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2016 Working Papers

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Title/Author(s) Abstract Number

The Role of Money in Federal Reserve Policy

Irfan Qureshi

Is the classic Taylor rule misspecified? I show that the inability of the Taylor rule
to explain the federal funds rate using real-time data stems from the omission of a money growth objective. I highlight the significant role played by money in the policy discourse during the Volcker-Greenspan era using new FOMC data, benchmarking a novel characterization of “good” policy. An application of this framework offers a unified policy-based explanation of the Great Moderation and Recession. Welfare analysis based on the New-Keynesian model endorses the rule with money. The evidence raises significant concerns about relying on the simple Taylor rule as a policy benchmark and suggests why money may serve as a useful indicator in guiding future monetary policy decisions.


Tax Revenues, Development, and the Fiscal Cost of Trade Liberalization, 1792-2006

Julia Cage and Lucie Gadenne

This paper documents the scal cost of trade liberalization: the extent to which countries are able to recover the trade tax revenues lost from liberalizing trade by increasing tax revenues from other sources. Using a novel dataset on government revenues over the period 1792-2006 we compare the fiscal impact of trade liberalization in developing countries and in today's rich countries at earlier stages of development. We nd that trade liberalization episodes led to larger and longer-lived decreases in total tax revenues in developing countries since the 1970s than in rich countries in the 19th and early 20th centuries. Half the developing countries in our sample experience a fall in total tax revenues that lasts more than ten years after an episode. Results are similar when we consider government expenditures, suggesting decreases in trade tax revenues negatively affect governments' capacity to provide public services in many developing countries.


Tax Me, But Spend Wisely? Sources of Public Finance and Government Accountability

Lucie Gadenne

Existing evidence suggests that extra grant revenues lead to little improvements in public services in developing countries - but would governments spend tax revenues differently? This paper considers a program that invests in the tax capacity of Brazilian municipalities. Using variations in the timing of program uptake I nd that it raises local tax revenues and that the increase in taxes is used to improve both the quantity and quality of municipal education infrastructure. In contrast increases in grants over which municipalities have the same discretion as over taxes have no impact on any measure of local public infrastructure. These results suggest that the way governments are financed matters: governments spend increases in tax revenues more towards expenditures that benefit citizens than increases in grant revenues.


Cereals, Appropriability and Hierarchy

Joram Mayshar, Omer Moavz, Zvika Neeman
& Luigi Pascali

We propose that the development of social hierarchy following the Neolithic Revolution was due to the ability of the emergent elite to appropriate crops from farmers, rather than a result of increased productivity, as usually maintained. Since cereals are easier to appropriate than roots and tubers, we argue that regional variations in the suitability of land for the cultivation of these different crop types can account for differences in the formation of hierarchies and states. Our empirical investigation supports a causal effect of the cultivation of cereals on hierarchy, and the lack of a similar effect of land productivity.


Geography, Transparency and Institutions

Joram Mayshar Omer Moav & Zvika Neeman

We propose a theory by which geographic attributes explain cross-regional institutional differences in : (1) the scale of the state, (2) the distribution of power within state hierarchy, and (3) property rights over land. The mechanism that underlies our theory concerns the state's extractive capacity. In particular, we argue that the ability to appropriate revenue from the farming sector is affected by the transparency of farming which, in turn, is affected by geography and technology. We apply the theory to explain the differences between the institutions of Ancient Egypt, Southern Mesopotamia and Northern Mesopotamia


Evolution in Well-being and Happiness after Increases in Consumption of Fruit and Vegetables

Redzo Mujcic and Andrew J. Oswald

Objectives: To explore whether improvements in psychological well-being occur after increases in fruit and vegetable consumption.

Methods: Longitudinal food diaries were examined on 12,000 randomly samples Australian adults over 2007, 2009, and 2013. The study examined fixed-effects regression equations on individuals' happiness and life satisfaction. It adjusted for a large set of other influences, including people's changing incomes and personal circumstances. Prospective analysis, Granger-causality tests, and instrumental-variable estimation were also done.

Results: Increases in fruit and vegetable intake were predictive of increases in happiness and life satisfaction. Well-being improvements were of up to 0.24 life-satisfaction points (for an increase of 8 portions a day), which is equal size to the psychological gain of moving from unemployment to employment. Improvements occurred within 24 months.

Conclusions: People's motivation to eat healthy food is weakened by the fact that physical-health benefits accrue decades later. This study offers a new possibility. Public-health policy could emphasise immediate well-being improvement from healthy eating.

Policy Implications: Citizens could be shown longitudinal evidence that 'happiness' gains from healthy eating can occur quickly and many years before enhances physical health.


Do Women Ask?

Benjamin Artz, Amanda H.Goodall, and Andrew J. Oswald

Women typically earn less than men. The reasons are not fully understood. Previous studies argue that this may be because (i) women 'don't ask' and (ii) the reason they fail to ask is out of concern of the quality of their relationships at work. This account is difficult to assess with standard labor-economics data sets. Hence we examine direct survey evidence. Using matched employer-employee data from 2013-2014, the paper find that the women-don't-ask account is incorrect. Once an hours-of-work variable is included in 'asking' equations, hypotheses (i) and (ii) can be rejected. Women do ask. However, women do not get.


Tough on young offenders: harmful or helpful?

Giulia Lotti

How harshly should society punish young lawbreakers in order to prevent or reduce their criminal activity in the future? Through a fuzzy regression discontinuity design, we shed light on the question by exploiting two quasi-natural experiments stemming to compare outcomes from relatively harsh or rehabilitative criminal incarceration practises involving young offenders in the 1980's in England and Wales. According to our local linear regression estimates, young offenders exposed to the harsher youth facilities are 20.7 percent more likely to recidivate in the nine years subsequent to their custody, and they commit on average 2.84 offences more than offenders who experienced prison. Moreover, they are more likely to commit to violent offences, thefts, burglaries and robberies. On the contrary, offenders who were sent to the more rehabilitative youth facilities are less likely to reoffend in the future when compared from their older peers in prison, but only when they are held in institutions that are not solely focussed on punishment.


Quantile Graphical Models: Prediction and Conditional Independence with Applications to Financial Risk Management

Alexandre Belloni, Mingli Chen & Victor Chernozhukov

We propose Quantile Graphical Models (QGMs) to characterize predictive and conditional independence relationships within a set of random variables of interest. This framework is intended to quantify the dependence in non-Gaussian settings which are ubiquitous in many econometric applications. We consider two distinct QGMs. First, Condition Independence QGMs characterize conditional independence at each quantile index revealing the distributional dependence structure. Second, Predictive QGMs characterize the best linear predictor under asymmetric loss functions. Under Gaussianity these notions essentially coincide but non-Gaussian settings lead us to different models as prediction and conditional independence are fundamentally different properties. Combined the models complement the methods based on normal and nonparanormal distributions that study mean predictability and use covariance and precision matrices for conditional independence. We also propose estimators for each QGMs. The estimators are based on high-dimension techniques including (a continuum of) ℓ1-penalized quantile regressions and low biased equations, which allows us to handle the potentially large number of variables. We build upon recent results to obtain valid choice of the penalty parameters and rates of convergence. These results are derived without any assumptions on the separation from zero and are uniformly valid across a wide-range of models. With the additional assumptions that the coefficients are well-separated from zero, we can consistently estimate the graph associated with the dependence structure by hard thresholding the proposed estimators. Further we show how QGM can be used to represent the tail interdependence of the variables which plays an important role in application concern with extreme events in opposition to average behaviour. We show that the associated tail risk network can be used for measuring systemic risk contributions. We also apply the framework to study financial contagion and the impact of downside movement in the market on the dependence structure of assets’ return. Finally, we illustrate the properties of the proposed framework through simulated examples.


Multi-attribute decision by sampling: An account of the attraction, comprimise and similarity effects

David Ronayne and Gordon D. A. Brown

Consumers' choices are typically influenced by choice context in ways that standard models cannot explain. We provide a concise explanation of the attraction, compromise and similarity effects. Value is assumed to be determined by simple dominance relations between choice options and sampled comparators, and selection of comparators is assumed to be systematically influenced by the choice options. In one experiment, participants viewed differing selections of market options prior to choice. The classic context effects appeared and disappeared as predicted. In the second experiment, individuals' sampling distributions of market options were influenced by the choice set as predicted by the model.


Monetarism, Indeterminacy and the Great Inflation

Irfan Qureshi

I study whether money growth targeting leads to indeterminacy in the price level. I extend a conventional framework and show that the price level may be indeterminate if the central bank's response to money growth is weak even when the Taylor principle is satisfied. Based on this reasoning, policy coefficients estimated using novel FOMC meeting-level data propose a new channel of the policy mistakes that may have triggered indeterminacy during the Great Inflation. I show that 'passively' pursuing money growth objectives generates significantly larger welfare loss compared to alternative specifications of the monetary policy rule but 'active' money growth targeting drastically minimises welfare and loss. I confirm the relationship between money and growth objectives and macroeconomic volatility using cross-country evidence.

Public Credit Guarantees and Access to Finance

Juan Carlos Gozzi and Sergio Schmukler

Public credit guarantee schemes have gained popularity as a tool to try to increase access to credit for firms perceived to be financially constrained, typically small and medium-sized enterprises. This paper discusses the potential relevance of these schemes by providing a brief overview of their use around the world and reviewing some important design features. The paper also presents a brief conceptual discussion of the role of public credit guarantees in increasing access to credit and the rationale for government intervention. Public credit guarantee schemes can constitute useful mechanisms for increasing access to finance for certain groups of borrowers, but their success and financial sustainability hinge on proper design. Moreover, rigorous evidence on the impact of these schemes is still scarce. More in-depth evaluations that jointly take into account financial sustainability and (financial and economic) additionality are needed, as well as an assessment of credit guarantees against alternative policy instruments.

National Happiness and Genetic Distance: A Cautious Exploration

Eugenio Proto and Andrew J. Oswald

This paper studies a famous unsolved puzzle in quantitative social science. Why do some nations report such high levels of mental well-being? Denmark, for instance, regularly tops the league table of rich countries’ happiness; Britain and the US enter further down; some nations do unexpectedly poorly. The explanation for the long observed ranking -- one that holds after adjustment for GDP and other socioeconomic variables -- is currently unknown. Using data on 131 countries, the paper cautiously explores a new approach. It documents three forms of evidence consistent with the hypothesis that some nations may have a genetic advantage in well-being.

This paper also appears as CAGE Discussion Paper No: 273

Estimation of Nonlinear Panel Models with Multiple Unobserved Effects

Mingli Chen

I propose a fixed effects expectation-maximization (EM) estimator that can be applied to a class of nonlinear panel data models with unobserved heterogeneity, which is modelled as individual effects and/or time effects. Of particular interest is the case of interactive effects, i.e. when the unobserved heterogeneity is modelled as a factor analytical structure. The estimator is obtained through a computationally simple, iterative two-step procedure, where the two steps have closed form solutions. I show that estimator is consistent in large panels and derive the asymptotic distribution for the case of the probit with interactive effects. I develop analytical bias corrections to deal with the incidental parameter problem. Monte Carlo experiments demonstrate that the proposed estimator has good finite-sample properties.

Commercialization and the Decline of Joint Liability Microcredit

Thiemo Fetzer

Numerous authors point to a decline in joint liability microcredit, and rise in individual liability lending. But empirical evidence is lacking, and there have been no rigorous analyses of possible causes. We first show using the well-known MIX Market dataset that there is evidence for a decline. Second, we show theoretically that commercialization–an increase in competition and a shift from non-profit to for-profit lending (both of which are present in the data)–drives lenders to reduce their use of joint liability loan contracts. Third, we test the model’s key predictions, and find support for them in the data.

This paper also appears as CAGE Discussion Paper No: 272

Effects of EU Regional Policy: 1989-2013

Sascha O. Becker

We analyze EU Regional Policy during four programming periods: 1989-1993, 1994-1999, 2000-2006, 2007-2013. When looking at all periods, we focus on the growth, employment and investment effects of Objective 1 treatment status. For the two later periods, we additionally look at the effects of the volume of EU transfers, overall and in sub-categories, on various outcomes. We also analyze whether the concentration of payments across spending categories affects the effectiveness if EU transfers. Finally, we pay attention to the role of EU funding for UK regions given the current debate in the UK.

This paper also appears as CAGE Discussion Paper No: 271

Does greater autonomy among women provide the key to better child nutrition?

Wiji Arulampalam

We examine the link between a mother’s autonomy - the freedom and ability to think, express, act and make decisions independently - and the nutritional status of her children. We design a novel statistical framework that accounts for cultural and traditional environment, to create a measure of maternal autonomy, a concept that has rarely been examined previously as a factor in children’s nutritional outcomes. Using data from the Third Round of the National Family Health Survey for India, supplemented with our qualitative survey, and accounting for “son preference” by limiting analysis to first-born children under 18 months of age, we document that maternal autonomy has a positive impact on the long-term nutritional status of rural children.

This paper also appears as CAGE Discussion Paper No: 269

Short-term Migration Rural Workfare Programs and Urban Labor Markets - Evidence from India

Clément Imbert and John Papp

This paper provides some of the first evidence that rural development policies can have fundamental effects on the reallocation of labor between rural and urban areas. It studies the spillover effects of the world's largest rural workfare program, India's rural employment guarantee. We find that the workfare program has substantial con¬sequences: it reduces short-term (or seasonal) migration to urban areas by 9% and increases wages for manual, short-term work in urban areas by 6%. The implied elas¬ticity of unskilled wages with respect to short-term migration is high (-0.7).

Rational Dialogs

Herakles Polemarchakis

Eventual consensus is the only property of a rational dialog.

This paper also appears as CRETA Discussion Paper No: 19

Religion and the Family: The Case of the Amish

James P. Choy

I construct a model of religion as an institution that provides community enforcement of contracts within families. Family altruism implies that family members cannot commit to reporting broken contracts to the community, so the community must monitor contract performance as well as inflicting punishment. The community has less information than family members, and so community monitoring is inefficient. I provide evidence from a study of Amish institutions, including qualitative evidence from sociological accounts and quantitative evidence from a novel dataset covering nearly the entire Amish population of Holmes county, Ohio. I find that 1) Amish households are not unitary, 2) the Amish community helps to support families by inflicting punishments on wayward family members, 3) without the community Amish people have difficulty committing to punishing family members, and 4) Amish community membership strengthens family ties, while otherwise similar religious communities in which there is less need for exchange between family members have rules that weaken family ties. My model has implications for understanding selection into religious practice and the persistence of culture.

This paper also appears as CAGE Working Paper No: 267

Constructing Social Division to Support Cooperation

James P. Choy

Many societies are divided into multiple smaller groups. Certain kinds of interaction are more likely to take place within a group than across groups. I model a reputation effect that enforces these divisions. Agents who interact with members of different groups can support lower levels of cooperation with members of their own groups. A hierarchical relationship between groups appears endogenously in equilibrium. Group divisions appear without any external cause, and improvements in formal contracting institutions may cause group divisions to disappear. Qualitative evidence from the anthropological literature is consistent with several predictions of the model.

This paper also appears as CAGE Working Paper No: 266

Business Practices in Small Firms in Developing Countries

David McKenzie and Christopher Woodruff

Management has a large effect on the productivity of large firms. But does management matter in micro and small firms, where the majority of the labor force in developing countries works? We develop 26 questions that measure business practices in marketing, stock-keeping, recordkeeping, and financial planning. These questions have been administered in surveys in Bangladesh, Chile, Ghana, Kenya, Mexico, Nigeria and Sri Lanka. We show that variation in business practices explains as much of the variation in outcomes – sales, profits and labor productivity and TFP – in microenterprises as in larger enterprises. Panel data from three countries indicate that better business practices predict higher survival rates and faster sales growth. The association of business practices with firm outcomes is robust to including numerous measures of the owner’s human capital. We find that owners with higher human capital, children of entrepreneurs, and firms with employees employ better business practices.

This paper also appears as CAGE Working Paper No: 265

Optimal Leverage and Strategic Disclosure

Giulio Trigilia

Firms seeking external financing jointly choose what securities to issue, and the extent of their disclosure commitments. The literature shows that enhanced disclosure reduces the cost of financing. This paper analyses how disclosure affects the optimal composition of financing means. It considers a market where firms compete for external financing under costly-state-verification, but, in contrast to the standard model: (i) the degree of asymmetric information between firms and outside investors is variable, and (ii) firms can affect it through a disclosure policy, modeled as a verifiable signal with a cost decreasing in its noise component. Two central predictions emerge

This paper also appears as CRETA Discussion Paper No: 18

Fact and Fantasy in Soviet Records: The Documentation of Soviet Party and Secret Police Investigations as Historical Evidence
Mark Harrison

When we use Soviet documentation of political and secret police investigations to write history, to what extent are we vulnerable to the biases and inventions of the investigators? The problem is framed as one of principal and agent. It is argued that Soviet principals allowed their agents scope to manipulate facts and bias interpretations, not freely, but within strict limits that were laid down from above and varied from time to time. These limits were set by the leader’s “revolutionary insight,” the communist equivalent of what passes in more open societies today as “truthiness.” An understanding of the Soviet truthiness of the particular time is the best guide we have to interpreting the documentary records of that time. Evaluating them in this light, we see that Soviet historical documents are little different from the records of any other time and place.

This paper also appears as CAGE Working Paper No: 263

Herding and Contrarian Behavior in
Financial Markets: An Experimental

Park and

We analyze and con rm the existence and extent of rational informational
herding and rational informational contrarianism in a nancial market experiment,
and compare and contrast these with equivalent irrational phenomena.
In our study, subjects generally behave according to benchmark rationality.
Traders who should herd or be contrarian in theory are the signi cant sources
of both within the data. Correcting for subjects who can be identi ed as
less rational increases our ability to predict herding or contrarian behavior

This paper also appears as CRETA Discussion Paper No: 17

Designing a Strategy-Proof Spot
Market Mechanism with Many
Traders: Twenty-Two Steps to
Walrasian Equilibrium

Peter Hammond

To prove their Walrasian equilibrium existence theorem, Arrow and Debreu
(1954) devised an abstract economy that Shapley and Shubik (1977) cricitized
as a market game because, especially with untrustworthy traders, it
fails to determine a credible outcome away from equilibrium. All this earlier
work also postulated a Walrasian auctioneer with complete information
about traders' preferences and endowments. To ensure credible outcomes,
even in disequilibrium, warehousing is introduced into a multi-stage market
game. To achieve Walrasian outcomes in a large economy with incomplete
information, even about traders' endowments, a strategy-proof demand revelation
mechanism is considered, and then extended to include warehousing.

This paper also appears as CRETA Discussion Paper No: 16

Sovereign Debt and Incentives to
Default with Uninsurable Risks

Gaetano Bloise, Herakles Polemarchakis and Yiannis

Sovereign debt is not sustainable even in the presence of uninsurable risks; which extends the result of Bulow and Rogoff (1989). But the argument is not as general. Indeed, examples show that positive borrowing may be enforced even though the sovereign’s natural debt limits, corresponding to the most pessimistic evaluation of future endowment, are finite. Unsustainable sovereign debt in incomplete asset markets requires a strong version of high implied interest rates: the value of the most optimistic evaluation of future endowment is finite.

This paper also appears as CRETA Discussion Paper No: 15
It has been published in Theoretical Economics, Volume 12 (3). pp. 1121-1154.

On the Comparative Advantage of U.S.
Manufacturing: Evidence from the Shale Gas

Rabah Arezki and Thiemo Fetzer
This paper provides the first empirical evidence of the newly found comparative
advantage of the United States manufacturing sector following the so-called shale gas revolution. The revolution has led to (very) large and persistent differences in the price of natural gas between the United States and the rest of the world owing to the physics of natural gas. Results show that U.S. manufacturing exports have grown by about 6 percent on account of their energy intensity since the onset of the shale revolution. We also document that the U.S. shale revolution is operating both at the intensive and extensive margins.

This paper also appears as CAGE Working Paper No: 259
Causes and Consequences of the Protestant Reformation

Sascha O. Becker, Steven Pfaff and Jared Rubin
The Protestant Reformation is one of the defining events of the last millennium. Nearly 500 years after the Reformation, its causes and consequences have seen a renewed interest in the social sciences. Research in economics, sociology, and political science increasingly uses detailed individual-level, city-level, and regional-level data to identify drivers of the adoption of the Reformation, its diffusion pattern, and its socioeconomic consequences. This survey takes stock of the research so far, tries to point out what we know and what we do not know, and which are the most promising areas for future research.

This paper also appears as CAGE Working Paper No: 260