FACTOR ANALYSIS OF A LARGE DSGE MODEL

We study the workings of the factor analysis of high‐dimensional data using artificial series generated from a large, multi‐sector dynamic stochastic general equilibrium (DSGE) model. The objective is to use the DSGE model as a laboratory that allows us to shed some light on the practical benefits and limitations of using factor analysis techniques on economic data. We explain in what sense the artificial data can be thought of having a factor structure, study the theoretical properties of the principal components estimates of the factor space, investigate the substantive reason(s) for the good performance of diffusion index forecasts, and assess the quality of the factor analysis of highly disaggregated data. In all our exercises, we explain the precise relationship between the factors and the basic macroeconomic shocks postulated by the model. Copyright © 2012 John Wiley & Sons, Ltd.     

The inefficiency of refinancing: Why prepayment penalties are good for risky borrowers

This paper provides a theoretical analysis of the efficiency of prepayment penalties in a dynamic competitive lending model with risky borrowers and costly default. When considering improvements in the borrower's creditworthiness as one of the reasons for refinancing mortgages, we show that refinancing penalties can be welfare improving and that they can be particularly beneficial to riskier borrowers in the form of lower mortgage rates, reduced defaults, and increased availability of credit. Thus, a high concentration of prepayment penalties among the riskiest borrowers can be an outcome of efficient equilibrium in a mortgage market. We also provide empirical evidence that is consistent with the key predictions of our model.     

Capital structure decisions: Evidence from deregulated industries

Deregulation significantly affects the firms’ operating environment and leverage decisions. Firms experience a significant decline in profitability, asset tangibility and a significant increase in growth opportunities following deregulation. Firms respond by reducing leverage. Deregulation also significantly affects the cross-sectional relation between leverage and its determinants. Leverage is much less negatively correlated with profitability and market-to-book and much more positively (negatively) correlated with firm size (earnings volatility) following deregulation. These results are consistent with the dynamic tradeoff theory of capital structure. Also consistent with the dynamic tradeoff theory, those firms that are more likely to be above their target capital structure issue significantly more equity in the first few years following deregulation.     

The Unemployment–Output Tradeoff in Transition Economies: Does Okun''s Law Apply?

This paper investigates whether an Okun-type relationship between output and unemployment is taking hold in formerly planned economies as they move towards the market. Using a first-differences variant of Okun's Law, we test for its presence in 25 transition countries divided into groups of ``reform leaders' and ``reform laggards.' For leaders, represented by the 10 European Union (EU) accession countries, Okun's Law is detected in both 1991–94 and 1995–2000 periods. For laggards, represented by the remaining group, it is present only for the later period and only when countries affected by wars are removed from the sample. A comparison of unemployment–output elasticities and unemployment levels in EU candidates and EU members themselves indicates that their labor markets might be converging.     

The Role of Banks in Monetary Policy Transmission: Empirical Evidence from Russia

This paper focuses on the role of the banking sector in monetary policy transmission in an emerging economy with a rapidly developing financial system. Specifically, we examine whether the central bank's monetary policy stance affects banks' lending behavior. Based on a comprehensive quarterly dataset on all Russian banks from 1Q1999 to 1Q2007, we find evidence for the existence of a bank lending channel in Russia. Contrary to several studies on developed economies, the level of a bank's capitalization matters for the transmission process. Better capitalized banks are less likely to adjust their lending practices following a change in the monetary policy stance.     

Are private banks more efficient than public banks?

We study whether bank efficiency is related to bank ownership in Russia. We find that foreign banks are more efficient than domestic private banks and, surprisingly, that domestic private banks are not more efficient than domestic public banks. These results are not driven by the choice of production process, the bank's environment, management's risk preferences, the bank's activity mix or size, the econometric approach, or the introduction of deposit insurance. The policy conclusion is that the efficiency of the Russian banking system may benefit more from increased levels of competition and greater access of foreign banks than from bank privatization.     

A Counterintuitive Argument for Résumé Embellishment

Applied ethicists say little about résumé embellishment. Presumably, this is so because résumé embellishment seems obviously wrong; an instance of ordinary lying, familiar moral prohibitions against which cover the case completely. Analysis of résumé embellishment merely as ordinary lying overlooks its collective action aspects. Taking account of those aspects and their implications, I argue on consequentialist grounds that, given some plausible background conditions, a limited form of résumé embellishment is morally permissible (and perhaps required). This outcome is a particular instantiation of a more general principle about how one ought to act when participating in a morally valuable co-ordinative practice. I conclude by identifying implications for how employers ought to use résumés in hiring decisions.     

The effects of social- and self-motives on the intentions to share positive and negative word of mouth

We examine social- and self-motives as drivers of Word of Mouth (WOM). The main proposition is that the transmitter expects to gain personal and social benefits from sharing his opinion about a brand. The gains are in the form of expected satisfaction of self- and social-needs. In the research model, self-needs (i.e., self-enhancement and self-affirmation) are considered the initial driver of WOM. The desire for their satisfaction through WOM results in an intended social interaction, which in turn triggers social-motives: social-needs (i.e., social comparison and social bonding) and social-intentions (i.e., helping others and providing social information). WOM is the outcome of the intention to engage in a social interaction that is initiated by the intention to satisfy self-needs. Through an empirical analysis, we examine how the underlying mechanism varies for positive and negative WOM. Positive WOM is motivated primarily by the need for self-enhancement, and negative WOM is motivated by the need for self-affirmation. The need for social comparison affects both valences of WOM, the need for social bonding affects only positive WOM, and intention to help others and share social information affect only negative WOM. The findings suggest that discussing brands can be a mechanism for acquiring personal and social benefits, and consequently, promotional campaigns should highlight the gains customers accrue through WOM.