income shares wealth and growth abstract the paper analyzes the relationship between income shares wealth and growth in an environment where positional goods are taken into account and rent is generated this hypothesis which is a macro engine for inequality creates a gap between profit share and property share and implies a clear cut distinction between capital and wealth the interactions between these aspects are studied in a medium run growth model led by aggregate demand where monetary aspects also matter the results of the dynamic analysis obtained by means of simulations are in keeping with some recent stylized facts furthermore the model generates bounded dynamics where the co movements between variables are more complex than those obtained in the recent literature at the same time the disequilibrium processes can create a link between medium run considerations and a more long run perspective

asset prices credit and the business cycle abstract this paper uses the multivariate unobserved components model with phase shifts to analyse the interaction of interest rates output asset prices and credit in the us we find close linkages amongst cyclical fluctuations in the variables

monetary policy and macroprudential policy different and separate the paper discusses how monetary and macroprudential policies can be distinguished how appropriate goals for the two policies can be determined whether the policies are best conducted separately or coordinately and by the same or different authorities and how they can be coordinated when desired the institutional frameworks in canada sweden and the uk are briefly compared the swedish example of monetary policy strongly leaning against the wind and the subsequent policy turnaround is summarized as well as what estimates have been found of the costs and benefits of leaning against the wind politique monetaire et politique macro prudentielle differente et separee ce memoire se demande comment on peut distinguer les politiques monetaire et macro prudentielle comment on peut determiner les objectifs de ces deux politiques si ces deux politiques ont un meilleur impact separement ou coordonnees et mises en uvre par la meme ou differentes autorites et comment on peut les coordonner quand on le desire on compare succinctement les cadres institutionnels du canada de la suede et du royaume uni la politique monetaire suedoise va fortement a contre courant et le virage subsequent de la politique est resume ainsi que les couts et avantages de cette strategie

top income shares and aggregate wealth income ratio in a two class corporate economy this paper examines some determinants of top income shares and the aggregate wealth income ratio in the usa the paper first points out the difficulties in piketty s neo classical version of explanation of us income inequality which stresses the effect of the rising aggregate wealth income ratio and high elasticity of factor substitution second the analysis based on a cambridge two class model along the lines of kaldor 1955 56 1966 and pasinetti 1962 highlights the role of financialization in increasing inequality third the analysis suggests that the rise in the aggregate wealth income ratio from 1980 to 2007 in the usa is explained mostly by asset price inflation not by technical relations finally the analysis examines the effects of the slowdown in capital accumulation on income distribution and wealth income ratios which are very different from those in piketty s capital in the twenty first century

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

the rising instability of u s earnings the inequality of earnings and of family incomes in the united states has increased since the late 1970s autor katz and kearney 2008 this increase in cross sectional inequality has largely been interpreted as a growing disparity in permanent incomes between those with high incomes and those with low incomes however growing inequality could equally well be a result of growing income instability if workers experience increasingly large fluctuations in earnings from year to year this would also increase the measured inequality of earnings from year to year for example if everyone maintained the same level of permanent income but some experienced a 500 increase in their income in the first year and then a reversal to 500 below their permanent incomes in the following year while an equal number experienced the opposite a drop in income followed by an offsetting rise measured inequality would rise though nothing would have happened to the dispersion of permanent incomes while this example is an extreme one it points to the fact that the large rise in earnings inequality between the 1970s and the 1990s could reflect either a rise in disparity of permanent incomes a rise in earnings instability or some portion of both without longitudinal data it is impossible to distinguish between these two very different explanations for increased cross sectional measures of inequality in this paper we provide longitudinal measures that separate changes in income inequality into changes that permanently change income to new levels and those that only reflect transitory change we refer to the latter as changes in income instability and discuss how the instability of individual earnings and family income in the united states has evolved over the last quarter century

capital is back wealth income ratios in rich countries 1700 2010 how do aggregate wealth to income ratios evolve in the long run and why we address this question using 1970 2010 national balance sheets recently compiled in the top eight developed economies for the united states united kingdom germany and france we are able to extend our analysis as far back as 1700 we find in every country a gradual rise of wealth income ratios in recent decades from about 200 300 in 1970 to 400 600 in 2010 in effect today s ratios appear to be returning to the high values observed in europe in the eighteenth and nineteenth centuries 600 700 this can be explained by a long run asset price recovery itself driven by changes in capital policies since the world wars and by the slowdown of productivity and population growth in line with the s g harrod domar solow formula that is for a given net saving

wealth inequality and intergenerational links previous work has had difficulty generating household saving behaviour that makes the distribution of wealth much more concentrated than that of labour earnings and that makes the richest households hold onto large amounts of wealth even during very old age i construct a quantitative general equilibrium overlapping generations model in which parents and children are linked by accidental and voluntary bequests and by earnings ability i show that voluntary bequests can explain the emergence of large estates while accidental bequests alone cannot and that adding earnings persistence within families increases wealth concentration even more i also show that the introduction of a bequest motive generates lifetime savings profiles more consistent with the data

bank lending and property prices in hong kong abstract this paper studies the relationship between residential property prices and bank lending in hong kong this is an interesting topic for three reasons first swings in property prices have been extremely large and frequent in hong kong second under the currency board regime monetary policy cannot be used to guard against asset price swings third despite the collapse in property prices since 1998 the banking sector remains sound while the contemporaneous correlation between lending and property prices is large our results suggest that the direction of influence goes from property prices to bank credit rather than conversely

the impact of monetary policy on stock market bubbles and trading behavior evidence from the lab we investigate the effect of monetary policy on stock market bubbles and trading behavior in experimental asset markets we introduce the possibility of investing in interest bearing bonds to the widely used laboratory asset market design of smith et al 1988 treatment groups face a variable interest rate policy which depends on asset prices while control groups are subjected to a constant interest rate we observe a strong impact of our interest rate policy on liquidity in the stock market but only a small impact on bubbles however we find that announcing the possibility of reserve requirements significantly reduces bubbles

predicting u s recessions financial variables as leading indicators this paper examines the out of sample performance of various financial variables as predictors of u s recessions series such as interest rates and spreads stock prices and monetary aggregates are evaluated individually and in comparison with other financial and nonfinancial indicators the analysis focuses on out of sample performance from one to eight quarters ahead results show that stock prices are useful with one to three quarter horizons as are some well known macroeconomic indicators beyond one quarter however the slope of the yield curve emerges as the clear individual choice and typically performs better by itself out of sample than in conjunction with other variables

income inequality in the united states 1913 1998 this paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the united states using individual tax returns data top income and wages shares display a u shaped pattern over the century our series suggest that the large shocks that capital owners experienced during the great depression and world war ii have had a permanent effect on top capital incomes we argue that steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks top wage shares were flat before world war ii dropped precipitously during the war and did not start to recover before the late 1960s but are now higher than before world war ii as a result the working rich have replaced the rentiers at the top of the income distribution

accounting for the u s earnings and wealth inequality we show that a theory of earnings and wealth inequality based on the optimal choices of ex ante identical households that face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the u s earnings and wealth inequality almost exactly

merit and rent in a growing economy in the framework of romer s 1990 growth model we endogenize human capital accumulation as the risky outcome of an effort choice policies favouring the accumulation of physical capital may reduce the incentives to effort leading the economy on a balanced path with a high capital intensity and a low growth rate

retail banking and behavioral financial engineering the case of structured products abstract we apply cumulative prospect theory and hedonic framing to evaluate discount reverse convertibles drcs and reverse convertible bonds rcbs as important examples of structured products from a boundedly rational investor s point of view while common expected utility theory would also conclude that drcs and rcbs are of interest to investors with moderate return expectations and underestimated stock return volatility that theory would overestimate the market success of drcs and underestimate that of rcbs in comparison to a situation with bounded rationality hedonic framing and relatively low subjectively felt competence levels of investors are decisive for the demand for rcbs

solving the incomplete markets model with aggregate uncertainty using the krusell smith algorithm and non stochastic simulations abstract this article describes the approach to computing the version of the stochastic growth model with idiosyncratic and aggregate risk that relies on collapsing the aggregate state space down to a small number of moments used to forecast future prices one innovation relative to most of the literature is the use of a non stochastic simulation routine

investment analysis of autocallable contingent income securities autocallable contingent income securities autocalls have payouts contingent on the performance of an underlying asset and give investors an opportunity to earn high yields in a low interest environment the authors collected data on us issued autocalls and modeled a typical autocall under various assumptions finding that they are issued on underlying assets that display high volatility high prices and negative skewness incorporating stochastic volatility into the model explains some of the overpricing routinely reported in prior studies

what does a financial shock do first international evidence in this paper we attempt to evaluate the quantitative impact of financial shocks on key indicators of real activity and financial conditions we focus on financial shocks as they have received wide attention in the recent literature and in the policy debate after the global financial crisis we estimate a panel var for 21 advanced economies based on quarterly data between 1985 and 2011 where financial shocks are identified through sign restrictions we find robust evidence that financial shocks can be separately identified from other shock types and that they exert a significant influence on key macroeconomic variables such as gdp and particularly investment but it is unclear whether these shocks are demand or supply shocks from the standpoint of their macroeconomic impact the financial development and structure of a given country is found not to matter much for the intensity of the propagation of financial shocks moreover we generally find that these shocks play a role not only in crisis times but also in normal conditions finally we discuss the implications of our findings for monetary policy fabio fornari and livio stracca

on the heterogeneous welfare gains and losses from trade how are the gains and losses from trade distributed across individuals within a country first we document that tradable goods constitute a larger fraction of expenditures for poor households second we build a trade model with nonhomothetic preferences to generate the documented relationship between tradable expenditure shares income and wealth and uninsurable earnings risk to generate heterogeneity in income and wealth third we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution in a numerical exercise we permanently reduce trade costs so as to generate a rise in import share of gdp commensurate with that seen in the data from 2001 to 2014 we find that households in the lowest wealth decile experience welfare gains over the transition measured by permanent consumption equivalents that are 67 percent larger than those in the highest wealth decile

pareto and piketty the macroeconomics of top income and wealth inequality abstract since the early 2000s research by thomas piketty emmanuel saez and their coauthors has revolutionized our understanding of income and wealth inequality in this paper i highlight some of the key empirical facts from this research and comment on how they relate to macroeconomics and to economic theory more generally one of the key links between data and theory is the pareto distribution the paper describes simple mechanisms that give rise to pareto distributions for income and wealth and considers the economic forces that influence top inequality over time and across countries for example it is in this context that the role of the famous r g expression is best understood

should central banks respond to movements in asset prices in recent decades asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries in light of this experience how if at all should central bankers respond to asset price volatility we have addressed this issue in previous work bernanke and gertler 1999 the context of our earlier study was the relatively new but increasingly popular monetary policy framework known as inflation targeting see e g bernanke and frederic mishkin 1997 in an inflation targeting framework publicly announced medium term inflation targets provide a nominal anchor for monetary policy while allowing the central bank some flexibility to help stabilize the real economy in the short run the inflation targeting approach gives a specific answer to the question of how central bankers should respond to asset prices changes in asset prices should affect monetary policy only to the extent that they affect the central bank s forecast of inflation to a first approximation once the predictive content of asset prices for inflation has been accounted for there should be no additional response of monetary policy to assetprice fluctuations in use now for about a decade inflationtargeting has generally performed well in practice however so far this approach has not often been stress tested by large swings in asset prices our earlier research employed simulations of a small calibrated macroeconomic model to examine how an inflation targeting policy defined as one in which the central bank s instrument interest rate responds primarily to changes in expected inflation might fare in the face of a boom and bust cycle in asset prices we found that an aggressive inflationtargeting policy rule in our simulations one in which the coefficient relating the instrument interest rate to expected inflation is 2 0 substantially stabilizes both output and inflation in scenarios in which a bubble in stock prices develops and then collapses as well as in scenarios in which technology shocks drive stock prices intuitively inflation targeting central banks automatically accommodate productivity gains that lift stock prices while offsetting purely speculative increases or decreases in stock values whose primary effects are through aggregate demand conditional on a strong policy response to expected inflation we found little if any additional gains from allowing an independent response of central bank policy to the level of asset prices in our view there are good reasons outside of our formal model to worry about attempts by central banks to influence asset prices including the fact that as history has shown the effects of such attempts on market psychology are dangerously unpredictable hence we concluded that inflationtargeting central banks need not respond to asset prices except insofar as they affect the inflation forecast in the spirit of recent work on robust control the exercises in our earlier paper analyzed the performance of policy rules in worst case discussants robert shiller yale university glenn rudebusch federal reserve bank of san francisco kenneth rogoff harvard university

are structured products fairly priced an analysis of the german market for equity linked instruments abstract based on a unique data set this paper examines the pricing of equity linked structured products in the german market the daily closing prices of a large variety of structured products are compared to theoretical values derived from the prices of options traded on the eurex european exchange for the majority of products the study reveals large implicit premiums charged by the issuing banks in the primary market a set of driving factors behind the issuers pricing policies is identified for example underlying and type of implicit derivative s for the secondary market the product life cycle is found to be an important pricing parameter

is piketty s second law of capitalism fundamental in capital in the twenty first century thomas piketty uses what he calls the second fundamental law of capitalism to predict that capital to income ratios are poised to increase dramatically as economies growth rates fall during the twenty first century this law states that in the long run the capital to income ratio equals s g where s is the economy s saving rate and g its growth rate we argue that this law rests on a theory of saving that is hard to justify first it holds the net saving rate constant as growth falls driving the gross savings rate to one as growth goes to zero second it is inconsistent with both the textbook growth model and the theory of optimal saving in both of these theories the net saving rate goes to zero as growth goes to zero third both of these theories provide a reasonable fit to observed data on gross and net saving rates and growth rates in cross country panel data whereas piketty s does not finally contrary to piketty s second law both of these theories predict that capital to income ratios increase only modestly as growth falls

monetary policy and financial imbalances facts and fiction following the financial crisis many have argued that monetary policy should lean against asset price increases and that deviations of credit and asset prices from trend can be used to capture financial imbalances we study quarterly data spanning 1986 2008 for a sample of 18 countries and argue that such measures contain little information useful for forecasting the future economic conditions this casts doubts on the leaning against the wind view we also argue that tightening monetary policy in response to such imbalances are likely to depress real growth substantially that finding however is sensitive to the lucas critique katrin assenmacher wesche and stefan gerlach

zipf s law for cities an explanation zipf s law is a very tight constraint on the class of admissible models of local growth it says that for most countries the size distribution of cities strikingly fits a power law the number of cities with populations greater than s is proportional to 1 s suppose that at least in the upper tail all cities follow some proportional growth process this appears to be verified empirically this automatically leads their distribution to converge to zipf s law

the distribution of wealth and fiscal policy in economies with finitely lived agents we study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth financial markets are incomplete exposing agents to both labor and capital income risk we show that the stationary wealth distribution is a pareto distribution in the right tail and that it is capital income risk rather than labor income that drives the properties of the right tail of the wealth distribution we also study analytically the dependence of the distribution of wealth of wealth inequality in particular on various fiscal policy instruments like capital income taxes and estate taxes and on different degrees of social mobility we show that capital income and estate taxes can significantly reduce wealth inequality as do institutions favoring social mobility finally we calibrate the economy to match the lorenz curve of the wealth distribution of the u s economy

market thickness and the impact of unemployment on housing market outcomes abstract a search and matching model is developed to study how unemployment influences the housing market in the presence of the thick market effect a structural estimation of the model is conducted based on texas city level data that covers three years 1990 2000 and 2010 simulations help clarify how much the thick market effect amplifies the impact of unemployment a three percentage point increase in the unemployment rate lowers the price by 10 74 and reduces the transaction volume by 5 49 incorporating a feedback mechanism from housing prices to unemployment strengthens the amplification magnitude of the thick market effect

the effects of changing input costs on food prices the relationships between changes in food sector input costs and retail food prices are examined results indicate that increases in factor prices pass quickly to consumers within two quarters for most foods in addition rising farm level prices and substantial increases in nonfarm resource prices appear to explain why food prices rose more rapidly than nonfood prices in the 1970s the analysis is based on a twenty equation econometric model of the food price determination process specified following popkin s stage of processing approach causality and validation test statistics for the model are presented

refitting the kuznets curve using a gender specific threshold model abstractprevious studies have reached mixed conclusions regarding the relationship between inequality and per capita income these studies however fail to consider gender differences in income inequality and how these may impact on the relationship between income inequality and per capita income using australian taxation statistics we derive three sets of gini coefficients i e female male and total for the period 1950 2013 we then examine the relationship between inequality and real per capita income and find that a gender specific threshold panel regression outperforms three other conventional models our findings suggest that one set of coefficients does not fit all in that the use of aggregate and constant coefficients may mask variations within and between gender inequality over time

can traditional theories of structural change fit the data two traditional explanations for structural changes are sector biased technological progress and non homothetic preferences this paper integrates both into an otherwise standard growth model and quantitatively evaluates them vis a vis time series the exercise identifies a set of puzzles for standard theories i the model cannot account for the steep decline in manufacturing and rise in services in the later data ii the standard model requires implausibly low elasticity of substitution across goods to match the consumption and output data and iii the behavior of consumption and output shares differs significantly from that of employment shares we argue that models that incorporate home production sector specific factor distortions and differences across sectors in the accumulation of human capital are promising avenues to amend the standard models jel o11 o14 o41

the dynamics of inequality the past forty years have seen a rapid rise in top income inequality in the united states while there is a large number of existing theories of the pareto tail of the long run income distributions almost none of these address the fast rise in top inequality observed in the data we show that standard theories which build on a random growth mechanism generate transition dynamics that are too slow relative to those observed in the data we then suggest two parsimonious deviations from the canonical model that can explain such changes scale dependence that may arise from changes in skill prices and type dependence that is the presence of some high growth types these deviations are consistent with theories in which the increase in top income inequality is driven by the rise of superstar entrepreneurs or managers

thomas piketty and the rate of time preference using a standard model in which the individual consumption path is computed solving an optimal control problem we investigate central claims of piketty 2014 rather than r g confirmed in the data r g with being the rate of time preference matters if this condition holds and the elasticity of substitution in the production function is larger than one the capital share converges to one in the long run nevertheless this does not have major impact on the distribution of wealth the latter however converges to maximum inequality for heterogeneous time preferences or rates of interest either persistent or stochastic for the latter the presence of finite life times leads to a distribution with finite wealth inequality featuring fat tails

monetary policy and the global housing bubble what caused the housing boom of the 2000s a number of researchers have suggested that loose monetary policy during the first half of the 2000s was a primary cause of the substantial run up in house prices in many countries however using a common statistical approach we find that monetary policy was not the main factor that should not be surprising although low interest rates raise house prices the increase in prices during the mid 2000s was much larger than the historical relationship between the two variables would suggest instead we investigate further the link between the marked loosening in terms and standards for mortgage credit and the most rapid increases in house prices this link provides some evidence for a story where credit provision and the demand for housing fed on each other and helped spur the housing boom our work suggests a greater role for macroprudential regulation rather than monetary policy in managing asset price booms jane dokko brian m doyle michael t kiley jinill kim shane sherlund jae sim and skander van den heuvel

globalization outsourcing and wage inequality there is considerable debate over whether international trade has contributed to the declining economic fortunes of less skilled workers one issue that has become lost in the current discussion is how firms respond to import competition and how these responses in turn are transmitted to the labor market in previous work we have argued that outsourcing by which we mean the import of intermediate inputs by domestic firms has contributed to an increase in the relative demand for skilled labor in the united states if firms respond to import competition from low wage countries by moving non skill intensive activities abroad then trade will shift employment towards skilled workers within industries in this paper we extend our previous work by combining new import data from the revised nber trade database with disaggregated data on input purchases from the census of manufactures we construct industry by industry estimates of outsourcing for the period 1972 1990 and reexamine whether outsourcing has contributed to an increase in relative demand for skilled labor our main finding is that outsourcing can account for 31 51 of the increase in the relative demand for skilled labor that occurred in u s manufacturing industries during the 1980s compared to our previous estimate of 15 33 this abstract was borrowed from another version of this item

mismatch in human capital accumulation this article studies the allocation of heterogeneous agents to levels of educational attainment the goal is to understand the magnitudes and sources of mismatch in this assignment both in theory and in the data the article presents evidence of substantial mismatch between ability and educational attainment across 21 oecd countries with a main focus on germany italy japan and the united states model parameters are estimated using a simulated method of moments approach the main empirical finding is that measured mismatch arises largely from noise in test scores and does not reflect borrowing constraints taste shocks play a minor role in explaining mismatch

cost of business cycles with indivisibilities and liquidity constraints it is almost universally agreed that individuals face incomplete insurance markets and cannot perfectly insure against the idiosyncratic risk in this paper simple general equilibrium models with incomplete insurance markets are examined in order to assess the impact of imperfect insurance on the magnitude of the welfare costs of business cycles two versions of incomplete insurance markets are considered and certain statistical properties of the equilibrium stochastic processes in these environments are compared with those of a perfect insurance economy

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

between scylla and charybdis income distribution consumer credit and business cycles we introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios growing inequality produces debt led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend instead when inequality rises but the banking sector is highly regulated aggregate demand and output fall our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy jel c63 d31 e62 g01

a ricardian model with a continuum of goods under nonhomothetic preferences demand complementarities income distribution and north south trade this paper develops a ricardian model of trade in which goods are indexed according to priority and higher indexed goods are consumed only by richer households south north has a comparative advantage in lower higher indexed goods and hence specializes in goods with lower higher income elasticities of demand product cycles and a southern terms of trade deterioration result from faster population growth and uniform productivity growth in south and a global productivity improvement south s domestic income redistribution policy can improve its terms of trade so much that every household in south may be better off at the expense of north

does detrending matter for the determination of the reference cycle and the selection of turning points we examine the sensitivity of turning points classification to detrending and compare the implied cycles to those derived by nber or doc researchers two dating rules are considered turning point dates are broadly insensitive to detrending with one dating rule but not the other and many procedures generate false alarms and miss several common turning points with the latter one amplitude and duration properties are also sensitive detrending and dating rules the hodrick and prescott and a frequency domain filters are best in mimicing nber and doc cycles regardless of the dating rule used