Current Unpublished Working Papers
Mortgage Choice in the Housing Boom: Impacts of House Price Appreciation and Borrower Type
2014-05 | With Furlong and Lang | January 2014
The U.S. housing boom during the first part of the past decade was marked by rapid house price appreciation and greater access to mortgage credit for lower credit-rated borrowers. The subsequent collapse of the housing market and the high default rates on residential mortgages raise the issue of whether the pace of house price appreciation and the mix of borrowers may have affected the influence of fundamentals in housing and mortgage markets. This paper examines that issue in connection with one aspect of mortgage financing, the choice among fixed-rate and adjustable-rate mortgages. This analysis is motivated in part by the increased use of adjustable-rate mortgage financing, notably among lower credit-rated borrowers, during the peak of the housing boom. Based on analysis of a large sample of loan level data, we find strong evidence that house price appreciation dampened the influence of a number of fundamentals (mortgage pricing terms and other interest rate related metrics) that previous research finds to be important determinants of mortgage financing choices. With regard to the mix of borrowers, the evidence indicates that, while low risk-rated borrowers were affected on the margin more by house price appreciation, on balance those borrowers tended be at least as responsive to fundamentals as high risk-rated borrowers. The higher propensity of low credit-rated borrowers to choose adjustable-rate financing compared with high credit-rated borrowers in the housing boom appears to have been related to borrower credit risk metrics. Given the evidence related to loan pricing terms, other interest rate metrics and fixed effects, the relation of credit risk to mortgage financing choice seems more consistent with considerations such as credit constraints, risk preferences, and mortgage tenor than just a systematic lack of financial sophistication among higher credit risk borrowers.
Understanding Changes in Exchange Rate Pass-Through
2008-13 | February 2008
Recent research suggests that there has been a decline in the extent to which firms “pass through” changes in exchange rates to prices. Beyond providing further evidence in support of this claim, this paper proposes an explanation for the phenomenon. It then presents empirical evidence of a structural break during the 1990s in the relationship between the real exchange rate and CPI inflation for a set of 14 OECD countries. It is suggested that the recent reduction in the real exchange rate pass-through can be attributed
in part to the low-inflation environment of the 1990s.
Revising the Sticky-Information Phillips Curve
Manuscript | December 2004
This paper provides a theoretical extension and an empirical test of a leading new approach to Phillips curve derivation–Mankiw and Reis’s sticky information model. Firstly, I relax the original model’s assumption that information about key macroeconomic variables is received at the same rate. Secondly, I provide a formal justification for a firm’s decision to forego receiving information about a particular macroeconomic variable every period. Finally, using a sample of G7 countries, I provide empirical evidence in support of the theoretical assumption of different rates of information arrival for different macroeconomic variables.
Searching for an Open Economy Phillips Curve
Manuscript | July 2004
Mankiw and Reis’s (2002) sticky-information Phillips curve seems to be on its way to replace the previously popular New Keynesian one. Indeed, both models have appealing theoretical foundations, yet the sticky-information model yields more plausible predictions about the effects of monetary policy. However, the two models have not been compared in an open economy setting, which is the purpose of this paper. As a first step,
I extend Mankiw and Reis’s and the New Keynesian models to an open economy setting. I then compare responses of inflation to a real exchange rate shock in the two models. I show that, under plausible parameter values, both models perform equally well. Thus, although Mankiw and Reis’s model does better then the New Keynesian when it comes to the effects of monetary shocks, it is hard to choose between the two when effects of exchange rate shocks are considered.
Published Articles (Refereed Journals and Volumes)
Financial and Housing Wealth and Consumption Spending: Cross-Country and Age Group Comparisons
Housing Studies 27(5), July 2012, 1-22 | yrd
In this study we explore the link between household expenditures and wealth across the age distribution by examining the elasticity of consumption spending from different types of wealth. We use a new source of harmonized wealth micro data for five countries: Canada, Finland, Italy, Germany and the US. Our results indicate that the effect of housing wealth dominates the effect of financial wealth in Finland, Italy, Germany, the US, and also in Canada for certain age groups. We find consumption responsiveness to housing wealth to be statistically significantly lower for younger households. The analysis also confirms the existence of between-country differences.
Job Flows, Demographics, and the Great Recession
Research in Labor Economics 32, 2011, 115-154
The recession the US economy entered in December of 2007 is considered to be the most severe downturn the country has experienced since the Great Depression. The unemployment rate reached as high as 10.1% in October 2009–the highest we have seen since the 1982 recession. In this chapter, we examine the severity of this recession compared to those in the past by examining worker flows into and out of unemployment taking into account changes in the demographic structure of the population. We identify the most vulnerable groups of this recession by dissagregating the workforce by age, gender, and race. We find that adjusting for the aging of the U.S. labor force increases the severity of this recession. Our results indicate that the increase in the unemployment rate is driven to a larger extent by the lack of hiring (low outflows), but flows into unemployment are still important for understanding unemployment rate dynamics (they are not as acyclical as some literature suggests) and differences in unemployment rates across demographic groups. We find that this is indeed a “mancession,” as men face higher job separation probabilities, lower job finding probabilities, and, as a result, higher unemployment rates than women. Lastly, there is some evidence that blacks suffered more than whites (again, this difference is particularly pronounced for men).
Understanding Changes in Exchange Rate Pass-Through
Journal of Macroeconomics 32, 2010, 1118-1130
Recent research suggests that there has been a decline in the extent to which firms “pass through” changes in exchange rates to prices. This paper provides further evidence in support of this claim. Additionally, it proposes an explanation for this phenomenon. The paper then presents empirical evidence of a structural break during the 1990s in the relationship between the real exchange rate and CPI inflation for a set of fourteen OECD countries. It is suggested that the recent reduction in the real exchange rate pass-through can in part be attributed to the low inflationary environment of the 1990s.
Gender, Monetary Policy, and Employment: The Case of Nine OECD Countries
Feminist Economics 15(3), July 2009, 323-353 | With Sierminska
In many countries, low and stable inflation is the focus of monetary policy. Recent empirical evidence from developing countries indicates, however, that the costs of reducing inflation are disproportionately borne by women. This paper seeks to determine whether a similar pattern is evident in nine Organisation for Economic Co-operation and Economic Development (OECD) countries, using quarterly data for 1980-2004. The study examines economywide and sectoral employment effects by gender by utilizing two methodologies: single equation regression and vector autoregression analysis. Results indicate that the link between monetary policy instruments (short-term interest rates) and employment in the industrial countries under investigation is weak and does not vary by gender.