fringe benefits and small businesses evidence from the federal reserve board small business survey data from the 1993 national survey of small businesses nssbf is used to analyse the factors affecting the provision of pensions and health insurance by small businesses the race of the business owner is found to impact the provision of taxadvantaged fringe benefits even after accounting for a wide range of other economic and demographic variables it is not possible to determine why owner race impacts the provision of fringe benefits by small businesses but the significance of the race variable might reflect a lower level of marketing effort by financial service firms in minority dominated communities the owner education variable which is also significant in both the pension and health insurance models could also be a proxy for the availability of general information about the importance of fringe benefits with the exception of the sole proprietorship variable the demographic and economic variables appear to have similar effects on the provision of both pensions and health insurance by small busi

ownership structure and ceo compensation implications for the choice of foreign market entry modes drawing on agency theory corporate governance and international business literatures we develop arguments relating equity ownership structures and ceo compensation mix to a firm s choice of foreign market entry modes based on a sample of 432 foreign market entries by 118 non diversified firms in the us manufacturing sector between 1991 and 1998 our findings indicate that greater equity ownership by institutional shareholders and inside directors is positively associated with a preference for full control entry modes in addition our results suggest that ceos with a greater proportion of pay tied to firm long term performance are more inclined to choose full control entry modes over shared control modes

asset allocation and asset location household evidence from the survey of consumer finances abstract the rapid growth of assets in self directed tax deferred retirement accounts has generated a new set of financial decisions for many households in addition to deciding which assets to hold the traditional choice among bonds stocks and other investment classes households with substantial assets in both taxable and tax deferred accounts tda must now decide where to hold them this paper uses data from the survey of consumer finances to assess how many households have enough assets in both taxable and tax deferred accounts to face significant asset location choices it also investigates the asset location decisions these households make in 2001 49 of households had at least some assets in a tax deferred account and more than 11 million households had at least us 25 000 in both a taxable and a tax deferred account asset allocation inside and outside tax deferred accounts is quite similar with about 70 of assets in each location invested in equity securities roughly two thirds of households with financial assets in both taxable and tax deferred accounts hold portfolios that are tax efficient most of the other third could reduce their taxes by relocating heavily taxed fixed income assets to their tax deferred account for more than half of the households that hold apparently tax inefficient portfolios however a shift of less than us 10 000 in financial assets would eliminate tax inefficiency

explaining european union citizens trust in the european central bank in normal and crisis times we study the determinants of trust in the european central bank ecb as measured by the european commission s eurobarometer survey in particular during the global financial crisis and the european sovereign debt crisis we find that the fall in trust in the ecb in crisis times can be rather well explained based on the pre crisis determinants we also show that the fall in trust reflected the macroeconomic deterioration a more generalized fall in the trust in european institutions in the wake of the crisis and the severity of the banking sector s problems to which the ecb was associated in the public opinion

the illusory effects of saving incentives on saving the authors evaluate research on how tax based saving incentives iras and 401 k s affect saving previous research overstates the impact of the incentives on saving by failing to account for several issues households with saving incentives have stronger tastes for saving than others saving incentives have interacted with debt nonfinancial assets financial markets and pensions and saving incentives represent pretax balances whereas taxable accounts represent posttax balances accounting for these issues essentially eliminates the impact of saving incentives on saving the authors conclude that little if any of the contributions to existing saving incentives have raised saving

do tax incentives for saving in pension accounts cause debt accumulation evidence from danish register data abstract this paper applies a quasi experimental research design on a danish 2010 policy that reduced tax incentives for saving in annuity pension schemes to show significant substitution of savings from retirement accounts to gross debt repayments we find that for every 1 danish currency unit reduction in retirement savings 31 cents goes to debt repayments taking into account all types of savings we find full crowding out consistent with previous findings we document that the effect is driven by a minority about 23 percent who actively rebalance their savings

wealth and portfolio composition theory and evidence we examine a survey of 6010 u s households and estimate a model for household portfolio allocation we extend the conventional portfolio choice model in order to capture the observed incompleteness of household portfolios we show that the empirical specification of the joint discrete and continuous choice that characterizes household portfolio behavior is a switching regressions model with endogenous switching we go on to examine the impact of taxes on portfolio composition using detailed survey data to calculate precisely the marginal tax rate facing each household finally we estimate wealth elasticities of demand for a range of assets and liabilities

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

the informational content of initial public offerings the ability of capital markets to distinguish firms of different value by the size of their initial equity offerings is attenuated when insiders can sell equity more than once a model is developed in which there is price risk from holding equity between periods when the uncertainty is small there must be pooling in the first period when uncertainty is large the pooling equilibria dominate the separating equilibrium the size of an entrepreneur s initial public offering of equity can be informative this point was made in leland and pyle 1977 and stiglitz 1982 an entrepreneur with a good project can signal the value of the project by his or her willingness to retain equity an implicit assumption of this analysis is that the entrepreneur has only one opportunity to sell equity the assumption of a single sale is important since once the entrepreneur has signalled his or her project value by retaining equity investors should be willing to purchase the remaining equity however if entrepreneurs with bad projects foresee this they too may wish to retain equity initially and render themselves indistinguishable from entrepreneurs with good projects the current paper develops a model with two trading periods to capture the impact of having repeat sales of equity there is a public offering in the first period then the entrepreneur can make an open market sale in the second period however there is exogenous price risk which makes it costly for the entrepreneur to wait to sell in this context the value of the entrepreneur s project may not be revealed in the first period retaining equity is not very costly when uncertainty is small and there will only be pooling equilibria in this case in such a situation no information is revealed in the first period when the level of uncertainty is great there does exist a separating equilibrium however the pooling equilibria pareto dominate the separating equilibrium throughout the analysis the focus will be on paretooptimal equilibria the idea that an informed agent can profitably trade over time has been examined in related contexts kyle 1985 looked at the optimal trading strategy for an insider whose sequence of purchases is hidden in the aggregate order flow in equilibrium the insider s information is not completely incorporated into the market price until the close of trading

taxes and transaction costs in asset market equilibrium abstract this paper examines the effects of capital taxation in an imperfect capital market in which acquiring risky assets incurs costs individual portfolio choice has two distinct aspects the extensive choice of which assets to hold in the portfolio and the intensive choice of what fraction of wealth to invest in each asset held the traditional assumption of zero transaction costs obscures the extensive choice this paper shows that if trading in assets is costly capital taxes have extensive effects as well as the intensive effects previously studied

tax deferred accounts constrained choice and estimation of individual saving the paper analyzes the effect of tax deferred individual retirement accounts iras in the united states on net individual saving the results are based on a model of constrained optimization with the limit on tax deferred saving the principle constraint the estimates suggest that contributions to iras represent substantial net saving increases were the ira limit to be increased only about 10 to 20 of resulting increase in ira contributions would be taken from other savings about 50 would come from reduced consumption and about 35 from reduced

how retirement saving programs increase saving this paper summarizes the authors work on the effect of ira and 401 k contributions on net personal saving they consider many different nonparametric approaches to controlling for heterogeneity in individual saving behavior and conclude that the weight of the available evidence suggests that contributions to both iras and 401 k s largely represent new saving the authors devote particular attention to reconciling their results with the findings in other studies that reach different conclusions sometimes using the same databases that the authors analyze methodological limitations that undermine the reliability of results in other studies explain many of these disparities

employers provision of pensions and sick pay evidence from the 1990 workplace indistrial relations survey this paper examines the determinants of pension and sick pay provision using data on some 1100 private sector establishments with 25 or more employees it also compares the wages of employees eligible for a pension or for sick pay with the wages of those for whom no such provision was made using ordered probit techniques three levels of provision were examined with respect to each type of benefit no provision provision for white collar employees only and provision for all employees benefit provision was found to be associated with work place size and with the extent to which employment was white collar it was negatively associated with the level of part time working new establishments were slightly less likely to offer pensions than older ones but age had no impact on sick pay provision perhaps because it is less complex and costly than pension provision establishments which recognized trade unions were more likely to offer fringe benefits than those which did not however blue collar unions se

differential income taxation and household asset allocation this article empirically investigates the effects of differential income taxation on households portfolio choice and asset allocation applying a two stage budgeting model of asset demand to german survey data the model is structured into the discrete and the continuous asset choice cross sectional variation in marginal tax rates appropriately instrumented as well as over time variation from a major tax reform are used to identify the tax effects households with higher tax rates are found to have relatively greater demand for tax privileged assets such as nonowner occupied housing mortgage repayments building society deposits stocks insurances and consumer credits than households with lower tax rates demand at higher tax rates is lower for owner occupied housing bank deposits and bonds

stockholding behavior of u s households evidence from the 1983 1989 survey of consumer finances most households persistently invest in riskless assets but not stocks and may do so because they perceive information required for market participation to be costly relative to expected benefits in a consumption capital asset pricing model ccapm increased risk aversion income risk and lower resources reduce the information expense sufficient to deter stockholding bivariate probit analysis using the 1983 1989 survey of consumer finances shows that households with lower risk aversion higher education and greater wealth who were nonstockholders in 1983 had an increased conditional probability of entering by 1989 whereas 1983 stockholders with lower resources more limited education and greater risk aversion were more likely to be nonstockholders by 1989

savings in times of demographic change lessons from the german experience pension reforms in many developed countries make individuals shoulder a bigger share of longevity and income risks the desired response is that individuals accumulate private assets for retirement whether this actually takes place is of paramount relevance for scientists and policy makers we take germany as an example twenty years of pension reform have transformed the monolithic german pension system into a multi pillar system formerly generous public pension benefits are gradually being reduced while substantial incentives are granted to occupational and private saving schemes has this transition worked out we survey the reform steps and household s reactions how did individuals adjust their labor market behavior how did private and occupational pension plans take off how do behavioral adjustments vary in the population most germans adapted to the new situation both actual and expected retirement decisions changedand the share of households without supplementary pensions decreased from 73 to 39 in little more than a decade this is a remarkable success nonetheless households with low education low income and less financial education did neither adjust their retirement behavior nor pick up supplementary pension plans and are thus likely to face difficulties in bridging the gap arising in future pension income

how do firms form their expectations new survey evidence author s coibion o gorodnichenko y kumar s abstract 2018 american economic association all rights reserved we survey new zealand firms and document novel facts about their macroeconomic beliefs there is widespread dispersion in beliefs about past and future macroeconomic conditions especially inflation this dispersion in beliefs is consistent with firms incentives to collect and process information using experimental methods we find that firms update their beliefs in a bayesian manner when presented with new information about the economy and that changes in their beliefs affect their decisions inflation is not generally perceived as being important to business decisions so firms devote few resources to collecting and processing information about inflation

how should capital be taxed this survey discusses how capital should be taxed in advanced economies we review the theoretical optimal tax literature survey empirical studies on the distribution of capital and the distortion

household debt and the tax reform act of 1986 prior to the tax reform act of 1986 tra 86 interest paid on all types of household debt was deductible from income before the payment of taxes in 1986 congress changed the law to phase out the deductibility of consumer interest over a five year period congress believed deductibility of interest provided an incentive to invest in consumer durables rather than assets which produce taxable income and therefore an incentive to consume rather than save by phasing out the present deductibility of personal interest congress intended to eliminate from the prior tax law a significant disincentive to saving joint committee on taxation jct 1987 p 263 the other goal of the provision was to raise 9 6 billion per year in tax revenue by 1991 because congress determined that encouraging home ownership is an important policy goal achieved in part by providing a deduction for residential mortgage interest it chose to retain the residential mortgage interest deduction jct 1987 pp 263 64 thus mortgage interest was fully deductible for interest paid on debt secured by a taxpayer s first or second residence up to his basis in the residence the omnibus budget reconciliation act of 1987 obra 87 changed the law so that interest paid was fully deductible on up to 1 million in acquisition debt and 100 000 in home equity debt 2 debt is categorized as acquisition debt if it is used for the purchase or improvement of a home home equity debt includes all other debt secured by a home by keeping the mortgage interest deduction congress may have provided a loophole that some taxpayers could exploit there was no restriction on the use of home equity debt and taxpayers who owned homes could borrow against their home equity to pay for the same purchases they had previously funded with consumer loans homeowners were given an incentive to shuffle their portfolios away from consumer debt into mortgage debt the widespread introduction of home equity lines of credit in the mid 1980 s which may have been spurred in part by the change in tax law provided an inexpensive and flexible method for households to make this shift 3 measuring the extent of portfolio shuffling is important for understanding whether households view mortgage and consumer debt as close substitutes clearly the substitution of mortgage debt for consumer debt undermines the goals of congress to boost saving and increase revenue moreover homeowners already have substantial tax preferences through the lack of taxes on the imputed income from housing and the preferential tax treatment of capital gains on their principal residence the ability to use deductible mortgage debt to finance consumer purchases provides homeowners another tax advantage relative to renters figure 1 plots the percentage change in putnam investments one post office square bos on ma 02109 e mail dean maki putnaminv com this paper was completed while i was on the staff of the board of governors of the federal reserve system financial support from the stanford institute for economic policy research and the lynde and harry bradley foundation is gratefully acknowledged i would like to thank john shoven orazio attanasio john pencavel tim bresnahan anne royalty doug bernheim al teplin craig furfine martha starrmccluer raphael bostic len burman julia coronado two anonymous referees seminar participants and the financial institutions research review group for helpful comments the views expressed in this paper are those of the author and do not necessarily reflect the views of putnam investments or the federal reserve board or its staff 1 in this paper consumer interest refers to interest paid on consumer loans that are not secured by a residence 2 under tra 86 interest paid on qualified educational and medical debt secured by a home was also deductible even if this debt exceeded the household s basis this provision was not renewed in obra 87 under obra 87 home equity debt also could not exceed the difference between the fair market value of the home and the amount of acquisition debt even if this difference was less than 100 000 3 of course homeowners can also increase their mortgage debt by taking out a traditional home equity loan by taking cash out when refinancing their mortgage or by taking out a larger mortgage when they durchase a home

inflation expectations and firm decisions new causal evidence author s coibion o gorodnichenko y ropele t abstract 2019 the author s we use a unique design feature of a survey of italian firms to study the causal effect of inflation expectations on firms economic decisions in the survey a randomly chosen subset of firms is repeatedly treated with information about recent inflation whereas other firms are not this information treatment generates exogenous variation in inflation expectations we find that higher inflation expectations on the part of firms leads them to raise their prices increase demand for credit and reduce their employment and capital however when policy rates are constrained by the effective lower bound demand effects are stronger leading firms to raise their prices more and no longer reduce their employment

have iras increased u s saving evidence from consumer expenditure surveys the vast majority of individual retirement account contributions represent net new saving based on evidence from the quarterly consumer expenditure surveys ces the results are based on analysis of the relationship between ira contributions and other financial asset saving the data show almost no substitution of iras for other saving estimates are based on a flexible constrained optimization model with the ira limit the principal constraint the implications of this model for saving in the absence of the ira option match very closely the actual non ira financial asset saving behavior prior to 1982 ira saving does not show up as other financial asset saving in the pre ira period

monk mortgages in a new keynesian model abstract there has been much interest recently in the role of household long term mortgage debt in the transmission of monetary policy this paper offers a tractable framework that integrates the long term debt channel with the standard new keynesian channel providing a tool for monetary policy analysis that reflects the recent debates in the literature as there is a nontrivial role in the model for both short and long term debt it provides a laboratory to investigate the effects of monetary policy operating not only through its current short term actions but also through expected persistent changes in its stance

precautionary motives and portfolio decisions theory predicts that under certain restrictions on preferences prudent consumers will allocate relatively more funds to riskless assets when there is uninsurable background risk this paper analyzes empirically the relevance of precautionary motives for the structure of household wealth to this end a new and rich data source from the netherlands is exploited the question of primary concern is what impact if any does the presence of income uncertainty have on the structure of dutch households portfolios we employ various semi parametric estimators both for cross sections and for panel data to assess the response of households portfolios to uninsurable background risk we find some but not unanimous support for the view that portfolios become less risky as income uncertainty increases

inflation expectations and behavior do survey respondents act on their beliefs we compare the inflation expectations reported by consumers in a survey with their behavior in a financially incentivized investment experiment the survey is found to be informative in the sense that the beliefs reported by the respondents are correlated with their choices in the experiment more importantly we find evidence that most respondents act on their inflation expectations showing patterns consistent with economic theory respondents whose behavior cannot be rationalized tend to have lower education and lower numeracy and financial literacy these findings help confirm the relevance of inflation expectations surveys and provide support to the microfoundations of modern macroeconomic models

the budgetary and welfare effects of tax deferred retirement saving accounts abstract the present paper analyzes the budgetary macroeconomic and welfare effects of tax deferred retirement saving accounts similar to u s 401 k plans in a dynamic general equilibrium overlapping generations economy with heterogeneous households because of the initial deferral of tax payments the short run budgetary cost of tax deferred accounts is significantly higher than the long run cost therefore the budget neutral introduction of tax deferred accounts would make current and near future households worse off although it would increase national wealth and total output in the long run if the government spread the short run cost to future households by increasing debt the policy change could make all age cohorts on average as well off as the economy without tax deferred accounts due to increased government debt and debt service costs however national wealth and total output would decrease in the long run thus introducing tax deferred accounts would not increase national wealth and improve social welfare at the same time this is partly because the policy change is regressive and reduces the risk sharing effect of the current income tax system

saving accounts versus stocks and bonds in household portfolio allocation we study the structure of household portfolios of financial wealth by analyzing both the determinants of total financial wealth and the choice between risky stocks and bonds and riskfree assets saving accounts the econometric specification is a generalized trivariate tobit model estimated on a cross section of 3 077 households in the netherlands in 1988 we account for endogeneity of financial wealth and for selectivity due to nonreporting results show that the level of financial wealth and the marginal tax rate are major determinants of the allocation between riskfree and risky assets

a portrait of the individual investor abstract behavioral finance models often rely on a concept of noise traders who are prone to judgment and decision making errors what do noise traders do we review prior research and present new survey evidence on the behavior of small individual investors who manage their own equity portfolios many people 1 discover naive patterns in past price movements 2 share popular models of value 3 are not properly diversified and 4 trade in suboptimal ways

the formation of expectations inflation and the phillips curve this paper argues for a careful re consideration of the expectations formation process and a more systematic inclusion of real time expectations through survey data in macroeconomic analyses while the rational expectations revolution has allowed for great leaps in macroeconomic modeling the surveyed empirical micro evidence appears increasingly at odds with the full information rational expectation assumption we explore models of expectation formation that can potentially explain why and how survey data deviate from full information rational expectations using the new keynesian phillips curve as an extensive case study we demonstrate how incorporating survey data on inflation expectations can address a number of otherwise puzzling shortcomings that arise under the assumption of full information rational expectations

borrowing constraints and portfolio choice this paper examines how borrowing ceilings in the personal loan market affect the portfolio choice of consumers most papers on borrowing constraints do not address the question of portfolio choice it is typically assumed that all assets can be liquidated to finance consumption in the case of an income shortfall in this case borrowing ceilings will never bind until consumers have run their assets down to zero and borrowed up to their limits however it may be more realistic to assume that consumers have a choice of allocating wealth between short term liquid assets e g cash that can be used for current consumption purposes and longer term illiquid assets e g housing equity cds that cannot be used for current consumption purposes but may be used as collateral for loans the central question of this paper is whether the presence of borrowing ceilings in the personal loan market will induce individuals to hold a larger share of their assets in liquid form this question is addressed within the context of two types of borrowing ceilings first it is assumed that borrowing ceilings are exogenous in that they are unaffected by the individual s portfolio choice this assumption is similar to that made in many papers on borrowing constraints 2 the presence of exogenous borrowing ceilings will unambiguously lead to more liquid portfolios individuals who know that there is a limit to the amount that can be borrowed will hold a larger share of their wealth in liquid form since by doing so the probability of becoming credit constrained in the future is reduced the case of exogenous borrowing ceilings is contrasted with the case in which borrowing ceilings are due to interest rate ceilings in

expectations heterogeneous forecast errors and consumption micro evidence from the michigan consumer sentiment surveys the household data underlying the michigan index of consumer sentiment are used to test the rationality of consumer expectations and their usefulness in forecasting expenditure the results can be interpreted as characterizing the shocks that hit different types of households over time expectations are found to be biased and inefficient at least ex post people underestimated the disinflation of the early 1980s and the severity of recent business cycles people s forecast errors are also systematically correlated with their demographic characteristics in part because of time varying group level shocks further sentiment helps forecast consumption growth some of this rejection of the permanent income hypothesis is due to the systematic demographic components in forecast errors

personal taxation pension wealth and portfolio composition this paper emphasizes the roles played by personal taxation and pension wealth in portfolio choice and composition a theoretical discussion of the impacts of taxation and participation in social security and private pension systems on individual wealth allocation is followed by empirical evidence based on u s cross section data both effects prove to be significant anticipated social security and private pension benefits exert a measurable influence on household portfolio allocation their omission from an asset demand model may lead to a misinterpretation of the impact of taxation on portfolio composition

inflation and its unpredictability theory and empirical evidence the effect of inflation on its unpredictability is theoretically ambiguous arthur m okun 1971 and milton friedman 1977 suggest that the effect is positive however a negative effect may exist if higher inflation induces the relevant economic agents to invest more in generating accurate predictions this paper provides a theoretical model to analyze these opposing arguments and specifies the conditions under which a positive effect exists new survey data regarding inflationary expectations in israel are used to empirically examine the model the data which allow single hypothesis testing of the relationship reveal a positive effect only in periods of high inflation indicating a possible threshold effect copyright 1993 by ohio state university press

signaling and the valuation of unseasoned new issues a comment in the march 1982 issue of this journal david downes and robert heinkel 1 present an empirical examination of the role of signaling in the valuation of initial public offerings of common stock for a large sample of unseasoned new issues they examine the leland pyle 2 signaling hypothesis that firm value should be positively related to the fraction of equity retained by the original shareholders downes and heinkel conclude that the data are consistent with the leland pyle signaling hypothesis in this comment i present a more complete test of the leland pyle signaling model i also present two alternative explanations for the positive empirical relation between firm value and insider holdings which i label the agency hypothesis and the wealth effect hypothesis i find that the testable implications of the agency hypothesis are supported while the evidence is ambiguous with respect to the testable implications of the wealth effect and signaling hypotheses

central bank communication and monetary policy a survey of theory and evidence over the last two decades communication has become an increasingly important aspect of monetary policy these real world developments have spawned a huge new scholarly literature on central bank communication mostly empirical and almost all of it written in this decade we survey this ever growing literature the evidence suggests that communication can be an important and powerful part of the central bank s toolkit since it has the ability to move financial markets to enhance the predictability of monetary policy decisions and potentially to help achieve central banks macroeconomic objectives however the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy

why sweden s welfare state needed reform according to professor walter korpi the swedish economy would be in better shape if leading politicians had paid less attention to the advice from an influential group of swedish academic economists allegedly hostile to the welfare state their claim that high taxes and extensive social security programmes have strong adverse effects on aggregate economic performance rested on a politically biased reading of comparative international data in purporting to show that sweden had fallen behind other comparable countries the sclerosis diagnosis they set the stage for cutbacks in the welfare state and a major tax reform involving substantially lower marginal tax rates apart from creating inequality at a negligible gain in efficiency the very same reforms may also explain why sweden ran into a macroeconomic tailspin in the early i 990s rather than an instructive case study of the ultimate consequences of a long term obsession with income equality and social protection the exceptional economic crisis can be traced to severe macroeconomic policy blunders the views of professor korpi are quite familiar for anyone that has followed the swedish debate over the last decade supporters of the welfare state applaud professor korpi for revealing the ideological bias underlying the evidence presented in support of the sclerosis diagnosis some swedish economists rather thank of him as a modern day don quixote eager to pick a fight with imaginary villains being a swede and a professor of economics i can hardly claim the status of an impartial observer i certainly believe that harberger triangles convey information and i am convinced that most of the recently implemented reforms make sense nevertheless i believe that professor korpi raises important issues many of the accusations made against the welfare state in sweden and elsewhere rest on evidence which does not survive normal academic scrutiny in their capacity as policy advisors academic economists far from always live up to the standards of the seminar room speculation and sweeping generalisations are poor substitutes for facts and empirical investigations like professor korpi i doubt that very important insights on the harmfulness of the welfare state can be gained from comparative aggregate data over the period i970 90 swedish economic growth was below the oecd average at the same time the public sector was very large however

inflation expectations as a policy tool abstract we assess the prospects for central banks using inflation expectations as a policy tool for stabilization purposes we review recent work on how expectations of agents are formed and how they affect their economic decisions empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear especially for firms two additional limitations prevent policy makers from being able to actively manage inflation expectations first available surveys of firms expectations are systematically deficient which can only be addressed through the creation of large nationally representative surveys of firms second neither households nor firms expectations respond much to monetary policy announcements in low inflation environments we provide suggestions for how monetary policy makers could pierce this veil of inattention through new communication strategies as well as the potential pitfalls to trying to do so

dividend taxes and international portfolio choice this paper investigates how dividend taxes influence portfolio choices using the response to the distinctive treatment of a subset of foreign dividends in the jobs and growth tax relief reconciliation act jgtrra of 2003 an open economy after tax capital asset pricing model is used to derive the hypothesis that jgtrra should lead to a portfolio reallocation by us investors towards equities in tax favored countries a difference in difference analysis that compares us equity holdings in affected and unaffected countries finds a substantial portfolio reallocation towards the former this effect cannot be explained by several potential alternative hypotheses including differential changes to the preferences of american investors differential changes in investment opportunities differential time trends in investment changed tax evasion behavior or changes in stock prices associated or contemporaneous with jgtrra

does ownership structure of emerging market firms affect their outward fdi the case of the indian automotive and pharmaceutical sectors this paper examines the impact of ownership structures of emerging market firms which are shaped by local institutions on the decision of these firms to undertake outward fdi our results suggest that family firms and firms with concentrated ownerships both ubiquitous in emerging markets are less likely to invest overseas and that strategic equity holding by foreign investors facilitates outward fdi we conclude that organisational forms such as family firms which are optimal outcomes of institutions prevailing in emerging markets may be suboptimal in a changing business environment in which outward fdi is necessary for access to resources and markets

transaction costs and the pricing of assets the existence of transaction costs explains why investors do not fully diversify their portfolios this paper examines the implications of such limited diversification oi equilibrium asset prices in the framework of the capital asset pricing model in the pricing equation obtained here an asset s risk premium depends on a weighted average of its covariance with the market and its own variance the absence of transaction costs in the sharpe lintner capital asset pricing model capm is often claimed to be only a minor idealization which hardly affects the substantive implications of the model this paper aims to demonstrate that this is not the case incorporating transaction costs into the capm leads to a major reformulation of its basic asset pricing equation in contrast with the capm formula

the price is right updating inflation expectations in a randomized price information experiment abstract using a unique randomized information experiment embedded in a survey this paper investigates how consumers inflation expectations respond to new information we find that respondents on average update their expectations in response to certain types of information and do so sensibly in a manner consistent with bayesian updating as a result of information provision the distribution of inflation expectations converges toward its center and cross sectional disagreement declines we document heterogeneous information processing by gender and present suggestive evidence of respondents forecasting under asymmetric loss our results provide support for expectation formation models in which agents form expectations rationally but face information constraints

on testing for full insurance using consumer expenditure survey data in a recent issue of this journal mace 1991 presented empirical evidence in support of the hypothesis that u s households engage in full risk sharing the data used were taken from the u s consumer expenditure survey cex for the years 1980 84 full insurance implies that household level consumption should be perfectly correlated with aggregate consumption but uncorrelated with householdlevel changes in income mace s surprising result was that at least for one functional specification household level income changes whether measured directly by changes in reported income or proxied by employment change dummies seemed to have no statistically significant effect on consumption this comment demonstrates that this result was due to measurement error in key variables

entrepreneurial optimism and the market for new issues this article analyzes the impact of entrepreneurial optimism on the market for new issues we find that the existence of optimists generates a new reason for entrepreneurs to own equity in their firms we show that optimism is a natural explanation for why some new issues are underpriced and others overpriced we also show that the impact of optimism on entrepreneurs equity holdings depends on the number of optimists absolute risk aversion and cash flow variance optimism makes entrepreneurs worse off in contrast optimism can make outside investors better off when entrepreneurs signal firm value by retaining shares and underpricing

capital income taxation and risk taking in a small open economy abstract how do capital income taxes affect household portfolio choice and growth we approach this question within the context of a stochastic model of a small open economy in which taxes on income from domestic capital equity and foreign bonds affect household portfolio choice welfare and the growth rate of the economy the theoretical and numerical analysis demonstrates the important role that risk plays in determining the mean and variability of growth as well as the conditions under which a higher tax rate can be welfare improving to shed more light on the complex theoretical interaction between taxes and risk taking we estimate a reduced form multinomial probit model of household portfolio choice using the method of simulated moments the empirical evidence is in stark contrast to the conventional wisdom we find that higher taxes make it less likely that the household will hold risky assets

new evidence on taxes and portfolio choice abstract identifying the effect of differential taxation on portfolio allocation requires exogenous variation in marginal tax rates marginal tax rates vary with income but income surely affects portfolio choice directly in systems of individual taxation like canada s couples with the same household income can face different effective tax rates on capital income when labor income is distributed differently within households using this source of variation we find portfolio responses to taxation among more affluent households the estimated effects are statistically significant but economically modest in a placebo test using data from the u s which has joint taxation we find no effect of the intra household distribution of labor income on portfolios

income risk borrowing constraints and portfolio choice economic theory suggests that uninsurable income risk and the expectation of future borrowing constraints can reduce the share of risky assets in a household s portfolio if the utility function exhibits decreasing absolute risk aversion and decreasing prudence an individual will reduce his exposure to rate of return risks when confronted with other independent risks if there are transaction costs the expectation of future borrowing constraints should induce individuals to keep a lower proportion of their wealth in the form of illiquid and risky assets the authors find support for these propositions in a cross section of italian households copyright 1996 by american economic association

does inflation targeting anchor long run inflation expectations evidence from the u s uk and sweden we investigate the extent to which inflation expectations have been more firmly anchored in the united kingdom a country with an explicit inflation target than in the united states a country with no such target using the difference between far ahead forward rates on nominal and inflation indexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons we show that far ahead forward inflation compensation in the u s exhibits substantial volatility especially at low frequencies and displays a highly significant degree of sensitivity to economic news similar patterns are evident in the uk prior to 1997 when the bank of england was not independent but have been strikingly absent since the bank of england gained independence in 1997 our findings are further supported by comparisons of dispersion in longer run inflation expectations of professional forecasters and by evidence from sweden another inflation targeting country with a relatively long history of inflation indexed bonds our results support the view that an explicit and credible inflation target helps to anchor the private sector s views regarding the distribution of long run inflation outcomes jel e31 e52 e58

marginal taxes and the asset portfolios of swedish households this paper focuses on the effects of marginal tax rates wealth income and a set of socioeconomic and demographic variables on the portfolio composition of households using detailed micro data on 2 000 swedish households in particular efforts are made to disentangle the effects of marginal tax rates on the portfolio behavior of households some econometric problems involved when estimating asset demand equations in the presence of incomplete portfolios are briefly discussed a final section examines the overall effect of marginal tax rates on asset demands by applying estimated discrete and continuous portfolio equations to compute different tax elasticities

the cyclicality of sales regular and effective prices business cycle and policy implications author s coibion olivier gorodnichenko yuriy hong gee hee abstract we study the cyclical properties of sales regular price changes and average prices paid by consumers effective prices using data on prices and quantities sold for numerous retailers across many us metropolitan areas inflation in the effective prices paid by consumers declines significantly with higher unemployment while little change occurs in the inflation rate of prices posted by retailers this difference reflects the reallocation of household expenditures across retailers a feature of the data which we document and quantify rather than sales we propose a simple model with household store switching and assess its implications for business cycles and policymakers jel d12 e31 e32 l25 l81

tax arbitrage and labor supply we examine how tax avoidance in the form of trade in well functioning asset markets affects the basic labor supply model we show that tax arbitrage has dramatic implications for positive normative and econometric analysis of how taxes affect work incentives

full privatization through controlling rights transfer in china the extent of its success this article investigates the effect of the second step of privatization in china which is full privatization through controlling rights transfer after share issue partial privatization it finds that fully privatized firms perform worse than state controlled enterprises expropriation by private block shareholders is greater than that by state block shareholders furthermore increase in expropriation is negatively related to performance change the results suggest that full privatization may not yield the expected efficiency gains in transition economies with weak legal system they also emphasize the importance of preventing private block shareholders from exploiting minority shareholders in the process of full privatization

taxation and the portfolio structure of spanish households using a sample of 5962 spanish households from the survey of household finances eff undertaken by the bank of spain this article describes the structure of their portfolio and estimates both a probit model and a tobit model to test how taxation affects respectively the decision to invest in each asset and the relative importance of each asset within the household portfolio the influence of taxation is measured using the average marginal personal income tax rate of the household the estimations performed show that the marginal tax rate is significant and displays the sign expected to explain both the holding of tax favourable assets and their weight in the household portfolio

the german public and its trust in the ecb the role of knowledge and information search abstract in this paper we analyse the effects of objective and subjective knowledge about monetary policy as well as the information search patterns of german citizens on trust in the ecb we rely on a unique representative public opinion survey of german households conducted in 2011 we find that subjective and factual knowledge as well as the desire to be informed about the ecb foster citizens trust specific knowledge about the ecb is more influential than general monetary policy knowledge objective knowledge is more important than subjective knowledge however an increasing intensity of media usage especially newspaper reading has a significantly negative influence on trust we conclude that the only viable way for the ecb to generate more trust in itself is to spread monetary policy knowledge

the role of media for inflation forecast disagreement of households and professional forecasters this paper investigates the effects of media coverage about consumer price inflation on inflation forecast disagreement of german households and professional forecasters we adopt a bayesian learning model in which media coverage of inflation affects forecast disagreement by influencing information sets as well as predictor choice our empirical results show that disagreement of households depends on the heterogeneity of story content and on the reporting intensity especially of news on rising inflation disagreement of professional forecasters does not depend on media coverage with respect to the influence of macroeconomic variables we provide evidence that disagreement of professional forecasters primarily depends on the inflation rate and on inflation volatility the response of households to inflation is much less pronounced

macroeconomic expectations of households and professional forecasters economists have long emphasized the importance of expectations in determining macroeconomic outcomes yet there has been almost no recent effort to model actual empirical expectations data instead m acroeconomists usually simply assume that expectations are rational this paper shows that while empirical household expectations are not rational in the usual sense expectational dynamics are well captured by a model in which households views derive from news reports of the views of professional forecasters which in turn may be rational the model s estimates imply that people only occasionally pay attention to news reports this inattention generates stickyness in aggregate expectations with important macroeconomic consequences

taxation portfolio choice and debt equity ratios a general equilibrium model this paper explores the portfolio behavior of investors differing with respect to both tax rates and risk aversion emphasizing the role of constraints on individual and firm behavior in ensuring the existence of and characterizing portfolio equilibrium under certain conditions on the securities available in the market which also are necessary for shareholders to be unanimous in supporting firm value maximization investors will be segmented by tax rate into two groups one specialized in equity and the other in debt though the relative wealths of the two groups determine the aggregate debt equity ratio each firm will be indifferent to its financial policy

inflation at the household level abstract we use scanner data to estimate inflation rates at the household level households inflation rates have an annual interquartile range of 6 2 9 0 percentage points most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods lower income households experience higher inflation but most cross sectional variation is uncorrelated with observables households deviations from aggregate inflation exhibit only slightly negative serial correlation almost all variability in a household s inflation rate comes from variability in household level prices relative to average prices not from variability in aggregate inflation

why do so few hold stocks the authors investigate why 75 percent of u s households do not hold stocks despite the equity premium and predictions of expected utility models the question is relevant for privatization asset pricing and tax progressivity issues they show that risk aversion per se heterogeneity of beliefs habit persistence time nonseparability and quantity constraints on borrowing do not account for the phenomenon a wedge between borrowing and lending rates and minimum investment requirements are plausible but empirically weak factors more promising explanations are inertia and departures from expected utility maximization there is also qualified support for nondiversifiable income risk as a contributing factor copyright 1995 by royal economic society

the portfolio composition of asset holdings in the united kingdom an extensive literature has developed on theoretical aspects of portfolio selection one basic model which often serves as a convenient benchmark assumes that individuals choose their portfolio to maximise expected utility in a world of perfect information perfect capital markets and no taxes or transaction costs if these individuals exhibit constant relative risk aversion the optimal asset combination will be one in which the proportion of wealth invested in each type of asset is independent of total wealth the asset proportions are also independent of age if the analysis is extended to a lifecycle framework with an additively separable intertemporal utility function once the stringent preconditions of this benchmark model are relaxed it becomes progressively more difficult to derive any firm predictions regarding the structure of asset portfolios the recognition of such factors as transaction costs indivisibilities capital market imperfections and the vagaries of tax systems as well as the possibility that relative risk aversion may not be constant makes it unlikely that asset proportions will show stability across wealth and age groups but portfolio theory is generally ambiguous about how the pattern of asset holdings is affected 2 it follows that the further analysis of portfolio behaviour needs to be primarily empirically orientated unfortunately data on the asset holdings of individuals or households are notoriously poor in comparison with other important economic variables information is available from sample surveys but there are usually problems with the limited asset coverage suspect valuations and biases arising from the non randomness of response rates furthermore the sample sizes are generally low against these deficiencies has to be set the fact that the surveys contain a range of other economic variables and demographic characteristics whose relationship with asset holdings can be investigated projector and weiss i966 report asset shares for a sample of 2 557 households in the united states and these data have been subsequently used by feldstein i976 to examine the impact of the tax structures on asset holdings using another source uhler and cragg i97i present results on portfolio composition for 965 households focusing in particular on the holdings of money balances exploiting yet

iras and household saving this paper examines the effects of individual retirement accounts iras on private and national saving the authors construct a formal model of dynamic utility maximization that generates closed form equations for ira and other saving their empirical estimates indicate that raising the annual ira contribution limit between 1983 and 1986 would have resulted in little if any increase in national saving results from sensitivity analysis imply substantially smaller effects on national saving than most previous researchers have estimated the authors results are consistent with new evidence they present indicating considerable potential among ira holders to shift taxable forms of saving into iras copyright 1994 by american economic association

the impact of separate taxation on the intra household allocation of assets evidence from the uk abstract the income tax system in the united kingdom moved from joint to independent taxation of husbands and wives income in 1990 one interesting aspect of independent taxation is the ability for households to choose the division of household assets between the two spouses this tax reform therefore creates an opportunity for households to engage in a form of tax avoidance by shifting their investment income to the spouse with the lower marginal tax rate we use family expenditure survey fes data to examine the impact of this tax reform on the magnitude of investment income shifting between spouses with different marginal tax rates we find a sizeable shift in the share and incidence of asset income claimed by wives who typically have lower marginal tax rates as well as in the incidence of the wife claiming all the household asset income indicating that households responded to this policy change by reallocating asset ownership

household informedness and long run inflation expectations experimental evidence this article uses an experiment embedded in a survey to analyze the response of consumers long run inflation expectations to information about the federal reserve s inflation target and past inflation on average respondents revise forecasts toward the 2 target with either information treatment forecast uncertainty and heterogeneity decline with the treatments but remain substantial since the information in the treatments is publicly available these findings are consistent with models of imperfect information in which agents do not fully and continually update their information sets or incorporate all available information into their expectations response to treatments varies with prior informedness and with demographic characteristics

the relationship between ownership financing decisions and firm performance a signaling model we develop a signaling model to show how adverse selection and moral hazard interact to determine a firm s ownership structure and financing and investment decisions endogenously testable implications are derived regarding the relationship between insider ownership performance measures such as tobin s q ratio and elements of financial structure such as the debt equity ratio

monetary policy in the media just like private companies depend crucially on their ability to reach customers policymakers must communicate with private agents to be successful and much of this communication is channeled through the media this is especially true for central banks which need to build credibility among the general public this paper analyses how favorably the print media report about the european central bank s ecb monetary policy decisions favorableness is inter alia influenced by the amount of information communicated by the ecb there are however also indications of a critical monitoring role of the media which reports more negatively when inflation exceeds the inflation target

the decision to seek advice in the self directed retirement fund industry this article examines the influence of investor knowledge and the cognitive bias that arises from overconfidence on the advice seeking behaviour of investors managing their own retirement funds specifically we trace whether overestimating one s own technical and financial abilities can hinder the willingness to seek advice particularly when it would be in the investors best interest to do so we identify a subset of investors who are not knowledgeable and yet do not seek advice these investors exhibit overconfidence in their ability to manage a fund despite holding under diversified and less sophisticated portfolios relative to their peers given the global rise in investors choosing to manage their own retirement funds and the importance of seeking advice in this context there are direct policy implications from these results they suggest a need to identify and target investors who display overconfidence since they are most likely to be managing underperforming retirement investments in the longe

why do people invest in personal pension plans the aim of this article is to identify the variables affecting the decision to make contributions to personal pension plans and the amount of such contributions for this purpose we specify and estimate a tobit model for a sample based on the 1995 personal income taxpayers panel prepared by the institute of fiscal studies spanish ministry of economy and finance formed by 3041 taxpayers of whom 358 made contributions to pension plans our results suggest that individuals decide to invest in pension plans on complex grounds combining the wish to benefit from tax savings and to ensure they will receive supplementary income upon retirement

assessing the effectiveness of saving incentives concluding that iras and 401 k s do increase saving this text provides a fresh cost benefit approach for analyzing the success of savings incentives it compares the new savings to the government tax revenue lost through contributions to iras and 401 k s

the effect of individual retirement accounts on household consumption and national saving a major debate exists on whether expanding tax favoured savings accounts such as individual retirement accounts iras will increase national savings much of the empirical debate has centred on whether ira contributions before the tax reform act of 1986 represented new savings or merely reshuffled assets we find no evidence that households financed their ira contributions from reductions in consumption at least initially we find evidence that households financed their ira contributions from existing savings or from saving that would have been done anyway our results indicate that at most 9 of ira contributions represented net additions to national saving

taxation and household portfolio composition us evidence from the 1980s and 1990s abstract this paper explores the relationship between household marginal income tax rates the set of financial assets that households own and the portfolio shares accounted for by each of these assets it analyzes data from the 1983 1989 1992 1995 and 1998 surveys of consumer finances and develops a new algorithm for imputing federal marginal tax rates to households in these surveys the empirical findings suggest that marginal tax rates have important effects on asset allocation decisions the probability that a household owns tax advantaged assets such as tax exempt bonds or assets held in tax deferred accounts is positively related to its tax rate on ordinary income in addition the portfolio share invested in corporate stock which is taxed less heavily than interest bearing assets is increasing in the household s ordinary income tax rate holdings of heavily taxed assets such as interest bearing accounts decline as a share of wealth as a household s marginal tax rate increases

ownership of stocks and mutual funds a panel data analysis this paper analyzes the ownership dynamics of stocks and mutual funds using representative household panel data the dutch center savings survey 1993 1998 a bivariate dynamic binary choice model is introduced allowing for interactions between the two types of assets we find that unobserved heterogeneity and state dependence play a large role for both types of assets the positive relation between ownership of one type in one period and the other type in the next period is explained by correlated unobserved heterogeneity a negative state dependence effect of lagged ownership of stocks on ownership of mutual funds is found which can be explained by the costs of shifting funds across the two forms of stockholding

marginal tax rates and tax favoured pension savings of the self employed evidence from sweden in recent years the study of how individuals respond to policies that aim at promoting pension savings has emerged as a vital area of economic research this paper adds to this body of literature by estimating the tax price elasticity of contributions to tax favoured pension savings accounts on a population of self employed individuals i exploit a unique total database over the swedish population that covers the years 19992005 using instrumental variables i obtain a tax price elasticity estimate of 0 51 and an income elasticity estimate of 0 13 whereas ordinary least squares ols produces estimates that conflict with consumer theory

individual retirement accounts saving and labor supply abstract this paper builds a general equilibrium model of overlapping generations and studies the effects of tax deferred saving and alternative retirement saving policies on life cycle saving and labor supply of households and on the aggregate economy

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

news on inflation and the epidemiology of inflation expectations this paper examines the nexus between news coverage on inflation and households inflation expectations in doing so we test the epidemiological foundations of the sticky information model carroll 2003 2006 we use both aggregate and household level data from the survey research center at the university of michigan we highlight a fundamental disconnection among news on inflation consumers frequency of expectation updating and the accuracy of their expectations our evidence provides at best weak support to the epidemiological framework as most of the consumers who update their expectations do not revise them toward professional forecasters mean forecast