Working Papers

Abstract: This note illustrates how agents' beliefs about economic outcomes can dynamically synchronize and de-synchronize to produce business-cycle-like fluctuations in a simple macroeconomic model. I consider a simple macroeconomic model with multiple equilibria, which are different ways that sunspots can forecast future output in a self-fulfilling manner. Agents are assumed to learn to use the sunspot variable through econometric learning. I show that if different agents have different interpretations of the sunspot, this leads to a complex nonlinear dynamic of synchronization of beliefs about the equilibrium being played. Depending on the extent of disagreement on the interpretation of the sunspot, the economy will be more or less volatile. The dispersion of the agents' beliefs is inversely related to volatility, since low dispersion implies that output is very sensitive to extrinsic noise (the sunspot). When disagreement crosses a critical threshold, the sunspot is practically ignored and the output is stable. The equation describing the evolution of the economy can be interpreted as a nonlinear-stochastic version of the Kuramoto model, a prototypical model of synchronization phenomena, and simulations confirm that the qualitative features of the model are in agreement with results from the Kuramoto literature.

Abstract: Accounts of the recent financial crisis claim that the practice of securitizing bank loans had led banks to be less vigilant in their lending habits. Securitization, the argument goes, gives the originators of the loans worse incentives to screen potential borrowers and monitor them as compared to traditional direct lending. But, unless investors are pricing securities irrationally, wouldn't contract theory suggest that banks should always prefer the contract that allows them to commit to higher vigilance?

This paper addresses this problem by introducing a model in which securitization leads to laxer lending standards, even though it is chosen optimally by banks and investors. I construct a model where investment is performed through intermediaries (banks) that choose the volume of lending and a variable level of effort in screening potential borrowers, set the lending standards, and can finance their activities either by eliciting deposits or selling securities. Securitization allows the banks to credibly communicate to investors information about the borrowers, which depositors cannot access.

Securitization has two effects: at fixed leverage, securitization gives banks better incentives to screen borrowers and leads to higher lending standards; however, it also allows banks to choose a higher level of leverage, which in turn degrades the screening effort. In equilibrium, securitization leads to lower vigilance, but is still preferred because it allows the banks to intermediate more funds. Paradoxically, the method of finance that allows banks to better communicate information about borrowers leads in equilibrium to less information being produced.

The model also provides a natural explanation for why securitization is not observed below a strict credit rating cutoff (FICO 620), and why securitization activity can discontinuously stop as a continuous function of overall economic conditions.

Abstract: Suppose that the public believes the predictions of some economists that we have reached the “end of growth”, and that developed economies should expect little to no growth in the future. How would such beliefs affect the public’s expectations about monetary policy? How should monetary policy react to such expectations if the central bank is more optimistic than the public? How does the answer depend on the perception that the public has about the bank’s beliefs?



Abstract: We assess the relationship between skin color and educational attainment for native-born non-Hispanic Black and White men and women, using data from the Coronary Artery Risk Development in Young Adults (CARDIA) Study. CARDIA is a medical cohort study with twenty years of social background data and a continuous measure of skin color, recorded as the percent of light reflected off skin. For Black men and women, we find a one-standard-deviation increase in skin lightness to be associated with a quarter-year increase in educational attainment. For White women, we find an association approximately equal in magnitude to that found for Black respondents, and the pattern of significance across educational transitions suggests that skin color for White women is not simply a proxy for family background. For White men, any relationship between skin color and attainment is not robust and, analyses suggest, might primarily reflect differences in family background. Findings suggest that discrimination on the basis of skin color may be less specific to race than previously thought.

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