intrinsic bubbles the case of stock prices several puzzling aspects of the behavior of united states stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends the authors call bubbles of this type intrinsic bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors intrinsic bubbles provide a more plausible empirical account of deviations from present value pricing than do the traditional examples of rational bubbles their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods copyright 1991 by american economic association

financial frictions the housing market and unemployment abstract we develop a two sector search matching model of the labor market with imperfect mobility of workers augmented to incorporate a housing market and a frictional goods market homeowners use home equity as collateral to finance idiosyncratic consumption opportunities a financial innovation that raises the acceptability of homes as collateral raises house prices and reduces unemployment it also triggers a reallocation of workers with the direction of the change depending on firms market power in the goods market a calibrated version of the model under adaptive learning can account for house prices sectoral labor flows and unemployment rate changes over 1996 2010

regime switching and the in stability of the price rent relationship evidence from the us present value models of house prices assert that in the absence of self fulfilling bubbles a house price is equal to the present discount value of all future rents which implies a linear relationship between house price and rent and hence a stable price to rent ratio using a markov switching error correction model we re examine this relationship in the us housing market and find two distinctive regimes one with a long run relation between house price and rent predicted by the present value models and the other in which the relation is nonlinear furthermore we find evidence that deviations of house prices from the present value models predictions are caused by the overreaction of house prices to movements in rents rather than speculative bubbles attributable to extraneous factors

the future of macroeconomics macro theory and models at the bank of england abstract the adoption as policy models by central banks of representative agent new keynesian dynamic stochastic general equilibrium models has been widely criticised including for their simplistic micro foundations at the bank of england the previous generation of policy models is seen in its 1999 medium term macro model mtmm instead of improving that model to correct its considerable flaws many shared by other non dsge policy models such as the federal reserve s frb us it was replaced in 2004 by the dsge based beqm though this clearly failed during and after the global financial crisis it was replaced in 2011 by the dsge compass complemented by a suite of models we provide a general critique of dsge models for explaining forecasting and policy analyses at central banks and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory rather than seeking to impose simplistic and unrealistic theory

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

detecting periodically collapsing bubbles a markov switching unit root test this paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals as this is essentially a problem of identifying the collapsing periods from the expanding ones we propose using a generalization of the dickey fuller test procedure which makes use of the class of markov regime switching models the potential of the new methodology is illustrated via simulation and an empirical example is given copyright 1999 john wiley sons ltd

credit supply and the housing boom an increase in credit supply driven by looser lending constraints in the mortgage market is the key force behind four empirical features of the housing boom before the great recession the unpreced

how important are wealth effects on consumption in canada we estimate the marginal propensity to consume from financial and housing wealth in canada the modelling framework of carroll et al 2011 that builds on the observed stickiness in consumption data is used estimations and inferences are conducted using identification robust methods the results provide support for the overall modelling strategy but there are also important differences in the identification status of the econometric equations considered based on the most informative specification we find that both types of wealthfinancial and housinghave significant effects in canada and that the former has a greater effect than the latter a simple extension of the model that also accounts for non price credit conditions shows that housing wealth may be relevant only during periods of easier access to credit finally we find support for relatively high stickiness in consumption growth in canada

rational ponzi games when can a government run a rational ponzi game i e issue debt and never pay back any interest or principal the transversalit y condition of each individual implies that such schemes require an i nfinity of lenders given this horizons are unimportant ponzi games cannot be ruled out by assuming that agents have infinite horizons the authors point out both the basic similarity of and some key diff erences between rational ponzi games and asset price bubbles or fiat money regarding international debt the analysis implies that what matters for the feasibility of rational ponzi games are conditions in the lenders not the borrowers economy copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the equilibrium effect of fundamentals on house prices and rents abstract using a dynamic equilibrium model of housing tenure choice with fully specified markets for homeownership and rental properties and endogenous house prices and rents this paper studies the effect of fundamentals on equilibrium house prices and rents lower interest rates relaxed lending standards and higher incomes are shown to account for approximately one half of the increase in the u s house price rent ratio between 1995 and 2006 and to generate the pattern of rapidly growing house prices sluggish rents increasing homeownership and rising household indebtedness observed in the data

detecting imbalances in house prices what goes up must come down i suggest a toolkit of four bubble detection methods that can be used to monitor developments in house prices these methods are applied to us finnish and norwegian data for the united states all measures unanimously suggest a bubble in the early to mid 2000s whereas current us house prices are found to be aligned with economic fundamentals one of the measures indicates imbalances in finland while there are no signs of a bubble in norway i find that large parts of the us house price bubble can be explained by the sharp increase in capital inflows and the extension of loans to the subprime mortgage market

new microfoundations for the aggregate matching function empirical studies of the aggregate labor market matching function have favored a cobb douglas functional form for which there are no microfoundations in the existing literature i present a new model for the matching process based on a telephone line poisson queuing process which unlike other microeconomic approaches can be integrated directly into standard theoretical search models this implies a ces matching function approximately cobb douglas when search costs are approximately linear the model allows empirical estimates of matching function parameters to be interpreted in terms of the costs and benefits of search

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

unequal assignment and unequal promotion in job ladders in this study gender differentials in professional status attainment are analyzed in the theoretical literature unequal treatment of females is often rationalized by their higher probability of quitting to test this hypothesis empirically we use data from the austrian microcensus and find that neither the risk of childbearing nor different productive characteristics can explain the crowding of females in lower hierarchical positions females have to fulfill higher ability standards to be promoted work experience is not rewarded in the same manner as it is for men

managing credit bubbles we study a dynamic economy where credit is limited by insu cient collateral and as a result investment and output are too low in this environment changes in investor sentiment or market expectations can give rise to credit bubbles that is expansions in credit that are backed not by expectations of future pro ts i e fundamental collateral but instead by expectations of future credit i e bubbly collateral credit bubbles raise the availability of credit for entrepreneurs this

explosive dynamics in house prices an exploration of financial market spillovers in housing markets around the world abstract asset prices in general and real house prices in particular are often characterized by a nonlinear data generating process which may display at times mildly explosive behavior in this paper using the recursive right tailed unit root test methodology proposed by phillips et al 2015a b we find widespread evidence of episodes of explosiveness or exuberance in international real house prices and establish a timeline of such episodes for a panel of 23 countries between first quarter 1975 and fourth quarter 2015 motivated by theory we adopt a dynamic panel logit probit framework to empirically investigate whether macro fundamentals and more specifically financial variables help predict such episodes of exuberance in international real house prices we find that interest rate spreads and real stock market growth together with standard housing fundamentals growth in real personal disposable income per capita and inflation are indeed among the best predictors furthermore we argue that financial developments in other asset markets can play a significant role as a trigger in the emergence of explosiveness in housing markets

booms and busts in the uk housing market the often volatile behaviour of uk house prices between 1957 and 1994 is analysed in an annual econometric model theory suggests that financial liberalisation of mortgage markets in the 1980s should have led to notable shifts in house price behaviour the evidence supports the predictions of theory suggesting shifts took place in wealth effects as in the consumption function and that real interest rates and income expectations became more important the presence of transactions costs suggests important nonlinearities in house price dynamics the paper also contains an explicit econometric treatment of expectations demography supply spillovers from the rented sector and of composition biases in the official house price index

exchange rate bubbles fundamental value estimation and rational expectations test abstract we propose a model of periodically collapsing bubbles which extends the van norden 1996 model and nests it by considering a non linear specification for the bubble size in the survival regime and the endogenous determination of the level of the fundamental value of the stochastic process they allow us to test for rationality in the formation of expectations and remove the arbitrariness of exogenously setting the level of the fundamental value this general model is applied to the exchange rate of the brazilian real to the us dollar from march 1999 to february 2011 the futures market exchange rate is used as a proxy of its expected future value and three different structural models are considered for the determination of the fundamental value the first two imply that the exchange rate satisfies either purchasing power parity ppp or a modified version of it the third structural model is a version of the monetary model of exchange rate determination fitted to the period under consideration we obtain the maximum likelihood estimate of the parameters of the models explore the properties of the errors test its restricted versions and compare the three specifications for the fundamental we find that the models we propose fit well the data and are useful in the heuristic interpretation of the exchange rate movements of the period finally we select the structural models that display the best performance according to several criteria

asset bubbles and bailouts as long as bubble size is relatively small bubbles increase production level but once the size becomes too large then bubbles reduce it given this non monotonic relationship this paper investigates the relationship between bubbles and government bailouts it shows that bailouts for bursting bubbles may positively influence ex ante production efficiency and relax the existence condition of stochastic bubbles the level of bailouts has a non monotonic relationship with production efficiency and a partial bailout policy achieves production efficiency moreover it examines the welfare effects of bailout policies rigorously and shows that even non risky bubbles may be undesirable for taxpayers

testing the present value relation for housing prices should i leave my house in san francisco abstract we examine the efficiency of residential housing markets by examining price rent and cost of capital indices generated from a transactions level data base for alameda and san francisco counties in northern california we can reject both constant and nonconstant discount rate versions of the housing price present value relation in the short run long run results are consistent with the housing price present value relation when we adjust the discount factor for changes in both tax rates and borrowing costs that characterize our 1970 1988 sample period our preferred explanation for the short run rejection of but long run consistency with the present value model is the high transaction costs that characterize the housing market however we cannot rule out the possibility that deviations of actual and present value price are due to asset market bubbles or nonrational expectations

bank integration and co movements across housing markets this paper investigates whether bank integration measured by cross border bank flows can capture the co movements across housing markets in developed countries by using a spatial dynamic panel model the transmission can occur through a global banking channel in which global banks intermediate wholesale funding to local banks changes in financial conditions are passed across borders through the banks balance sheet exposure to credit currency maturity and funding risks resulting in house price spillovers while controlling for country level and global factors we find significant co movement across housing markets of countries with proportionally high bank integration bank integration can better capture house price co movements than other measures of economic integration once we account for bank exposure other spatial linkages traditionally used to account for return co movements across region such as trade foreign direct investment portfolio investment geographic proximity etc become insignificant moreover we find that the co movement across housing markets decreases for countries with less developed mortgage markets characterized by fixed mortgage rate contracts low limits of loan to value ratios and no mortgage equity withdrawal

consequences of discretion in the formation of commodities policy abstract in a simple model of endogenous primary commodity price support policy i policy is affected by private inventories and ii private inventories are affected by speculative attempts to forecast policy the interaction between these two forces is rich yielding bubbles and extrinsic volatility thus helping to explain some odd episodes observed in commodity markets in addition under some conditions a government that wishes to support the price but is unable to commit to future action may be impotent and a government that does not want to support the price may be trapped into doing so by speculative activity

identification of financial factors in economic fluctuations we estimate demand supply monetary investment and nancial shocks in a var identified with a minimum set of sign restrictions on us data we find that financial shocks are major drivers of fluctuations in output stock prices and investment but have a limited effect on inflation in a second step we disentangle shocks originating in the housing sector shocks originating in credit markets and uncertainty shocks in the extended set upfinancial shocks are even more important and a leading role is played by housing shocks that have large and persistent effects on output

house prices and credit constraints making sense of the us experience most us house price models break down in the mid 2000s due to the omission of exogenous changes in mortgage credit supply associated with the sub prime mortgage boom from house price to rent ratio and inverted housing demand models previous models lack data on credit constraints facing first time home buyers incorporating a measure of credit conditions the cyclically adjusted loan to value ratio for first time buyers into house price to rent ratio models yields stable long run relationships more precisely estimated effects reasonable speeds of adjustment and improved model fits

endogenous business cycles and the dynamics of output hours and consumption abstract this paper studies the business cycle fluctuations predicted by a two sector endogenous business cycle model with sector specific external increasing returns to scale it focuses on aspects of actual fluctuations that have been identified both as defining features of business cycles and as ones standard real business cycle models cannot explain for empirically realistic calibrations of the degree of returns to scale the results suggest that endogenous fluctuations do not provide the dynamic element that is missing in existing real business cycle models jel e32

time varying persistence in real oil prices and its determinant abstract we provide empirical evidence for pronounced time variation in the persistence of real oil prices in particular we find episodes of mild explosiveness next to periods with random walk and also mean reverting behavior we address the question whether dynamic persistence can be directly related to macro financial variables spot futures spreads spill over effects from commodities and global real economic activity alongside these variables we use a large data set of more than one hundred fifty potential determinants featuring for example further oil related variables production and inventories and key macroeconomic series for the g7 countries by using model averaging techniques we robustly account for the inherent model uncertainty when dealing with such many potential explanatory variables as it turns out the one and only significant measure to explain time varying oil price persistence is the index of global real economic activity by kilian 2009 other variables related to e g supply shocks or speculation are however insignificant in line with recent findings we argue that fundamentals rather than speculation were the drivers of the explosive oil price in the 2000s

waking up from the american dream on the experience of young americans during the housing boom of the 2000s we exploit regional variations in house price fluctuations in the united states during the early to mid 2000s to study the impact of the housing boom on young americans choices related to home ownership household formation and fertility we also introduce a novel instrument for changes in house prices based on the predetermined industrial structure of the local economy we find that in regions that experienced large increases in house prices between 2001 and 2006 the youngest households were substantially less likely to purchase residential property to be married and to have a child both in 2006 and in 2011

econometric regime shifts and the us subprime bubble using aggregate quarterly data for the period 1975 q1 2010 q4 i find that the us housing market changed from a stable regime with prices determined by fundamentals to a highly unstable regime at the beginning of the previous decade my results indicate that these imbalances could have been detected with the aid of real time econometric modeling with reference to stiglitz s general conception of a bubble i use the econometric results to construct two bubble indicators which clearly demonstrate the transition to an unstable regime in the early 2000s the indicators are shown to granger cause a set of coincident indicators and financial in stability measures finally it is shown that the increased subprime exposure during the 2000s can explain the econometric breakdown i e the housing bubble may be attributed to the increased borrowing to a more risky segment of the market copyright 2013 john wiley sons ltd

indeterminacy and increasing returns abstract we investigate properties of the one sector growth model with increasing returns under two organizational structures capable of reconciling the existence of aggregate increasing returns with competitive behavior by firms the first involves input externalities the second involves monopolistic competition we show for parameters in close accord with recent literature on real business cycles that the model displays an indeterminate steady state that can be exploited to generate a model of business fluctuations driven by self fulfilling beliefs in our first class of models growth is generated by exogenous increases in factor productivity in the second class the marginal product of capital is large enough for endogenous growth journal of economic literature classification numbers e00 e3 o40

intrinsic bubbles and regime switching abstract froot and obstfeld 1991 allow for an intrinsic bubble in stock prices using approximately a century of annual data for the us in an attempt to model the widely documented deviations from the prices predicted by present values or fundamentals however they assume that the log of real dividends follows a constant random walk with drift over the whole period we show that this assumption is invalid and that a markov switching model is a more appropriate representation of dividends we then generalise the formulation of stock prices including the intrinsic bubble to allow for this and show that regime switching provides a better explanation for stock prices than the bubble we show that when allowance is made both for the bubble and for regime switching in the dividend process the incremental explanatory contribution of the bubble is low

the rise and fall of subprime mortgages after booming the first half of this decade u s housing activity has retrenched sharply single family building permits have plunged 52 percent and existing home sales have declined 30 percent since their september 2005 peaks a rise in mortgage interest rates that began in the summer of 2005 contributed to the housing market s initial weakness by late 2006 though some signs pointed to renewed stability they proved short lived as loan quality problems sparked a tightening of credit standards on mortgages particularly for newer and riskier products as lenders cut back housing activity began to falter again in spring 2007 accompanied by additional rises in delinquencies and foreclosures late summer financial market turmoil prompted further toughening of mortgage credit standards the recent boom to bust housing cycle raises important questions why did it occur and what role did subprime lending play how is the retrenchment in lending activity affecting housing markets and will it end soon is the housing slowdown spilling over into the broader economy

inequality household debt and financial instability an agent based perspective abstract our paper contributes to the literature on the causes of the 2007 2008 financial crisis in the united states by means of an agent based model we replicate an artificial credit network economy in order to assess the impact of growing income inequality in the presence of peer effects and home equity borrowing we show that the resulting debt financed consumption boom jeopardises the stability of the economic system thus paving the way for a financial crisis our model includes a behavioural rule for consumption based on expenditure cascades a hierarchical structure of household finance an articulated credit market with collateralised consumption loans and mortgages and a simple housing market results show that the model is able to capture the economic and social pressure of inequality on low and middle income households that pushes them to increase their consumption via home equity extraction rising non performing loans lead to higher bad debt on the banks balance sheets and consequently to the emergence of a crisis as an endogenous dynamic

the great depression versus the great recession in the u s how fiscal monetary and financial polices compare abstract this study reviews the financial distress that triggered and amplified the financial crises of the great depression and great recession and compares macroeconomic and financial policy responses shadow banking funded the build up of the financial excesses that preceded both the quicker and forceful response of monetary and fiscal policy during the great recession and stronger action to restore market functionality mitigated the downturn and aided recovery nevertheless actions to address the mortgage debt overhang were slower post depression reforms focused on preventing deposit runs and post great recession reforms on preventing runs on bank debt and shadow banks while boosting capital buffers

explaining the boom bust cycle in the u s housing market a reverse engineering approach we use a quantitative asset pricing model to reverse engineer the sequences of shocks to housing demand and lending standards needed to replicate the boom bust patterns in u s housing value and mortgage debt from 1993 to 2015 conditional on the observed paths for u s real consumption growth the real mortgage interest rate and the supply of residential fixed assets a specification with random walk expectations outperforms one with rational expectations in plausibly matching the patterns in the data counterfactual simulations show that shocks to housing demand housing supply and lending standards were important but movements in the mortgage interest rate were not

rational bubbles during poland s hyperinflation implications and empirical evidence abstract it has been argued that the polish hyperinflation at the end of the eighties was too excessive to be attributed to market fundamentals only in this paper a range of indirect non structural and structural tests for rational exploding deterministic and stochastic bubbles are carried out we adopt a new strategy based on the work of hall and sola 1993a which allows for the possibility of switching regimes in the time series properties of the data to allow for both indirect tests and structural tests for the presence of stochastic bubbles

expectations and bubbles in asset pricing experiments abstract we present results on expectation formation in a controlled experimental environment in each period subjects are asked to predict the next price of a risky asset the realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts in most experiments prices deviate from the benchmark fundamental and bubbles emerge endogenously these bubbles are inconsistent with rational expectations and seem to be driven by trend chasing behavior or positive feedback expectations of the participants we also analyze individual predictions of participants and find that participants within a group tend to coordinate on a common prediction strategy

allowance price drivers in the first phase of the eu ets abstract in the first phase of the eu emissions trading scheme eu ets the price per ton of co 2 initially rose to over 30 the price then collapsed to essentially zero by mid 2007 by deriving a structural model of the allowance price under the assumption of efficient markets i examine the extent to which this variation in price can be explained by marginal abatement costs i then gradually relax the model by allowing for delayed adjustment of price to fundamentals as well as by introducing lagged lhs variables the pattern of results suggests that while prices were not initially driven by marginal abatement costs this inefficiency was largely corrected after the accounting of 2005 emissions in april 2006

the other commercial real estate boom and bust the effects of risk premia and regulatory capital arbitrage abstract in the 2000 s u s commercial real estate cre prices experienced a boom and bust as dramatic as the more widely analyzed swings in house prices and contributed significantly to bank failures we model short run and long run movements in capitalization rates rent to price ratio and risk premia for office building and apartments in the mid 2000s boom cre prices were mainly driven by declines in required risk premia that stemmed from a weakening of capital requirements in the bust cre price declines were initially driven by a jump in general risk premia and later by a tightening of effective capital requirements on commercial mortgage backed securities cmbs from the dodd frank act the subsequent recovery in cre prices was induced and sustained by unusually low real treasury yields we conclude that macro prudential regulation of leverage may help limit asset price booms by preventing sharp declines in risk premia

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

labor market frictions indeterminacy and interest rate rules this paper studies the emergence of indeterminate equilibria in a standard new keynesian model characterized by labor market frictions under a policy rule that reacts strictly to inflation given labor market frictions monetary policy may not be able to prevent aggregate fluctuations from being driven solely by self fulfilling expectations this is not though a result that holds under all circumstances a monetary policy that reacts to some average measures of inflation or to the output gap may guarantee determinacy in the economy

ramsey monetary policy with labor market frictions abstract traditional new keynesian models prescribe that optimal monetary policy should aim at price stability in the absence of a labor market frictions the monetary authority faces no unemployment inflation trade off the design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market optimal policy features deviations from price stability in response to both productivity and government expenditure shocks when the hosios 1990 on the efficiency of matching and related models of search and unemployment review of economic studies 57 2 279 298 condition is not met search externalities make the flexible price allocation unfeasible optimal deviations from price stability increase with workers bargaining power as firms incentives to post vacancies fall and unemployment fluctuates above the pareto efficient one

changing credit limits changing business cycles abstract in the last half century capital markets across the industrialized world have undergone massive deregulation involving large increases in the loan to value ltv ratios of households and firms we study the business cycle implications of this phenomenon in an estimated dynamic general equilibrium model with multiple credit constrained agents a progressive relaxation of credit constraints initially leads to both higher macroeconomic volatility and stronger comovement between debt and real activity this pattern reverses at ltv ratios not far from those currently observed in many advanced economies due to credit constraints becoming non binding more often the non monotonic relationship between credit market conditions and macroeconomic fluctuations carries important lessons for regulatory and macroprudential policymakers while reducing the average ltv ratio may unintentionally increase macroeconomic volatility a countercyclical ltv ratio proves to be successful in dampening business cycle fluctuations and most importantly avoiding dramatic output drops

optimal time consistent macroprudential policy collateral constraints widely used in models of financial crises feature a pecuniary externality agents do not internalize how borrowing decisions made in good times affect collateral prices during a crisis we show that under commitment the optimal financial regulator s plans are time inconsistent and study time consistent policy quantitatively this policy reduces sharply the frequency and magnitude of crises removes fat tails from the distribution of asset returns and increases social welfare in contrast constant debt taxes are ineffective and can be welfare reducing while an optimized macroprudential taylor rule is effective but less so than the optimal time consistent policy

leverage and the foreclosure crisis how much of the foreclosure crisis can be explained by the large number of high leverage mortgages originated during the housing boom in our model heterogeneous households select from mortgages with different down payments and choose whether to default given income and housing shocks the use of low down payment loans is initially limited by payment to income requirements but becomes unrestricted during the boom the model approximates key housing and mortgage market facts before and after the crisis a counterfactual experiment suggests that the increased number of high leverage loans originated prior to the crisis can explain over 60 percent of the rise in foreclosure rates

housing wealth effects evidence from an australian panel we explore the positive relationship between house prices and household spending by following a panel of australian households no evidence for traditional housing wealth effects is found with young homeowners exhibiting the largest wealth effects young renters also exhibit a positive consumption response to house prices although less so than young homeowners this suggests that increasing house prices raise spending via easing credit constraints and a common association between house prices and a third factor results from a cohort level panel are similar to those using household level data suggesting that pseudo panels may be used as a partial substitute for actual panels

the theory of rational bubbles in stock prices free disposal of equity which directly rules out the existence of negative rational bubbles in stock pric es also imposes theoretical restrictions on the possible existence o f positive rational bubbles the analysis in this paper shows that a positive rational bubble can start only on the first date of trading of a stock thus the existence of a rational bubble at any date woul d imply that the stock has been overvalued relative to market fundame ntals since the first date of trading and that prior to the first da te of trading the issuer of the stock and potential stockholders who anticipated the initial pricing of the stock expected that the stock would be overvalued copyright 1988 by royal economic society

optimal monetary policy rules with labor market frictions abstract this paper studies optimal monetary policy rules in a framework with sticky prices matching frictions and real wage rigidities optimal policy is given by a constrained ramsey plan in which the monetary authority maximizes the agents welfare subject to the competitive economy relations and the assumed monetary policy rule i find that the optimal rule should respond to unemployment alongside with inflation this is so since models with matching frictions unlike standard new keynesian models feature a congestion externality that makes unemployment inefficiently high a strong response to inflation remains optimal while a response to output is always welfare detrimental

housing and the macroeconomy inflation and the financial accelerator three themes connecting housing and the macroeconomy are discussed first evidence is presented for the property market as one of the drivers of u s consumer price inflation second key drivers of house prices are explained to account for the remarkable diversity of international experience finally three potential links between housing credit and the financial accelerator are discussed these are the consumption channel the investment channel and feedback between bad loans and risk spreads via the financial system and how institutional differences between countries can explain the presence absence and magnitudes of these linkages

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

housing capital gains taxation and homeowner mobility evidence from the taxpayer relief act of 1997 abstract we provide new evidence on the impact of housing capital gains taxation on homeowner behavior by examining residential mobility before and after the taxpayer relief act of 1997 tra97 which generated the most sweeping reform of capital gains taxation in the last two decades in addition to lowering marginal tax rates on long term capital gains for all assets tra97 also eliminated any differential treatment of housing gains above and below age 55 allowing all homeowners to qualify for capital gains exclusions utilizing data drawn from the current population survey cps on either side of the law change 1996 and 1998 on homeowners just above 56 58 year olds and below 52 54 year olds the age 55 threshold and a reduced form difference in difference empirical approach our estimates suggest that the repeal of the differential capital gains tax treatment by age embodied in tra97 had an economically important and statistically significant impact on the residential mobility of under 55 homeowners across a variety of specifications the repeal raised the mobility rate by around 1 1 4 percentage points which for a mean mobility rate of 4 percentage points represented an increase in the mobility rate of homeowners in their early 50s by 22 31 furthermore the bulk of this effect was concentrated among highly mobile homeowners who a priori were more likely to have wanted to trade down e g divorced empty nesters those facing higher capital gains tax rates and those living in states that had experienced higher rates of nominal appreciation

joint dynamics of house prices and foreclosures this paper studies the joint transitional dynamics of the foreclosures and house prices in a standard life cycle incomplete markets model with housing and a realistic long term mortgage structure we calibrate our model to match several long term features of the u s housing market and analyze the effects of several unexpected and permanent shocks on the house price and the foreclosure rate both across the steady states and along the transition between the steady states we examine permanent unexpected shocks to the risk free interest rate the minimum down payment ratio and unemployment during the transition these shocks create large movements in house prices more importantly the foreclosure dynamics are quite significant along the transition compared to the steady state changes and there are strong feedbacks between foreclosures and house prices we assess the effects of a temporary reduction in the risk free interest rate which has moderate effects on house prices but little effect on foreclosure dynamics we also study the effects of an ex ante macroprudential policy which establishes a minimum down payment requirement at a higher threshold such a macroprudential policy helps substantially stabilize both house prices and foreclosures

how mortgage finance reform could affect housing abstract although major changes in mortgage finance have occurred since the subprime bust several issues remain unresolved centering on the roles of fannie mae freddie mac and the fha we analy

conditional testing for unit root bilinearity in financial time series some theoretical and empirical results abstract this paper introduces a t ratio type test for detecting bilinearity in a stochastic unit root process it appears that such a process is a realistic approximation for many economic and financial time series it is shown that under the null of no bilinearity the test statistics are asymptotically normally distributed proofs of these asymptotic normality results require the gihman and skorohod theory for multivariate diffusion processes finite sample results describe speed of convergence power of the tests and possible distortions to unit root testing which might appear due to the presence of bilinearity it is concluded that the two step testing procedure suggested here the first step for the linear unit root and the second step for its bilinearity is consistent in the sense that the size of the step one test is not affected by the possible detection of bilinearity at step two the empirical part of the paper describes testing unit root bilinearity for 65 garch adjusted stock market indices from mature and emerging markets it is shown that for at least 70 of these markets the hypothesis of no unit root bilinearity has to be rejected

the impact of housing markets on consumer debt credit report evidence from 1999 to 2012 we estimate the response of consumer debt portfolios to pronounced housing market swings from 1999 to 2012 using equifax sourced credit report data and a variety of identification approaches we find i the extraordinary climb in home equity debt from 2002 to 2006 is an expression of a stable longer term relationship between house price growth and home equity borrowing ii all preboom homeowners and older and prime postboom homeowners demonstrate near dollar for dollar substitution between expensive credit card and cheap home equity debt in response to home equity changes and iii little evidence of substitution between home equity and student loan debt

evidence on discrimination in consumer markets economists have contributed to the measurement of racial and ethnic discrimination in consumption and to the identification of its causes especially in housing markets and car sales to test the hypothesis that discrimination exists economists have turned to regression analysis and to audits a matched pair survey technique economists also have developed audit based measures of the incidence and severity of discrimination audit studies find continuing high levels of discrimination against minorities in the marketing of available housing and in car prices audit studies also find that discrimination can be caused both by economic agents prejudice and by their search for profits

endogenous business cycles with frictional labour markets we present a neoclassical model of capital accumulation with frictional labour markets under standard parameter values the equilibrium of the model is indeterminate and consequently displays expectations driven business cycles so called endogenous business cycles we study the properties of such cycles and find that the model predicts the high autocorrelation in output growth and the hump shaped impulse response of output found in us data important features that existing endogenous real business cycle models fail to explain the indeterminacy of the equilibrium stems from job search externalities and does not rely on increasing returns to scale as in most models

real business cycles and the animal spirits hypothesis abstract we calibrate a quantitative equilibrium macroeconomic model with an aggregate technology that is subject to increasing returns and show that this model may display fluctuations at business cycle frequencies even when there are no shocks to the fundamentals of the economy these fluctuations are due to the self fulfilling beliefs of investors which we call animal spirits we compare the impulse response functions predicted by our model and by two other more standard models with a four variable vector autoregression on u s data our animal spirits economy is the most successful of the three at matching broad features of the dynamic responses in the data journal of economic literature classification numbers e00 e3 e32

systematic monetary policy and the macroeconomic effects of shifts in residential loan to value ratios what are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets as measured by loan to value ltv ratios using a structural vector autoregression var we find that gdp and business investment increase following an expansionary ltv shock residential investment by contrast falls after a small initial uptick a result that depends on the systematic reaction of monetary policy we show that historically the fed tended to respond to expansionary ltv shocks by raising the monetary policy instrument and as a result mortgage rates increased and residential investment declined house prices are affected in a similar manner

pitfalls in testing for explosive bubbles in asset prices a number of studies e g robert j shiller 1981 olivier j blanchard and mark watson 1982 kenneth d west 1988 have argued that dividend and stock price data are not consistent with the market fundamentals hypothesis in which prices are given by the present discounted values of expected dividends these results have often been construed as evidence for the existence of bubbles or fads related arguments have been made with respect to gold bonds and foreign exchange a major problem with such arguments e g james hamilton and charles whiteman 1985 is that apparent evidence for bubbles can be reinterpreted in terms of market fundamentals that are unobserved by the researcher behzad t diba and herschel i grossman 1984 1988b and hamilton and whiteman 1985 have recommended the alternative strategy of testing for rational bubbles by investigating the stationarity properties of asset prices and observable fundamentals 1 in essence the argument for equities is that if stock prices are not more explosive than dividends then it can be concluded that rational bubbles are not present since they would generate an explosive component to stock prices 2 using unit root tests autocorrelation patterns and cointegration tests to implement this procedure diba and grossman 1988b p 529 state that the analysis supports the conclusion that stock prices do not contain explosive rational bubbles this paper shows that the above battery of tests is in fact unable to detect an important class of rational bubbles the point is demonstrated by constructing rational bubbles that appear to be stationary when unitroot tests are applied even though they are explosive in the relevant sense simulations show that when such bubbles are present stock prices will not appear to be more explosive than dividends on the basis of these tests even though the bubbles are substantial in magnitude and volatility the presence of rational bubbles in actual stock prices thus remains an open question