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Research Publications

Academic Publications

A list of articles published by members of the Dallas Fed Research staff.

  • 2011
  • 2010
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  • 2007
  • 2006
  • 2005
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  • 2002
  • 2001



House Prices and Credit Constraints: Making Sense of the U.S. Experience

The Economic Journal , May 2011
John V. Duca, John Muellbauer, and Anthony Murphy

Abstract: The U.S. house price boom has been linked to an unsustainable easing of mortgage credit standards. However, standard time series models of US house prices omit credit constraints and perform poorly in the 2000’s. We incorporate data on credit constraints for first time buyers into a model of US house prices based on the (inverted) demand for housing services. Our first time buyer loan-to-value series is weakly exogenous and captures shifts in the supply of mortgage credit and not expectations of future house price appreciation. Using this series, we estimate a U.S. house price equation that yields not only a stable long-run cointegrating relationship, a reasonable speed of adjustment, plausible income and price elasticities and an improved fit, but also sensible estimates of tax credit effects and the possible bottom in real house prices.


Credit, Housing Collateral and Consumption: Evidence from Japan, the UK and the U.S.

The Review of Income and Wealth , forthcoming 2011.
Janine Aron, John V. Duca, John Muellbauer, Keiko Murata, and Anthony Murphy

Abstract: The consumption behaviour of UK, U.S. and Japanese households is examined and compared using a modern Ando-Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral and other credit effects.  These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for UK and U.S., but not Japanese, households has undergone large shifts since 1980. The average consumption-to-income ratio rose in the UK and U.S. as mortgage down-payment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans.  The estimated housing collateral effect is similar in the U.S. and UK. In Japan, land prices (which proxy house prices) continue to negatively impact consumer spending. There are negative real interest rate effects on consumption in the UK and U.S. and positive effects in Japan. Overall, this implies important differences in the transmission of monetary and credit shocks in Japan versus the U.S., UK and other credit-liberalized economies.


VAR Estimation and Forecasting When Data Are Subject to Revision

Journal of Business and Economic Statistics , forthcoming 2011
N. Kundan Kishor and Evan F. Koenig

Abstract: We show that Howrey's method for producing economic forecasts when data are subject to revision is easily generalized to handle the case where data are produced by a sophisticated statistical agency. The proposed approach assumes that government estimates are efficient with a finite lag. It takes no stand on whether earlier revisions are the result of "news" or of reductions in "noise." We present asymptotic performance results in the scalar case and illustrate the technique using several simple models of economic activity. In each case, it outperforms both conventional VAR analysis and the original Howrey method. It produces GDP forecasts that are competitive with those of professional forecasters. Special cases and extensions of the analysis are discussed in a series of appendices that are available online.



Can Alternative Taylor-Rule Specifications Describe Federal Reserve Policy Decisions?

Journal of Policy Modeling , November–December 2010
Adriana Fernandez and Evan F. Koenig

Abstract: We look at how well several alternative Taylor-rule specifications describe Federal Reserve policy decisions in real time, using the newly developed Giacomini and Rossi (2007) test for non-nested model selection in the presence of (possible) parameter instability. Further, we isolate those Taylor-rule features that are most important for achieving relatively strong real-time performance. Key features of our preferred rule, which is robust to changing economic conditions, are the partial adjustment of the federal funds rate toward an equilibrium rate that depends on the unemployment rate and forward-looking inflation measures. We conclude by presenting an empirical application to show the policy relevance of our preferred rule in the context of the 2008–2009 recession.


Home Bias, Exchange Rate Disconnect, and Optimal Exchange Rate Policy

Journal of International Money and Finance , February 2010   
Jian Wang 

Abstract: This paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations. The paper first demonstrates, in a two-country Dynamic Stochastic General Equilibrium (DSGE) model, that home bias in consumption is important to replicate the exchange rate volatility and exchange rate disconnect documented in the data. When home bias is high, the shock to Uncovered Interest rate Parity (UIP) can substantially drive up exchange rate volatility while leaving the volatility of real macroeconomic variables, such as GDP, almost untouched. The model predicts that the volatility of the real exchange rate relative to that of GDP increases with the extent of home bias. This relation is supported by the data. A second-order accurate solution method is employed to find the optimal operational monetary policy rule. Our model suggests that the monetary authority should not seek to vigorously stabilize exchange rate fluctuations. In particular, when the central bank does not take a strong stance against the inflation rate, exchange rate stabilization may induce substantial welfare loss. The model does not detect welfare gain from international monetary cooperation, which extends Obstfeld and Rogoff's [Obstfeld, M., Rogoff, K., 2002. Global implications of self-oriented national monetary rules, Quarterly Journal of Economics May, 503–535] findings to a DSGE model. 


The Quantitative Role of Capital Goods Imports in US Growth

American Economic Review Papers and Proceedings , May 2010
Michele Cavallo and Anthony Landry

Abstract: A significant body of literature has found that technological improvements embodied in new capital goods account for a large share of US output growth. This phenomenon, known as investment-specific technological change, has stimulated the growth rate of output by raising the efficiency of equipment and software (E&S) in the production of final output. In an influential contribution, Jeremy Greenwood, Zvi Hercowitz, and Per Krusell (1997) found that investment-specific technological change accounted for nearly 60 percent of growth in US output per hour during the postwar period. The salient findings of this paper are that capital goods imports have contributed 20 to 30 percent to growth in US output per hour between 1967 and 2008, and that this contribution has even risen to a measured 30 to 40 percent in the last 20 years. These findings imply that capital goods imports have represented an increasing source of growth in US output per hour. In related work, Michele Cavallo and Anthony Landry (2009) show that the relative price of capital goods imports has fallen more rapidly than the relative price of domestic E&S investment over the sample period. This observation, together with the finding that a significant portion of the increase in the stock of E&S has stemmed from higher capital goods imports, hints that the decline in the relative price of capital goods imports has been a key driving force behind the observed increase in the stock of E&S.


Mexican Immigrant Employment Outcomes Over the Business Cycle

American Economic Review Papers and Proceedings , May 2010 
Pia M. Orrenius and Madeline Zavodny

Abstract: The United States is beginning to emerge from the deepest downturn the country has experienced since the Great Depression. As of October 2009, the number of unemployed persons had risen by 8.2 million since the “Great Recession” began in December 2007.1 All demographic groups have experienced job losses, but some groups have been more adversely affected than others.  Repeating the pattern of most previous downturns, the recession’s impact has been worst for low education and minority workers.


A Model of the Exchange Rate with Informational Frictions

B.E. Journal of Macroeconomics , 2010
Enrique Martinez-Garcia

Abstract: Data for the U.S. and the Euro-zone (12) during the post-Bretton Woods period show that nominal and real exchange rates are more volatile than consumption, very persistent, and highly correlated with each other. Open-economy models with price stickiness and local-currency pricing often require an average duration above 4 quarters to approximate those stylized facts. I argue that limited and asymmetric information introduces a lag in the consumption decisions, and as a result the real exchange rate becomes more volatile to ensure that goods markets clear at all times. Hence, informational frictions can explain the volatility of the real exchange rate without imposing price stickiness above the available estimates (e.g., Gali et al., 2001). I also find that differences in price stickiness across markets weaken the correlation between the nominal exchange rate and the CPI ratio between countries. This can increase the persistence of the real exchange rate, but often by worsening the model along other dimensions (e.g., by lowering the correlation between nominal and real exchange rates).


Do Remittances Boost Economic Development? Evidence from Mexican States

Law and Business Review of the Americas , Fall 2010
Pia M. Orrenius, Madeline Zavodny, Jesús Cañas, and Roberto Coronado
: Remittances have been promoted as a development tool because they can raise incomes and reduce poverty rates in developing countries. Remittances may also promote development by providing funds that recipients can spend on education or health care or invest in entrepreneurial activities. From a macroeconomic perspective, remittances can boost aggregate demand and thereby GDP as well as spur economic growth. However, remittances may also have adverse macroeconomic impacts by increasing income inequality and reducing labor supply among recipients. We used state-level data from Mexico during 2003-2007 to examine the aggregate effect of remittances on employment, wages, unemployment rates, the wage distribution, and school enrollment rates. Our results suggest that while employment, wages, and school enrollment have risen over time in Mexican states, increasing remittances do not account for these trends. However, remittances may lessen some measures of income inequality. Two-stage least squares specifications among central Mexican states suggest that remittances shift the wage distribution to the right, reducing the fraction of workers earning the minimum wage or less.


Improving the ACCRA U.S. Regional Cost of Living Index

Journal of Economic and Social Measurement , September 2010
Keith R. Phillips and Christina Daly

Abstract: The broadest and most commonly used measure of the cost of living across U.S. cities is the American Chamber of Commerce Research Association (ACCRA) index. This index is used by business and government organizations and the media to rank living standards and real wages across U.S. cities. In this study we reduce the aggregation bias in the index by calculating national average prices for the 59 item prices using population weights instead of the equal weight formula used by ACCRA. This correction results in a decline in the index values for all cities and changes in the rankings and bi-variate comparisons between city pairs. In some high-cost cities the index values decrease by over 25 percent, and in 74 percent of the cities the rank changes by greater than one spot.


State-Dependent Pricing, Local-Currency Pricing, and Exchange Rate Pass-Through

Journal of Economic Dynamics and Control , October 2010
Anthony Landry

Abstract: This paper presents a two-country DSGE model with state-dependent pricing as in in Dotsey et al. (1999) which firms discriminate across countries by setting prices in local currency. In this model, a domestic monetary expansion has greater spillover effects to foreign prices and foreign economic activity than an otherwise identical model with time-dependent pricing. In addition, the predictions of the state-dependent pricing model match the business-cycle moments better than the predictions of the time-dependent pricing model when driven by monetary policy shocks.


Housing Markets and the Financial Crisis of 2007–2009: Lessons for the Future

Journal of Financial Stability, December 2010
John V. Duca, Anthony Murphy, and John Muellbauer

Abstract: An unsustainable weakening of credit standards induced a US mortgage lending and housing bubble, whose consumption impact was amplified by innovations altering the collateral role of housing. In countries with more stable credit standards, any overshooting of construction and house prices owed more to traditional housing supply and demand factors. Housing collateral effects on consumption also varied, depending on the liquidity of housing wealth. Lessons for the future include recognizing the importance of financial innovation, regulation, housing policies, and global financial imbalances for fueling credit, construction, house price and consumption cycles that vary across countries.



Credit Unions and Small Business Lending

Journal of Financial Services Research , February 2009
David P. Ely and Kenneth J. Robinson

Abstract: Among the issues raised by consolidation within the banking industry is a concern that small businesses will be less able to obtain credit as community banks are acquired by larger or non-local institutions. Community banks have traditionally been a major source of funding for small businesses. The impact of bank consolidation on credit availability may depend in part on whether the remaining community institutions expand their small business lending activities. This study examines whether credit unions have a propensity to extend business loans in markets that have experienced bank merger and acquisition activity. We find some evidence that credit unions are more likely to engage in business lending in markets characterized by greater bank merger and acquisition activity. Moreover, the estimated economic significance is meaningful in many of the specifications.


The Effect of Tougher Enforcement of the Job Prospects of Recent Latin American Immigrants

Journal of Policy Analysis and Management , March 2009
Pia M. Orrenius and Madeline Zavodny

Abstract: Attempts to enforce immigration laws in the U.S. interior have proliferated in recent years, yet the effects of these laws on immigrants are largely unknown. This paper examines whether increases in immigration-related law enforcement since 2001 have adversely affected the labor market outcomes of low-education male immigrants from Latin America, a group that comprises the bulk of undocumented workers in the U.S. The crackdown on the use of fraudulent Social Security numbers, increased requirements for government-issued identification, and other changes associated with greater focus on national security likely lowered the demand for undocumented foreign-born workers in the years following the 9/11 terrorist attacks. Using Current Population Survey data and a difference-in-differences estimation technique, we find strong evidence of worse labor market outcomes among recent Latin American immigrants in the post-9/11 period relative to natives and prior Latin American immigrants. The results indicate a decline in employment, hours worked, and earnings among recent male Latin American immigrants relative to similarly low-skilled black and Hispanic natives and vis-a-vis Latin American immigrants who have been in the U.S. longer. Our findings are consistent with firms increasingly substituting legal workers for undocumented labor in the years following 9/11.


The Elasticity of Intertemporal Substitution: New Evidence from 401(k) Participation

Economics Letters , April 2009 
Gary V. Engelhardt and Anil Kumar 

Abstract: Using Health and Retirement Study data and a structural econometric model, we exploit variation in employer matching rates in 401(k) plans to generate new estimates of the EIS: 0.74 in our richest specification, with a 95% confidence interval of 0.37–1.21. 


Regulation and the Neo-Wicksellian Approach to Monetary Policy

Journal of Money Credit and Banking , June 2009  
John V. Duca and Tao Wu 

Abstract: Laubach and Williams (2003) employ a Kalman filter approach to jointly estimate the neutral real federal funds rate and trend output growth using an IS relationship and an output-gap-based inflation equation. They find a positive link between these two variables, but also much error surrounding neutral real rate estimates. We modify their approach by including variables for regulations on deposit interest rates and on wages and prices. These variables are statistically significant and notably affect estimates of two policy-relevant coefficients: the sensitivity of output to the real interest rate and that of inflation to the output gap.


Expectations and Exchange Rate Dynamics: A State-Dependent Pricing Approach

Journal of International Economics , June 2009
Anthony Landry 

Abstract: This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey et al. [Dotsey, M., King, R.G., and Wolman, A.L, 1999. State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly journal of Economics 114, 655-690] and variable demand elasticity as in Kimball [Kimball, M.S., 1995. The quantitative analytics of the basis neomonetarist model. journal of Money, Credit, and Banking 27, 1241-1277]. Following a domestic monetary expansion, the model predicts: (i) positive hump-shaped responses of domestic output and consumption, (ii) positive spillover effects on foreign output and consumption, (iii) a high international output correlation relative to consumption correlation, (iv) a delayed increase in domestic and foreign inflation, (v) a delayed nominal exchange rate overshooting, (vi) a deterioration in the terms of trade. and (vii) a J-curve in the trade balance. The model matches the impulse responses from an identified VAR more closely than an otherwise identical model with time-dependent pricing.


Immigrants in the US Economy: A Host-Country Perspective

Journal of Business Strategies , June 2009
Michael D. Nicholson and Pia M. Orrenius

Abstract: (No abstract)


Do Immigrants Work in Riskier Jobs?  

Demography , August 2009
Pia M. Orrenius and Madeline Zavodny

Abstract: Recent media and government reports suggest that immigrants are more likely to hold jobs with poor working conditions than U.S.-born workers, perhaps because immigrants work in jobs that "natives don't want." Despite this widespread view, earlier studies have not found immigrants to be in riskier jobs than natives. This study combines individual-level data from the 2003–2005 American Community Survey with Bureau of Labor Statistics data on work-related injuries and fatalities to take a fresh look at whether foreign-born workers are employed in more dangerous jobs. The results indicate that immigrants are in fact more likely, to work in risky jobs than U.S.-born workers, partly due to differences in average characteristics, such as immigrants 'lower English-language ability and educational attainment.


The Repeal of the Retirement Earnings Test and the Labor Supply of Older Men

Journal of Pension Economics and Finance , October 2009
Gary V. Engelhardt and Anil Kumar

Abstract: This paper examines the impact of the Senior Citizens Freedom to Work Act of 2000, which abolished the Social Security retirement earnings test for those aged 65–69, on the labor supply of older men using data from the 1996–2004 waves of the Health and Retirement Study (HRS). We use the fine structure of the 2000 Act to develop a new measure of exposure to the earnings test that varies across calendar years both by month and year of birth. We find that much, if not all, of the labor-supply response occurred for sub-groups of men who, either because of high mortality risk, high rates of pure time preference, or liquidity constraints, may have found the actuarial adjustment built into the earnings test relatively disadvantageous, particularly the lesser educated.


Purchasing Power Parity and Aggregation Bias for a Developing Country: The Case of Mexico

Journal of Development Economics , November 2009 
Raymond Robertson, Anil Kumar, and Donald H. Dutkowsky 

Abstract: This paper investigates long-run Purchasing Power Parity (PPP) between the US and Mexico. We use a panel of disaggregated price data between the US and Mexico with a long time series to look at two types of aggregation bias. The first is examined in Imbs et al.—which we refer to as estimator aggregation bias - and the second is put forth by Broda and Weinstein—hereafter, data aggregation bias. The findings indicate substantial estimator aggregation bias and data aggregation bias. Although estimates using aggregate data and imposing homogeneous coefficients provide little evidence of PPP, findings with disaggregated data and heterogeneous coefficient estimators offer strong support. The results also suggest the presence of small-sample bias as examined in Chen and Engel, but with little effect on the qualitative results. Tradable goods and non-tradable goods show little distinction in convergence rates. Estimated half-lives are lower under flexible than fixed exchange rates and indicate rapid convergence during the Mexican peso crisis. 


Vertical Specialization and International Business Cycle Synchronization

Scandinavian Journal of Economics , 2009
Costas Arkolakis and Ananth Ramanarayanan

Abstract: We explore the impact of vertical specialization-trade in goods across multiple stages of production-on the relationship between trade and business cycle synchronization across countries. We develop an international business cycle model in which the degree of vertical specialization varies with trade barriers. With perfect competition, we show analytically that fluctuations in measured total factor productivity are not linked across countries through trade. In numerical simulations, we find little dependence of business cycle synchronization on trade intensity. An extension of the model to allow for imperfect competition has the potential to resolve these shortcomings.


An Evaluation of Real-Time Forecasting Performance across Ten Western U.S. States

Journal of Economic and Social Measurement , 2009
Keith R. Phillips and Jose Joaquin Lopez

Abstract: The recent financial crisis and economic downturn has emphasized the importance of accurate sub-national forecasting models. To judge which models work best, researchers have emphasized the importance of looking at the true real-time performance of models and not simply an analysis of out-of-sample results. In this study, we utilize real-time forecasts from the Western Blue Chip Economic Forecast to analyze and evaluate a host of different forecasters and models across time and 10 U.S. states to see if some models and forecasters consistently outperform others. We use the forecast accuracy criteria established by the Blue Chip publication. To evaluate accuracy we develop a scoring procedure based on the number of years that the forecaster/model was closest to actual relative to what we would expect just by random chance. We also utilize standard measures such as the root mean square error and Theil's inequality coefficient and test the statistical significance of the best forecasts. We then take a closer look at one model that has proven to be very accurate.


Market Arbitrage: European and North American Natural Gas Prices

Energy Journal , Special Issue 2009
Stephen P.A. Brown and Mine K. Yücel

Abstract: The development of an international market for liquefied natural gas (LNG) and the resulting opportunities for intercontinental arbitrage are seen as creating a world in which movements in natural gas prices are linked between continents. Increased flows of LNG into the United States and the potential sensitivity of these shipments to price differentials between Europe and North America suggests the possibility of a strengthening relationship between natural gas prices on these two continents. At the same time, there is considerable evidence linking natural gas price movements in Europe and North America to those for crude oil. Accordingly, we use a series of econometric tests to determine whether the co-movement between natural gas prices in Europe and North America is mediated through crude oil prices or is being shaped directly by gas-to-gas arbitrage.



On the Determinants of Optimal Border Enforcement

Economic Theory , February 2008
Pia Orrenius, Mark Guzman and Joe Haslag

Abstract: We extend the current immigration-enforcement literature by incorporating both the practice of people smuggling and a role for non-wage income into a two-country, dynamic general equilibrium model. We use the model economy to examine three questions. First, how does technological progress in the smuggling industry affect the level of migration and capital accumulation for a given level of enforcement? Second, do changes in border enforcement affect the level of migration, capital accumulation, and smuggling activity? Third, is the optimal level of enforcement sensitive to technological progress in the smuggling industry? We show that the government chooses to devote resources to border enforcement only if the deterrent effect on smugglers is large enough. Otherwise, it is not worth taxing host-country natives as the taxes paid will more than offset any income gain resulting from fewer migrants.


Labor Supply, Deadweight Loss and Tax Reform Act of 1986: A Nonparametric Evaluation Using Panel Data

Journal of Public Economics , February 2008 
Anil Kumar

Abstract: Tax Reform Act of 1986 (TRA 1986) has provided an invaluable source of variation in tax rates to study the effects of tax reforms on labor supply in the US. Most existing studies exploiting variation generated by TRA 1986 have used cross-sectional variation in tax rates or assumed a linear labor supply function or have not couched their analysis in a nonlinear budget set framework. This paper uses the drastic variation in the budget set induced by TRA 1986 as a source of identification and combines two novel approaches to estimate behavioral effects of tax reforms. I first use nonparametric estimation methods with nonlinear budget sets [Blomquist, Soren, Newey, W., 2002. Nonparametric estimation with nonlinear budget sets. Econometrica 70 (6), 2455-2480] to estimate a labor supply function, using waves of PSID just before and after TRA 1986. Nonparametric method developed in Hausman and Newey [Hausman, J., Whitney Newey, 1995. Nonparametric measurement of exact consumer's surplus and deadweight loss. Econometrica 63, 1145-76] is then applied to estimate the deadweight loss from TRA 1986. The nonparametric estimate of the compensated wage elasticity is 0.22.1 find that TRA 1986 had a small but positive effect on labor supply of men of about 2% at the sample mean. TRA 1986 was associated with robust reduction in deadweight loss from the pre-TRA 1986 level and this reduction is positively correlated with income and wages.


Regional Business Cycle Integration Along the US–Mexico Border

Annals of Regional Science , March 2008
Keith Phillips and Jesus Cañas  

Abstract: Because of the growing internationalization of the US economy, a literature has developed on the impacts of globalization on US industries and regions. In this paper we look at four MSAs that have a long history of integration with Mexico and test how their overall business cycles are connected to those of the broader economies that surround them. As globalization increases in the US, the lessons learned from these MSAs can be useful for cities trying to understand how globalization may impact them in the future. Results suggest that the border MSAs are significantly integrated with the broader economies that surround them but that the integration varies based on the structure of the local economy. Border MSAs that have large retail sectors that sell to Mexican nationals are more integrated with the Mexican economy, while El Paso, which has a close relationship with the maquiladora sector in Juarez, is more integrated with the US and Texas economies.


Money on the Table: Some Evidence on the Role of Liquidity Constraints in 401(k) Saving

Economics Letters , May 2008 
Gary V. Engelhardt and Anil Kumar

Abstract: Using Health and Retirement Study data on contributions, earnings, and pension plans, we examine the role of liquidity constraints in explaining why employees fail to take full advantage of employer matching contributions in 401 (k) plans, leaving "money on the table." 


Core Inflation: A Review of Some Conceptual Issues

Federal Reserve Bank of St Louis Review , May-June 2008
Mark A. Wynne

Abstract: This paper reviews various approaches to the measurement of core inflation that have been proposed over the years using the stochastic approach to index numbers as a unifying framework. It begins with a review of how the concept of core inflation is used by the world's major central banks, including some of the inflation-targeting central banks. The author provides a comprehensive review of many of the measures of core inflation that have been developed over the years and highlights some of the conceptual and practical problems associated with them.


Stock Ownership and Congressional Elections: The Political Economy of the Mutual Fund Revolution

Economic Inquiry , July 2008
John V. Duca and Jason L. Saving 

Abstract: We find that higher stock ownership rates are linked to an upward shift in the Republican share of the House popular vote since the late 1980s, consistent with theories that property interests affect voting. To proxy for discontinuous stock ownership rates, we use equity mutual fund costs, which have fallen, are negatively correlated with stock ownership rates and the Republican vote share in the long run, and help explain short-run changes along with midterm elections, economic conditions, and presidential popularity Findings suggest that the major parties' shares of the House popular vote will fluctuate around 50% until other factors trigger a political realignment. 


The Effect of Minimum Wages on Immigrants' Employment and Earnings

Industrial and Labor Relations Review 6 , July 2008
Pia Orrenius and Madeline Zavodny

Abstract: This study examines how minimum wage laws affect the employment and earnings of low-skilled immigrants and natives in the U.S. Minimum wage increases might have larger effects among low-skilled immigrants than among natives because, on average, immigrants earn less than natives due to lower levels of education, limited English skills, and less social capital. Results based on data from the Current Population Survey for the years 1994-2005 do not indicate that minimum wages have adverse employment effects among adult immigrants or natives who did not complete high school. However, low-skilled immigrants may have been discouraged from settling in states that set wage floors substantially above the federal minimum.


Deliverability and Regional Pricing in US Natural Gas Markets

Energy Economics , September 2008
Stephen P.A. Brown and Mine Yücel

Abstract: During the 1980s and early 90s, interstate natural gas markets in the United States made a transition away from the regulation that characterized the previous three decades. With abundant supplies and plentiful pipeline capacity, a new order emerged in which freer markets and arbitrage closely linked natural gas price movements throughout the country. After the mid-1990s, however, U.S. natural gas markets tightened and some pipelines were pushed to capacity. We look for the pricing effects of limited arbitrage through causality testing between prices at nodes on the U.S. natural gas transportation system and interchange prices at regional nodes on North American electricity grids. Our tests do reveal limited arbitrage, which is indicative of bottlenecks in the U.S. natural gas pipeline system.


What Drives Natural Gas Prices?

Energy Journal , 2008
Stephen P.A. Brown and Mine K. Yücel

Abstract: For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices closely aligned with those for crude oil. More recently, however, the number of U.S. facilities able to switch between natural gas and residual fuel oil has declined, and over the past seven years, U.S. natural gas prices have been on an upward trend with crude oil prices but with considerable independent movement. Natural gas market analysts generally emphasize weather and inventories as drivers of natural gas prices. Using an error-correction model, we show that when these and other additional factors are taken into account, movements in crude oil prices have a prominent role in shaping natural gas prices. Our findings imply a continuum of prices at which natural gas and petroleum products are substitutes.



Exported Retail Sales along the Texas–Mexico Border

Journals of Borderlands Studies, Spring 2007
Roberto A. Coronado and Keith R. Phillips

Abstract: Trade between the U.S. and Mexico has boomed over the past 10 years due partly to the significant reduction in tariffs from the North American Free Trade Agreement (NAFTA) and the strong growth in the maquiladora industry. While commercial trade between the countries is well documented, less is known about the size of the cross-border retail trade that occurs. Though the size of this activity is small in comparison to commercial trade, it is a significant part of the economies of many border cities. In 2005 alone, there were more than 45 million non-commercial crossings at the bridges along the Texas-Mexico border. Many of these individuals were coming to purchase goods to take back to their home country. Since most of the retail trade conducted on the U.S. side of the border is done in cash, it is difficult to document the share of retail spending accounted for by Mexican nationals. In this article we use several techniques based on a simple consumption function to estimate the size of retail spending that is essentially exported to Mexico via cross-border shoppers. We then check our estimates of the proportion of retail sales going to Mexican nationals in the Texas border metros to see if they are consistent with the impacts to retail sales of movements in the real peso-dollar exchange rate.


The Relative Price Effects of Monetary Shocks

Journal of Macroeconomics , March 2007
Mark A. Wynne and Nathan Balke
We document the response of the individual components of the Producer Price Index (PPI) to commonly used measures of monetary shocks, and show that these responses are at variance with many widely used models of monetary nonneutrality. Monetary shocks are shown to have large relative price effects, resulting in an increase in the dispersion of the cross-section distribution of prices. Furthermore, in response to a contractionary (expansionary) monetary shock, a substantial number of prices tend to rise (fall). Most existing models of monetary nonneutrality are incapable of replicating these types of relative price responses.


Maquiladora Employment Patterns in Nuevo Laredo

Growth and Change , March 2007
Jesus Cañas

Abstract: (No abstract)


Crime on the U.S.–Mexico Border: The Effect of Undocumented Immigration and Border Enforcement

Migraciones Internacionales 4 , June 2007
Pia Orrenius and Roberto Coronado
In the 1990s, the U.S. border led the nation in the decline of property-related crimes, while violent crime rates fell twice as fast in the U.S. as in the median border county. This paper asks how changes in undocumented immigration and border enforcement have played a role in generating these divergent trends. We find that migrant apprehensions—our proxy for the volume of undocumented immigration—are correlated with violent crime and that increased border enforcement has not had a deterrent effect on such crime. Rather, increased border enforcement in a sector has led to more violent crime in neighboring sectors. In contrast to the results for violent crime, property crime is not correlated with migrant apprehensions, and while there is some evidence that border enforcement has lowered property crime rates, this result is sensitive to the model's specification. Our findings also indicate that the improved border economy over this period, specifically rapid job growth, played a significant role in lowering property crime rates.


Quantifying Moral Hazard: A Reply to Gary Richardson

Econ Journal Watch , September 2007
Linda M. Hooks and Kenneth J. Robinson 
In his comment on our 2002 Journal of Economic History paper, Gary Richardson (2007) proposes that our work specifies moral hazard too narrowly. Richardson posits that fixed-rate deposit insurance leads to moral hazard which takes many forms. These include not only the usual notion of risk-taking in the asset portfolio, but also mismanagement, malfeasance, and reduced incentives for depositor monitoring. We agree with his hypothesis and offer some evidence in support of additional avenues for moral hazard to have played a role in the activities of Texas banks in the 1920s.


Does Immigration Affect Wages? A Look at Occupation-Level Evidence

Labour Economics 14 , October 2007
Pia Orrenius and Madeline Zavodny
Previous research has reached mixed conclusions about the effect of higher levels of immigration on the wages of natives. This paper reexamines this question using data from the Current Population Survey and the Immigration and Naturalization Service and focuses on differential effects by skill level. Using occupation as a proxy for skill, we find that an increase in the fraction of foreign-born workers tends to lower the wages of natives in blue collar occupations—particularly after controlling for endogeneity—but does not have a statistically significant negative effect among natives in skilled occupations. The results also indicate that immigrants adjusting their immigration status within the U.S., but not newly arriving immigrants, have a significant negative impact on the wages of low-skilled natives. This suggests that immigrants become closer substitutes for natives as they spend more time in the U.S.


Employer Matching and 401(k) Saving: Evidence from the Health and Retirement Study

Journal of Public Economics , November 2007
Gary V. Engelhardt and Anil Kumar
Abstract: Employer matching of employee 401(k) contributions is often touted as a powerful incentive to save for retirement and is a key component in pension-plan design in the United States. Using detailed administrative contribution, earnings, and pension-plan data from the Health and Retirement Study, this analysis formulates a life-cycle-consistent econometric specification of 401(k) saving and estimates the determinants of saving accounting for non-linearities in the household budget set induced by matching. The participation estimates indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) participation by 5 percentage points. The parametric and semi-parametric estimates for saving indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) saving by $365 (in 1991 dollars). Overall, the analysis reveals that the 401(k) saving response to matching is quite inelastic, and, hence, matching is a rather poor policy instrument with which to raise retirement saving.



A New Monthly Index of the Texas Business Cycle

Journal of Social and Economic Measurement, March 2006
Keith R. Phillips

Abstract: In this article I attempt to measure the Texas business cycle using a technique developed by Stock and Watson that statistically estimates the underlying comovement in broad indicators of the state’s economy. The timing, length and severity of economic recessions and expansions in a state are important to businesses seeking to set up operations or expand in those areas. Given a limited amount of data at the state level and their sometimes inconsistent movements, it is not straight forward to define a state business cycle.

The new Texas Coincident Index (TCI) is constructed with the Texas unemployment rate, a quarterly Real Gross State Product measure due to Berger and Phillips, and a nonfarm employment series that is benchmarked quarterly and is seasonally adjusted using the two-step approach described in Berger and Phillips. Use of these components and the Kalman filter, which smoothes across variables as well as over time, results in an index which is much smoother and gives clearer signals of turning points than the old TCI produced by Phillips. The new TCI exhibits cyclical patterns that are highly correlated with those of employment and RGSP, and matches well with recessions and expansions that were independently identified.


Mutual Funds and the Evolving Long-Run Effects of Stock Wealth on U.S. Consumption

Journal of Economics and Business, June 2006
John V. Duca

Abstract: Lower mutual fund loads have plausibly boosted the stock wealth elasticity of U.S. consumption by enhancing stock liquidity and arguably by inducing stock ownership among middle-income families, consistent with theory and cross-section data. In load-modified models, the stock wealth elasticity is declining in loads and more stable long-run wealth and income coefficients arise, especially controlling for mortgage refinancing and equity withdrawal activity. Modified models imply that the stock wealth elasticity has risen, while conventional models overestimate the wealth and underestimate the income elasticities of consumption.


Ireland’s Great Depression

Economic and Social Review, Summer/Autumn 2006
Mark A. Wynne, Finn Kydland, and Alan Ahearne

Abstract: We argue that Ireland experienced a great depression in the 1980s comparable in severity to the better known and more studied depression episodes of the interwar period. Using the business cycle accounting framework of Chari, Kehoe and McGrattan (2005), we examine the factors that led to the depression and the subsequent recovery in the 1990s. We calculate efficiency, labor, investment and government wedges and evaluate the contribution of each to the downturn and subsequent recovery. We find that the efficiency wedge on its own can account for a significant portion of the downturn, but predicts a stronger recovery in output than occurred. The labor wedge also helps account for what happened during the depression episode. We also find that the investment wedge played no role in the depression.


Consumer Sovereignty in the Modern Global Era

Journal of Private Enterprise, Fall 2006
Jason L. Saving

Abstract: (No abstract)


Strengthening Globalizationâ??s Invisible Hand: What Matters Most?

Business Economics , October 2006 (winner of NABEâ??s 2006 Edmund A. Mennis Contributed Paper Award)
Thomas F. Siems and Adam S. Ratner

Abstract: In this paper, we investigate what matters most to sustaining strong economic growth in today’s more globalized, knowledge economy. An examination of 2005–2006 statistical and survey data across 52 countries reveals that economic growth is driven mainly by developed and trustworthy financial markets, a well-educated and skilled workforce and access to information and communications technologies. Moreover, we find that creditworthy financial markets are strengthened by free and open economies based on the rule of law and legal protections. Our findings support the notion that innovative ideas and entrepreneurship are at the heart of economic growth. However, these ideas need support from institutional policies and practices that create and sustain growth by providing needed protections and a market in which to finance them.


Financial Sector Weakness and the M2 Velocity Puzzle

Economic Inquiry, October 2006
Cara Lown, Stavros Peristiani, and Kenneth J. Robinson

Abstract: Deterioration in the link between M2 and GDP, along with large prediction errors, led the Federal Reserve to downgrade M2 as a reliable indicator in 1993. We argue that the financial condition of depository institutions was a major factor behind this unusual pattern of M2 growth. When constructing measures of M2 based on banksâ?? and thriftsâ?? capital positions, we obtain superior M2 forecasting results and a more stable relationship between M2 and the ultimate goals of policy. M2 may contain useful information when there are no major disturbances to depository institutions.


Nonparametric Conditional Density Estimation of Labour Force Participation

Applied Economics Letters, October 2006
Anil Kumar

Abstract: Labour force participation decision has been studied primarily in a parametric framework. The weaknesses of the parametric estimators to misspecification of the error distribution and to functional form assumptions are well known. This paper compares the predictive performance of widely used parametric and semiparametric estimators with results obtained from nonparametric kernel conditional density estimation with likelihood cross-validated bandwidth selection and mixed data type. The results are striking. The predictive performance of the nonparametric estimator is 95% against 71% to 77% of the parametric and semiparametric estimators. The nonparametric estimator is able to correctly predict the outcome for 83% of non-participants in the labour force as against 15% by probit and logit models. This underscores the need to use nonparametric estimators in studying labour market behaviour.


The Control of Money

Journal of Private Enterprise, Fall 2006
Mark A. Wynne

Abstract: In Capitalism and Freedom, Milton Friedman argued that monetary policy should be determined by a rule, specifically a money growth rule, and that the exchange rate between national monies should be flexible and market-determined. This paper reviews the arguments Friedman made to support his case, and considers the impact of Friedmanâ??s proposals on the theory and practice of monetary policy over the past forty years.


Argentina's Feeble Recovery: Insights from a Real Business Cycle Approach

Journal of Policy Reform, 2006
Carlos E.J.M. Zarazaga

Abstract: Argentina's GDP increased 30% between 2002 and 2005, prompting optimistic assessments that the country had finally left behind its secular stagnation. However, this strong performance followed a sharp decline in economic activity and therefore could be the manifestation of a bounce-back effect with no lasting impact on Argentina's mediocre long-term growth rates. The paper examines this conjecture with the quantitative discipline imposed by a Real Business Cycle methodology and concludes that the 2002-05 expansion was not only a rebound, but also considerably weaker than the model predicts, a finding not consistent with upbeat views about the country's long-term prospects.



Social Security Personal-Account Participation with Government Matching

Journal of Pension Economics and Finance, July 2005
Gary V. Engelhardt and Anil Kumar

Abstract: This paper examines the potential impact of government matching contributions on personal-account participation in the President's Commission on Strengthening Social Security's Model 3 for Social Security reform. Given the government's choice of four plan-design parameters, the magnitude of the match is determined solely by the differential return personal-account assets receive above the notional return, referred to as the "personal-account premium", akin to the equity premium. The impact of matching on personal-account participation is simulated for older workers (ages 40 to 65) in the first wave of the Health and Retirement Study (HRS) using empirical estimates from a structural model of the impact of employer matching on participation in corporate 401(k) plans. For a personal-account premium of three percentage points, which implies a match rate of 7.5% for middle- to lower-income workers, the simulations imply that 72% of mid-career and older workers would participate in voluntary personal accounts. The response of participation to matching is very inelastic; it seems not unlikely that participation by mid-career and older workers would achieve the mid-range assumption by the Commission of 67%. There is substantial heterogeneity in participation across subsets of older workers: participation would be the lowest for low-educated, minority, female, and unmarried mid-career and older workers.


Sarbanes-Oxley: Corporate Transparency or Cost Trap?

Journal of Financial Transformation, August 2005
Robert L. Formaini and Thomas F. Siems

Abstract: We examine the potential impact of the 2002 Sarbanes-Oxley Act on America’s future growth prospects and its traditional brand of capitalism. We conclude that while greater corporate governance is a worthy goal, policy should be aimed at reinvigorating the market for corporate control to discipline managers and directors, not to deter them from doing their jobs effectively.


Why Have US Households Increasingly Relied on Mutual Funds to Own Equity?

Review of Income and Wealth, September 2005
John V. Duca

Abstract: U.S. households have increasingly used mutual funds to own equity outside of retirement accounts owing to two developments. The first is a decline in equity mutual fund loads, which are negatively correlated with stock ownership rates, which have doubled owing to greater ownership through mutual funds. The second is improved confidence in future family finances. Both effects are consistent with recent models of equity participation, in which lower asset transfer costs and lower income risk induce equity investing by middle-income households, who-in practice and owing to diversification considerations-are more likely to indirectly hold stocks through mutual funds.


Social Security: Tyranny of the Status Quo

Journal of Private Enterprise, Fall 2005
Thomas F. Siems

Abstract: This paper revisits Milton Friedman’s arguments against Social Security’s pay-as-you-go structure found in Capitalism and Freedom and makes a case for why personal accounts are now needed. The paper concludes that only a market-driven solution seems capable of resolving Social Security’s eminent long-run crisis.


Self-Selection among Undocumented Immigrants from Mexico

Journal of Development Economics, October 2005
Pia Orrenius and Madeline Zavodny

Abstract: This paper examines the effect of changes in migration determinants on the skill level of undocumented Mexican immigrants. We focus on the effect of changes in economic conditions, migrant networks, and border enforcement on the educational attainment of men who cross the border illegally. Results from hazard models using data from the Mexican Migration Project indicate that migrants are not negatively selected with regard to education. However, improvements in U.S. and Mexican economic conditions are associated with a decline in the average education of undocumented immigrants, and stricter border enforcement are associated with higher average skill levels.


Who Supplied My Cheese? Supply Chain Management in the Global Economy

Business Economics, October 2005 (winner of NABE’s 2005 Edmund A. Mennis Contributed Paper Award)
Thomas F. Siems

Abstract: Today, with an Internet connection and some specialized skills, individuals and companies located in the remotest ends of the earth can compete and collaborate globally. This paradigm shift has occurred as technological forces, the fracturing of political barriers, and a relentless drive for greater efficiencies changed how we work and where we work, ushering in the age of globalization in ways never imagined previously. While many factors can influence macroeconomic variables, including better monetary and fiscal policies, freer trade, and fewer economic shocks?evidence is presented here that better global supply chain management and a more global economy should not be overlooked. On the one hand, these new practices have likely helped to keep inflation lower, reduce economic volatility, strengthen productivity growth, and improve living standards. On the other hand, these new practices cause greater uncertainties and calls for protectionist policies, as outsourcing and offshoring move work to lower cost providers with little regard for geopolitical boundaries.



The Wealth Effects from a Subordinated Debt Policy: Evidence from Passage of the Gramm-Leach-Bliley Act

Review of Financial Economics, February 2004
Andrew H. Chen, Kenneth J. Robinson and Thomas F. Siems

Abstract: Using an event study methodology which assumes that returns follow a GARCH (1,1) process, we estimate the wealth effects of a possible subordinated debt policy by examining the stock market reaction to the passage of the Gramm-Leach-Bliley (GLB) Act. A portfolio of banks with relatively high amounts of subordinated debt experienced positive and significant wealth effects associated with passage of the GLB. Portfolios made up of all banks, and those with no subordinated debt experience statistically insignificant wealth effects. We argue that these results suggest that policymakers should consider the use of subordinated debt as a way to enhance market discipline on banks.


Measurement Bias in the HICP: What Do We Know and What Do We Need to Know?

Journal of Economic Surveys, February 2004
Mark A. Wynne and D. Rodriguez-Palenzuela 

Abstract: The Harmonized Index of Consumer Prices (HICP) is the primary measure of inflation in the euro area, and plays a central role in the policy deliberations of the European Central Bank (ECB). The ECB defines its Treaty mandate of price stability as '... a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%[...] to be maintained over the medium term.' Among the rationales given for defining price stability as prevailing at some positive measured inflation rate is the possibility that the HICP as published incorporates measurement errors of one sort or another that may cause it to systematically overstate the true rate of inflation in the euro area. This paper reviews what currently is known about the scope of measurement error in the HICP. We conclude that given the vague conceptual framework of the HICP, the scant research on price measurement issues in the EU and the ongoing improvements in the HICP, there is very little scientific basis at this time for a point (or even an interval) estimate of a positive bias in the HICP.


The Effects of Terrorism on Global Capital Markets

European Journal of Political Economy, June 2004
Andrew H. Chen and Thomas F. Siems

Abstract: The event study methodology is used to assess the effects of terrorism on global capital markets. We examine the U.S. capital market's response to 14 terrorist/military attacks dating back to 1915 and global capital markets' response to two recent events—Iraq's invasion of Kuwait in 1990 and the September 11, 2001 terrorist attacks. U.S. capital markets are more resilient than in the past and recover sooner from terrorist attacks than other global capital markets. Evidence suggests that this increased market resilience can be partially explained by a stable banking/financial sector that provides adequate liquidity to promote market stability and minimize panic.


What Are the Consequences of an Amnesty for Undocumented Immigrants?

Georgetown Public Policy Review, Spring 2004
Pia Orrenius and Madeline Zavodny

Abstract: The U.S. has not had a major amnesty program that would allow undocumented immigrants to legalize their status since 1986. As the number of undocumented immigrants surged throughout the 1990s and into the new millennium, momentum for a new amnesty program gained ground until the terrorist attacks on September 11, 2001, derailed President Bush's attempts to overhaul U.S. immigration policy. A renewed effort at immigrant reform is currently underway in the U.S. This article discusses the current situation of undocumented immigrants in the U.S. and the likely economic consequences of an amnesty program. The results of the 1986 amnesty indicate several lessons for designing an amnesty plan that would improve the lives of the currently undocumented, minimize adverse effects on other groups, and stem the continuing tide of undocumented immigrants.


Recent Developments in Understanding the Demand for Money

Journal of Economics and Business, Special Issue July-August 2004
John V. Duca A. and David D. VanHoose

Abstract: Even though macroeconomic theories developed since the late 1980s have de-emphasized the role of monetary aggregates in the transmission of monetary policy, considerable research on the demand for money has continued. This paper addresses why understanding the demand for money remains relevant, and it surveys additions to the money demand literature since the 1980s. The paper considers recent contributions to the theory of the demand for money, discusses recent econometric advances in money demand estimation techniques, and reviews evidence revealed by empirical studies of the demand for alternative monetary aggregates. We conclude by discussing avenues for future research.


Maquiladora Downturn: Structural Change or Cyclical Factors?

International Business and Economics Research Journal, August 2004
Roberto Coronado, Jesus Cañas and Robert W. Gilmer

Abstract: Mexico’s maquiladora industry is currently the focus of much attention in the media, in corporate boardrooms, and among Mexican government officials. After watching the maquiladora industry sustain its biggest ever employment decline in recent years, many observers now question the industry’s future in Mexico. The 2001 U.S. economic recession took a heavy toll on Mexico’s maquiladora industry, although the size of the industry’s contraction during the recent recession—almost 260,000 jobs—suggests there are more factors at work than the mild business cycle. The advantages of operating plants in Mexico, such as low wages and tax incentives, are now offered by a number of developing countries. At the same time, location has become less important for many products, as innovations in transportation and technology lower shipping costs. This paper attempts to estimate how much of the current maquiladora downturn is due to the business cycle and how much is due to structural changes. We use the Branson-Love methodology to estimate structural and cyclical impacts on the maquiladora employment downturn. Results suggest that the 2001 U.S. recession and rising real wages in Mexico account for much of the maquiladora downturn. Historically, these are the two most important factors driving maquiladora growth, but new factors such as China’s membership in the World Trade Organization, the Caribbean initiative and implementation of NAFTA Article 303 have changed corporate options for plant location or affected the cost structure in Mexico. Although our statistical results strongly suggest a recovery in maquiladora employment, potentially important qualifications are discussed as well.


Short-Run Maquiladora Employment Dynamics in Tijuana

Annals of Regional Science, Fall 2004
Roberto Coronado, Thomas M. Fullerton, Jr. and Don P. Clark

Abstract: The Tijuana maquiladora sector has grown enormously over the past two decades. Short-term time series characteristics of this segment of the regional economy are analyzed in an attempt to clarify labor market behavior associated with this remarkable performance. Parameter estimation is accomplished using linear transfer function analysis. Data are drawn from the January 1980-December 2000 sample period. Empirical results indicate that real wage rates, maquiladora plants, United States industrial activity, and the real exchange rate of the peso play significant roles in determining month-to-month fluctuations in maquiladora employment. Sub-sample simulation exercises are conducted using a random walk benchmark in order to examine forecast accuracy. Empirical results indicate that the linear transfer function technique provides relatively accurate forecasts all step-lengths.


Monetary Policy Perspectives on the Accuracy of Inflation Measures

IFC Bulletin, November 2004
Mark A. Wynne

(No abstract)


On the Political Economy of Immigration and Income Redistribution

International Economic Review, November 2004
Jim Dolmas and Gregory W. Huffman

Abstract: In this article, we analyze an economy in which agents vote over immigration policy and redistributive tax policy. We show that natives' preferences over immigration are influenced by the prospect that immigrants will be voting over future tax policy. We also show that changes in the degree of international capital mobility, the distribution of initial capital among natives, the wealth or poverty of the immigrant pool, and the future voting rights and entitlements of immigrants can have dramatic effects on equilibrium immigration and tax policies. Finally, we provide some empirical support for the model's predictions.


The Impact of Banks' Expanded Securities Powers on Small-Business Lending

Review of Financial Economics, Special Issue 2004
David P. Ely and Kenneth J. Robinson

Abstract: The Gramm-Leach-Bliley Act (GLB) repealed many of the Glass-Steagall restrictions separating commercial and investment banking. We explore whether the ability of commercial banking organizations to conduct securities underwriting has lead to greater small-business lending at banks with securities affiliates. We hypothesize that this effect on small-business lending might emerge from greater incentives to engage in relationship lending. Our test results are inconsistent with this hypothesis. Banks with a securities affiliate and with less than $1 billion in assets record lower portfolio proportions of small-business lending than banks without a securities affiliate. For larger banks, the differences between small-business lending proportions at banks with and without a securities affiliate are not statistically different when considering the smaller loan categories. Large banks with securities affiliates, though, record significantly lower portfolio proportions of both the largest category of small-business loans and total small-business loans.



The Use and Abuse of Real-Time Data in Economic Forecasting

Review of Economics and Statistics, August 2003
Sheila Dolmas, Evan F. Koenig and Jeremy Piger

Abstract: We distinguish between three different strategies for estimating forecasting equations with real-time data and argue that the most popular approach should generally be avoided. The point is illustrated with a model that uses current-quarter monthly industrial production, employment, and retail sales data to predict real GDP growth. When the model is estimated using either of our two alternative methods, its out-of-sample forecasting performance is superior to that obtained using conventional estimation and compares favorably with that of the Blue Chip consensus.


Is the Markup a Useful Real-Time Predictor of Inflation?

Economics Letters, August 2003
Evan F. Koenig

Abstract: Unlike their revised counterparts, real-time markup data fail to improve the performance of a simple Phillips-curve inflation forecasting equation and have little predictive power beyond that of survey measures of inflation expectations.


Increasing Market Discipline on Banks: Subordinated Debt and Bank Loan Sales

Research in Finance, 2003
Andrew H. Chen, Kenneth J. Robinson and Thomas F. Siems

Abstract: While subordinated debt can be used to increase market discipline on banks by playing a corporate governance role in the presence of a federal safety net that encourages risk taking, it also has implications for banks’ loan sales. Using two measures of banks’ loan sales activity, we find greater proportions of subordinated debt increase the likelihood that banks engage in loan sales activity, and are associated with greater proportions of loan sales. Our results have implications about banks’ lending efficiency as well as their transparency and disclosure policies that could play a role in the transmission mechanism of monetary policy.


Is the Community Reinvestment Act in Need of Further Reform? Evidence from Equity Markets during the 1995 Reform Process

Journal of Financial Services Research, February 2003
David P. Ely and Kenneth J. Robinson

Abstract: In May 1995 the Federal Banking Agencies adopted major reforms to the implementation of the Community Reinvestment Act (CRA) to make the examination process more objective and performance-based, promote consistency, and reduce regulatory burden. This study presents tests of excess stock returns around key events in the reform process and examines whether the patterns of returns were affected by financial institution type and size. While we find that portfolios of banks and thrifts recorded statistically significant excess returns for certain events, the cumulative response was mostly statistically insignificant. A policy implication of our findings is that the potential for further improvement in the administration of CRA requirements still existed following the 1995 reform efforts.


Do Amnesty Programs Reduce Undocumented Immigration? Evidence from IRCA

Demography, August 2003
Pia Orrenius and Madeline Zavodny

Abstract: This paper examines whether mass legalization programs reduce future undocumented immigration. We focus on the effects of the 1986 Immigration Reform and Control Act, which granted amnesty to nearly 2.7 million undocumented immigrants. We find that apprehensions of persons attempting to illegally cross the U.S.-Mexico border declined immediately following passage of the law but returned to normal levels during the period when undocumented immigrants could file for amnesty and the years thereafter. Our findings suggest that the amnesty program did not change long-run patterns of undocumented immigration from Mexico.


Early Warning Models in Real Time

Journal of Banking and Finance, October 2003
Jeffery W. Gunther and Robert R. Moore

Abstract: Using a unique set of banking data containing both originally reported and subsequently revised financial variables, we find adverse revisions to accounting statements are associated with downgrades in supervisory ratings. To assess the financial significance of the revisions, we compare the ability of the original and revised data to map into exam ratings. The relationship between accounting data and exam results is significantly stronger for revised data than for real-time data. Our findings document significant differences between real-time and revised banking data, highlight the auditing role of bank exams, and provide a more realistic assessment of early warning model accuracy.


Loss Underreporting and the Auditing Role of Bank Exams

Journal of Financial Intermediation, April 2003
Jeffery W. Gunther and Robert R. Moore

Abstract: Using a unique set of banking data containing both originally reported and subsequently revised financial variables, we study accounting restatements. Our results indicate the worse a bank's financial condition, the more likely it is for originally reported data to understate financial losses. Also, we find supervisory exams have an important role in uncovering financial problems and prompting accounting restatements to correct loss underreporting. While revisions are directly related to financial difficulties, exam-based restatements are evident at even the earliest states of deterioration, indicating substantial accounting misstatements—at both banks and other types of companies—can occur well outside severe business circumstances.



Safety and Soudness and the CRA: Is There a Conflict?

Economic Inquiry, July 2002
Jeffery W. Gunther

Abstract: Ordered probit regressions of the supervisory ratings assigned to banks point to a conflict between the credit enhancement objectives associated with the Community Reinvestment Act (CRA) and financial safety and soundness standards. Aggressive banking strategies tend to help CRA ratings but hurt safety and soundness ratings. In addition, banks with financial problems are more likely to receive substandard CRA ratings, even though their condition may require a retrenchment from CRA objectives. Finally, there is some limited evidence to suggest that a greater focus on lending in low-income neighborhoods helps CRA ratings but at the expense of safety and soundness.


The Likelihood and Extent of Banks' Involvement with Interest Rate Derivatives as End Users

Research in Finance, October 2002
Jeffery W. Gunther and Thomas F. Siems

Abstract: Based on annual data for medium-sized U.S. commercial banks from 1991 through 1998, we investigate both the decision of whether to participate in interest rate derivatives and, for those banks participating, the extent of their involvement as end users. We find the hedging of balance sheet positions is an important motivation for involvement in derivatives. In addition, the extent of involvement is directly related to a bank's capital position. These results pointing to the typical end user as a financially secure bank seeking to hedge unwanted risk argue against the need for any additional restrictions on derivatives activities.


Deposit Insurance and Moral Hazard: Evidence from Texas Banking in the 1920s

Journal of Economic History, September 2002
Linda M. Hooks and Kenneth J. Robinson

Abstract: Using recently collected examination data from a sample of texas state-chartered banks over the period 1919–1926, the role of moral hazard in increasing ex-ante asset risk is explored. Analyzing individual bank-level data, we find that the existence of deposit insurance for state-chartered banks increased their likelihood of failure. Increases in loan concentrations followed declines in capitalization at insured state banks. However, we find no statistically significant relationship between loan concentrations and capitalization at uninsured national banks or at state banks before the introduction of deposit insurance. These results show a moral-hazard effect at work.


X-Efficiency in Banking: Looking Beyond the Balance Sheet

Journal of Money, Credit, and Banking, November 2002
Thomas F. Siems and Jeffrey A. Clark

Abstract: The distribution free and stochastic econometric frontier estimation methods are used to derive bank specific measures of cost and profit X-efficiency. This is done to investigate the importance of including aggregate measures of off-balance sheet (OBS) activities. The results indicate that economic cost and production cost X-efficiency estimates increase with the inclusion of the OBS measure. Profit X-efficiency estimates are largely unaffected. Further, the composition of banks' OBS activities appears to help explain interbank differences in cost and profit X-efficiency estimates, whereas bank size and the mix between on- and off-balance-sheet banking activities are largely uncorrelated with the X-efficiency estimates.


B2B E-Commerce and the Search for the Holy Grail

Journal of e-Business and Information Technology, February 2002
Thomas F. Siems

Abstract: Through new online marketplaces and improved supply chain management practices, business-to-business (B2B) electronic commerce (e-commerce) is changing the way transactions are processed, how business relationships are formed, and how fast the U.S. economy will grow. By improving the flow, timeliness, and accuracy of information, B2B e-commerce will move markets closer to the textbook model of perfect competition, which is the Holy Grail of economics. With many well-informed buyers and sellers, low-cost access to information, extremely low transaction costs, and reduced barriers to entry, B2B e-commerce boosts business productivity and lowers costs. But the long-run beneficiaries of these improvements will be consumers, as continued productivity improvements from B2B e-commerce will raise living standards and reduce inflationary pressures.


Evaluating the Productive Efficiency and Performance of U.S. Commercial Banks

Managerial Finance, May 2002
Thomas F. Siems, Richard S. Barr, Kory A. Killgo and Sheri Zimmel

Abstract: We use a constrained multiplier, input-oriented, data envelopment analysis (DEA) model to evaluate the productive efficiency of U.S. commercial banks from 1984 to 1998. We find strong and consistent relationships between efficiency and independent measures of performance. Moreover, we find the impact of varying economic conditions is mediated to some extent by the relative efficiencies of banks operating in these conditions. Finally, we find a close relationship between efficiency and soundness as determined by bank examiner ratings. The model could be useful to banks in benchmarking with other institutions and regulators as a complementary off-site surveillance tool in the bank examination process.


Regional Specialization, Rolling Recessions and Risk Sharing in a Monetary Union

Irish Banking Review, Spring 2002
Mark A. Wynne

Abstract: The monetary union between the states and regions of the U.S. has been a fertile source of insights about the long-run prospects for European Economic and Monetary Union (EMU). Many have argued that labour mobility has played a key role in facilitating adjustment to local ("asymmetric") shocks in the U.S. and that the absence of such mobility within the twelve-nation euro area spells trouble for EMU in the long term. Labour mobility is simply one of the mechanisms available for smoothing asymmetric shocks: others are also available. This article reviews how one asymmetric shock played out in the U.S., illustrating the key role of migration. It also argues that looking to the past is a poor guide to what we may expect to see in the future: the fact that EMU has occurred with a wide array of other reforms will greatly facilitate the development of adjustment mechanisms that will smooth asymmetric shocks in the future.



Restaurant Prices and the Mexican Peso

Southern Economic Journal, July 2001
Roberto Coronado and Thomas M. Fullerton, Jr.

Abstract: Of prime interest to border economies is exchange rate performance and currency valuation. Commonly used tools for this task include purchasing power parity (PPP) nominal benchmarks, and inflation-adjusted trade-weighted indices. The latter have the advantage of relying on commonly available international macroeconomic data but overlook microeconomic information that may offer additional insight to issues surrounding exchange rate policy debates. Other efforts have utilized small samples of international product price comparisons to shed light on currency valuation questions. This paper develops one such tool by repeated sampling of prices charged for identical menu items sold at restaurant franchises in El Paso, Texas, and Ciudad Juarez, Chihuahua. A battery of statistical tests indicate that the international currency value of the peso consistently differed from the exchange rate implied by the border region restaurant price ratios in 1997, 1998, and 1999.


The Rise of Goods-Market Competition and the Fall of Nominal Wage Contracting: Endogenous Wage Contracting in a Multisector Economy

Journal of Macroeconomics, Winter 2001
John V. Duca and David D. Van Hoose

Abstract: This paper shows how heterogeneity in wage setting and a link between nominal wage flexibility and goods-market competition arise in a multisector economy that is affected by aggregate and sector-specific shocks. Aggregate volatility increases the variance of real contract wages, whereas sectoral volatility increases the relative variance of real Walrasian wages. Given this trade-off, the prevalence of nominal wage contracting reflects both the relative volatility of aggregate versus sectoral disturbances and the overall degree of goods-market market competition. We find that these variables help explain the decline in unionization (a proxy for contracting) in the United States.


Reengineering Social Security in the New Economy

Cato Institute Social Security Paper No. 22, Jan. 2001
Thomas F. Seims

Abstract: The United States is currently undergoing profound social, demographic, and economic changes, shifting from an industrial base to a new information economy, at the same time that life expectancies are increasing and the baby-boom generation is nearing retirement. Given these changes, it is more important than ever to reengineer Social Security, adapting it to this new reality.

Specifically, the current pay-as-you-go (PAYGO) Social Security system is structurally flawed and produces a declining rate of return that is far lower than the return that workers could earn through investing their taxes in private capital markets. Indeed, young workers can expect future returns from Social Security of from only 0.58 percent (for high-wage earners) to 2.93 percent (for low-wage workers) even if the system somehow manages to pay all future benefits without an increase in taxes. The tax increases or benefit cuts necessary to keep the system solvent would reduce those rates of return still further. In contrast, workers who privately invested their payroll taxes could expect rates of return, and retirement benefits, between four and ten times greater.

If Social Security is to provide the same retirement security in the new economy as it did in the old, we must transform it from a PAYGO system, which essentially transfers wealth from one generation to another, to a system based on savings and investment in private capital markets. Given the dangers of allowing the government to control the investment of Social Security funds, the only viable alternative is to move to a system of individually owned, privately invested accounts.


The Capital Markets' Perspective on B2B E-Commerce Initiatives and Alliances

Journal of Financial Transformation, DATE
Thomas F. Siems and Andrew H. Chen

Abstract: In the business-to-business (B2B) sector, new electronic commerce (e-commerce) initiatives like Internet-enabled supply chains and electronic marketplaces (e-marketplaces) offer firms significantly lower procurement costs, increased operating efficiencies, and expanded market opportunities. Using an event-study methodology, we find that the capital markets respond favorably to firms announcing new B2B e-commerce initiatives and alliances. For B2B e-marketplaces, we find slightly higher, though statistically insignificant, average abnormal returns associated with vertical markets than with horizontal markets. When examining the data by the type of partner the e-commerce provider aligns with, we find that the capital markets reward firms the greatest when they form alliances with a competitor or a computer industry giant. The abnormal returns associated with these announcements are on average more than three times greater than returns from announcing a B2B e-commerce initiative alone or with Old Economy industry leaders.


Comment on Stabilization Policy and the Costs of Dollarization

Journal of Money, Credit, and Banking, May 2001
Carlos E. J. M. Zarazaga

Abstract: Comments on the article "Stabilization Policy and the Costs of Dollarization," by Stephanie Schmitt-Grohe and Martin Uribe, published in the May 2001 Part 2 edition of the Journal of Money, Credit and Banking. Welfare cost invariance property of the model used in the article; reasons for the large devaluation rate prescribed by the model used in the article.


Evidencia Respecto de la Valoración del Peso Mexicano en la Región Fronteriza

Investigación Económica
Roberto Coronado and Thomas M. Fullerton, Jr.

Abstract: El desempeño del tipo de cambio y la valoración de la moneda son de interés primordial para las economías fronterizas. Las herramientas normalmente utilizadas para esta tarea incluyen las referencias nominales de la paridad del poder de compra y los índices de inflación ajustados por ponderaciones de comercio. Este último tiene la ventaja de contar con los datos macroeconómicos internacionales normalmente disponibles, pero omite otra información que puede ofrecer una visión adicional a los problemas circundantes de los debates de la política de tipo de cambio. Otros esfuerzos han utilizado muestras pequeñas de comparación internacional de los precios de los productos para remarcar las cuestiones sobre la valoración de la moneda. Este artículo desarrolla tal herramienta por medio de repetidas muestras de precios cobrados por artículos idénticos del menú vendidos en franquicias de restaurantes en El Paso, Texas y Ciudad Juárez, Chihuahua. Un conjunto de pruebas estadísticas indican que el peso ha sido consistentemente devaluado en 1997, 1998 y 1999.

Credit and Economic Activity: Credit Regimes and Nonlinear Propagation of Shocks
Review of Economics and Statistics, May 2000
Nathan S. Balke

Abstract: In this paper, we examine empirically whether credit plays a role as a nonlinear propagator of shocks. This propagation takes the form of a threshold vector autoregression in which a regime change occurs if credit conditions cross a critical threshold. Using nonlinear impulse-response functions, we evaluate the dynamics implied by the threshold model. These suggest that shocks have a larger effect on output in the "tight" credit regime than is normally the case, and that contractionary monetary shocks typically have a larger effect than expansionary shocks. Finally, using a nonlinear version of historical decompositions, we attempt to determine the relative contribution to output growth of shocks and the nonlinear structure.

An Equilibrium Analysis of Relative Price Changes and Aggregate Inflation
Journal of Monetary Economics, April 2000
Nathan S. Balke and Mark A. Wynne

Abstract: Inflation is positively correlated with the variability of relative prices as measured by the standard deviation of the cross-section distribution of prices, and also with the third moment (skewness) of the cross-section distribution of prices. The conventional interpretation of these relationships is that they reflect sluggishness in the adjustment of individual prices in response to shocks. In this paper we question this interpretation. First, we show that similar correlations among the moments exist in alternative measures of underlying technology shocks. Second, when these shocks are fed into a general equilibrium model with multiple sectors and flexible prices, the resulting prices also display a positive correlation between aggregate inflation and skewness of the cross-section distribution.

Inequality, Inflation, and Central Bank Independence
Canadian Journal of Economics, February 2000
Jim Dolmas, Gregory W. Huffman and Mark A. Wynne

Abstract: What can account for the different contemporaneous inflation experiences of various countries, and of the same country over time? We present an analysis of the determination of inflation from a political economy perspective. We document a positive correlation between income inequality and inflation and then present a theory of the determination of inflation outcomes in democratic societies that illustrates how greater inequality leads to greater inflation, owing to a desire by voters for wealth redistribution. We conclude by showing that democracies with more independent central banks tend to have better inflation outcomes for a given degree of inequality.


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