We evaluate the importance of three different channels for explaining the recent performance of subprime mortgages. First, the riskiness of the subprime borrowing pool may have increased. Second, pockets of regional economic weakness may have helped push a larger proportion of subprime borrowers into delinquency. Third, for a variety of reasons, the recent history of local house price appreciation and the degree of house price deceleration may have affected delinquency rates on subprime mortgages. While we find a role for all three candidate explanations, patterns in recent house price appreciation are far and away the best single predictor of delinquency levels and changes in delinquencies. Importantly, after controlling for the current level of house price appreciation, measures of house price deceleration remain significant predictors of changes in subprime delinquencies. The results point to a possible role for changes in house price expectations for explaining changes in delinquencies.

Writings on the macroeconomic impact of capital account liberalization find few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. The lion's share of papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory, because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.

The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology--furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to "standardize" the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing short-term capital controls. We find that there should exist country-specific characteristics for capital controls to be effective. From these simple perspective, this rationalizes why some capital controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-capital control are conditional on the level of short-term capital flows.

This paper examines the degree of integration into world financial markets and the impacts on several key macroeconomic variables of selected East Asian economies, and draws policy implications. According to our analysis, the degrees of integration into world financial markets in those economies are increasing. Regarding the impacts of increasing integration into world financial markets on several macroeconomic variables, we find three results. First, casual two-way plots among macroeconomic variables do not support the theoretical prediction of reduction in relative consumption volatility. Second, the saving-investment correlation is higher than those of in Euro area economies. Third, the degrees of smoothing of idiosyncratic shock by cross-holding of financial assets are lower than Euro area economies. Those results suggest two policy implications. First, there's some room for improvement in welfare gains in those economies by further risk sharing. Second, holding all other conditions given, the increasing integration into world financial markets alone is unlikely to provide a sound ground for a currency union in East Asia at this stage.

Most models currently used to determine optimal foreign reserve holdings take the level of international debt as given. However, given the sovereign's willingness-to-pay incentive problems, reserve accumulation may reduce sustainable debt levels. In addition, assuming constant debt levels does not allow addressing one of the puzzles behind using reserves as a means to avoid the negative effects of crisis: why do not sovereign countries reduce their sovereign debt instead? To study the joint decision of holding sovereign debt and reserves, we construct a stochastic dynamic equilibrium model calibrated to a sample of emerging markets. We obtain that the optimal policy is not to hold reserves at all. This finding is robust to considering interest rate shocks, sudden stops, contingent reserves and reserve dependent output costs.

In this paper, we conduct a dynamic panel analysis of the determinants of the household saving rate in China using a life cycle model and panel data on Chinese provinces for the 1995-2004 period from China's household survey. We find that China's household saving rate has been high and rising and that the main determinants of variations over time and over space therein are the lagged saving rate, the income growth rate, and (in some cases) the real interest rate and the inflation rate. However, we find that the variables relating to the age structure of the population usually do not have a significant impact on the household saving rate. These results provide mixed support for the life cycle hypothesis as well as the permanent income hypothesis, are consistent with the existence of inertia or persistence, and imply that China's household saving rate will remain high for some time to come.

This paper investigates the role of shocks to U.S. productivity and demand in driving the real value of the dollar, and the dynamics of the U.S. trade balance. Using sign restrictions based on robust predictions by standard theory, we identify shocks that increase domestic labor productivity and output in manufacturing (our measure of U.S. tradables), relative to an aggregate of other industrial countries including the rest of the G7, while driving down (up in the case of demand) the relative price of tradables (in accord to Harrod-Balassa-Samuelson effects). Consistent with previous results based on different methodologies, we find that positive productivity differentials raise U.S. consumption and investment relative to the rest of the world, and deteriorate net exports; both the U.S. real exchange rate and the U.S. terms of trade appreciate in response to these shocks. Demand shocks also appreciate the dollar, but have negligible effects on absorption and the trade balance. These findings question a common view in the literature, that a country's terms of trade deteriorate when its tradables supply grows, providing a mechanism to contain differences in national wealth even if productivity level do not converge. They also provide an empirical contribution to the current debate on the adjustment of the U.S. current account position. Contrary to widespread presumptions, productivity growth in the U.S. tradable sector does not necessarily improve the U.S. trade deficit, nor deteriorate the U.S. terms of trade, at least in the short and medium run.

Data on international relative prices from industrialized countries show large and systematic deviations from relative purchasing power parity. We embed a model of imperfect competition and variable markups in some of the recently developed quantitative models of international trade to examine whether such models can reproduce the main features of the fluctuations in international relative prices. We find that when our model is parameterized to match salient features of the data on international trade and market structure in the U.S., it reproduces deviations from relative purchasing power parity similar to those observed in the data because firms choose to price-to-market. We then examine how pricing-to-market depends on the presence of international trade costs and various features of market structure.

The basic inability of standard theoretical models to generate a sufficiently large and variable nominal bond risk premium has been termed the "bond premium puzzle." We show that the term premium on long-term bonds in the canonical dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is too small and stable relative to the data. We find that introducing long-memory habits in consumption as well as labor market frictions can help fit the term premium, but only by seriously distorting the DSGE model's ability to fit other macroeconomic variables, such as the real wage; therefore, the bond premium puzzle remains.

We study the convergence of European bond markets and the anchoring of inflation expectations in euro area countries using high-frequency bond yield data for France, Germany, Italy and Spain. We find that Economic and Monetary Union (EMU) has led to substantial convergence in euro area sovereign bond markets in terms of interest rate levels, unconditional daily fluctuations, and conditional responses to major macroeconomic data announcements. Our findings also suggest a substantial increase in the anchoring of long-term inflation expectations since EMU, particularly for Italy and Spain, which since monetary union have seen their long-term interest rates become much lower, much less volatile, and much better anchored in response to news. Finally, the reaction of far-ahead forward interest rates to macroeconomic announcements has converged substantially across euro area countries and even been eliminated over time, thus underlining not only market integration but also the credibility that financial markets attach to monetary policy in the euro area.

A common assumption in the academic literature and in the actual supervision of banking systems worldwide is that franchise value plays a key role in limiting bank risk-taking. As the underlying source of franchise value is assumed to be market power, reduced competition has been considered to promote banking stability. Boyd and De Nicolo (2005) propose an alternative view where concentration in the loan market could lead to increased borrower debt loads and a corresponding increase in loan defaults that undermine bank stability. Martinez-Miera and Repullo (2007) encompass both approaches by proposing a nonlinear relationship between competition and bank risk-taking. Using unique datasets for the Spanish banking system, we examine the empirical nature of that relationship. After controlling for macroeconomic conditions and bank characteristics, we find that standard measures of market concentration do not affect the ratio of non-performing commercial loans (NPL), our measure of bank risk. However, using Lerner indexes based on bank-specific interest rates, we find a negative relationship between loan market power and bank risk. This result provides evidence in favor of the franchise value paradigm.

Access to external finance is a key determinant of a firm's ability to develop, operate and expand. To date, the literature has examined a variety of macroeconomic and microeconomic factors that influence firm financing. In this paper, we examine access by Spanish firms to external financing, both from bank and non-bank sources. We use dynamic panel data estimation techniques to estimate our models over a sample of 60,000 firms during the period from 1992 to 2002. We find that Spanish firms are quite dependent on short-term non-bank financing (such as trade credit), which makes up about 65 percent of total firm debt. Our results indicate that this type of financing is less sensitive to firm characteristics than short-term bank financing. However, we also find that short-term bank debt seems to be accessed more during economic expansions, which may suggest a substitution away from non-bank financing as firm conditions improve. Short-term bank debt also seems to be accessed more as funding rates rise, possibly again suggesting a substitution away from higher-priced non-bank alternatives. Using data from the Spanish Credit Register maintained by the Banco de Espana, we find that the impact of funding costs on access to external financing, whether from banks or non-banks, is affected by the nature of borrowing firms' bank relationships and collateral. In particular, we provide evidence of a potential hold-up problem in loan markets. Moreover, collateral plays a key role in making long-term finance available to firms.

We develop new techniques to assess the relationship between commercial bank performance and the economic conditions in the markets in which they operate. In the analysis, we allow for heterogeneity in the responses of banks to regional economic conditions. We find a statistically significant relationship between bank performance and shocks to the regional markets in which they operate. We find that region-specific shocks have a significant and persistent effect on the cross-sectional variance of bank performance in the market. That is, shocks affecting average performance of banks in a region also tend to increase the dispersion of their performance. We demonstrate that this effect is due to heterogeneity in the banks' exposures to their regional economies. Moreover, by allowing for this heterogeneity, we find that systematic responses to regional economic effects are notably more important in explaining the variation in bank performance than suggested by analysis in which responses are constrain to be the same for all banks.

We derive the class of arbitrage-free affine dynamic term structure models that approximate the widely-used Nelson-Siegel yield-curve specification. Our theoretical analysis relates this new class of models to the canonical representation of the three-factor arbitrage-free affine model. Our empirical analysis shows that imposing the Nelson-Siegel structure on this canonical representation greatly improves its empirical tractability; furthermore, we find that improvements in predictive performance are achieved from the imposition of absence of arbitrage.

To conduct policy efficiently, central banks must use available data to infer, or learn, the relevant structural relationships in the economy. However, because a central bank's policy affects economic outcomes, the chosen policy may help or hinder its efforts to learn. This paper examines whether real-time learning allows a central bank to learn the economy's underlying structure and studies the impact that learning has on the performance of optimal policies under a variety of learning environments. Our main results are as follows. First, when monetary policy is formulated as an optimal discretionary targeting rule, we find that the rational expectations equilibrium and the optimal policy are real-time learnable. This result is robust to a range of assumptions concerning private sector learning behavior. Second, when policy is set with discretion, learning can lead to outcomes that are better than if the model parameters are known. Finally, if the private sector is learning, then unannounced changes to the policy regime, particularly changes to the inflation target, can raise policy loss considerably.

This paper explores how the steady trends in increasing tuition costs, college enrollment, and the college wage gap might be related to the quality of college graduates. The model shows that the signaling role of education might be an important yet largely neglected ingredient in these recent changes. I develop a special signaling model in which workers of heterogeneous abilities face the same costs, yet a larger proportion of able individuals self-select to attend college since they are more likely to get higher returns. With imperfect information, the skill premium is an outcome which depends on the equilibrium quality of college attendees and nonattendees. Incorporating a production function of college education, I discuss the properties of the college market equilibrium. A skill-biased technical change directly decreases self-selection into college, but the general equilibrium effect may overturn the direct decline, since increased enrollment and rising tuition costs increase self-selection. Higher initial human capital has an external effect on subsequent investment in school: All agents increase their education, and the higher equilibrium tuition costs increase self-selection and the college premium.

This paper uses a new dataset to study the relationship between economic output and sovereign default for the period 1820-2004. We find a negative but surprisingly weak relationship between output and default. Throughout history, countries have indeed defaulted during bad times (when output was relatively low), but they have also maintained debt service in the face of severe adverse shocks, and they have defaulted when domestic economic conditions were favorable. We show that this constitutes a puzzle for standard theories, which predict a much tighter negative relationship as default provides partial insurance against declines in output.

For over two decades, researchers have provided evidence that the yield curve, specifically the spread between long- and short-term interest rates, contains useful information for signaling future recessions. Despite these findings, forecasters appear to have generally placed too little weight on the yield spread when projecting declines in the aggregate economy. Indeed, we show that professional forecasters appear worse at predicting recessions a few quarters ahead than a simple real-time forecasting model that is based on the yield spread. This relative forecast power of the yield curve remains a puzzle.

Previous studies of real wage cyclicality have made only sparing use of the microdata detail that is available in the Panel Study of Income Dynamics (PSID). The present paper brings to bear this additional detail to investigate the robustness of previous results and to examine whether there are important cross-sectional and demographic differences in wage cyclicality. Although real wages were procyclical across the entire distribution of workers from 1967 to 1991, the wages of lower-income, younger, and less-educated workers exhibited greater procyclicality. However, workers' straight-time hourly pay rates have been acyclical, suggesting that more variable pay margins such as bonuses, overtime, late shift premia, and commissions have played a substantial if not primary role in generating procyclicality.

Since bank credit lines are a major source of corporate funding and liquidity, we examine the determinants of credit line usage with a database of Spanish corporate credit lines. A line's default status is the primary factor driving its usage, which increases as a firm approaches default. Several lender characteristics suggest an important role for bank monitoring in firms' usage decisions. Credit line usage is found to be inversely related to macroeconomic conditions. Overall, while several factors influence corporate credit line usage, our analysis suggests that default and supply-side variables are the most important.

The composition of capital inflows to emerging market economies tends to follow a predictable dynamic pattern across the business cycle. In most emerging market economies, total inflows are procyclical, with debt and portfolio equity flowing in first, followed later in the expansion by foreign direct investment (FDI). To understand the dynamic composition of these flows, we use a small open economy (SOE) framework to model the composition of capital inflows as the equilibrium outcome of emerging market firms' financing decisions. We show how costly external financing and FDI search costs generate a state-contingent cost of financing such that the cheapest source of financing depends on the phase of the business cycle. In this manner, the financial frictions are able to explain the interaction between the types of flows and deliver a time-varying composition of flows, as well as other standard features of emerging market business cycles. If, as this work suggests, flows are an equilibrium outcome of firms' financing decisions, then volatility of capital inflows is not necessarily bad for an economy. Furthermore, using capital controls to shut down one type of flow and encourage another is certain to have both short- and long-run welfare implications.

This paper empirically assesses the importance of interpersonal income comparisons using individual level data on suicide deaths in the United States. We model suicide as a choice variable, conditional on exogenous risk factors, reflecting an individual's assessment of current and expected future utility. Our empirical analysis considers whether suicide risk is systematically related to the income of others, holding own income and other individual factors fixed. We estimate proportional hazards and probit models of the suicide hazard using two separate and independent data sets: (1) the National Longitudinal Mortality Study and (2) the National Center for Health Statistics' Mortality Detail Files combined with the 5 percent Public Use Micro Sample of the 1990 decennial census. Results from both data sources show that, controlling for own income and individual characteristics, individual suicide risk rises with reference group income. This result holds for reference groups defined broadly, such as by county, and more narrowly by county and one demographic marker (e.g., age, sex, race). These findings are robust to alternative specifications and cannot be explained by geographic variation in cost of living, access to emergency medical care, mismeasurement of deaths by suicide, or by bias due to endogeneity of own income. Our results confirm findings using self-reported happiness data and are consistent with models of utility featuring "external habit" or "Keeping Up with the Joneses" preferences.

This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies uncertainty about the model’s dynamics, utility-based welfare criterion, and the "natural" rates of output and interest that would prevail absent nominal rigidities. We estimate the degree of uncertainty regarding natural rates due to parameter uncertainty. We find that optimal Taylor rules under parameter uncertainty respond less to the output gap and more to price inflation than would be optimal absent parameter uncertainty. We also show that policy rules that focus solely on stabilizing wages and prices yield welfare outcomes very close to the first-best.

This paper derives a general class of intrinsic rational bubble solutions in a standard Lucas-type asset pricing model. I show that the rational bubble component of the price-dividend ratio can evolve as a geometric random walk without drift, such that the mean of the bubble growth rate is zero. Driftless rational bubbles are part of a continuum of equilibrium solutions that involve an explicit trade-off between the mean and volatility of the bubble growth rate. I also derive a near-rational asset pricing solution in which the representative agent does not construct separate forecasts for the fundamental and bubble components of the asset price. Rather, the agent constructs only a single forecast for the total asset price that is similar in form to the corresponding rational forecast, but involves fewer parameters. The parameters of the agent's forecast rule are chosen to match the moments of observable data. In the near-rational equilibrium, the actual law of motion for the price-dividend ratio is stationary, highly persistent, and nonlinear. The agent's forecast errors exhibit near-zero autocorrelation at all lags, making it difficult for the agent to detect a misspecification of the forecast rule. Unlike a rational bubble, the near-rational solution allows the asset price to occasionally dip below its fundamental value. Under mild risk aversion, the near-rational solution generates pronounced low-frequency swings in the price-dividend ratio, positive skewness, excess kurtosis, and time-varying volatility--all of which are present in long-run U.S. stock market data. An additional contribution of the paper is to demonstrate an approximate analytical solution for the fundamental asset price that employs a nonlinear change of variables.

Model uncertainty has the potential to change importantly how monetary policy should be conducted, making it an issue that central banks cannot ignore. In this paper, I use a standard new Keynesian business cycle model to analyze the behavior of a central bank that conducts policy with discretion while fearing that its model is misspecified. My main results are as follows. First, policy performance can be improved if the discretionary central bank implements a robust policy. This important result is obtained because the central bank's desire for robustness directs it to assertively stabilize inflation, thereby mitigating the stabilization bias associated with discretionary policymaking. In effect, a fear of model uncertainty can act similarly to a commitment mechanism. Second, exploiting the connection between robust control and uncertainty aversion, I show that the central bank's fear of model misspecification leads it to forecast future outcomes under the belief that inflation (in particular) will be persistent and have large unconditional variance, raising the probability of extreme outcomes. Private agents, however, anticipating the policy response, make decisions under the belief that inflation will be more closely stabilized, more tightly distributed, than under rational expectations. Third, as a technical contribution, I show how to solve an important class of linear-quadratic robust Markov-perfect Stackelberg problems.

We examine the performance and robustness properties of monetary policy rules in an estimated macroeconomic model in which the economy undergoes structural change and where private agents and the central bank possess imperfect knowledge about the true structure of the economy. Policymakers follow an interest rate rule aiming to maintain price stability and to minimize fluctuations of unemployment around its natural rate but are uncertain about the economy's natural rates of interest and unemployment and how private agents form expectations. In particular, we consider two models of expectations formation: rational expectations and learning. We show that in this environment the ability to stabilize the real side of the economy is significantly reduced relative to an economy under rational expectations with perfect knowledge. Furthermore, policies that would be optimal under perfect knowledge can perform very poorly if knowledge is imperfect. Efficient policies that take account of private learning and misperceptions of natural rates call for greater policy inertia, a more aggressive response to inflation, and a smaller response to the perceived unemployment gap than would be optimal if everyone had perfect knowledge of the economy. We show that such policies are quite robust to potential misspecification of private sector learning and the magnitude of variation in natural rates.

The empirical research literature regarding the effects of market structure on small business lending has yielded ambiguous results. This paper empirically tests for the presence of countervailing effects of increases in market concentration on small business loan volume. Countervailing effects would be expected if both the traditional Structure, Conduct, Performance (SCP) paradigm of industrial organization and a paradigm whereby market power benefits the formation of lending relationships (the relationship hypothesis), are at work. Using Community Reinvestment Act (CRA) data on small loans to small businesses, it is found that, on average, across MSAs, SCP effects dominate. But, as predicted by the relationship hypothesis, the negative effects of increases in concentration on small business loan volume are weaker, the greater the presence of young firms and the higher the business failure rate. Relationship effects due to business failure appear to come from highly concentrated MSAs. Endogeneity concerns are further addressed with the estimation of a regression that separates out the effects of changes in the number of lenders from the effects of changes in the sum of squared deviations of market shares.

We construct a vintage capital model in which worker skills lie along a continuum and workers can be paired with different vintages (as technology evolves) under a matching rule of "best worker with the best machine." Labor reallocation in response to technology shocks has two key implications for the wage premium. First, it limits both the magnitude and duration of change in the wage premium following a (permanent) embodied technology shock, so empirically plausible shocks do not lead to the kind of increases in the wage premium observed in the U.S. during the 1980s and early 1990s (though an increase in labor force heterogeneity does). Second, positive disembodied technology shocks tend to push up the wage premium as well, and while this effect is small, it does mean that a higher premium does not provide unambiguous information about the underlying shock. Labor reallocation also means that if embodied technology comes to play a larger role in long-run growth, investment and savings tend to fall in steady state, with little effect on output and employment, enabling the household to increase consumption without sacrificing leisure. The short run effects are more conventional: permanent shocks to disembodied technology induce a strong wealth effect that reduces savings and induces a consumption boom while permanent shocks to embodied technology induce dominant substitution effects and an expansion characterized by an investment boom.

Innovations in the mortgage market since the mid-1990s have effectively reduced a number of financing constraints. Coinciding with these innovations, we document a significant change in the propensity for households to own their homes, as well as substantial increases in the share of household income devoted to housing. These changes in housing expenditures are especially large for those groups that faced the greatest financial constraints, and are robust across the changing composition of households and their geographic location. We present evidence that young, constrained households may have used newly designed mortgages to finance their increased expenditures on housing.

We use robust control techniques to study the effects of model uncertainty on monetary policy in an estimated, semi-structural, small-open-economy model of the U.K. Compared to the closed economy, the presence of an exchange rate channel for monetary policy not only produces new trade-offs for monetary policy, but it also introduces an additional source of specification errors. We find that exchange rate shocks are an important contributor to volatility in the model, and that the exchange rate equation is particularly vulnerable to model misspecification, along with the equation for domestic inflation. However, when policy is set with discretion, the cost of insuring against model misspecification appears reasonably small.

We document key facts about marriage and divorce, comparing trends through the past 150 years and outcomes across demographic groups and countries. While divorce rates have risen over the past 150 years, they have been falling for the past quarter century. Marriage rates have also been falling, but more strikingly, the importance of marriage at different points in the life cycle has changed, reflecting rising age at first marriage, rising divorce followed by high remarriage rates, and a combination of increased longevity with a declining age gap between husbands and wives. Cohabitation has also become increasingly important, emerging as a widely used step on the path to marriage. Out-of-wedlock fertility has also risen, consistent with declining "shotgun marriages." Compared with other countries, marriage maintains a central role in American life. We present evidence on some of the driving forces causing these changes in the marriage market: the rise of the birth control pill and women's control over their own fertility; sharp changes in wage structure, including a rise in inequality and partial closing of the gender wage gap; dramatic changes in home production technologies; and the emergence of the internet as a new matching technology. We note that recent changes in family forms demand a reassessment of theories of the family and argue that consumption complementarities may be an increasingly important component of marriage. Finally, we discuss how these facts should inform family policy debates.

Currency crises of the past decade highlighted the importance of balance-sheet effects of currency crises. In credit-constrained markets such effects may lead to further declines in credit. Controlling for a host of fundamentals, we find a systematic decline in foreign credit to emerging market private firms of about 25% in the first year following currency crises, which we define as large changes in real value of the currency. This decline is especially large in the first five months, lessens in the second year and disappears entirely by the third year. We identify the effects of currency crises on the demand and supply of credit and find that the decline in the supply of credit is persistent and contributes to about 8% decline in credit for the first two years, while the 35% decline in demand lasts only five months.

To explore the link between household consumption and wealth, we use a new source of harmonized microdata (Luxembourg Wealth Study). We investigate whether there are differences in wealth effects from different types of wealth and across age groups. We consider three countries: Canada, Italy and Finland. We find that the overall wealth effect from housing is stronger than the effect from financial wealth for the three countries in the sample. Additionally, in accordance with the life-cycle theory of consumption, we find the housing wealth effect to be significantly lower for younger households. We also find between-country differences in the wealth effect.

This paper documents significant time-variation in the degree of global price convergence over the last two decades. In particular, there appears to be a general U-shaped pattern with price dispersion first falling and then rising in recent years, a pattern which is remarkably robust across country groupings and commodity groups. This time-variation is difficult to explain in terms of the standard gravity equation variables common in the literature, as these tend not to vary much over time or have not risen in recent years. However, regression analysis indicates that this time-varying pattern coincides well with oil price fluctuations, which are clearly time-varying and have risen substantially since the late 1990s. As a result, this paper offers new evidence on the role of transportation costs in driving international price dispersion.

There is an ongoing debate in the U.S. among policymakers and the courts concerning the practical effects of state investment tax incentives. However, this debate often suffers from a lack of clear information on the extent of such incentives among states and how these incentives have evolved over time. This paper takes a first step toward addressing this shortcoming. Compiling information from all 50 states and the District of Columbia over the past 40 years, we are able to paint a picture of the variation in state investment tax incentives across states and over time. In particular, we document three stylized facts: (1) Over the last 40 years, state investment tax incentives have become increasingly large and increasingly common among states; (2) these incentives, as well as the level of the overall after-tax price of capital, are to a large extent clustered in certain regions of the country; and (3) states that enact investment tax credits tend to do so around the same time as their neighboring states.

Under federal-state law workers who quit a job are not entitled to receive unemployment insurance benefits. To show how the existence of the uninsured affects wages and employment, I extend an equilibrium search model to account for two types of unemployed workers: those who are currently receiving unemployment benefits and for whom an increase in unemployment benefits reduces the incentive to work, and those who are currently not insured. For these, work provides an added value in the form of future eligibility, and an increase in unemployment benefits increases their willingness to work. Incorporating both types into a search model permits me to solve analytically for the endogenous wage dispersion and insurance rate in the economy. I show that, in general equilibrium when firms adjust their job creation margin, the wage dispersion is reduced and the overall effect of benefits can be signed: higher unemployment benefits increase average wages and decrease the vacancy-to-unemployment ratio.

Over the past four decades, state investment tax incentives have proliferated. This emergence of state investment tax credits (ITC) and other investment tax incentives raises two important questions: 1) Are these tax incentives effective in achieving their stated objective, to increase investment within the state?; 2) To the extent these incentives raise investment within the state, how much of this increase is due to investment drawn away from other states? To begin to answer these questions, we construct a detailed panel dataset for 48 states for 20+ years. The dataset contains series on output and capital, their relative prices, and establishment counts. The effects of tax variables on capital formation and establishments are measured by the Jorgensonian user cost of capital that depends in a nonlinear manner on federal and state tax variables. Cross-jurisdictional differences in state investment tax credits and state corporate tax rates entering the user cost, combined with a panel that is long in the time dimension, are key to identifying the effectiveness of state investment ince