Schools and Location: Tiebout,Alonso, and Governmental Finance Policy

Many discussions of school finance policy fail to consider how households respond to policies that change the attractiveness of different residential locations. We develop a general equilibrium model that incorporates workplace choice, residential choice, and political choice of tax and expenditure levels. Importantly, we consider multiple workplaces, a fundamental feature of today's metropolitan landscape. This basic model permits investigating how accessibility and public goods interact in a metropolitan area. The model is used to analyze two conventional policy initiatives: school district consolidation and district power equalization. The surprising conclusion is that school quality and welfare can fall for all families when these restrictions on choice are introduced.     

Long‐Run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention

We study the portfolio decision of a household with limited information‐processing capacity (rational inattention [RI]) in a setting with recursive utility. We find that RI combined with a preference for early resolution of uncertainty could lead to a significant drop in the share of portfolios held in risky assets, even when the departure from the standard expected utility setting with full‐information rational expectations is small. In addition, we show that the equilibrium equity premium increases with the degree of inattention because inattentive investors with recursive utility face greater long‐run risk and thus require higher compensation in equilibrium.     

A Dilemma between Liquidity Regulation and Monetary Policy: Some History and Theory

History suggests a conflict between current Basel III liquidity ratios and monetary policy, which we call the liquidity regulation dilemma. Although forgotten, liquidity ratios, named “securities-reserve requirements,” were widely used historically, but for monetary policy (not regulatory) reasons, as central bankers recognized the contractionary effects of these ratios. We build a model rationalizing historical policies: a tighter ratio reduces the quantity of assets that banks can pledge as collateral, thus increasing interest rates. Tighter liquidity regulation paradoxically increases the need for central bank's interventions. Liquidity ratios were also used to keep yields on government bonds low when monetary policy tightened.