Partial retirement and the earnings test

This paper studies the effects of the earnings test on retirement behavior. The earnings tests of most social security systems tax post0retirement earnings at a relatively high level and do not lead to actuarially fair increases in futere benefits. This results in discouragement of partial retirement. The paper shows that a reduction in the earnings test's tax rate is likely to increase part-time work, and that, in special cases, the increase in work effort may even lead to a reduction in the net transfer from social security to the individual.I wish to thank the Institute of Industrial Relations at UC Berkeley for its hospitality and support. This research has been financed by the Austrian Fonds zur Förderung der wissenschaftlichen Forschung. I am indebted to J. K. Brunner, W. T. Dickens, J. Falkinger, E. Lazear, T. Sikor, B.-A. Wickström, R. Winter-Ebmer, and two referees for comments on an earlier draft.     

Distributional aspects of the divisibility of money: an example

Summary. I highlight the importance of the distributional aspects of moneys divisibility by comparing a search-theoretic model with random transfers of indivisible money balances, to one with deterministic transfers of partially divisible balances. Randomization allows price flexibility, as if money were fully divisible. Partial divisibility does not, but allows money redistributions. An example of the relevance of such extensive margin aspects of divisibility is provided.JEL Classification Numbers: D30, D83, E40.I thank Dean Corbae and seminars participants at the Federal Reserve Bank of Richmond, University of Texas at Austin, Purdue University, the Midwest Macroeconomics Meetings, the Central Bank Institute of the Federal Reserve Bank of Cleveland, and the meetings of the Society for the Advancement of Economic Theory, where this work has been presented during the years 2002 and 2003.     

Dynamic costly state verification

Summary. I study a model of dynamic risk sharing with costly state verification (CSV). In the model, a risk neutral agent enters an infinitely repeated relationship with a risk averse agent. In each period, the risk averse agent receives a random income which is observed only by himself, unless the risk neutral agent engages in costly monitoring. I provide a set of characterizations for the optimal contract, and I show that CSV has interesting effects on the long run distribution of the agents expected utilities.Received: 19 February 2003, Revised: 11 February 2004, JEL Classification Numbers: D8.This research was initially joint work with Bruce Smith. I thank Bruce for the inspiration. I thank Fernando Alvarez, Narayana Kocherlakota, Steve Spear, and an anonymous referee for helpful comments. I also thank seminar participants at Carnegie Mellon University, Federal Reserve Banks of Minneapolis, Federal Reserve bank of Richmond, Duke University, SUNY Buffalo, University of Rochester, University of Pittsburgh, University of Western Ontario, the 1998 Econometric Society winter meeting, the 1999 SED meeting, and the 1999 SITE workshop at Stanford University for discussions.     

THE RISE AND IMPACT OF NURSE PRACTITIONERS AND PHYSICIAN ASSISTANTS ON THEIR OWN AND CROSS-OCCUPATION INCOMES

There has been a dramatic increase in the authority granted to nurse practitioners (NP) and physician assistants (PA). This "expanded" authority has changed who can provide health-care services and has weakened the control physicians have traditionally held over the provision of medical services. These changes in regulation have varied by occupation, state, and year and provide variation that can be exploited to empirically measure the individual and collective impacts of changes in NP authority and PA authority on practitioner incomes. It is found that changes in NP and PA regulatory authority do impact the labor markets of all three practitioner categories. NPs having greater practice authority brings physician incomes down, has differential impacts on PA incomes, and improves their own earnings, other factors held constant. PAs having increased authority has a downward effect on NP earnings, a positive impact on physician income, and little impact on their own incomes. ( JEL I18, J18, J44, H75)     

A monetary mechanism for sharing capital: Diamond and Dybvig meet Kiyotaki and Wright

Summary. A model is presented in which banks update public records, accept deposits of fiat money and intermediate capital. I show that inside money is more liquid than outside money, increasing the turnover rates of idle capital. The model offers a simple explanation for the dual role of financial institutions: Banks are monitored and can issue nominal assets upon request, which helps them to transfer capital in sufficiently high rates and to also become intermediaries. The model shares some features with those of Diamond and Dybvig [5], and Kiyotaki and Wright [7].Received: 18 February 2003, Revised: 16 February 2004, JEL Classification Numbers: E51, G21, G24.Ricardo de O. Cavalcanti: I thank two anonymous referees, Susumu Imai, B. Ravikumar and Neil Wallace, as well as participants at the Economic Theory symposium Recents Developments in Money and Finance, and seminar participants at the Richmond Fed, Queens University, and Sabanci University for comments on an early draft. The hospitality and financial support of the Cleveland Fed Central Bank Institute and CNPq are greatfully appreciated. The authors opinions are not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.     

IDENTITY MANAGEMENT: WORKER INDEPENDENCE AND DISCRIMINATION AGAINST GAY MEN

I build on a growing literature documenting wage differentials for gay men by showing that the wage differential gay men experience varies significantly across occupations with different levels of worker independence. The penalty is smallest in management and professional occupations, which involve a high level of worker independence. It is largest in service occupations, which include a lower level of independence. This distribution of earnings penalties is consistent with discrimination being the source of the gay wage penalty. The results support the conjecture that higher levels of independence allow gay men to more successfully manage the disclosure of sexual orientation and mediate the negative effects of discrimination. (JEL J3, J7, J15)     

Evolving views on monetary policy in the thought of Hayek,Friedman, and Buchanan

Attempting to find the technically optimal monetary policy is futile if the Federal Reserve’s independence is undermined by political influences. F. A. Hayek, Milton Friedman, and James Buchanan each sought ways to improve the performance of the Federal Reserve. They each ended up rejecting the possibility that technical refinement or minor reforms might be sufficient. After properly accounting for the concerns of robust political economy, each concluded that a fundamental restructuring of our monetary system was necessary. Friedman turned to binding rules, Buchanan to constitutionalism, and Hayek to competing private currencies. We synthesize their contributions to make a case for applying the concepts of robust political economy to the Federal Reserve through the adoption of professional humility, creative thinking, and an emphasis on the politically possible, not the politically acceptable.     

Earnings dynamics of men and women in Finland: permanent inequality versus earnings instability

I decompose the earnings variance of Finnish male and female workers into its permanent and transitory components using the approach of Baker (J Labor Econ,15:338–375, 1997) and Haider (J Labor Econ, 19:799–836, 2001) in the spirit of scientific replication. I find that the increasing earnings inequality of men and women is driven by both the transitory and permanent components of earnings. In addition, I find considerable differences in the earnings dynamics of men and women, that have been largely neglected in previous studies of earnings dynamics. The inequality among men is dominated by the permanent component. Conversely, permanent and transitory components are of comparable magnitudes to women. As a corollary, men experience more stable income paths but display larger permanent earnings differences. Women, on the other hand, face more unstable earnings profiles but show smaller permanent differences in earnings.     

On characterizing equilibria of economies with externalities and taxes as solutions to optimization problems

Summary We characterize equilibria of general equilibrium models with externalities and taxes as solutions to optimization problems. This characterization is similar to Negishi's characterization of equilibria of economies without externalities or taxes as solutions to social planning problems. It is often useful for computing equilibria or deriving their properties. Frequently, however, finding the optimization problem that a particular equilibrium solves is difficult. This is especially true in economies with multiple equilibria. In a dynamic economy with externalities or taxes there may be a robust continuum of equilibria even if there is a representative consumer. This indeterminacy of equilibria is closely related to that in overlapping generations economies.An earlier version of this paper, entitled Externalities and Taxes in General Equilibrium, was presented at the North American meetings of the Econometric Society, June 1988, at the University of Minnesota. We are grateful to David Backus, Kenneth Judd, Patrick Kehoe, and Rodolfo Manuelli for helpful conversations. National Science Foundation grants SES 86-18325 and SES 87-08616 provided financial support.The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.     

New techniques for estimation of rational expectation models and Volcker deflation

Multivariate autoregressive moving average models are used to form the “reduced forms” of Muth's rational expectation models. One implication of the modern macroeconomic theory is that economic agents' expectations should change in the presence of major policy changes. This paper proposes a simple method for directly comparing the formulation of expectations, and illustrates it by considering the impact of a recent policy change in the US under Paul Volcker of the Federal Reserve Bank. Many new interpretations are based on transfer functions, “gain” calculations, Green's function matrices from solutions of difference equations, and complex conjugate roots to measure cyclical phenomena. Furthermore, the traditional distributed lag models are criticized for arbitrarily assuming that the gain is unity. We provide an equation for minimum mean squared error regulation, and indicate the role played by rational two-step ahead speculations made by economic agents, along with changes therein emanating from the policy change.     

POLITICS AND THE FEDERAL RESERVE

Evidence presented here supports a two-part hypothesis that (1) the Federal Reserve is a powerful political entity, not independent of politics, and (2) it preserves its political power by carrying out the monetary policy desired by the President of the United States. This evidence includes the historical record from the Truman to Reagan administrations, politicization of Federal Reserve research, and political lobbying by the Federal Reserve. Formerly secret minutes of the regional Federal Reserve Banks' boards of directors meetings provide source material. The conclusion suggests a more efficient method of translating political signals and a rule for more predictable monetary policy.     

Domestic financial market frictions,unrestricted international capital flows,and crises in small open economies

Summary. We present an example of a small open economy where small increases in the world interest rate may induce a sharp decline in output and a precipitous depreciation of the exchange rate. Due to a costly state verification problem in domestic credit markets, combined with unrestricted international capital flows, our economy generates two long-run equilibria, one with low GDP and a relatively depreciated real exchange rate (RER), and one with high GDP and a relatively appreciated RER. The first is always a saddle, while the second may be a sink or a source, depending on the level of the world interest rate. A crisis is identified with the economy switching from an equilibrium path approaching the high-output steady state to the saddlepath approaching the low-output steady state. In Mexicos recent history, periods of growth associated with appreciation of the RER have alternated with periods of sharp contraction and depreciation of the RER. Our economy displays such behavior in response to changes in the world interest rate.Received: 9 April 2002, Revised: 20 March 2003JEL Classification Numbers: E5, F4.G. Antinolfi, E. Huybens: We thank Steve Fazzari, Tim Kehoe, Todd Keister, Manuel Santos, Karl Shell and especially Bruce Smith for very helpful discussions. Jaime Calleja Alderete, Eduardo Camero Godínez, and Juan Vargas Hernández provided excellent research assistance. All remaining errors are ours. Huybens was an assistant professor in the Centro de Investigación Económica, ITAM, at the time this article was written, and part of this work was completed while Antinolfi was a visiting scholar at the Federal Reserve Bank of St. Louis. The views expressed herein are those of the authors, and do not reflect those of the World Bank or the Federal Reserve Bank of St. Louis. Correspondence to: G. Antinolfi     

The effect of the market-based monetary policy transparency index on inflation and output variability

This paper examines empirically the effectiveness of the Federal Reserve’s policy under different levels of transparency by using a dynamic and continuous market-based index proposed by Kia (2011 Kia, A. 2011. “Developing a Market-based Monetary Policy Transparency Index: Evidence from the United States.” Economic Issues 16 (2): 53–79. [Google Scholar]) on inflation volatility and output volatility. In theory, the more transparent the monetary policy, the less volatile the money market will be with fewer disturbances and thus the more stable will be the economy. First, a bivariate VAR-BEKK-GARCH(1,1) model is estimated for inflation and output variables in the US economy in order to produce conditional variances and covariance over the period October 1982 to December 2011. Second, by incorporating conditional variances and transparency in a VAR model, impulse response functions reveal that after a positive shock in the Federal Reserve’s transparency (i.e. market participants consider the Federal Reserve’s actions to be more transparent), there is a statistically significant decrease in both inflation volatility and output volatility. Our results reveal the dynamic and crucial role that a central bank’s transparency plays in retaining economic stability and assuring the forecasts concerning inflation and economic growth made by the economic units.     

'Independence' and the founding of the Federal Reserve

The Federal Reserve is ‘independent’, but contrary to opinions often expressed, it was not intended by its creators to be free from political control, although others involved in the debate over its establishment hoped that it would be. ‘Independence’ was independence from banking interests, not government. A gradual development of independence preceded a much greater acquisition of power during the Reagan Presidency. The lessons of history include the fact that with few changes in the Federal Reserve Act, its position in the American government has been dramatically transformed. Consequently, contrary to common practice in the economics literature, the ‘independence’ (from government) of a central bank evidently cannot be measured by tabulating characteristics of its statutes.     

Optimal contracts in a dynamic costly state verification model

Summary. This paper describes optimal contracts in a dynamic costly state verification model with stochastic monitoring. An agent operates a risky project on behalf of a principal who can observe the projects revenues at a cost. We show that an optimal contract exists such that, at any history, either the principal claims the projects entire revenues or promises to claim nothing in the future. In particular, the agents expected income rises with time. Moreover, except in at most one period, the principal claims all revenues when audit occurs. We provide conditions under which all optimal contracts satisfy these properties.Received: 4 February 2004, Revised: 4 June 2004, JEL Classification Numbers: D8, C7. Correspondence to: Cyril MonnetWe wish to thank Patrick Bolton, Vitor Gaspar, Mark Guzman, Martin Hellwig, Narayana Kocherlakota, Thorsten Koeppl, Albert Marcet, Benny Moldovanu, Ernst-Ludwig von Thadden and seminar participants at the University of Mannheim, the University of Minnesota, the Society for Economics Dynamics Meetings in New York and the Society for the Advancement in Economic Theory in Rhodos for helpful comments and discussions. The views expressed herein are those of the authors and may not reflect the views of the European Central Bank, the Eurosystem, the Federal Reserve Bank of Dallas or the Federal Reserve System.     

Interest on reserves,settlement, and the effectiveness of monetary policy

Over the last several years, the Federal Reserve has conducted a series of large scale asset purchases. The effectiveness of these purchases is dependent on the monetary transmission mechanism. Former Federal Reserve chairman Ben Bernanke argued that large scale asset purchases are effective because they induce portfolio reallocations that ultimately lead to changes in economic activity. Despite these claims, a large fraction of the expansion of the monetary base is held as excess reserves by commercial banks. Concurrent with the large scale asset purchases, the Federal Reserve began paying interest on reserves and enacted changes in its Payment System Risk policy. In this paper, I estimate the effect of the payment of interest on reserves (as well as other payment policy changes) on the demand for daylight overdrafts through Fedwire. Since Fedwire provides overdrafts at a fixed price, any fluctuation in the quantity of overdrafts is a change in demand. A reduction in overdrafts corresponds with an increase in the demand for reserves. I show that the payment of interest on reserves has had a negative and statistically significant effect on daylight overdrafts. Furthermore, I interpret these results in light of recent theoretical work. I argue that by paying an interest rate on excess reserves that is higher than comparable short term rates, the Federal Reserve likely hindered the portfolio reallocation channel outlined by Bernanke. Thus, the payment of interest on reserves increased payment processing efficiency, potentially at the expense of limiting the ability of monetary policy to influence economic activity.     

The Influence of Economists On the Federal Reserve Act

Many economists helped to lay the groundwork for the Federal Reserve. Some did important work analyzing the problems of the National Bank System and arguing for formation of a central bank in economics journals. At least as importantly, if not more so, some economists took an active role in the reform movement and provided help and advice with the actual Congressional bill. Among these are J. Lawrence Laughlin, who chaired a group that actively raised support for the Federal Reserve Act in Congressional districts, and H. Parker Willis, who served as an expert for the subcommittee which wrote the original draft of what became the Federal Reserve Act. More broadly, this episode illustrates the impact that intellectuals and ideas can have on actual events; the analysis contemporary economists did in academic journals and in more political activities before and after the panic of 1907 guided the actual formation of a working central bank (JEL B10, N21).     

Liquidity of secondary capital markets: Allocative efficiency and the maturity composition of the capital stock

Summary We investigate the function of liquid financial markets for the allocation of productive capital. We consider an economy where agents endogenously choose among capital production technologies with differing gestation periods. Long-gestation capital investments must be rolled-over in secondary capital markets. The use of such investment technologies therefore requires the support of liquid financial markets. We investigate how changes in the liquidity of these markets (i.e., in the costs of transacting) affect (a) the choice of capital production technology, (b) per capita income and the per capita capital stock, (c) the level of financial market activity, (d) the real return on savings and (e) welfare in a steady state equilibrium. Improvements in financial market liquidity raise rates of return on savings, and favor the increased use of long gestation capital investments. However, such improvements may or may not lead to higher levels of real activity or steady state welfare. We describe conditions under which various outcomes occur.We have benefited from the comments of seminar participants at the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of Minneapolis, the International Monetary Fund, Berkeley, Boston College, Boston University, Brown, Chicago, Illinois, Miami, UC San Diego, Simon Fraser, University of British Columbia, University of Washington, Yale, the Canadian Macro Study Group Meetings, the Murrary S. Johnson Conference (University of Texas/Federal Reserve Bank of Dallas), and the Far West Rotating Economic Theory Conference. We would also like to thank John Bryant, Andreas Hornstein, Dan Peled, Bill Schworm, Karl Shell, Bart Taub and an anonymous referee for their comments on an earlier draft of the paper.     

Education and income of the states of the United States: 1840–2000

This article introduces original annual average years of schooling measures for each state from 1840 to 2000. Our methodology results in state estimates similar to those reported in the United States Census from 2000 back to 1940 and national, turn of the century estimates strikingly close to those presented by Schultz (Schultz, T. (1961). In N. B. Henry (Ed.), Social forces influencing American education. Chicago: University of Chicago Press.) and Fishlow (Fishlow, A. (1966). In H. Rosovsky (Ed.), Industrialization in two systems. John Wiley & Sons). To further determine the validity of our state schooling estimates, we first combine original data on real state per worker output with existing data to provide a more comprehensive series of real state output per worker from 1840 to 2000. We then estimate aggregate Mincerian earnings regressions and discover that the return to a year of schooling for the average individual in a state ranges from 11% to 15%. This range is robust to various time periods, various estimation methods, various assumptions about the endogeneity of schooling and is in line with the body of evidence from the labor literature. All views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.     

Independent but Not Indifferent: Partisan Bias in Monetary Policy at the Fed

Independent central banks are thought to be effective inflation hawks because they are run by technocrats with conservative monetary policy preferences. However, central bankers can only protect their independence by compromising with the elected officials who grant them their independence. Policy, therefore, is likely to be a weighted average of the preferences of the central bank and the government. Consequently, central bankers may be eager to help right‐wing governments stay in power and oppose the election of left‐wing governments. We show evidence from the United States that interest rates (a) decline as elections approach when Republicans control the White House, but rise when Democrats do; and (b) are sensitive to the inflation rate (output gap) when Democrats (Republicans) are in the White House. Thus, the Federal Reserve is a conditional inflation hawk. Since the Fed became operationally independent in 1951, the Republicans have exhibited a decided electoral advantage in presidential politics.