inflation and the fiscal limit abstract we use a rational expectations framework to assess the implications of rising debt in an environment with a fiscal limit the fiscal limit is defined as the point where the government no longer has the ability to finance higher debt levels by increasing taxes so either an adjustment to fiscal spending or monetary policy must occur to stabilize debt we give households a joint probability distribution over the various policy adjustments that may occur as well as over the timing of when the fiscal limit is hit one policy option that stabilizes debt is a passive monetary policy which generates a burst of inflation that devalues the existing nominal debt stock the probability of this outcome places upward pressure on inflation expectations and poses a substantial challenge to a central bank pursuing an inflation target the distribution of outcomes for the path of future inflation has a fat right tail revealing that only a small set of outcomes imply dire inflationary scenarios avoiding these scenarios however requires the fiscal authority to renege on some share of future promised transfers

financial crises unconventional monetary policy exit strategies and agents expectations a central bank may purchase assets during a financial crisis and then exit from those purchases agents have rational expectations about financial crises as rare events the probability the central bank purchases assets and the exit strategy selling off assets quickly produces a double dip recession while slowly unwinding generates a smooth recovery expectations about the exit strategy influence the initial effectiveness of purchases increasing the probability of purchases during crises distorts the pre crisis economy and depends upon the exit strategy the welfare benefits of unconventional policy may differ ex ante versus ex post as can the preferred exit strategy

risk unemployment and the stock market a rare event based explanation of labor market volatility what is the driving force behind the cyclical behavior of unemployment and vacancies what is the relation between job creation incentives of firms and stock market valuations we answer these questions in a model with time varying risk modeled as a small and variable probability of an economic disaster a high probability implies greater risk and lower future growth lowering the incentives of firms to invest in hiring during periods of high risk stock market valuations are low and unemployment rises the model thus explains volatility in equity and labor markets and the relation between the two first draft november 15 2014 kilic mkilic wharton upenn edu wachter jwachter wharton upenn edu we are grateful to andy abel gabriel chodorow reich max croce giuliano curatola zvi eckstein joao gomes urban jermann christian opp sang byung seo ctirad slavik mathieu taschereau dumouchel michael wachter nancy ran xu amir yaron and seminar participants at the wharton school at the trans atlantic doctoral conference at the western finance association meetings and at the safe asset pricing workshop for helpful comments

best policy response to environmental shocks applying a stochastic framework abstract the paper develops a general framework for the analysis of environmental shocks in growing economies endogenous capital investments allow identifying the dual role of capital as a buffer against shocks and a source of pollution we study the effects of recurring natural disasters on optimal growth and efficient environmental policies emissions may cause continuous fluctuations entail discrete and recurring jumps or trigger so called tipping points with large costs to the economy closed form solutions are provided for all the model variants we discuss possible applications in environmental economics and identify current research gaps

using asset prices to measure the cost of business cycles we measure the cost of consumption fluctuations using an approach that does not require the specification of preferences and instead uses asset prices we measure the marginal cost of consumption fluctuations the per unit benefit of a marginal reduction in consumption fluctuations expressed as a percentage of lifetime consumption we find that the gains from eliminating all consumption uncertainty are very large however for consumption fluctuations corresponding to business cycle frequencies we estimate the marginal cost to be between 0 08 percent and 0 49 percent of lifetime consumption

a new method of estimating risk aversion i show existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model i derive a formula for the coefficient of relative risk aversion in terms of the ratio of the income elasticity of labor supply to wage elasticity and degree of complementarity between consumption and labor i bound the degree of complementarity using data on consumption choices when labor supply varies across states using labor supply elasticity estimates i find a mean estimate of 1 then show generating 2 requires that wage increases cause sharper labor supply reductions jel d81 j22

estimating local welfare generated by an nfl team under credible threat of relocation this study offers the opportunity to examine the welfare contribution of the minnesota vikings to minnesota households in the context of a credible threat of team relocation we find the credibility of the threat of relocation is essential to providing unbiased estimates of welfare this study utilizes contingent valuation methodology cvm and a random utility model rum to analyze minnesotans decision making mechanisms for supporting a new stadium initiative while previous studies have attempted to measure the welfare associated with a sports franchise we develop and discuss bias that may be imparted to estimates when the researcher fails to calculate a choke price further we develop an unbiased approach to identify welfare when respondents perceive a risk of losing the franchise the range of welfare contribution by the vikings to households in minnesota is 445 3 million to 1 571 3 million according to a 95 confidence interval based on our study

dealing with debt abstract this paper explores the menu of options for renormalizing public debt levels relative to nominal activity in the long run should governments eventually decide to do so although debt ratios may need to rise further in some cases a vision of longer term options is key to weighing alternative medium term stabilization strategies orthodox ones the standard fare of officialdom include enhancing growth running primary budget surpluses and privatizing government assets heterodox polices include restructuring debt contracts generating unexpected inflation taxing wealth and repressing private finance advanced countries have relied far more on heterodox approaches than many observers choose to remember

the risk of policy tipping and stranded carbon assets if global warming is to stay below 2 c there are four risks of assets stranding first substantial fossil fuel reserves will be stranded at the end of the fossil era second this is true for exploration capital too third unanticipated changes in present or expected climate policy cause discrete jumps in today s valuation of physical and natural capital fourth if timing and intensity of climate policy are uncertain revaluation of assets occurs as uncertainty about future climate policy is resolved to highlight these four effects we use an analytical model of investment in exploration capital with intertemporal adjustment costs reserves depletion and market capitalization and calibrate it to the global oil and gas industry climate policy implements a carbon budget commensurate with 2 c peak warming and we allow for immediate or delayed carbon taxes and renewable subsidies the social welfare ranking of these instruments is inverse to that of the oil and gas industry which prefers renewable subsidy and delaying taxes for as long as possible we also pay attention to how the legislative risk of tipping into policy action affects the timing of the end of the fossil era the profitability of existing capital and green paradox effects

volatility risk and economic welfare this paper examines the effects of time varying volatility on welfare i construct a tractable endogenous growth model with recursive preferences stochastic volatility and capital adjustment costs the model shows that a rise in volatility can decelerate growth in the absence of any level shocks in contrast to level risk which is always welfare reducing for a risk averse household volatility risk can increase or decrease welfare depending on model parameters when calibrated to u s data the model finds that the welfare cost of volatility risk is largely negligible under plausible model parameterizations

sports jobs and taxes the economic impact of sports teams and stadiums this book examines the economic impact of new stadiums or a sports franchise on the local economy it explores such general issues as the appropriate method for measuring economic benefits and costs the source of the bargaining power of teams in obtaining subsidies from local government the local politics of attracting and retaining teams the relationship between sports and local employment and the importance of stadium design in influencing the economic effects of a facility the book also contains case studies of major league sports facilities in baltimore chicago cincinnati cleveland indianapolis san francisco and the twin cities and of minor league baseball stadiums and spring training facilities the primary conclusions are the sports teams and stadiums are not a source of local economic growth and employment the size of the net subsidy exceeds the financial benefit of a new stadium and cities are probably willing to subsidize sports teams because of the intense popularity of sports among a substantial proportion of voters and businesses and the leverage that teams enjoy from the monopoly position of professional sports leagues

the ethical backlash of corporate branding past decades have witnessed the growing success of branding as a corporate activity as well as a rise in anti brand activism while appearing to be contradictory both trends have emerged from common sources the transition from industrial to post industrial society and the advent of globalization the examination of which might lead to a socially grounded understanding of why brand success in the future is likely to demand more than superior product performance placing increasing demand on corporations with regard to a broader envelop of socially responsible behavior directions for strategic and managerial options are suggested

the economic consequences of professional sports strikes and lockouts post evaluation of the effects of the lockout an examination of the impact of past work stoppages in professional football and basketball can shed some light on the potential impact of the nba lockout as well as the viability of professional sports as engines of economic growth in cities the parameter estimates from a reduced form empirical model of the determination of real per capita income in 37 standard metropolitan statistical areas smsas over the period 1969 1996 suggest that prior work stoppages in professional football and baseball had no impact on the economies of cities with franchises further the departure of professional basketball from cities had no impact on their economies in the following years these results refute the idea that attracting professional sports franchises represents a viable economic development strategy

optimal input trade policy under economic uncertainties in a small open economy this article theoretically analyses optimal input trade policy under economic uncertainties in a small open economy the benchmark model explains both key business cycle moments and asset prices of

catastrophic natural disasters and economic growth this paper examines the short and long run average causal impact of catastrophic natural disasters on economic growth by combining information from comparative case studies the counterfactual of the cases studied is assessed by constructing synthetic control groups taking advantage of the fact that the timing of large sudden natural disasters is an exogenous event it is found that only extremely large disasters have a negative effect on output both in the short and long run however this result appears in two events where radical political revolutions followed the natural disasters once these political changes are controlled for even extremely large disasters do not display any significant effect on economic growth it is also found that smaller but still very large natural disasters have no discernible effect on output

averting catastrophes the strange economics of scylla and charybdis faced with numerous potential catastrophes nuclear and bioterrorism mega viruses climate change and others which should society attempt to avert a policy to avert one catastrophe considered in isolation might be evaluated in cost benefit terms but because society faces multiple catastrophes simple cost benefit analysis fails even if the benefit of averting each one exceeds the cost we should not necessarily avert them all we explore the policy interdependence of catastrophic events and develop a rule for determining which catastrophes should be averted and which should not jel d61 q51 q54

macroeconomic disasters and the equity premium puzzle are emerging countries riskier abstract not necessarily i provide evidence that advanced countries equity premium and consumption growth differ significantly from those of emerging countries i then estimate distinct disaster risk parameters for these two country groups my bayesian analysis demonstrates that in some aspects advanced countries are more exposed to disaster risk while in others their exposure is smaller disasters are estimated to be more severe and uncertain in advanced countries but are on average less persistent advanced countries are also more likely to experience a global disaster whereas disasters in emerging countries tend to be more idiosyncratic i show that country group heterogeneity in disaster length and magnitude has the largest impact on equity premium

do natural disasters affect the poor disproportionately price change and welfare impact in the aftermath of typhoon milenyo in the rural philippines summary this paper illustrates the sharp contrast in welfare impacts between the rich and the poor caused by typhoon milenyo in a philippine village we find that fish prices dropped sharply due to the damage caused to fish pens near the village leading to positive net welfare gains among the wealthy in contrast the poor do not consume much fish and thus did not gain from the sharp decline in prices finally consumption reallocation played an important role as an ex post risk coping measure albeit only among the wealthy who are relatively well protected against typhoons

on the aggregate welfare cost of great depression unemployment abstract the potential benefit of policies that eliminate a small likelihood of economic crises is calculated an economic crisis is defined as an increase in unemployment of the magnitude observed during the great depression for the u s the maximum likelihood estimate of entering a depression is found to be about once every 83 years the welfare gain from setting this small probability to zero can range between 1 and 7 of annual consumption in perpetuity for most estimates more than half of these large gains results from a reduction in individual consumption volatility

evaluation of an informal rule for the allocation of sports capital funding significant empirical research has highlighted the existence of pork barrel politics this is where public expenditure is targeted at particular regions based on the logic of collective action political entrepreneurs maximize their chances of re election by searching for and implementing programs or projects characterized by concentrated benefits for key constituents and broadly dispersed costs using data on capital grants to irish sports teams for 1998 2015 this paper analyzes the extent to which an informal rule can correct this bias the case of allocating sports capital grants is particularly interesting since academic research media commentary and ministerial statements all seem to confirm the existence of political bias with such allocations in ireland specifically the geographical distribution of the grants are clearly linked to the minister for sport that minister s constituent county receives significantly higher per capita grant allocation than any other county the grants were suspended in 2009 because of a fiscal crisis arising from the recession when the grants were restored in 2012 a new informal rule for allocations was introduced that informal rule was introduced to reduce the extent of pork barrel politics by ensuring that no county received less than 75 or more than 150 of the national average of the per capita grant allocations the present study evaluated the effectiveness of that informal rule in reducing pork barrel politics in irish sports capital grant allocations

can ambiguity about rare disasters explain equity premium puzzle abstract we study the effects of ambiguity aversion to diffusion risk and jump risk on asset prices in a production based asset pricing model and find that ambiguity aversion to jump risk can resolve equity premium puzzle and risk free rate puzzle

the price of victory the impact of the olympic games on residential real estate markets the olympic games have come to be viewed as an unprecedented opportunity to leverage a short term event into a long term positive legacy although the olympics are assumed to yield economic benefits there has been no rigorous analysis of the impact of hosting on residential real estate markets utilising a substantial dataset for six host cities and comparable cities between 1984 and 2000 this paper employs an adjusted interrupted time series approach to estimate the house price impacts of hosting the olympic games the results suggest that the olympics are not a one size fits all economic development strategy and that potential outcomes are dependent on a number of factors including the co ordination of planning and olympic related development and the relative scale of the total olympic investment

market fragility and the paradox of the recent stock bond dissonance abstract after the lehman brothers collapse the stock index has exceeded its pre lehman brothers peak by 36 in real terms seemingly markets have been demanding more stocks instead of bonds yet instead of observing higher bond rates paradoxically bond rates have been persistently negative after the lehman brothers collapse to explain this paradox we suggest that in the post lehman brothers period investors changed their perceptions on disasters thinking that disasters occur once every 30 years on average instead of disasters occurring once every 60 years in our asset pricing calibration exercise this rise in perceived market fragility alone can explain the drop in both bond rates and price dividend ratios observed after the lehman brothers collapse which indicates that markets mostly demanded bonds instead of stocks

wealth distribution and output fluctuations we explore the link between wealth inequality and output fluctuations in a general two sector neoclassical growth model with endogenous labor and heterogeneous agents when agents have homogeneous crra preferences and individual wealth is pareto distributed a sufficiently large rise in the gini index typically leads to an increase in endogenous fluctuations of output for general economies we show that under plausible conditions on the fundamentals wealth inequality is still a destabilizing factor

on the long run evolution of inheritance france 1820 2050 this paper attempts to document and account for the long run evolution of inheritance we find that in a country like france the annual flow of inheritance was about 20 25 of national income between 1820 and 1910 down to less than 5 in 1950 and back up to about 15 by 2010 a simple theoretical model of wealth accumulation growth and inheritance can fully account for the observed u shaped pattern and levels using this model we find that under plausible assumptions the annual bequest flow might reach about 20 25 of national income by 2050 this corresponds to a capitalized bequest share in total wealth accumulation well above 100 our findings illustrate the fact that when the growth rate g is small and when the rate of return to private wealth r is permanently and substantially larger than the growth rate say r 4 5 vs g 1 2 which was the case in the 19th century and early 20th century and is likely to happen again in the 21st century then past wealth and inheritance are bound to play a key role for aggregate wealth accumulation and the structure of lifetime inequality contrarily to a widely spread view modern economic growth did not kill inheritance

credit constraints equity market liberalization and growth rate asymmetry abstract this paper provides evidence that financial openness is an important determinant of growth rate asymmetry in emerging markets i exploit exogenous shocks to financial flows and examine the impact of equity market liberalization on the skewness of output growth for 93 countries during the 1973 2009 period i show that opening the economy to foreign portfolio investment results in a substantially higher negative skewness of output growth this result obtains with equal strength in the aggregate data and in the sectoral data and it is disproportionately stronger in sectors that require more external finance the skewness effect of financial openness is stronger in countries which experienced a banking crisis after liberalization

why financial executives do bad things the effects of the slippery slope and tone at the top on misreporting behavior this paper employs theory of normal organizational wrongdoing and investigates the joint effects of management tone and the slippery slope on financial reporting misbehavior in study 1 we investigate assumptions about the effects of sliding down the slippery slope and tone at the top on financial executives decisions to misreport earnings results of study 1 indicate that executives are willing to engage in misreporting behavior when there is a positive tone set by the chief financial officer cfo kind attitude toward employees and non aggressive attitude about earnings regardless of the presence or absence of a slippery slope a negative tone set by the cfo does not facilitate the transition from minor indiscretions to financial misreporting in study 2 we find that auditors evaluating executives decisions under the same conditions as those in study 1 do not react to the slippery slope condition but auditors assess higher risks of fraud when the cfo sets a negative tone overall our results indicate that many assumptions about the slippery slope and tone at the top should be questioned we provide evidence that pro organizational behaviors and incrementalism yield new insights into the causes of ethical failures financial misreporting behavior and failures of corporate governance mechanisms

a winning proposition the economic impact of successful national football league franchises it was the best of times and it was the worst of times this classic phrase could be used to describe the period of 1990 through 1993 for fans of the buffalo bills the bills performed well enough to win the american football conference championship four consecutive years but each year the team s season ended with a super bowl defeat the purpose of this study is to determine if fans of successful but not world champion sport teams like the buffalo bills experience economic benefits in conjunction with their team s successes coates and humphreys 2002 examined whether a sports team winning a championship had a positive effect on the real per capita personal income of the local metropolitan area despite examining various measures of success across several different sports 1 coates and humphreys found that the local national football league nfl team winning the super bowl was the only variable that had a significant positive effect on income although matheson 2006 shows evidence contradicting the findings coates and humphreys results are interesting when considered in the context of other similar studies that fail to find a positive effect from the presence of the teams in the city coates and humphreys 1999 2003 the building of stadia for the teams coates and humphreys 1999 or the presence of major events like the super bowl or world cup baade and matheson 2000 2004 matheson and baade 2006 on local income in this paper we use a psychological framework to provide a rationale for the increased economic well being associated with a super bowl victory additionally we rely on the psychological literature and argue that the economic benefits of a winning team should extend beyond just the championship team to the cities of teams that experience seasonal success to examine whether a winning effect can be extended to all teams in the league and is not limited to just the super bowl champion we include the winning percentage of the local nfl team although lacking a formal model the psychological literature suggests multiple individual level processes that may account for the economic impact of winning percentage to test whether the effect is based on increased consumption or increased productivity we estimate our models on the real wage income per capita as well as personal income additionally because the econometric model is a dynamic panel series model a model that can exhibit substantial bias in the coefficients judson and owen 1999 we use the method of arellano and bond 1991 to correct for bias this method also provides insight in regard to the directionality of the winning percentage and personal income relationship specifically that winning percentage drives changes in personal income as opposed to changes in personal income impacting winning percentage in the arellano bond estimations winning percentage is treated as endogenous meaning within the system while the remaining variables are treated as being exogenous as an additional further check we reestimate the model including team salary if the direction of causation flows from income to winning it would be indicated by increases in the coefficient on payroll for the team the results show that even after including team salaries in the model winning percentage still positively impacts income i psychological impact of sport team s success research has consistently demonstrated that people go to great lengths to publicly identify with winning sport teams cialdini et al 1976 cialdini and richardson 1980 end 2001 joinson 2000 wann and branscombe 1990 this tendency to bask in the reflected glory cialdini et al 1976 is related to event specific success a team s victory and global success winning percentage qualifying for play offs etc specifically end et al 2002 found that when sport fans were asked to identify their favorite teams the teams with which they identified had an average winning percentage significantly greater than 50

macroeconomic priorities and crash states this paper reproduces lucas s analysis of the costs of business cycles in an economy with a low probability crash state in consumption growth it is shown that the presence of a crash state dramatically increases the costs of consumption volatility

time varying rare disaster risks oil returns and volatility abstract this paper provides a novel perspective to the predictive ability of rare disaster risks for west texas intermediate wti oil market returns and volatility using a nonparametric quantile based methodology over the monthly period of 1918 01 2013 12 we show that a nonlinear relationship and structural breaks exists between oil returns and various rare disaster risks hence linear granger causality tests are misspecified and the linear model results of non predictability are unreliable however the quantile causality test shows that rare disaster risks strongly affect both wti returns and volatility with stronger evidence of predictability observed at lower quantiles of the respective conditional distributions our results are robust to alternative specification of volatility based on a garch model and measure of rare disaster risks based on the number of crises

relative risk aversion and power law distribution of macroeconomic disasters summary the coefficient of relative risk aversion is notoriously difficult to estimate recently barro and jin on the size distribution of macroeconomic disasters econometrica 2011 79 3 434 455 have come up with a new estimation approach that fits a power law model to the tail of distribution of macroeconomic disasters we show that their results can be successfully replicated using a more refined power law fitting methodology and a more comprehensive dataset copyright 2014 john wiley sons ltd

disaster risk and preference shifts in a new keynesian model in rbc models disaster risk shocks reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall through their effects on agents preferences gourio 2012 this paper offers a solution to this puzzle by developing a new keynesian model with such a small but time varying probability of disaster we show that price stickiness combined with an eis smaller than unity restores procyclical consumption and wages while preserving countercyclical risk premia in response to disaster risk shocks the mechanism then provides a rationale for discount factor first and second moment uncertainty shocks

on the size distribution of macroeconomic disasters confidence interval of 2 to 4 the results are robust to uncertainty about the values of the disaster probability and the equity premium and can accommodate seemingly paradoxical situations in which the equity premium may appear to be infinite

leading by example values based strategy to instill ethical conduct years of research clearly shows that relying on traditional organizational power bases is not effective when companies want to promote business ethics and performance it is not only that the use of legitimate power to establish ethics codes and coercive power to punish employees who do not comply does not work this study based on a multi method research approach in the retail industry indicates that the classic iron fist leads to unethical business values and lower service performance but there is a light at the end of the tunnel for forward looking managers the ethical attitudes and behaviors of employees within international organizations is a dynamic variable that is possible to change by the use of values based leadership our extensive study of a large grocery store chain owned by a multinational corporation indicates that managers who lead by example will boost team values and commitment

on the welfare cost of rare housing disasters abstract this paper examines the welfare cost of rare housing disasters characterized by large drops in house prices i construct an olg general equilibrium model with recursive preferences and housing disaster shocks the likelihood and magnitude of housing disasters are inferred from historical housing market experiences in the oecd the model shows that despite the rarity of housing disasters canadian households would willingly give up 6 percent of their non housing consumption each year to eliminate the housing disaster risk the welfare evaluation of this risk however varies considerably across age groups the risk translates into a welfare loss of as much as 16 percent of annual non housing consumption for the old but a welfare gain of 2 percent for the young this asymmetry stems from the fact that compared to the old younger households suffer less from house price declines in disaster periods due to smaller holdings of housing assets and benefit from lower house prices in normal periods due to the negative price effect of disaster risk

labor market search endogenous disasters and the equity premium puzzle abstract the present paper investigates i the endogenous disaster mechanism in a textbook search and matching model when calibrated with a constant flow value of unemployment that is close to average labor productivity and ii its contribution to solve the equity premium puzzle i offer a simple explanation for the core of the disaster mechanism the lower bound say xkink on the annuitized costs the firm incurs from investing in a match lies sufficiently close to the body of productivity s distribution if labor productivity drops close to or even below xkink for consecutive periods the firm s annuitized share in expected future productivity of a worker can either only barely or even no longer at all break even the annuitized lower bound of the costs the firm faces vacancies become unprofitable and the economy quickly enters a downward spiral the core of the mechanism relies critically on an unreasonably high and constant flow value of unemployment disasters disappear entirely for slightly smaller or procyclical values and the effects cannot be compensated by empirically plausible adjustments of the model s remaining parameters while the model can generate a sizeable equity premium combined with a small risk free rate if the flow value of unemployment is large and constant and if the coefficient of relative risk aversion and the elasticity of intertemporal substitution are both high premia again collapse by an order of magnitude in the versions of the model without disasters

asset bubbles and the cost of economic fluctuations lucas 1987 2003 estimates that the cost of economic fluctuations is low a social planner would pay no more than 0 1 of permanent consumption to eliminate all future business cycle fluctuations the current paper extends lucas calculations by studying the costs of fluctuations arising from asset bubbles we estimate two classes of costs consumption volatility due to asset bubbles in a representative agent economy and consumption volatility that arises because households have heterogeneous exposure to the bubble assets we show that the magnitude of welfare costs is primarily driven by the existence of heterogeneity our benchmark calibration implies that the asset bubbles of the last decade generated a social welfare cost equal to a permanent 3 reduction in the level of national consumption if assets are held proportionately across the population these welfare costs fall by an order of magnitude our calculations are sensitive to the details of the calibration including the degree of balance sheet and trading heterogeneity the coefficient of relative risk aversion and the magnitude of the asset bubble our preferred specifications generate welfare costs ranging from 1 to 10 of permanent national consumption

asset pricing and the propagation of macroeconomic shocks this paper considers the implications of habit formation and financial frictions for the propagation of macroeconomic shocks in a model that is capable of matching asset pricing moments a short lived shock that destroys a small fraction of the economy s stock of pledgeable collateral generates a persistent recession a stock market crash and a flight to safety effect this novel mechanism creates a tight link between the asset pricing implications of macroeconomic models and their ability to propagate and amplify the effects of macroeconomic shocks

interpreting volatility shocks as preference shocks this paper examines the relationship between volatility shocks and preference shocks in an analytically tractable endogenous growth model with recursive preferences and stochastic volatility i show that there exists an explicit mapping between volatility shocks and preference shocks and a rise in volatility generates the same impulse responses of macroeconomic aggregates as a negative preference shock

are we willing to pay enough to back the bid valuing the intangible impacts of london s bid to host the 2012 summer olympic games using a contingent valuation survey this paper provides the first empirical test of the proposition that intangible impacts might justify hosting major sporting events on cost benefit grounds respondents drawn from london manchester and glasgow were asked for their willingness to pay wtp to host the 2012 olympic games in london on the basis of the intangible impacts that this event might provide annual mean wtp is 22 12 and 11 per year for 10 years in these 3 uk cities respectively an illustrative total uk wtp for intangible impacts is in the region of 2 billion statistical analysis of wtp determinants reveals a range of plausible explanatory factors such as respondents degree of support for the bid

a rational economic model of paygo tax rates abstract we argue that paygo rates are determined by a representative agent and a benevolent government jointly maximizing the expected life time utility of the agent the distributions of labor and capital income are calculated from national data on real gdp real wages and the real return to capital since 1950 with uniform risk aversion predicted rates explain 83 of the variance of observed rates the globalization of capital markets would lead to convergence of paygo rates our results are immune to crises like 2008

information acquisition and welfare we study information acquisition in a flexible framework with strategic complementarity or substitutability in actions and a rich set of externalities that are responsible for possible wedges between the equilibrium and the efficient acquisition of information first we relate the in efficiency in the acquisition of information to the in efficiency in the use of information and explain why efficiency in the use is no guarantee of efficiency in the acquisition next we show how the acquisition of private information affects the social value of public information i e the comparative statics of equilibrium welfare with respect to the quality of public information finally we illustrate the implications of the results in a monetary economy with price rigidities and dispersed information about productivity shocks

evaluating risky consumption paths the role of intertemporal substitutability abstract in dynamic stochastic welfare comparisons a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption risk changes the problem arises in any setting in which uncertainty is propagated over time notably but not exclusively in economies with stochastic consumption trends regardless of the preference setup adopted an increase in risk aversion amplifies the per period costs of risks the weights consumers use to cumulate the per period costs of risks with persistent effects should however depend on intertemporal substitutability as well as on risk aversion under time separable expected utility preferences an increase in the period utility function s curvature therefore alters the welfare effect of risk for reasons that are in part unrelated to risk aversion to illustrate these points i reconsider lucas s estimate of the cost of consumption instability for the postwar united states

optimal fiscal and monetary policies in the face of rare disasters this paper studies optimal fiscal and monetary policies in an economy exposed to large adverse shocks rare disasters we contrast optimal policies under commitment and discretion and identify several striking differences between these institutional environments a government that can commit to its policy plans relies heavily on debt to smooth the adverse effects of large shocks over time lack of commitment seriously limits the government s ability to use debt as a shock absorber under discretion an increase in debt leads to an increase in inflation expectations and therefore higher nominal interest rate distortions hence the discretionary government keeps debt in close vicinity of its steady state level and the response of taxes inflation and interest rates to shocks is much more pronounced under discretion than under commitment this is particularly relevant for large shocks and when the initial stock of government debt is already high at the time the shock occurs we also argue that the adverse welfare effects of disasters are larger under discretion than under commitment but these welfare differentials can be significantly reduced by making the discretionary government inflation averse

joseph schumpeter lecture the great moderation the great panic and the great contraction this lecture examines the causes of the recent financial crisis and subsequent recession on the macroeconomic side the great moderation encouraged an overly optimistic assessment of risk combined with low interest rates reflecting both loose monetary policy and relatively high asian savings rates that encouraged a build up of excessive leverage in the banking system on the microeconomic side distorted incentives led to a concentration and mispricing of risk informational complexities associated with new financial assets and the interconnectedness of financial institutions then resulted in the closure of funding markets and a flight to safety when loan defaults rose unexpectedly the episode indicates the need to focus on agency and information problems between banks and their funders in addition to those between the banks and their borrowers it also suggests that the process of financial intermediation should play a more prominent role in macroeconomic models jel e32 e44 e52 e58 f32 g01 g21

measuring intertemporal substitution the importance of method choices and selective reporting i examine 2 735 estimates of the elasticity of intertemporal substitution in consumption eis reported in 169 published studies the literature shows strong selective reporting researchers discard negative and insignicant estimates too often which pulls the mean estimate up by about 0 5 the reporting bias dwarfs the effects of methods with the exception of the choice between micro and macro data when i correct the mean for the bias for macro estimates i get zero even though the reported t statistics are on average two the corrected mean of micro estimates of the eis for asset holders is around 0 3 0 4 calibrations greater than 0 8 are inconsistent with the bulk of the empirical evidence jel e21 c83

fifth order perturbation solution to dsge models abstract this paper derives a fifth order perturbation solution to dsge models the paper develops a new notation that reduces the notational complexity of high order solutions and yields a faster code the new notation consists of new matrix forms of high order multivariate chain rules and a new representation of the model as a function of one vector variable the algorithm that implements the new notation is between 3 and 55 times faster than dynare depending on model size and solution order

rare disasters asset prices and welfare costs a representative consumer model with epstein zin weil preferences and i i d shocks including rare disasters accords with observed equity premia and risk free rates if the coefficient of relative risk aversion equals 3 4 if the intertemporal elasticity of substitution exceeds one an increase in uncertainty lowers the price dividend ratio for equity and a rise in the expected growth rate raises this ratio calibrations indicate that society would willingly reduce gdp by around 20 percent each year to eliminate rare disasters the welfare cost from usual economic fluctuations is much smaller though still important corresponding to lowering gdp by about 1 5 percent each year

tails fears and risk premia we show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia exploiting the special structure of the jump tails and the pricing thereof we identify and estimate a new investor fears index the index reveals large time varying compensation for fears of disasters our empirical investigations involve new extreme value theory approximations and high frequency intraday data for estimating the expected jump tails under the statistical probability measure and short maturity out of the money options and new model free implied variation measures for estimating the corresponding risk neutral expectations

the effect of professional sports on the earnings of individuals evidence from microeconomic data this article examines the impact of professional sports franchises in labour markets using data from the march supplement to the current population survey cps for workers employed in specific occupational groups in all large us cities from 1983 to 2002 results from a standard wage model suggest that professional football franchises increase average hourly and weekly earnings of males employed in these occupations but professional baseball franchises reduce them these results support growing evidence that professional sports affect labour markets however the mixed nature of the association between sport and earnings provides little economic justification for government subsidies for professional sport

on the welfare costs of business cycle fluctuations and economic growth variation in the 20th century and beyond lucas 1987 has shown a surprising result in business cycle research the welfare cost of business cycles are very small our paper has several original contributions first in computing welfare costs we propose a novel setup that separates the eects of uncertainty stemming from business cycle uctuations and economic growth variation second we extend the sample from which to compute the moments of consumption the whole of the literature chose primarily to we gratefully acknowledge the comments of caio almeida carlos e da costa robert f engle pedro c ferreira antonio fiorencio rodolfo manuelli samuel pessoa and octavio tourinho on this or on earlier versions of this paper all errors are ours we thank cnpq brazil faperj and inct for nancial support y corresponding author

valuation of natural capital under uncertain substitutability abstract natural capital is complex to value notably because of the high uncertainties surrounding the substitutability of its future ecosystem services we examine a lucas economy in which a consumption good is produced by combining different inputs one of them being an ecosystem service that is partially substitutable with other inputs the growth rate of these inputs and the elasticity of substitution evolve in a stochastic way we characterize the socially efficient ecological discount rates that should be used to value future ecosystem services at different time horizons we show that the inverse of the elasticity of substitution can be interpreted as the ccapm beta of natural capital we also show that any increase in risk of this beta reduces the ecological discount rate if our collective beliefs about the elasticity of substitution of ecosystem services are gaussian the ecological discount rates go to minus infinity for finite maturities in that case a marginal increase in natural capital has an infinite value we provide a realistic calibration of the model that is coherent with observed asset prices by using the model of extreme events of barro 2006 the bliss maturity for infinite discount factors is less than 100 years in this calibration

aggregate instability under balanced budget consumption taxes a re examination we re examine the destabilizing role of balanced budget fiscal policy rules based on consumption taxation using a one sector model with infinitely lived households we consider a specification of preferences derived from jaimovich 2008 14 and jaimovich and rebelo 2009 15 which is flexible enough to encompass varying degrees of income effect when the income effect is not too large we show that there exists a laffer curve which explains the multiplicity of steady states and that non linear consumption taxation may destabilize the economy promoting expectation driven fluctuations if the elasticity of intertemporal substitution in consumption is sufficiently larger than one and the tax rate is counter cyclical with respect to consumption numerical illustrations also show that consumption taxation may be a source of instability for most oecd countries for a wide range of structural parameters configurations we finally prove the robustness of our conclusions if we consider a discrete time setup

how much would you pay to resolve long run risk abstract though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny the long run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles has ignored the full implications of their parameter specifications recursive utility implies that the temporal resolution of risk matters and a quantitative assessment thereof should be part of the calibration process this paper gives a sense of the magnitudes of implied timing premia its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long run risks and related models jel d81 g11 g12

ambiguity attitudes in a large representative sample using a theorem showing that matching probabilities of ambiguous events can capture ambiguity attitudes we introduce a tractable method for measuring ambiguity attitudes and apply it in a large representative sample in addition to ambiguity aversion we confirm an ambiguity component recently found in laboratory studies a insensitivity the tendency to treat subjective likelihoods as 50 50 thus overweighting extreme events our ambiguity measurements are associated with real economic decisions specifically a insensitivity is negatively related to stock market participation ambiguity aversion is also negatively related to stock market participation but only for subjects who perceive stock returns as highly ambiguous this paper was accepted by james smith decision analysis

the causes and consequences of wal mart s growth wal mart is the largest company in the world yet little is known about its economic impact this essay discusses what is known about wal mart s competitive advantage and its economic impact on local communities as well as the national and global economy and highlights the open questions to be addressed by future research

equity returns and business cycles in small open economies this is the first paper in the literature to match key business cycle moments and long run equity returns in a small open economy with production these results are achieved by introducing three modications to a standard real business cycle model 1 borrowing and lending costs are imposed to increase the volatility of the intertemporal marginal rate of substitution 2 investment adjustment costs are assumed to make equity returns more volatile and 3 ghh preferences are employed to smooth consumption we also decompose the contributions of productivity the world interest rate and government expenditure shocks to the equity premium our results are based on data from argentina brazil and chile

intergenerational risk sharing pensions and endogenous labour supply in general equilibrium we show that a two tier pension system with a pay as you go first tier and a fully funded defined wage indexed second tier can provide for optimal intergenerational risk sharing without distorting the labour supply thereby achieving the first best other arrangements with a fully funded second tier fail to achieve the first best

international evidence on the size of the random walk in output this paper contributes three extensions of cochrane s work on measuring the relative stability of long term growth it estimates variance ratios for nine oecd countries over the period 1871 1985 presents an improved approximation to the distribution of the variance ratio and considers the comovements of long growth cycles across countries the evidence indicates that the relative stability of long term growth found by cochrane is unique to the united states relative to the united states most countries have more variable dynamics at low frequencies and smoother dynamics at frequencies traditionally associated with business cycles

the intended and unintended consequences of financial market regulations a general equilibrium analysis in a production economy with trade in financial markets motivated by the desire to share labor income risk and to speculate we show that speculation increases volatility of asset returns and investment growth increases the equity risk premium and reduces welfare regulatory measures such as constraints on stock positions borrowing constraints and the tobin tax have similar effects on financial and macroeconomic variables borrowing limits and a financial transaction tax improve welfare because they substantially reduce speculative trading without impairing excessively risk sharing trades

asset market participation and portfolio choice over the life cycle using error free data on life cycle portfolio allocations of a large sample of norwegian households we document a double adjustment as households age a rebalancing of the portfolio composition away from stocks as they approach retirement and stock market exit after retirement when structurally estimating an extended life cycle model the parameter combination that best fits the data is one with a relatively large risk aversion a small per period participation cost and a yearly probability of a large stock market loss in line with the frequency of stock market crashes in norway

an empirical study of the determinants of green party voting i empirically study the determinants of individuals green voting behavior for this i make use of three datasets from germany a panel dataset and two cross sectional datasets the empirically strongest determinants are the voters attitude or distance to nuclear sites the level of schooling and net income i show that those voters with deviant attitudes or alternative world views are more likely to vote green a result of the fact that the green party has always had the position of a protest party i find little role for demographic variables like gender marital status or the number of children this is in contrast to the stated preference literature age plays a role for explaining voting behavior only insofar as it proxies for health

perturbation solution and welfare costs of business cycles in dsge models abstract lucas 1987 argues that the removal of cyclical fluctuations would barely improve economic welfare he considers a risk averse consumer valuing exogenously given streams of consumption c t c e g t e 2 2 t driven by an iid sequence of draws t from a standard normal distribution this allows him to change the size 2 of the fluctuations without changing the mean of the process in production economies too uncertainty is typically introduced in form of multiplicative log normally distributed shocks so that mean preserving spreads can be analyzed in an analogous way however only few stochastic dynamic general equilibrium dsge models admit an analytic solution the most prevalent method to solve these models perturbation methods obtain an approximation to the stochastic model by perturbing the solution of the model s deterministic counterpart with respect to the uncertainty parameter yet widely available formulae to compute perturbation solutions are based only on the perturbation of t and do not adequately capture the additional deviation 2 2 in the mean between the stochastic model and its deterministic version we show within a model admitting an analytical solution that a second order approximation of the welfare criterion also requires to perturb the mean thus welfare measures based on the standard procedures for second order solutions are seriously biased by a purely exogenous mean effect we develop a general procedure of computing second order accurate approximations of welfare gains or losses in the canonical dsge model by extending the computation of second order solutions pioneered by schmitt grohe and uribe 2004 to allow for mean preserving increases in the size of shocks we apply our method to the model considered by cho et al 2015 and show that different from the results reported by these authors removing the cycle is always welfare improving welfare measures computed from weighted residuals methods confirm the logic behind our perturbation approach and verify the accuracy of our estimates

macrofinancial imbalances in historical perspective a global crisis index abstract global crisis episodes are rare events that can be properly studied by adopting the long run view of macroeconomic history in this study we explore the strength of the relationship between current account imbalances credit growth and equity returns at global level and document new evidence of a recurring sequencing pattern ahead of global crisis periods where credit booms are preceded by growing external imbalances and crisis episodes occur at the low end of the contraction phase of equity returns we use this information to construct a single aggregate measure with the aim of signaling periods of increasing risk of macroeconomic and financial instability at global level three major crisis episodes are identified with our global crisis index the 1929 crisis the breakdown of the bretton woods system and the recent financial crisis since past global crisis episodes at international level culminated with the collapse of existing international monetary systems the ongoing debate on the reforms needed to enhance the stability of international financial markets indicates the recent global financial crisis as a major turning point in the evolution of the international financial and monetary system

intergenerational redistribution in the great recession in this paper we construct a stochastic overlapping generations general equilibrium model in which households are subject to aggregate shocks that aect both wages and asset prices we use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across dierent household age groups the model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages asset price declines hurt the old who rely on asset sales to nance consumption but benet the young who purchase assets at depressed prices in our preferred calibration asset prices decline more than twice as much as wages consistent with the experience of the us economy in the great recession a model recession is approximately welfare neutral for households in the 20 29 age group but translates into a large welfare loss of around 10 percent of lifetime consumption for households aged 70 and over

the cost of business cycles under endogenous growth robert e lucas jr argued that the welfare gains from reducing aggregate consumption volatility are negligible subsequent work that revisited his calculation continued to find small welfare benefits further reinforcing the perception that business cycles do not matter this paper argues instead that fluctuations can affect welfare by affecting the growth rate of consumption i show that fluctuations can reduce growth starting from a given initial consumption which can imply substantial welfare effects as lucas himself observed empirical evidence suggests the welfare effects are likely to be substantial about two orders of magnitude greater than lucas original estimates

rare disasters and risk sharing with heterogeneous beliefs risks of rare economic disasters can have a large impact on asset prices at the same time difficulties in inference regarding both the likelihood and severity of disasters as well as agency problems can lead to significant disagreements among investors about disaster risk we show that such disagreements generate strong risk sharing motives such that just a small number of optimists in the economy will significantly reduce the disaster risk premium our model highlights the latent nature of disaster risk the disaster risk premium will likely be low and smooth during normal times but increases dramatically when the risk sharing capacity of the optimists is reduced e g following a disaster the model also helps reconcile the difference in the amount of disaster risk implied by financial markets and international macroeconomic data and provides caution to the approach of extracting disaster probabilities from asset prices which will disproportionately reflect the beliefs of a small group of optimists finally our model predicts an inverse u shaped relation between the equity premium and the size of the disaster insurance market the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

the estimation of prewar gross national product methodology and new evidence the paper develops new methodology for the estimation of prewar gnp taps previously unused data sources and develops new estimates for the periods 1869 1908 and 1869 1928 primary among the new data sources are direct measures of output in the transportation communications and construction sectors and estimates of the consumer price index new measures of real gnp nominal gnp and the gnp deflator are developed the new estimates of real gnp are as volatile on average over the business cycle as the traditional kuznets kendrick series but dampen the amplitude of some cycles while raising the amplitude of others the new estimates of the gnp deflator are distinctly less volatile than the traditional series and in fact no more volatile than those in the postwar period

consumption disasters in the twentieth century an earlier study barro 2006 applied the thomas a rietz 1988 insight on rare eco nomic disasters to explain the equity premium and related asset pricing puzzles key param eters were the probability p of disaster and the distribution of disaster sizes b in the main analysis p and the distribution were assumed to be time invariant an extension to time vary ing p is in xavier gabaix 2008 because large macroeconomic disasters are rare pinning down p and the distribution from historical data requires long time series for many countries along with the assumption of rough parameter stability over time and across countries barro 2006 relied on the long term international gdp data for 35 countries from angus maddison 2003 using the definition of an economic disaster as a peak to trough fall in per capita gdp by at least 15 percent 60 disas ters were found corresponding to p 0 017 per year the average disaster size was 29 percent and the empirical size distribution was used to calibrate a model of asset pricing the underlying asset pricing theory relates to consumption c rather than gdp this distinc tion is especially important for wars for exam ple in the united kingdom during the two world wars gdp increased while c fell sharply the difference representing mostly added military spending maddison 2003 provides national accounts information only for gdp our initial idea was to add consumption c which we measure by personal consumer expenditure because of diffi culties in separating durables from nondurables in the long term data we have not assembled data on government consumption some of which may substitute for c and thereby affect asset pricing however this substitution is prob ably unimportant for military outlays which are the type of government spending that moves a lot during some disaster events maddison 2003 represents a monumental contribution for international studies using long term gdp data however although much of the information is sound close examination revealed many problems specifically maddison tends to fill in missing data with doubtful assumptions and this practice is often significant for major crises as examples maddison assumed that belgium s gdp during wwi and wwii moved with france s that mexico s gdp between 1910 and 1920 including the revolution and civil war followed a smooth trend with no crisis that gdp for colombia and peru over more than a decade moved with the average of brazil and chile and that gdp in germany for the crucial years 1944 1946 followed a linear trend there are also some mismatches between original works and published series for gdp in japan at the end of wwii and greece during wwii and its civil war given these difficulties our project expanded to estimating long term gdp for many countries the maddison informa tion was often usable but superior estimates can be constructed in many cases also results from recent major long term national accounts projects for some countries are now available including argentina brazil chile colombia greece norway spain sweden and taiwan we are dealing with long term national accounts data for 41 countries but the current study applies to the 21 for which we have thus far assembled annual data on c and gdp from before wwi to 2006 see table 1 for a list of included countries and starting years we begin discussant john campbell harvard university