Knowledge that Transforms

The tail index of a density has been widely used as an indicator of the probability of getting a large deviation in a random variable. Most of the theory underlying popular estimators of it assume that the data are independently and identically distributed (i.i.d.). However, many recent applications of the estimator have been to financial data, and such data tend to exhibit long-range dependence. We show, via Monte Carlo simulations, that conventional measures of the precision of the estimator, which are based on the i.i.d. assumption, are greatly exaggerated when such dependent data are used. This conclusion also has implications for estimates of the likelihood of getting some extreme values, and we illustrate the changed conclusions one would get using equity return data.

Using an expanded version of the purchasing-power-parity condition we construct simultaneous equation models for three key exchange rates which incorporate meaningful long-run equilibrium relationships and complex short-run dynamics. We show that fully dynamic out-of-sample forecasts from these models are capable of significantly outperforming those of a random walk model over horizons as short as 3 months, and that they are also more accurate than the vast majority of professional forecasts.

This paper provides evidence that suggests that financial repression has substantial direct effects on financial development, independently of its well-known influence through the level of the real interest rate. It also demonstrates that the process of economic growth is not weakly exogenous with respect to financial development. Thus financial repression may impose real costs that are additional to those suggested by previous empirical studies.

We explore the impact of the child care tax credit in the U.S. income tax system on the labor supply decisions of married women with young children by incorporating the cost of child care into a structural labor supply model. Using data from the 1986 NLSY, we find that government subsidies to child care increase labor supply substantially. Our policy simulations show that an increase in the value of the child care tax credit (i.e., percent of expenditures subsidized) would have a much larger effect on labor supply than an increase in the annual expenditure limits of the subsidy or making the subsidy refundable.

We develop a framework to extract information regarding subsequent spot rate movements from the term structure of forward exchange premiums while admitting possible deviations from rationality and the presence of risk premiums. Using weekly dollar–sterling, dollar– mark, and dollar–yen data, the restrictions implied by our framework are not rejected, and spot and forward exchange rates together are well represented by a vector error correction model (VECM). Dynamic out-of-sample forecasts up to one year ahead indicate that the VECM is strikingly superior to a range of alternative forecasts, including a random walk and standard spot-forward regressions.

Traditional cross-sectional measures find greater inequality in the United States than in industrialized Western European countries, but are unable to distinguish transitory from permanent inequality. With longitudinal data, we measure cross-sectional inequality during the 1980s using the Shorrocks measure of income stability to find the degree to which single-period measures exaggerate permanent inequality. Surprisingly, given the smaller social welfare system and the less restrictive labor markets in the United States, we find that both single-period inequality and the share of that inequality that persists over time are greater in the United States than in Germany.

Theoretical literature shows that income uncertainty boosts saving, yet empirical work is incomplete. I test for the precautionary motive for saving using panel data. Knowing this motive's size is important for gauging the responsiveness of saving to government programs that reduce uncertainty, and for comparison to other motives, such as bequests. Most empirical studies of precautionary saving use either aggregate time-series or cross-sectional data, which cannot capture the effects of individual income uncertainty. I derive measures of total, permanent, and transitory income uncertainty from panel data—the National Longitudinal Survey—and find a strong precautionary motive. A doubling of uncertainty increases the ratio of wealth to permanent income by 29%.

This paper assesses the importance of the zero lower bound on nominal interest rates for the interest-rate channel of monetary policy. We simulate several interest-rate setting policy rules with either high or low inflation targets. We determine the extent to which the zero bound prevents real rates from falling, thus cushioning aggregate output in response to negative spending shocks. For small temporary and large permanent shocks, the output path with zero inflation lies modestly below that for higher inflation. For large shocks persisting a few quarters, differences in output paths across high- and low-inflation scenarios can be larger.

The conventional approach to estimating how fast economics converge examines the cross-economy relationship between the growth rate of per-capita output over some time period and its initial level. This approach produces consistent estimates only under highly restrictive assumptions, which are violated by the data. The paper develops an alternative approach that produces consistent estimates under weak assumptions. This approach yields estimates substantially larger than those reported in the literature and also sufficiently large to be broadly consistent with the predictions of neoclassical growth theory.

This note presents tests of the specification of univariate and bivariate ordered probit. The test is sensitive to deviations from either normality or the exogeneity of the explanatory variables. As an example, the ownership of dogs and televisions, both sources of time-intensive entertainment, is studied. The specification for dogs is not rejected, the specification for televisions is rejected at the 2.0% level, and the specification of both together is rejected at the 1.3% level.