Knowledge that Transforms

Currently, a growing literature is emerging on estimating the impact of exogenous shocks using the difference-in-difference (DD) tech? nique. Essentially, this technique compares the impact of an unexpected event in a particu? lar locale (called the treatment/experimental group) to a location or set of locations (called a control group) similar to the experimental group in all respects except for the shock itself. One challenge many DD studies face is how to choose the control group, and there is now a growing literature on this (Joshua A. Angrist and Alan B. Krueger 1999; Jeffrey D. Kubik and John R. Moran 2003; and Alberto Abadie, Alexis Diamond, and Jens Hainmueller 2007). Another challenge is whether one can general? ize one's results based on a single experimental group, as is typical for most DD analysis. This paper adopts a generalized-difference-in-dif ference (GDD) technique outlined in Ariel R. Belasen and Solomon W. Polachek (forthcom? ing) to examine the impact of hurricanes on the labor market. This technique incorporates many experimental as well as many control groups, and as such this approach addresses a number of shortcomings in current DD analyses. We find that earnings of the average worker in a Florida county rise over 4 percent within the first quarter of being hit by a major Category Four or Five hur? ricane relative to counties not hit, and rise about Wa percent for workers in Florida counties hit by less major Category One to Three hurricanes. Concomitantly, employment falls between Wi and 5 percent depending on hurricane strength. On the other hand, the effects of hurricanes on neighboring counties have the opposite effects, moving earnings down between 3 and 4 percent in the quarter the hurricane struck. To better examine the specific shocks, we also observe sectoral employment shifts. Finally, we conduct a time-series analysis and find that, over time, there is somewhat of a cobweb, with earnings and employment rising and falling each quarter over a two-year time period.

Recent sovereign defaults are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default is more likely in recessions because this is when it is more costly for a risk averse borrower to repay noncontingent debt. The model closely matches business cycles in Argentina predicting high volatility of interest rates, higher volatility of consumption relative to output, and negative correlations of output with interest rates and the trade balance. (JEL E21, E23, E32, E43, F34, O11, O19)

We provide a pricing theory for emerging asset classes, like emerging markets, that are not yet mature enough to be attractive to the general public. We show how leverage cycles can cause contagion, flight to collateral, and issuance rationing in a frequently recurring phase we call the anxious economy. Our model provides an explanation for the volatile access of emerging economies to international financial markets, and for three stylized facts we identify in emerging markets and high yield data since the late 1990s. Our analytical framework is a general equilibrium model with heterogeneous agents, incomplete markets, and endogenous collateral, plus an extension encompassing adverse selection. (JEL D53, G12, G14, G15)

We find that prior to World Trade Organization membership, countries set import tariffs 9 percentage points higher on inelastically supplied imports relative to those supplied elastically. The magnitude of this effect is similar to the size of average tariffs in these countries, and market power explains more of the tariff variation than a commonly used political economy variable. Moreover, US trade restrictions not covered by the WTO are significantly higher on goods where the United States has more market power. We find strong evidence that these importers have market power and use it in setting noncooperative trade policy. (JEL F12, F13)

A consistent finding in the poverty literature is the diminution of the impact of the macroeconomy on official poverty rates in the United States since the early 1980s. Up until then, measures of aggregate economic activity (real GDP growth or the unemployment rate) had a more substantial influence on the poverty rate. Most recently, this fact has been documented by Hilary W. Hoynes, Marianne E. Page, and Ann Huff Stevens (2006, HPS hereafter). Kevin Lang (2007) notes that much has changed since the early 1980s with respect to antipoverty policy and labor market factors that affect poverty status. Important changes include the transition from cash to in-kind transfers, the stagnation in real median earnings, rising earnings inequality, and the increase in female-headed households. Nevertheless, after considering several factors that influence poverty, including wage growth, inequality, and female employment, HPS conclude their analysis of poverty trends with the view that explanation of the change in the response of poverty to macroeconomic indicators remains an open issue. This paper examines whether traction may be gained on this issue by enhancing our understanding of the volatility of poverty rates. Specifically, we examine the volatility of poverty rates over time and across demographic groups. To the extent that poverty rate variability is associated with the risk of poverty incidence, it is shown that certain eras have exposed members of particular demographic groups to more poverty risk than others. Then, we contrast the volatility of poverty rates to that of aggregate economic activity. Margaret M. McConnell and Gabriel Perez-Quiros (2000), among others, present evidence that the volatility of real GDP has been significantly Poverty Volatility and Macroeconomic Quiescence

This paper looks at the predictions of a standard heterogeneous firm model regarding the exports of firms across markets in response to a particular trade policy experiment and compares these predictions to the data. A unique feature of our data is that it has information on the exports of the same firm to different markets which allows us to look for a new set of predictions of such models. We argue that while certain predictions seem consistent with the data, others are not. We then describe the patterns found in the data and argue that firm and market specific demand shocks help explain a number of these anomalies. These parsimoniously capture factors, like business contacts or networks, or even fashion shocks, that make buyers more attracted to one firm rather than another in a particular market.

Recent research has reaffirmed that the prob? ability of an unemployed worker finding a job varies substantially over the business cycle. Robert E. Hall (2005, 101) concludes from his examination of a variety of data sources that Unemployment is high in a recession because jobs are hard to find, not because more job-seek? ers have been dumped into the labor market by elevated separation rates. Shimer (2007) shows that movements in the job finding probability account for three-quarters of the fluctuations in the unemployment rate in the United States during the postwar period, while movements in the exit rate from employment to unemployment account for the other quarter. Michael W. Elsby, Ryan Michaels, and Gary Solon (2007) argue that movements in the job finding probability accounted for about 65 percent of unemploy? ment fluctuations prior to the last two reces? sions, and more in 1990-1991 and 2001. Shigeru Fujita and Gary Ramey (2007) claim a more substantial role for the exit rate to unemploy? ment but still find that the job finding probabil? ity accounts for at least half of the fluctuations in unemployment. While it is theoretically convenient to discuss a single job finding probability for all workers, economists have long recognized that the job finding probability falls with unemployment duration (Hyman B. Kaitz 1970). This paper reexamines duration dependence and the cycli? cally of duration dependence in the job finding probability, both empirically and theoretically. To start, I develop a simple model with a single parameter that determines both how the job finding probability varies with unemployment duration and how it varies with aggregate eco? nomic conditions. The model's main departure from most existing research is to think of unemployed workers as waiting for labor mar? ket conditions to improve, rather than searching for job opportunities (Boyan Jovanovic 1987; Fernando Alvarez and Shimer 2007). They continuously compare their lifetime utility in the best available job with their lifetime utility if they remain unemployed. Individual / works if this difference, 8?(t), is positive at time t and not if it is negative. If S? is persistent, this leads to duration dependence in the hazard rate of exiting unemployment, since a newly unem? ployed worker is more likely to be near the threshold for taking a job than someone who is long term unemployed. The extent of dura? tion dependence is governed by the stochastic process for S?, which also determines how the average job finding probability varies with eco? nomic conditions.

Charles Tiebout's suggestion that people “vote with their feet” for communities with optimal bundles of taxes and public goods has played a central role in local public finance for over 50 years. Using a locational equilibrium model, we derive formal tests of his premise. The model predicts increased population density in neighborhoods experiencing exogenous improvements in public goods and, for large improvements, increased relative mean incomes. We test these hypotheses in the context of changing air quality. Our results provide strong empirical support for the notion that households “vote with their feet” for environmental quality. (JEL H41, H73, Q53, R23)

The sustained rise in US current account deficits, the stubborn decline in long-run real rates, and the rise in US assets in global portfolios appear as anomalies from the perspective of conventional models. This paper rationalizes these facts as an equilibrium outcome when different regions of the world differ in their capacity to generate financial assets from real investments. Extensions of the basic model generate exchange rate and foreign direct investment excess returns broadly consistent with the recent trends in these variables. The framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment. (JEL: E44, F21, F31, F32)

Do Women Supply More Public Goods Than Men? Preliminary Experimental Evidence from Matrilineal and Patriarchal Societies by Steffen Andersen, Erwin Bulte, Uri Gneezy and John A. List. Published in volume 98, issue 2, pages 376-81 of American Economic Review, May 2008