http://www.minneapolisfed.org/publications_papers/qr/ This publication has become an occasional review, which means we will likely be publishing only twice a year. Our primary purpose, however, has not changed: to present economic research aimed at improving policymaking by the Federal Reserve System and other government authorities. We have not changed the name, only the frequency. It will remain the <i>Quarterly Review</i>. While keeping the name might seem odd, we are reluctant to give up the name recognition that we have acquired over the past 25 years. Retaining our name also allows our research to be cited as it has in the past. <br><br> <center><em>For best results, use Adobe Acrobat Reader Version 4.0 or newer to view PDF files.</em></center> 2012-10-22T00:00:00-06:00 http://www.minneapolisfed.org/disclaimer.cfm en Federal Reserve Bank of Minneapolis http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4980 2012-10-22T00:00:00-06:00 Macroeconomics has made tremendous advances following the introduction of labor supply into the field. Today, it is widely acknowledged that labor supply matters for many key economic issues, particularly for business cycles and tax policy analysis. However, the extent to which labor supply matters for such questions depends on the aggregate labor supply elasticity—that is, the sensitivity of the time allocation between market and nonmarket activities. For several decades, the magnitude of the aggregate labor supply elasticity has been the subject of much debate. In this article, we review the debate and conclude that the elasticity of labor supply of the aggregate household is much higher than the elasticity of the identical households being aggregated. The aggregate household utility function differs from the individuals’ utility functions for the same reason that the aggregate production function differs from the individual firms’ production functions being aggregated. The differences in individual and aggregate supply elasticities are what aggregation theory predicts. Aggregate Labor Supply 2012-10-22T00:00:00-06:00 Edward C. Prescott Edward C. Prescott 2012-10 Quarterly Review October 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4820 2012-02-13T00:00:00-06:00 Many researchers, policymakers, and pundits have argued that the housing crisis may harm labor markets because homeowners who owe more than their homes are worth are less likely to move to places that have productive job opportunities. I show that, in the available data, negative equity <i>does not</i> make homeowners less mobile. In fact, homeowners who have negative equity are slightly <i>more</i> likely to move than homeowners who have positive equity. Ferreira, Gyourko, and Tracy’s (2010) contrasting result that negative equity reduces mobility arises because they systematically drop some negative-equity homeowners’ moves from the data Negative Equity Does Not Reduce Homeowners’ Mobility 2012-02-13T00:00:00-06:00 Sam Schulhofer-Wohl Sam Schulhofer-Wohl 2012-02 Quarterly Review February 2012 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4628 2011-03-09T00:00:00-06:00 This article is largely a description of inequality of earnings, income, and wealth in the United States in 2007 as measured by the Survey of Consumer Finances (SCF). We look at inequality in relation to various characteristics such as age, education, employment status, marital status, and whether households are late payers or include bankruptcy filers. We also look at economic mobility. We compare these variables in 2007 with their values in our earlier study in 1998. Facts on the Distributions of Earnings, Income, and Wealth in the United States: 2007 Update 2011-03-09T00:00:00-06:00 Javier Díaz-Giménez Javier Díaz-Giménez José-Víctor Ríos-Rull José-Víctor Ríos-Rull Andrew Glover Andrew Glover 2011-03 Quarterly Review February 2011 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4510 2010-07-14T00:00:00-06:00 I present a search-based model in which money coexists with equity shares on a risky aggregate endowment. Agents can use equity as a means of payment, so shocks to equity prices translate into aggregate liquidity shocks that disrupt the mechanism of exchange. I characterize a family of optimal monetary policies, and find that the resulting equity prices are independent of monetary considerations. I also study monetary policies that target a constant, but nonzero, nominal interest rate, and find that to the extent that a financial asset is valued as a means to facilitate transactions, the asset’s real rate of return will include a liquidity return that depends on monetary considerations. Through this liquidity channel, persistent deviations from an optimal monetary policy can cause the real prices of assets that can be used to relax trading constraints to exhibit persistent deviations from their fundamental values. <p> * Originally presented at the Thirty-fourth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis and published as part of their conference proceedings (Federal Reserve Bank of St. Louis <i>Review</i>, July/August 2010, <i>92</i> (4), pp. 303-10). This revised version was concomitantly published in the <i>Quarterly Review</i>. Asset Prices, Liquidity, and Monetary Policy in the Search Theory of Money 2010-07-14T00:00:00-06:00 Ricardo Lagos Ricardo Lagos 2010-07 Quarterly Review July 2010 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4509 2010-07-14T00:00:00-06:00 Applied macroeconomists interested in identifying the sources of business cycle fluctuations typically have no more than 40 or 50 years of data at a quarterly frequency. With sample sizes that small, identification may not be possible even with correctly specified representations of the data. In this article, I investigate whether small samples are indeed a problem for some commonly used statistical representations. I compare three—a vector autoregressive moving average (VARMA), an unrestricted state space, and a restricted state space—that are all consistent with the same prototype business cycle model. The statistical representations that I consider differ in the amount of a priori theory that is imposed, but all are correctly specified. I find that the identifying assumptions of VARMAs and unrestricted state space representations are too minimal: the range of estimates for statistics of interest for business cycle researchers is so large as to be uninformative. Measurement with Minimal Theory 2010-07-14T00:00:00-06:00 Ellen R. McGrattan Ellen R. McGrattan 2010-07 Quarterly Review July 2010 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3283 2008-06-18T00:00:00-06:00 This article analyzes Keynes’s “Economic Possibilities for our Grandchildren”—an essay presenting Keynes’s views about economic growth into the 21st century—from the perspective of modern growth theory. I find that the implicit theoretical framework used by Keynes to form his expectations about the 21st-century world economy is remarkably close to modern growth models, featuring a stable steady-state growth path driven by technological progress. On the other hand, Keynes’s forecast of employment in the 21st century is far off the mark, reflecting a mistaken view that the income elasticity of leisure is much higher than that of consumption. Back to the Future with Keynes 2008-06-18T00:00:00-06:00 Lee E. Ohanian Lee E. Ohanian 2008-06 Quarterly Review July 2008 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3284 2008-06-18T00:00:00-06:00 The key question asked by standard monetary models used for policy analysis is, How do changes in short-term interest rates affect the economy? All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates. We argue that the data on exchange rates imply nearly the opposite: the observation that exchange rates are approximately random walks implies that fluctuations in interest rates are associated with nearly one-for-one changes in conditional variances and nearly no changes in conditional means. In this sense, standard monetary models capture essentially none of what is going on in the data. We thus argue that almost everything we say about monetary policy using these models is wrong. If Exchange Rates Are Random Walks, Then Almost Everything We Say About Monetary Policy Is Wrong 2008-06-18T00:00:00-06:00 Patrick J. Kehoe Patrick J. Kehoe Andrew Atkeson Andrew Atkeson Fernando Alvarez Fernando Alvarez 2008-06 Quarterly Review July 2008 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1108 2007-11-01T00:00:00-06:00 This article is a primer on the great depressions methodology developed by Cole and Ohanian (1999, 2007) and Kehoe and Prescott (2002, 2007). We use growth accounting and simple dynamic general equilibrium models to study the depression that occurred in Finland in the early 1990s. We find that the sharp drop in real GDP over the period 1990–93 was driven by a combination of a drop in total factor productivity (TFP) during 1990–92 and of increases in taxes on labor and consumption and increases in government consumption during 1989–94, which drove down hours worked in Finland. We attempt to endogenize the drop in TFP in variants of the model with an investment sector and with terms-of-trade shocks but are unsuccessful. Modeling Great Depressions: The Depression in Finland in the 1990s 2007-11-01T00:00:00-06:00 Timothy J. Kehoe Timothy J. Kehoe Kim J. Ruhl Kim J. Ruhl Juan Carlos Conesa Juan Carlos Conesa 2007-11 Quarterly Review November 2007 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1107 2007-11-01T00:00:00-06:00 People are enjoying longer retirement periods, and population growth is slowing and, in some countries, falling. In this article, we determine the implications of these demographic changes for the needed amount of government debt. If tax rates and the transfer share of gross national income (GNI) are both high, the needed debt is near zero. With such a system, however, huge deadweight losses are incurred as a result of the high tax rate on labor income. With a savings system, a large government debt to annual GNI ratio is needed. In a country with early retirement and no population growth, the needed government debt is as large as five times GNI, and welfare is as much as 24 percent higher in terms of lifetime consumption equivalents in the savings system relative to the tax-and-transfer system. On the Needed Quantity of Government Debt 2007-11-01T00:00:00-06:00 Edward C. Prescott Edward C. Prescott Kathryn Birkeland Kathryn Birkeland 2007-11 Quarterly Review November 2007 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1066 2006-09-01T00:00:00-06:00 This article describes a newly constructed data set of all U.S. state banks from 1782 to 1861. It contains the names and locations of all banks and branches that went into business and an estimate of when each operated. The compilation is based on reported balance sheets, listings in banknote reporters, and secondary sources. Based on these data, the article presents a count of the number of banks and branches in business by state. I argue that my series are superior to previously existing ones for reasons of consistency, accuracy, and timing. The article contains examples to support this argument. Early State Banks in the United States: How Many Were There and Where Did They Exist? 2006-09-01T00:00:00-06:00 Warren E. Weber Warren E. Weber 2006-09 Quarterly Review September 2006 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1065 2006-09-01T00:00:00-06:00 Latin American countries are the only Western countries that are poor and that aren’t gaining ground on the United States. This article evaluates why Latin America has not replicated Western economic success. We find that this failure is primarily due to total factor productivity (TFP) differences. Latin America’s TFP gap is not plausibly accounted for by human capital differences, but rather reflects inefficient production. We argue that competitive barriers are a promising channel for understanding low Latin TFP. We document that Latin America has many more international and domestic competitive barriers than do Western and successful East Asian countries. We also document a number of microeconomic cases in Latin America in which large reductions in competitive barriers increase productivity to Western levels. <br><br> Reprinted from <i>Journal of Monetary Economics</i>, Vol. 52, No. 1, Harold L. Cole, Lee E. Ohanian, Alvaro Riascos, and James A. Schmitz Jr., “Latin America in the Rearview Mirror,” 69–107, copyright 2005, with permission from Elsevier. <br><br>This paper is available online only from Elsevier. http://www.sciencedirect.com/science/journal/03043932. To request a paper copy of the Quarterly Review issue in which this article appears, send your mailing address to mea@res.mpls.frb.fed.us. Latin America in the Rearview Mirror 2006-09-01T00:00:00-06:00 James A. Schmitz, Jr. James A. Schmitz, Jr. Lee E. Ohanian Lee E. Ohanian Alvaro Riascos Alvaro Riascos Harold L. Cole Harold L. Cole 2006-09 Quarterly Review September 2006 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1043 2005-10-01T00:00:00-06:00 This article is a summary of the papers presented at the Models of Monetary Economies II conference, hosted in May 2004 by the Federal Reserve Bank of Minneapolis and the University of Minnesota. It focuses on several themes in the papers, including the microfoundations of monetary theory, optimal monetary policy, and the role of banking, and also overviews how the contributions fit together. Finally, the article comments on monetary theory in general—how it has evolved and where it may be headed. <br><br> Reprinted, with permission, from the <i>International Economic Review</i> (May 2005, vol. 46, no. 2, pp. 305–16): “Introduction to ‘Models of Monetary Economies II: The Next Generation’” by Randall Wright. © 2005 by Blackwell Publishing, www.blackwell-synergy.com. <br><br>This paper is available online only from Blackwell Publishing. http://www.blackwell-synergy.com/toc/iere/46/2. To request a paper copy of the <i>Quarterly Review</i> issue in which this article appears, send your mailing address to mea@res.mpls.frb.fed.us. Introduction to “Models of Monetary Economies II: The Next Generation” 2005-10-01T00:00:00-06:00 Randall Wright Randall Wright 2005-10 Quarterly Review October 2005 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1044 2005-10-01T00:00:00-06:00 In this article, I examine the current state of knowledge about optimal monetary policy. I distinguish between two literatures, basic and applied. The basic literature is explicit about the frictions that generate a positive value for money and make it socially beneficial. The applied literature is not. I describe the recent lessons about monetary policy that we have learned from each literature and discuss how the two distinct approaches may be usefully combined. <br><br> Reprinted, with permission, from the <i>International Economic Review</i> (May 2005, vol. 46, no. 2, pp. 715–29): “Optimal Monetary Policy: What We Know and What We Don’t Know” by Narayana R. Kocherlakota. © 2005 by Blackwell Publishing, www.blackwell-synergy.com. <br><br>This paper is available online only from Blackwell Publishing. http://www.blackwell-synergy.com/toc/iere/46/2. To request a paper copy of the <i>Quarterly Review</i> issue in which this article appears, send your mailing address to mea@res.mpls.frb.fed.us. Optimal Monetary Policy: What We Know and What We Don’t Know 2005-10-01T00:00:00-06:00 Narayana Kocherlakota Narayana Kocherlakota 2005-10 Quarterly Review October 2005 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1025 2004-12-01T00:00:00-06:00 We deduce properties of optimal monetary policies based on modern theory and standard empirical findings. In light of this analysis, we examine FOMC policy procedures and conclude that they put too much emphasis on short-term economic stabilization and too little emphasis on longer-term price stability. We propose a form of inflation targeting to address this problem. Avoiding Significant Monetary Policy Mistakes 2004-12-01T00:00:00-06:00 Gary H. Stern Gary H. Stern Preston J. Miller Preston J. Miller 2004-12 Quarterly Review December 2004 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1026 2004-12-01T00:00:00-06:00 The goal of this article is to summarize the main trends in the earnings and employment distribution in the United States using data drawn from the March Current Population Surveys covering the period between 1961 and 2002. We show that inequality started to increase for men in 1974, and for women in 1981, and for both genders inequality continued to increase throughout 2002. During the same period the wage premium of college graduates over non-college workers increased substantially and the ratio of college educated workers to non-college workers also increased. These facts support the popular <I>skill-biased technical change (SBTC)</I> hypothesis. However, other facts raise some doubts about the SBTC hypothesis. First, the college wage premium is mainly due to workers with a postgraduate degree, but their increase in the labor force started much earlier than the spectacular rise in their wages. Also there has been no marked change in recent decades in the occupational distribution of workers. However, the earning premium of professional over blue collar workers followed the same trend as the college earning premium. And finally, the most dramatic changes in the labor market took place among women. The Evolution of U.S. Earnings Inequality: 1961–2002 2004-12-01T00:00:00-06:00 Zvi Eckstein Zvi Eckstein Éva Nagypál Éva Nagypál 2004-12 Quarterly Review December 2004 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=906 2004-07-01T00:00:00-06:00 This article describes changes in the number of average weekly hours of market work per person in the United States since World War II. Overall, this number has been roughly constant; for various groups, however, it has shifted dramatically—from males to females, from older people to younger people, and from single- to married-person households. The article provides a detailed look at how the lifetime pattern of work hours has changed since 1950 for different demographic groups. This article also documents several factors that lead to the reallocation of hours worked across groups: increases in relative wages of females to males; technological innovations that shift female labor from the home to the market; increases in Social Security benefits to retired workers; and changes in family structure. The data presented are based on those collected by the U.S. Bureau of the Census during the 1950–2000 decennial censuses. Changes in Hours Worked, 1950–2000 2004-07-01T00:00:00-06:00 Ellen R. McGrattan Ellen R. McGrattan Richard Rogerson Richard Rogerson 2004-07 Quarterly Review July 2004 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=905 2004-07-01T00:00:00-06:00 Americans now work 50 percent more than do the Germans, French, and Italians. This was not the case in the early 1970s, when the Western Europeans worked more than Americans. This article examines the role of taxes in accounting for the differences in labor supply across time and across countries; in particular, the effective marginal tax rate on labor income. The population of countries considered is the G-7 countries, which are major advanced industrial countries. The surprising finding is that this marginal tax rate accounts for the predominance of differences at points in time and the large change in relative labor supply over time. Why Do Americans Work So Much More Than Europeans? 2004-07-01T00:00:00-06:00 Edward C. Prescott Edward C. Prescott 2004-07 Quarterly Review July 2004 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=964 2003-12-01T00:00:00-06:00 This study describes how the U.S. government measures real consumption growth and how it tries to take account of a complicating factor: that the goods and services offered to consumers change over time; new products are introduced and old products are improved. The 1996 Boskin Commission critique of this government methodology is described, along with the changes made in response to that critique. Also described is recent research related to how real consumption growth should be measured in the presence of new and better products. Measuring Consumption Growth: The Impact of New and Better Products 2003-12-01T00:00:00-06:00 Peter J. Klenow Peter J. Klenow 2003-12 Quarterly Review Winter 2003 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=963 2003-12-01T00:00:00-06:00 Models with sticky prices predict that monetary policy changes will affect relative prices and relative quantities in the short run because some prices are more flexible than others. In U.S. micro data, the degree of price stickiness differs dramatically across consumption categories. This study exploits that diversity to ask whether popular measures of monetary shocks (for example, innovations in the federal funds rate) have the predicted effects. The study finds that they do not. Short-run responses of relative prices have the wrong sign. And monetary policy shocks seem to have persistent effects on both relative prices and relative quantities, rather than the transitory effects one would expect from differences in price flexibility across goods. The findings reject the joint hypothesis that the sticky-price models typically employed in policy analysis capture the U.S. economy and that commonly used monetary policy shocks represent exogenous shifts. Sticky Prices and Monetary Policy Shocks 2003-12-01T00:00:00-06:00 Mark Bils Mark Bils Oleksiy Kryvtsov Oleksiy Kryvtsov Peter J. Klenow Peter J. Klenow 2003-12 Quarterly Review Winter 2003 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=893 2003-07-01T00:00:00-06:00 This study analyzes two monetary economies, a cash-credit good model and a limited-participation model. In these models, monetary policy is made by a benevolent policymaker who cannot commit to future policies. The study defines and analyzes Markov equilibrium in these economies and shows that there is no time-inconsistency problem for a wide range of parameter values. The study originally appeared in a book, <I>Advances in Economics and Econometrics: Theory and Applications</I> © 2003 by Cambridge University Press. How Severe is the Time-Inconsistency Problem in Monetary Policy? 2003-07-01T00:00:00-06:00 V. V. Chari V. V. Chari Lawrence J. Christiano Lawrence J. Christiano Stefania Albanesi Stefania Albanesi 2003-07 Quarterly Review Summer 2003 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=892 2003-07-01T00:00:00-06:00 This article investigates U.S. interbank relationships before the Civil War using previously unknown data for Pennsylvania banks from 1851 to 1859 that disaggregate the amounts due from other banks by debtor bank. It finds that country banks, banks outside of Philadelphia and Pittsburgh, dealt almost exclusively with financial center banks. Most had a large, highly stable relationship with a single correspondent bank. The location of a country bank’s correspondent was consistent with trade patterns, particularly railroad and canal linkages. Philadelphia banks, in contrast, did not establish correspondent-type banking relationships. Further, Philadelphia’s correspondent banking market was not highly concentrated, and entry was easy. This study originally appeared in the <I>Journal of Monetary Economics</I> © 2003 by Elsevier Science B.V. Interbank Payments Relationships in the Antebellum United States: Evidence From Pennsylvania 2003-07-01T00:00:00-06:00 Warren E. Weber Warren E. Weber 2003-07 Quarterly Review Summer 2003 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=968 2003-04-01T00:00:00-06:00 Economists have offered many theories for the U.S. Great Depression, but no consensus has formed on the main forces behind it. Here we describe and demonstrate a simple methodology for determining which theories are the most promising. We show that a large class of models, including models with various frictions, are equivalent to a prototype growth model with time-varying efficiency, labor, and investment wedges that, at least on face value, look like time-varying productivity, labor taxes, and investment taxes. We use U.S. data to measure these wedges, feed them back into the prototype growth model, and assess the fraction of the fluctuations in 1929–39 that they account for. We find that the efficiency and labor wedges account for essentially all of the decline and subsequent recovery. Investment wedges play, at best, a minor role. This article originally appeared in the <I>American Economic Review</I>. © American Economic Association. <br> <br> RELATED PAPER: Staff Report 328 <i><a href='http://www.minneapolisfed.org/research/sr/sr328.pdf'>Business Cycle Accounting</a></i> Accounting for the Great Depression 2003-04-01T00:00:00-06:00 Ellen R. McGrattan Ellen R. McGrattan Patrick J. Kehoe Patrick J. Kehoe V. V. Chari V. V. Chari 2003-04 Quarterly Review Spring 2003 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=969 2003-04-01T00:00:00-06:00 Does the extent of competitive pressure industries face influence their productivity? We study a natural experiment conducted in the iron ore industry as a result of the collapse in world steel production in the early 1980s. For iron ore producers, whose only market is the steel industry, this collapse was an exogenous shock. The drop in steel production differed dramatically by region: it fell by about a third in the Atlantic Basin but only very little in the Pacific Basin. Given that the cost of transporting iron ore is very high relative to its mine value, Atlantic iron ore producers faced a much greater increase in competitive pressure than did Pacific iron ore producers. In response to the crisis, most Atlantic iron ore producers doubled their labor productivity; Pacific iron ore producers experienced few productivity gains. This article originally appeared in the <I>American Economic Review</I>. © American Economic Association. Competitive Pressure and Labor Productivity: World Iron Ore Markets in the 1980s 2003-04-01T00:00:00-06:00 James A. Schmitz, Jr. James A. Schmitz, Jr. Jose E. Galdon-Sanchez Jose E. Galdon-Sanchez 2003-04 Quarterly Review Spring 2003 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=883 2002-12-01T00:00:00-06:00 Both Chile and Mexico experienced severe economic crises in the early 1980s, yet Chile recovered much faster than Mexico. This study analyzes four possible explanations for this difference and rules out three, explanations based on money supply expansion, real wage and real exchange rate declines, and foreign debt overhangs. The fourth explanation is based on government policy reforms in the two countries. Using growth accounting and a calibrated growth model, the study determines that the only policy reforms promising as explanations are those that primarily affect total factor productivity, or how inputs are used, not the inputs themselves. Interpreting historical evidence with economic theory, the study concludes that the crucial difference between Chile and Mexico in the 1980s and 1990s is earlier government policy reforms in Chile, particularly reforms in policies affecting the banking system and bankruptcy procedures. Decades Lost and Found: Mexico and Chile Since 1980 2002-12-01T00:00:00-06:00 Patrick J. Kehoe Patrick J. Kehoe Timothy J. Kehoe Timothy J. Kehoe Raimundo Soto Raimundo Soto Raphael Bergoeing Raphael Bergoeing 2002-12 Quarterly Review Winter 2002 http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1019 2002-12-01T00:00:00-06:00 In This Issue 2002-12-01T00:00:00-06:00 Arthur J. Rolnick Arthur J. Rolnick 2002-12 Quarterly Review Winter 2002