A Micro Model of the Federal Funds Market

This paper demonstrates that valuable insights into the determination of Federal funds rates can be gained through modeling the micro-decisions of market participants. Fed fund demand functions are derived for different bank valuation functions and several implications are discussed. Specifically, it is: (i) possible to rationalize the observation that large banks are net purchasers and small banks net sellers of Fed funds; (ii) to explain the positive spread of Fed funds rates over other short-term money market rates; and (iii) to link the size of this spread to the Federal Reserve's underlying monetary policy strategy.     

Order Arrival,Quote Behavior,and the Return-Generating Process

This paper establishes three empirical results. We find positive autocorrelation in actual intra-day stock returns, in intra-day returns computed from quote midpoints, and in the arrival of buy and sell orders. We present a model of return generation that incorporates these features via lagged adjustment of the limit-order price and positive dependence in bid and ask transactions. The return model is observationally equivalent to an ARMA process, which is consistent with the observed return behavior.     

UNEMPLOYMENT AND CONSUMPTION

In this paper we argue that the aggregate unemployment rateis a valuable measure of aggregate income uncertainty. Accordingto the theory of precautionary saving, an increase in incomeuncertainty would be expected to increase saving. We use U.S.quarterly data on the consumption of motor vehicles first toexamine whether unemployment has a negative effect on consumptionand then to differentiate between the various explanations forthis phenomenon. We conclude that the negative relationshipbetween unemployment and consumption is due in large part toprecautionary saving motives.     

The Swing Voter's Curse in the Laboratory

This paper reports the first laboratory study of the swing voter's curse and provides insights on the larger theoretical and empirical literature on "pivotal voter" models. Our experiment controls for different information levels of voters, as well as the size of the electorate, the distribution of preferences and other theoretically relevant parameters. The design varies the share of partisan voters and the prior belief about a payoff relevant state of the world. Our results support the equilibrium predictions of the Feddersen–Pesendorfer model. The voters act as if they are aware of the swing voter's curse and adjust their behaviour to compensate. While the compensation is not complete and there is some heterogeneity in individual behaviour, we find that aggregate outcomes, such as efficiency, turnout and margin of victory, closely track the theoretical predictions.     

Quantifying Optimal Growth Policy

We determine the optimal growth policy within a comprehensive endogenous growth model. The model accounts for important elements of the tax transfer system and for transitional dynamics. It captures the three main growth engines based on standard ingredients in order to understand the quantitative policy and welfare implications of the existing theory. Our calibrated model indicates that the current policy leads to severe underinvestment in both R&D and physical capital, implying that both R&D and capital investment subsidies should be increased substantially. We argue that previous research has overlooked a strong evidence for the welfare significance of the quest for the optimal growth policy by failing to calibrate the distortionary tax system.