The Cyclical Behavior of Interest Rates

This article investigates the behavior of the term structure of interest rates over the business cycle. In contrast to prior studies that measure the business cycle by the simple growth in aggregate economic activity, we consider the deviation of aggregate economic activity from its potentially stochastic trend. We show that incorporating both an independent trend and cyclical component in consumption improves the efficiency in estimating consumption-based asset pricing models. We also find that the term spread is more informative about future changes in stochastically detrended real gross domestic product (GDP) than future growth rates in real GDP.     

LABOR MARKET ASSIMILATION OF IMMIGRANTS: THE IMPORTANCE OF LANGUAGE SKILLS

The pending Immigration Reform and Control Act (Simpson-Mazzoli) would require current illegal aliens to demonstrate minimal proficiency in English or to enroll in an English language class to attain permanent-resident status. This paper examines the importance of English language skills in the assimilation of immigrants. Data on 1975 earnings for men from 11 language /ethnic groups are used. English skills are found to play an important role in determining the earnings of immigrant and minority-language men in the U.S. Costs of deficiencies in English are substantial for most immigrants—more than $1,000 per year for eight of the 11 groups.     

Interest Rates in Trade Credit Markets

All things equal, interest rates should increase with the borrower's risk. And yet, Klapper, Laeven, and Rajan (2012) cannot find such a positive relation in a broad sample of trade credit contracts. We shed some light on this puzzle by arguing that competition between informed and uninformed suppliers weakens the link between the trade credit cost and the borrower's creditworthiness. Our model implies that trade credit rates are more likely to increase with the borrower's risk if suppliers are less profitable, have high cost of funds, or sell inputs to firms plagued by moral hazard and financial distress.     

The Taylor Rule and “Opportunistic” Monetary Policy

We investigate the possibility that the Taylor rule should be formulated as a threshold process such that the Federal Reserve acts more aggressively in some circumstances than in others. It seems reasonable that the Federal Reserve would act more aggressively when inflation is high than when it is low. Similarly, it might be expected that the Federal Reserve responds more to a negative than a positive output gap. Although these specifications receive some empirical support, we find that a modified threshold model that is consistent with “opportunistic” monetary policy makes significant progress toward explaining Federal Reserve behavior.     

NEGLECTED WOMEN AND OTHER IMPLICATIONS OF COMPARABLE WORTH

Comparable worth proposals presume that the gender wage gap is a result of occupational segregation. The proposals argue that females are channeled into "women's jobs" and that overcrowding depresses women's wages below the "value" of the work performed. Comparable worth legislation proposes replacing the idea of equal pay for equal work with a principle of equal pay for different work of comparable worth determined by job evaluations. Such job evaluations are feasible only for the public sector and large private employers. The analysis in this paper recognizes that comparable worth wage adjustments are to be limited to the large employers. It examines how employers in the covered sector tend to alter their pay packages and hiring standards. Comparable worth legislation also affects wages in the uncovered sector populated by small employers. The rationing of women's jobs and the changes in hiring standards for men's jobs in the covered sector tend to redound to the benefit of smart, energetic women and dull, indolent men.     

Higher Order Effects in Asset Pricing Models with Long‐Run Risks

This paper shows that the latest generation of asset pricing models with long‐run risk exhibit economically significant nonlinearities, and thus the ubiquitous Campbell‐Shiller log‐linearization can generate large numerical errors. These errors translate in turn to considerable errors in the model predictions, for example, for the magnitude of the equity premium or return predictability. We demonstrate that these nonlinearities arise from the presence of multiple highly persistent processes, which cause the exogenous states to attain values far away from their long‐run means with nonnegligible probability. These extreme values have a significant impact on asset price dynamics.