Recent Working Papers
948. Giovanni Cerulli, CNR-IRCrES, Maria Ventura, STICERD, London School of Economics, and Christopher F. Baum, Boston College, "The Economic Determinants of Crime: an Approach through Responsiveness Scores", (03/2018; PDF)
Abstract: Criminality has always been part of human social interactions, shaping the way peoples have constructed states and legislation. As social order became a greater concern for the public authorities, interest in investigating incentives pushing individuals towards engaging in illegal activities has become a central issue of the political agenda. Building on the existing literature, this paper proposes to focus on a few primary determinants of crime, whose effect is in-vestigated using a Responsiveness Scores (RS) approach performed over 50 US states during the period 2000–2012. The RS approach allows us to account for unit heterogeneous response to each single determinant, thus paving the way to a more in-depth analysis of the relation between crime and its drivers. We attempt to overcome the limitations posed by standard regression methods, which assume a single coefficient for all determinants, thus contributing to the literature in the field with stronger evidence on determinants’ effects and the geographical patterns of responsiveness scores.
947. Songnian Chen, HKUST, Shakeeb Khan, Boston College, and Xun Tang, Rice University, "Exclusion Restrictions in Dynamic Binary Choice Panel Data Models", (02/2018; PDF)
Abstract: In this note we revisit the use of exclusion restrictions in the semiparametric binary choice panel data model introduced in Honore and Lewbel (2002). We show that in a dynamic panel data setting (where one of the pre-determined explanatory variables is the lagged dependent variable), the exclusion restriction in Honore and Lewbel (2002) implicitly re- quires serial independence condition on an observed regressor, that if violated in the data will result in their procedure being inconsistent. We propose a new identification strategy and estimation procedure for the semiparametric binary panel data model under exclusion restrictions that accommodate the serial correlation of observed regressors in a dynamic setting. The new estimator converges at the parametric rate to a limiting normal distri- bution. This rate is faster than the nonparametric rates of existing alternative estimators for the binary choice panel data model, including the static case in Manski (1987) and the dynamic case in Honore and Kyriazidou (2000).
946. Shakeeb Khan, Boston College, Denis Nekipelov, University of Virginia, and Justin Rao, Microsoft Research, "Measuring the Return to Online Advertising: Estimation and Inference of Endogenous Treatment Effects", (02/2018; PDF)
Abstract: In this paper we aim to conduct inference on the “lift” effect generated by an online advertisement display: specifically we want to analyze if the presence of the brand ad among the advertisements on the page increases the overall number of consumer clicks on that page. A distinctive feature of online advertising is that the ad displays are highly targeted- the advertising platform evaluates the (unconditional) probability of each consumer clicking on a given ad which leads to a higher probability of displaying the ads that have a higher a priori estimated probability of click. As a result, inferring the causal effect of the ad display on the page clicks by a given consumer from typical observational data is difficult. To address this we use the large scale of our dataset and propose a multi-step estimator that focuses on the tails of the consumer distribution to estimate the true causal effect of an ad display. This “identification at infinity” (Chamberlain (1986)) approach alleviates the need for independent experimental randomization but results in nonstandard asymptotics. To validate our estimates, we use a set of large scale randomized controlled experiments that Microsoft has run on its advertising platform. Our dataset has a large number of observations and a large number of variables and we employ LASSO to perform variable selection. Our non-experimental estimates turn out to be quite close to the results of the randomized controlled trials.
945. Ryo Kawasaki, Hideo Konishi, Boston College, and Junki Yukawa, "Equilibria in Bottleneck Games", (01/2018; PDF)
Abstract: This paper introduces a bottleneck game with finite sets of commuters and departing time slots as an extension of congestion games by Milchtaich (1996). After characterizing Nash equilibrium of the game, we provide sufficient conditions for which the equivalence between Nash and strong equilibria holds. Somewhat surprisingly, unlike in congestion games, a Nash equilibrium in pure strategies may often fail to exist, even when players are homogeneous. In contrast, when there is a continuum of atomless players, the existence of a Nash equilibrium and the equivalence between the set of Nash and strong equilibria hold as in congestion games (Konishi, Le Breton, and Weber, 1997a).
944. Hideo Konishi, Boston College and Chen-Yu Pan, Wuhan University, "Silent Promotion of Agendas: Campaign Contributions and Ideological Polarization", (01/2018; PDF)
Abstract: Until recently, both Republican and Democratic administrations have been promoting free trade and market deregulation for decades without intensive policy debates. We set up a two-party electoral competition model in a two-dimensional policy space with campaign contributions by an interest group that promotes a certain agenda that many voters disagree. Assuming that voters are impressionable to campaign spending for/against candidates, we analyze incentive compatible contracts between the interest group and the candidates on agenda policy positions and campaign contributions. If the interest group pushes its agenda more than the candidates want by providing contributions, then the candidates can compete only over the other (ideological) dimension. As the agenda is pushed further by the interest group, ideological policy polarization and campaign contributions surge.
943. Rosen Valchev, Boston College, "Bond Convenience Yields and Exchange Rate Dynamics", (10/2017; PDF)
Abstract: This paper proposes a new explanation for the failure of Uncovered Interest Parity (UIP) that rationalize both the classic UIP puzzle and the evidence that the puzzle reverses direction at longer horizons. In the model, excess currency returns arise as compensation for endogenous fluctuations in bond convenience yield differentials. Due to the interaction of monetary and fiscal policy, the impulse response of the equilib- rium convenience yield is non-monotonic, which generates the reversal of the puzzle. The model fits exchange rate dynamics very well, and I also find direct evidence that convenience yields indeed drive excess currency returns.
942. Filippo De Marco, Bocconi University, Marco Macchiavelli, Federal Reserve Board, and Rosen Valchev, Boston College, "Beyond Home Bias: Portfolio Holdings and Information Heterogeneity", (01/2018; PDF)
Abstract: We investigate whether information frictions are important determinants of banks’ sovereign debt portfolios. Going beyond the classic home versus foreign distinction in holdings, we study the heterogeneity within the foreign sovereign portfolio. First, we propose a modified version of the Van Nieuwerburgh and Veldkamp (2009) model with a two-tiered information structure that links portfolio holdings and information acquisition. Second, we find strong support for the key predictions of the model in the data: if a bank makes a forecast for a given country, it is more likely to hold debt of that country. Moreover, more optimistic and more precise forecasts predict larger portfolio holdings.
941. Rosen Valchev, Boston College, "Dynamic Information Acquisition and Portfolio Bias", (06/2017; PDF)
Abstract: While international portfolios are still heavily biased towards home assets, the home bias has exhibited a clear downward trend in the last few decades. Interestingly, the underlying rise in foreign investment has been primarily directed to just a handful of OECD countries, and has not given rise to an across the board increase in all foreign investments. To understand the evolution of the home bias, this paper develops a dynamic model of information acquisition and portfolio choice. The dynamic framework introduces two new endogenous forces due to the fact that asset payoffs depend on the future asset prices and hence on the future information sets. First, there is a measure of endogenous unlearnable uncertainty in asset payoffs which generates decreasing returns to information when agents are sufficiently well informed about an asset, and hence gives a reason to diversify information and portfolios. In addition, the dynamic framework introduces a strategic complementarity in learning, due to the “beauty contest” of dynamic asset markets, which is absent in the benchmark static model where learning is purely a strategic substitute. As a result of both of these new endogenous forces, the model can explain the high overall level of the home bias, its decline over time and the fact that the rise in foreign investment has been coordinated on just a handful of destination countries. Moreover, the model predicts that the home bias decline is linked to the fall in information costs, and I find direct evidence of this in the data.
940. Cosmin Ilut, Duke University, Rosen Valchev, Boston College, "Paralyzed by Fear: Rigid and Discrete Pricing under Demand Uncertainty", (03/2016; PDF)
Abstract: Price rigidity is central to many predictions of modern macroeconomic models, yet, standard models are at odds with certain robust empirical facts from micro price datasets. We propose a new, parsimonious theory of price rigidity, built around the idea of demand uncertainty, that is consistent with a number of salient micro facts. In the model, the monopolistic firm faces Knightian uncertainty about its competitive environment, which has two key implications. First, the firm is uncertain about the shape of its demand function, and learns about it from past observations of quantities sold. This leads to kinks in the expected profit function at previously observed prices, which act as endogenous costs of changing prices and generate price stickiness and a discrete price distribution. Second, the firm is uncertain about how aggregate prices relate to the prices of its direct competitors, and the resulting robust pricing decision makes our rigidity nominal in nature.
939. Christopher F. Baum, Boston College, Mustafa Caglayan, Heriot-Watt University, and Bing Xu, Heriot-Watt University, "Uncertainty Effects on the Financial Sector: International Evidence", (12/2017; PDF)
Abstract: We examine the effects of uncertainty on the financial sector in a multidimensional context. In our investigation, using a large country-level unbalanced panel dataset, we show that inflation uncertainty reduces availability of private sector credit; harms banks' efficiency and operational performance, evidenced by lower returns and increased reliance on non-interest income activities; and distorts sectoral stability, as liquidity and banks' appetite for risk increases. Our findings, based on the full dataset and country splits, are economically meaningful and provide evidence that uncertainty harms the overall health of the financial sector.
938. Peter N. Ireland, Boston College, "Allan Meltzer’s Model of the Transmission Mechanism and Its Implications for Today", (11/2017; PDF)
Abstract: Allan Meltzer developed his model of the monetary transmission mechanism in research conducted with Karl Brunner. The Brunner-Meltzer model implies that the Federal Reserve would benefit from drawing brighter lines between monetary and fiscal policy actions, eschewing credit market intervention and focusing, instead, on using its control over the monetary base to stabilize the aggregate price level. The model downplays the importance of the zero lower interest rate bound and suggests a greater role for monetary aggregates in the Fed’s policymaking strategy. Finally, it highlights the benefits that accrue when policy is conducted according to a rule rather than discretion.
937. Michael T. Belongia, University of Mississippi and Peter N. Ireland, Boston College, "The Demand for Divisia Money: Theory and Evidence", (11/2017; PDF)
Abstract: A money-in-the-utility function model is extended to capture the distinct roles of noninterest-earning currency and interest-earning deposits in providing liquidity services to households. It implies the existence of a stable money demand relationship that links a Divisia monetary aggregate to spending or income as a scale variable and the associated Divisia user-cost dual as an opportunity cost measure. Cointegrating money demand equations of this form appear in quarterly United States data spanning the period from 1967:1 through 2017:2, especially for the Divisia M2 aggregate. The identification of a stable money demand function over a period that includes the financial innovations of the 1980s and continues through the recent financial crisis and Great Recession suggests that a properly measured aggregate quantity of money can play a role in the conduct of monetary policy. That role can be of greater prominence when traditional interest rate policies are constrained by the zero lower bound.
936. Christopher F. Baum, Boston College, Madhavi Pundit, Asian Development Bank, and Arief Ramayandi, Asian Development Bank, "Capital Flows and Financial Stability in Emerging Economies", (10/2017; PDF)
Abstract: There is mixed evidence for the impact of international capital flows on financial sector's stability. This paper investigates the relationship between components of gross capital flows and various financial stability indicators for 16 emerging and newly industrialized economies. Departing from panel data methods, for each financial stability proxy, we employ systems of seemingly unrelated regression estimators to allow variation in the estimated relationship across countries, while permitting cross equation restrictions to be imposed within a country. The findings suggest that, after controlling for macroeconomic factors, there are significant effects of different gross capital flow measures on the financial stability proxies. However, the effects are not homogeneous across our sample economies and across flows. Country-specific financial and macroeconomic characteristics help to explain some of these differences.
Note: This paper was first circulated by the Asian Development Bank as ADB Economics Working Paper 522
935. Ryan Chahrour, Boston College and Kyle Jurado, Duke University, "Recoverability", (11/2017; PDF)
Abstract: When can structural shocks be recovered from observable data? We present a necessary and sufficient condition that gives the answer for any linear model. Invertibility, which requires that shocks be recoverable from current and past data only, is sufficient but not necessary. This means that semi-structural empirical methods like structural vector autoregression analysis can be applied even to models with non-invertible shocks. We illustrate these results in the context of a simple model of consumption determination with productivity shocks and non-productivity noise shocks. In an application to postwar U.S. data, we find that non-productivity shocks account for a large majority of fluctuations in aggregate consumption over business cycle frequencies.
934. Ryan Chahrour, Boston College, and Rosen Valchev, Boston College, "International Medium of Exchange: Privilege and Duty", (10/6/17; PDF)
Abstract: The United States enjoys an “exorbitant privilege” that allows it to borrow at especially low interest rates. Meanwhile, the dollarization of world trade appears to shield the U.S. from international disturbances. We provide a new theory that links dollarization and exorbitant privilege through the need for an international medium of exchange. We consider a two-country world where international trade happens in decentralized matching markets, and must be collateralized by assets — a.k.a. currencies — issued by one of the two countries. Traders have an incentive to coordinate their currency choices and a single dominant currency arises in equilibrium. With small heterogeneity in traders’ information, the model delivers a unique mapping from economic conditions to the dominant currency. Nevertheless, the model delivers a dynamic multiplicity: in steady-state either currency can serve as the international medium of exchange. The economy with the dominant currency enjoys lower interest rates and the ability to run current account deficits indefinitely. Currency regimes are stable, but sufficiently large shocks or policy changes can lead to transitions, with large welfare implications.
933. Luca Benati, University of Bern, and Peter N. Ireland, Boston College, “Money-Multiplier Shocks”, (8/1/17; PDF)
Abstract: Shocks to the M1 multiplier–in particular, shocks to the reserves/deposits ratio–played a key role in driving U.S. macroeconomic fluctuations during the interwar period, but their role in the post-WWII era has been almost uniformly negligible. The only exception are shocks to the currency/deposits ratio, which played a sizeable role for inflation and M1 velocity. By contrast, shocks to the multiplier of the non-M1 component of M2, which had been irrelevant in the interwar period, have played a significant role in driving the nominal side of the
economy during the post-WWII period up to the collapse of Lehman Brothers, in particular during the Great Inflation episode. During either period, the multiplier of M2-M1 has been cointegrated with the short rate. The monetary base had exhibited a non-negligible amount of permanent variation during the interwar period, whereas it has been trend-stationary during the post-WWII era. In spite of the important role played by shocks to the multiplier of M2-M1 during the post-WWII period, we still detect a non-negligible role for a nonmonetary
permanent inflation shock, which has the natural interpretation of a disturbance originating from the progressive de-anchoring of inflation expectations which started in the mid-1960s, and their gradual re-anchoring following the beginning of the Volcker disinflation.
932. Tayfun Sönmez, Boston College, and M. Utku Ünver, Boston College, “Market Design for Living-Donor Organ Exchanges: An Economic Policy Perspective”, (6/30/17; PDF)
Abstract: Within the last decade kidney exchanges emerged as a modality of transplantation to better utilize living donation possibilities as a cross disciplinary success of medical doctors and ethicists, market design economists, and computer scientists. This paper summarizes at which fronts these efforts have been successful and what needs to be done further to increase their impact. Also this paradigm is partially
being applied to liver exchanges. There are other organs for which living donation is possible and gains from exchange can be much bigger than kidneys. Recent academic work on single-graft liver and dual-donor organ exchanges for lobar lung, dual-graft liver, and simultaneous liver-kidney transplantation are also discussed.
931. Tayfun Sönmez, Boston College, M. Utku Ünver, Boston College, and M. Bumin Yenmez, Boston College, “Incentivized Kidney Exchange”, (6/30/17; PDF)
Abstract: Within the last decade, kidney exchange has become a mainstream paradigm to increase the number of transplants. However, compatible pairs do not participate, and the full benefits from exchange can be realized only if they do. In this paper, we propose a new scheme, incentivizing participation of compatible pairs in exchange via insurance for a future renal failure in the patient. Efficiency and equity analyses of this scheme are conducted and compared with that of living-donor exchange in a new dynamic continuum model of kidney transplantation. We also calibrate the model with data from the US and quantify our predictions.
930. James Anderson, Boston College, "N-S Trade with Weak Institutions", (06/2017; PDF)
Abstract: States with weak institutions can lose from trade with strong states when trade is subject to predation. The happy liberal idea of trade fostering better institutions and peace can be turned on its head. The Ricardian model of trade subject to predation offered here implies imperialism without capital, contra Marxists. Weak and poor South trades with strong and rich North. Poor South labor is attracted to predation. Labor market effects of predation and enforcement amplify opposing interests in the terms of trade, potentially obviating the standard gains from trade that allows bargaining solutions to surplus division.
929. Raffaele Santioni, Bank of Italy, Fabio Schiantarelli, Boston College, and Philip E. Strahan, Boston College and NBER, "Internal Capital Markets in Times of Crisis: The Benefit of Group Affiliation in Italy", (05/2017; PDF)
Abstract: Italy’s economic and banking systems have been under stress in the wake of the Global Financial Crisis and Euro Crisis. Firms in business groups have been more likely to survive this challenging environment, compared to unaffiliated firms. Better performance stems from access to an internal capital market, and the survival value of groups increases, inter alia, with group-wide cash flow. We show that actual internal capital transfers increase during the crisis, and these transfers move funds from cash-rich to cash-poor firms and also to those with more favorable investment opportunities. The ability to borrow externally provides additional funds that are shared across group affiliated firms. Our results highlight the benefits of internal capital markets when external capital markets are tight or distressed.
928. James Anderson, Boston College, and Yoto V. Yotov, Drexel University, "Short Run Gravity", (05/2017; PDF)
Abstract: Short run gravity is a geometric weighted average of long run gravity and bilateral capacity. The model features (i) joint trade costs endogenous to bilateral volumes, (ii) long run gravity as a limiting case of efficient investment in bilateral capacities, (iii) a structural ratio of short run to long run trade elasticities equal to a microfounded buyers' incidence elasticity, and (iv) tractable short and long run models of the extensive margin. Application to manufacturing trade of 52 countries during the globalization period 1988-2006 strongly supports the model. Results solve several time invariance and trade elasticity puzzles in the literature.
927. Arthur Lewbel, Boston College, "Identification and Estimation Using Heteroscedasticity Without Instruments: The Binary Endogenous Regressor Case", (12/2016; PDF)
Abstract: Lewbel (2012) provides an estimator for linear regression models containing an endogenous regressor, when no outside instruments or other such information is available. The method works by exploiting model heteroscedasticity to construct instruments using the available regressors. Some authors have considered the method in empirical applications where an endogenous regressor is binary (e.g., endogenous Diff-in-Diff or endogenous binary treatment models), without proving validity of the estimator in that case. The present paper shows that the assumptions required for Lewbel’s estimator can indeed be satisfied when an endogenous regressor is binary.
926. Hideo Konishi, Boston College, and Chen-Yu Pan, Wuhan University, "Campaign Contributions for Free Trade: Salient and Non-salient Agendas", (05/2017; PDF)
Abstract: Although protectionism became a salient issue in the 2016 presidential election campaign, both Republican and Democratic adminis- trations have been silently promoting free trade for decades. We set up a two-party electoral competition model in a two-dimensional policy space with campaign contributions by a group (exporting/multinational firms) that is interested in promoting free trade, for which voters do not have positive sentiment. Assuming that voters are impressionable to campaign spending for/against candidates, we analyze the optimal contract between the interest group and the candidates on policy is- sues and campaign contributions. If voters' negative sentiment to free trade is not too strong, the interest group tends to contribute to both candidates to make free trade a nonsalient issue, and the candidates compete over the other (ideological) dimension only. If votersíneg- ative sentiment to free trade is strong, the interest group tends to contribute to a more malleable candidate only.
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