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First Quarter 2011 Research Rap

First Quarter 2011 Research Rap

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Published by: Federal Reserve Bank of Philadelphia on Jun 28, 2011
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26 Q1 2011
Business Review 
 
www.philadelphiafed.org
You can find more Research Rap abstracts on our website at: www.philadelphiafed.org/research-and-data/ publications/research-rap/. Or view our working papers at: www.philadelphiafed.org/research-and-data/ publications/.Abstracts of research papersproduced by theeconomists atthe PhiladelphiaFed
ESEARCH
AP
 EXTENDED BENEFITS ANDUNEMPLOYMENT TRANSITIONRATES
Using the monthly CPS, the authorestimates unemployment-to-employment(UE) transition rates and unemployment-to-inactivity (UN) transition rates byunemployment duration for male workers.When estimated for the period of 2004-2007, during which no extended benefitsare available, both of the transition-rateprofiles show clear patterns consistentwith the expiration of regular benefits at26 weeks. These patterns largely disappearin the profiles for the period of 2009-2010,during which large-scale extensions havebecome available. The author conductscounterfactual experiments in whichthe estimated profiles for 2009-2010 arereplaced by the hypothetical profilesinferred from the ones for 2004-2007. Theresults indicate that the benefit extensionsin recent years have raised male workers’unemployment rate by 0.9-1.7 percentagepoints. Roughly 50-60 percent of the totalincrease is attributed to the effects on UEtransition rates and the remaining partis accounted for by the effects on UNtransition rates.
Working Paper 10-35, “Effects of theUI Benefit Extensions: Evidence from theMonthly CPS,” Shigeru Fujita, Federal ReserveBank of Philadelphia
 HOW INVENTORIES AFFECT TRADE,INFORMATION, AND PRICES
The authors study trade between a buyerand a seller when both may have existinginventories of assets similar to those beingtraded. They analyze how these inventoriesaffect trade, information dissemination,and price formation. The authors show thatwhen the buyer’s and seller’s initial leverageis moderate, inventories increase price andtrade volume, but when leverage is high, trademay become impossible (a “market freeze”).Their analysis predicts a pattern of trade inwhich prices and trade volume first increase,and then markets break down. The authorsuse their model to discuss implications forregulatory intervention in illiquid markets.
Working Paper 10-36, “Market Run-Ups,Market Freezes, and Leverage,” Philip Bond,University of Minnesota, and Yaron Leitner,Federal Reserve Bank of Philadelphia
 EXPLAINING LIFE-CYCLE PATTERNSOF HOUSEHOLDS’ TIME USE ANDCONSUMPTION
The authors incorporate home productionin a dynamic general equilibrium modelof consumption and saving with illiquidhousing and a collateralized borrowingconstraint. They show that the model iscapable of explaining life-cycle patterns of households’ time use and consumption of different categories. Specifically, households’market hours and home hours are fairly stable
 
Business Review 
Q1 2011 27
www.philadelphiafed.org
early in the life cycle. Market hours start to declinesharply at age 50, while home hours begin to increaseat age 55. Households’ consumption of the marketgood, home input, and housing services all exhibithump shapes over the life cycle, with the market goodhaving the most pronounced hump, followed by thehome input, and then housing services. A plausiblyparameterized version of the authors’ model predictsthat the interaction of the labor efficiency profile andthe availability of home production technology explainhouseholds’ time use over the life cycle. The resultingincome profiles, the endogenous borrowing constraint,and the presence of home production account for theinitial hump in all three consumption goods. Theconsumption profiles in the second half of the life cycleare mostly driven by the complementarity of homehours, home input, and housing in home production.
Working Paper 0-37, “Consumption and Time Useover the Life Cycle,” Michael Dotsey, Federal ReserveBank of Philadelphia; Wenli Li, Federal Reserve Bank of Philadelphia; and Fang Yang, State University of New Yorkat Albany
DATA REVISIONS AND THE STATISTICAL(UN)RELIABILITY OF MEASURES OFPRODUCTIVITY GROWTH
Productivity growth is carefully scrutinizedby macroeconomists because it plays key roles inunderstanding private savings behavior, the sources of macroeconomic shocks, the evolution of internationalcompetitiveness, and the solvency of public pensionsystems, among other things. However, estimates of recent and expected productivity growth rates sufferfrom two potential problems: (i) recent estimates of growth trends are imprecise, and (ii) recently publisheddata often undergo important revisions.This paper documents the statistical (un)reliabilityof several measures of aggregate productivity growthin the U.S. by examining the extent to which they arerevised over time. The authors also examine the extentto which such revisions contribute to errors in forecastsof U.S. productivity growth.The authors find that data revisions typicallycause appreciable changes in published estimates of productivity growth rates across a range of differentproductivity measures. Substantial revisions often occur years after the initial data release, which they arguecontributes significantly to the overall uncertaintypolicymakers face. This emphasizes the need for meansof reducing the uncertainty facing policymakers andpolicies robust to uncertainty about current economicconditions.
Working Paper 11-1, “Lessons from the Latest Dataon U.S. Productivity,” Jan P.A.M. Jacobs, University of Groningen, and Simon van Norden, HEC Montreal andVisiting Scholar, Federal Reserve Bank of Philadelphia
TERMS OF CREDIT IN A COMPETITIVEMARKET
The author studies the terms of credit in acompetitive market in which sellers (lenders) arewilling to repeatedly finance the purchases of buyers(borrowers) by engaging in a credit relationship. Thekey frictions are: (i) the lender is unable to observethe borrower’s ability to repay a loan; (ii) the borrowercannot commit to any long-term contract; (iii) it iscostly for the lender to contact a borrower and to walkaway from a contract; and (iv) transactions withineach credit relationship are not publicly observable.The lender’s optimal contract has two key properties:delayed settlement and debt forgiveness. Asymmetricinformation gives rise to the property of delayedsettlement, which is a contingency in which thelender allows the borrower to defer the repaymentof his loan in exchange for more favorable terms of credit within the relationship. This property, togetherwith the borrowers’ lack of commitment, gives rise todebt forgiveness. When the borrower’s participationconstraint binds, the lender needs to “forgive” part of the borrower’s debt to keep him in the relationship.Finally, the author studies the impact of the changes inthe initial cost of lending on the terms of credit.
Working Paper 11-2, “A Dynamic Model of UnsecuredCredit,” Daniel R. Sanches, Federal Reserve Bank of Philadelphia
STRATEGIC FACTORS AND THE DECISIONTO DEFAULT ON FIRST VS. SECOND LIENMORTGAGES
Strategic default behavior suggests that the defaultprocess is not only a matter of an inability to pay.Economic costs and benefits affect the incidence andtiming of defaults. As with prior research, the authorsfind that people default strategically as their homevalue falls below the mortgage value (exercise the putoption to default on their first mortgage). While some

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