to potential entrepreneurs is rationed due to endogenous search frictions in the spirit of diamond 1990 these imperfections mirror job search frictions in the labour market we study the determination of equilibrium unemployment in the presence of credit market frictions both with exogenous and endogenous wages we explore a number of possible extensions endogenous destruction monetary policy and the short run effects of financial liberalization

enlarging the contracting space collateral menus access to credit and economic activity recent reforms across eastern european countries have given more flexibility and information to parties to engage in secured debt transactions the menu of assets legally accepted as collateral was enlarged to include movable assets e g machinery and equipment generalized difference in differences tests show that firms operating more movable assets borrowed more as a result those firms also invested more hired more and became more efficient and profitable following the changes in the contracting environment the financial deepening we document triggered important reallocation effects firms affected by the reforms increased their share of fixed assets and employment in the economy

labor hoarding and the business cycle this paper investigates the sensitivity of solow residual based measures of technology shocks to labor hoarding behavior using a structural model of labor hoarding and the identifying restriction that innovations to technology shocks are orthogonal to innovations in government consumption we estimate the fraction of the variability of the solow residual that is due to technology shocks our results support the view that a significant proportion of movements in the solow residual are artifacts of labor hoarding behavior specifically we estimate that the variance of innovations to technology is roughly 50 percent less than that implied by standard real business cycle models in addition our results suggest that existing real business cycle studies substantially overstate the extent to which technology shocks account for the variability of postwar aggregate u s output

the unemployment volatility puzzle is wage stickiness the answer i discuss the failure of the canonical search and matching model to match the cyclical volatility in the job finding rate i show that job creation in the model is influenced by wages in new matches i summarize microeconometric evidence and find that wages in new matches are volatile and consistent with the model s key predictions therefore explanations of the unemployment volatility puzzle have to preserve the cyclical volatility of wages i discuss a modification of the model based on fixed matching costs that can increase cyclical unemployment volatility and is consistent with wage flexibility in new matches

the panel study of income dynamics after fourteen years an evaluation this article considers the representativeness of the panel study of income dynamics psid over its 14 year history from 1968 to 1981 given the dynamics of entry and exit from the panel by 1981 40 of the original members had left the sample and were replaced by new entrants who joined either existing households or new households being formed by members of the original sample we consider the distribution of demographic characteristics and earnings equations over time and we compare the psid with the current population survey cps by either approach we find little evidence that the psid has become unrepresentative

til death or taxes do us part the effect of income taxation on divorce there is now much empirical evidence that economic incentives affect the divorce decision via their impact on the flow of benefits of divorced vs married individuals however the effect of the individual income tax on divorce has been neglected in this work the income tax in the us is structured so that tax liability often changes with marriage some couples incur a marriage penalty in the form of higher taxes when they marry while others receive a marriage subsidy because their tax burden falls with marriage in this paper the authors examine the impact of the individual income tax on the likelihood of divorce in the us using data from the panel study on income dynamics they estimate a discrete time hazard model of the probability of divorce from the first marriage to test the hypothesis that the probability of divorce rises with the marriage penalty they also examine the role of other economic factors in the divorce decision the authors find that individuals respond to tax incentives in their decision to divorce although these responses are typically small and differ for men and women authors

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

income taxes and the timing of marital decisions abstract in this paper we estimate the impact of the federal individual income tax on the timing of marital decisions anecdotal evidence suggests that the tax penalty often associated with marriage contributes to the decision of when to marry using household data from the panel study on income dynamics we estimate various models of the probability of delaying marriage as a function of the change in tax burden caused by marriage as well as several other variables we find that there is a significant positive relationship between the marriage penalty in a year and the probability of delaying marriage until the following year the magnitude of the effect however is small

saying i don t the effect of the affordable care act young adult provision on marriage this paper investigates the effect of the affordable care act young adult provision on the propensity to marry the young adult provision expanded options for obtaining insurance coverage outside of marriage young adults affected by the provision might have less incentive to marry since one avenue for obtaining health insurance coverage is through marriage this paper examines this question by applying difference in differences type methods using the 2008 2013 american community survey results suggest that the provision is associated with decreases in the likelihood of marrying cohabitation and spousal health insurance coverage and an increase in the probability of divorce

long run growth uncertainty observed macroeconomic forecasts display a positive correlation between expectations of long run growth of endogenous variables e g output and cyclical activity existing business cycle models appear inconsistent with the evidence this paper presents a model of the business cycle in which households have imperfect knowledge of long run growth rate of endogenous variables and continually learn about these growth rates the model features comovement and mutual influence between households growth expectations and market outcomes it can replicate the evidence on growth forecasts and suggests that optimism and pessimism about long run growth rates is a crucial ingredient in understanding business cycle fluctuations

income taxes and the marriage decision economic incentives have been found to play an important role in the marriage decision in developed and developing countries however the way in which the income tax treatment of the family affects these incentives has been routinely ignored this paper uses time series data for the united states from 1947 to 1988 to estimate the impact of economic factors including for the first time the tax consequences of marriage on the aggregate marriage rate the estimation results indicate that economic factors like income female wages and education play an important and statistically significant role in the marriage decision in particular the tax consequences of marriage clearly affect the marriage decision when income taxes increase with marriage the aggregate marriage rate declines however the magnitude of this impact is quite small this result suggests that some individuals respond to tax incentives in their marriage choices but that for many individuals taxes do not affect these decisions

the married widow marriage penalties matter marriage penalties are a controversial feature of many government policies empirical evidence of their behavioral effects is quite mixed which is surprising because economic theory predicts that they should have an impact on the headship decision we investigate the removal of marriage penalties from the surviving spouse pensions of the canadian public pension system in the 1980s these reforms provide a simple and transparent source of identification our results indicate that marriage penalties can have large and persistent effects on marriage decisions we also present evidence suggesting that it is individuals with characteristics correlated with greater wealth who respond to the penalties jel j1 h2