Aggregate Economic Conditions Research Articles

Partisan-Biased Households’ Expectations: Aggregate Economic Conditions vs Personal Economic Circumstances

Partisan-Biased Households’ Expectations: Aggregate Economic Conditions vs Personal Economic Circumstances

Regional aggregate indicators under subnational heterogeneity: evidence from the COVID-19 pandemic in Spain

The COVID-19 outbreak forced governments to implement regional measures avoiding the spread of the virus, while evaluating their economic effects. However, official Spanish regional economic information is scarce. We estimate monthly regional aggregated indicators for each Spanish region combining a mixed frequency Dynamic Factor Model with a recursive procedure that identifies the most informative variables capturing economic developments in each region. The set of variables that better describe aggregate economic conditions varies considerably across the regions, which emphasizes the heterogeneity in their productive structures. Our results suggest that the post-pandemic recovery will be uneven across territories, stressing the need to monitor regional economic developments.

Sentiments and real business cycles

We introduce sentiments under incomplete information in an otherwise standard real business cycle model. Individual firms receive signals about their idiosyncratic demand shocks, which are confounded by sentiments. Sentiments coordinate the optimal decisions of individual firms through their extraction of aggregate economic conditions from the signals. We show that there exists a sentiment-driven rational expectations equilibrium, in addition to a fundamental equilibrium. Optimism stimulates the aggregate economy, leading to positive comovements between output, consumption, investment, and hours worked. We calibrate a full-fledged dynamic stochastic general equilibrium model based on U.S. aggregate data and find that sentiment shocks substantially amplify aggregate fluctuations and contribute to real business cycles.

The value of social status

We quantify the value of social status using secondary market prices for Delaware license plates. Delaware plates are numbered sequentially, are private property, and can be legally bequeathed or traded. In Delaware, they are a valuable source of social status. Market prices suggest a preference for lower plate numbers and there are extreme price jumps that are consistent with exclusive low-digit clubs. The aggregate value of this market indicates that people purchase status as a significant portion of their consumption bundle. Finally, social status as an asset appears to be uncorrelated with aggregate economic and market conditions.

Collateralization and asset price bubbles when investors disagree about risk

Abstract Survey respondents disagree strongly about the dispersion of future returns and, increasingly, macroeconomic uncertainty. Such disagreement about risk may raise asset prices when collateralized debt products allow investors to realize perceived gains from trade. Investors who expect low volatility in collateral cash-flow appreciate senior debt as riskless. Those who expect high volatility, in contrast, value the upside potential in junior debt or equity claims. We show how such self-selection may have had a sizeable effect on the prices of RMBS and CDOs before the crisis, as investors disagreed about the volatility of aggregate economic conditions and their importance for default rates in collateral pools.

Developments in the Credit Score Distribution over 2020

<ns3:p>The distribution of household credit risk can vary with aggregate economic and credit conditions. For example, the share of subprime-scored borrowers declined at a relatively steady pace during the economic recovery from the Global Financial Crisis. Although the COVID-19 pandemic interrupted the economic conditions that supported this trend, the pace of decline accelerated following the pandemic’s onset in March 2020. The analysis that follows suggests that this acceleration was largely driven by the Coronavirus Aid, Relief, and Economic Security Act’s (CARES Act) forbearance provisions.</ns3:p>

Sentiments and Real Business Cycles

We introduce sentiments under incomplete information into an otherwise standard real business cycle model. Individual firms receive signals about their idiosyncratic demand shocks which are confounded by sentiments. Sentiments coordinate optimal decisions of individuals through their extraction of the aggregate economic conditions from the signals. We show that there exists a sentiment-driven rational expectations equilibrium in addition to a fundamental equilibrium. Optimistic sentiments boost the aggregate economy, leading to positive comovements among output, consumption, investment, and hours worked. We calibrate a full-blown dynamic stochastic general equilibrium model based on U.S. aggregate data and find that sentiment shocks substantially amplify the aggregate fluctuations.

Age of Marriage, Weather Shocks, and the Direction of Marriage Payments

We study how aggregate economic conditions affect the timing of marriage, and particularly child marriage, in Sub‐Saharan Africa and in India. In both regions, substantial monetary or in‐kind transfers occur with marriage: bride price across Sub‐Saharan Africa and dowry in India. In a simple equilibrium model of the marriage market in which parents choose when their children marry, income shocks affect the age of marriage because marriage payments are a source of consumption smoothing, particularly for a woman's family. As predicted by our model, we show that droughts, which reduce annual crop yields by 10 to 15% and aggregate income by 4 to 5%, have opposite effects on the marriage behavior of a sample of 400,000 women in the two regions: in Sub‐Saharan Africa they increase the annual hazard into child marriage by 3%, while in India droughts reduce such a hazard by 4%. Changes in the age of marriage due to droughts are associated with changes in fertility, especially in Sub‐Saharan Africa, and with declines in observed marriage payments. Our results indicate that the age of marriage responds to short‐term changes in aggregate economic conditions and that marriage payments determine the sign of this response. This suggests that, in order to design successful policies to combat child marriage and improve investments in daughters' human capital, it is crucial to understand the economic role of marriage market institutions.

A Machine Learning Analysis of Seasonal and Cyclical Sales in Weekly Scanner Data

This paper analyzes weekly scanner data collected for 108 groups at the county level between 2006 and 2014. The data display multi-dimensional weekly seasonal effects that are not exactly periodic but are cross-sectionally dependent. Existing univariate procedures are imperfect and yield adjusted series that continue to display strong seasonality upon aggregation. We suggest augmenting the univariate adjustments with a panel data step that pools information across counties. Machine learning tools are then used to remove the within-year seasonal variations. A demand analysis of the adjusted budget shares finds three factors: one that is trending, and two cyclical ones that are well aligned with the level and change in consumer confidence. The effects of the Great Recession vary across locations and product groups, with consumers substituting towards home cooking away from non-essential goods. The adjusted data also reveal changes in spending to unanticipated shocks at the local level. The data are thus informative about both local and aggregate economic conditions once the seasonal effects are removed. The two-step methodology can be adapted to remove other types of nuisance variations provided that these variations are cross-sectionally dependent. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Amendment Fee as Rent Extraction: Transmission of Covenant Violations to Real Economy

State-contingent control rights allow creditors to intervene after borrowers’ negative performance. Identifying the value of ex-post creditor intervention remains an empirical challenge due to the unknown counterfactual outcomes and the lack of randomly assigned treatment. In this paper, we investigate this question through examining an important form of renegotiation outcomes following covenant violations– the payment of amendment fee, which has been largely overlooked in the previous literature. Exploiting a hand-collected novel data on covenant amendments in corporate loan contracts, we first document the prevalence of nontrivial amendment fee payment made by borrowers in violation of covenants in exchange for waivers of covenant violations. We find that the amendment fee payment following covenant violation exhibits clear exclusiveness with explicit creditor intervention– only 6.9% covenant violations are followed by both amendment fee payments and creditor intervention on firm policy. This exclusiveness of amendment fee payment and creditor intervention suggests a potential time consistency issue in corporate debt contracting– creditors cannot commit to intervening after borrowers’ negative performance once been offered a side-payment for not doing so. We then examine factors that may affect the occurrence and the size of amendment fee payment following covenant violations. These factors include borrower side factors, creditor side factors and aggregate economic conditions. Eventually, we exploit variations in creditors’ share in borrowers’ outstanding liability as a measure of creditors’ skin-in-the-game to extract exogenous variations in the treatment assignment following covenant violations– whether or not interventions are undertaken. Using this instrumental variable, we identify a significantly positive real value added by creditors taking explicit actions intervening the operation of borrowers in covenant violations.

Economic hardship and suicides

PurposeThe purpose of this paper is to investigate the determinants of aggregate suicides in 15 OECD countries during 1960-2010 using an economic model where changes in the welfare of consumers play the critical role for determining the number of suicides.Design/methodology/approachThe hardship index based on economic theory is developed. In estimating the model, the authors apply the Pesaran et al. (2001) approach that allows the simultaneous estimation of the long-run and short-run parameters. To make sure that the authors’ findings are not specific to their method, the authors also use the generalized method of moments estimation in the panel set-up.FindingsThe authors found a relatively strong positive relationship between macroeconomic conditions, especially changes in aggregate consumption, and suicides. The relationship appears to be robust also in terms of the various control variables cited in the literature. The hardship index which is based on the habit persistence model of consumption predicts and explains the long-term behavior of suicides in most of the countries. Thus, the hardship index is a better economic explanatory variable than the unemployment rate or other proxies describing economic conditions.Originality/valueMarrying the economic theory and econometric methods produces a reasonable empirical model to explain the connection between aggregate economic conditions and suicides.

The Effects of Aggregate and Gender-Specific Labor Demand Shocks on Child Health

We estimate the relationship between local labor market opportunities and child health using state unemployment rates and demand-induced changes in mothers' and fathers' employment opportunities. In contrast with studies of adult health, we find little evidence that aggregate economic conditions are correlated contemporaneously with children's health. However, we find important patterns by gender. In particular, improvements in women's employment opportunities are consistently associated with worse child health, while better labor market conditions for men have positive effects. These patterns suggest that both family income and maternal time are important inputs to child health. [ABSTRACT FROM AUTHOR]

Age of Marriage, Weather Shocks, and the Direction of Marriage Payments

This paper studies how aggregate economic conditions affect marriage markets in developing countries where marriage is regulated by traditional customary norms. We examine how local economic shocks influence the timing of marriage, and particularly child marriage, in Sub-Saharan Africa and in India, where substantial monetary or in-kind transfers occur with marriage: bride price across Sub-Saharan Africa and dowry in India. In a simple equilibrium model of the marriage market in which parents choose when their children marry, income shocks affect the age of marriage because marriage payments are a source of consumption smoothing, particularly for a woman's family. As predicted by our model, we show that droughts, which reduce annual crop yields by 10 to 15%, have opposite effects on the marriage behavior of a sample of 400,000 women in the two regions: in Sub-Saharan Africa, they increase the annual hazard into child marriage by 3%, while in India droughts reduce such a hazard by 4%. Changes in the age of marriage due to droughts are associated with changes in fertility, especially in Sub-Saharan Africa, and with declines in observed marriage payments. Our results indicate that the age of marriage responds to short-term changes in aggregate economic conditions and that traditional norms determine this response. This suggests that, in order to design successful policies to combat child marriage and improve investments in daughters' human capital, it is crucial to understand the economic role of traditional cultural norms.

Time-varying risk, mispricing attributes, and the accrual premium

We examine the mispricing attributes of the accrual effect in the presence of time-varying common risk factors, which are not independent of aggregate economic conditions. We find that the persistence of unconditional abnormal returns for accrual-based portfolios is not independent of firm-level characteristics such as size and book-to-market ratio (BE/ME). However, after adjusting for time-varying risk measures, the premiums associated with accruals and firm fundamentals are distinct from one another. The empirical evidence shows that a long-short hedge portfolio based on accruals and BE/ME generates significant abnormal returns even in the presence of time-varying risk. Taken together, our time-series and cross-sectional evidence strengthens the assertion that the well-known accrual effect is significantly associated with high-BE/ME value firms that tend to be low-investment firms. The fact that time-varying risk adds to the description of average returns of accrual-sorted portfolios and corroborates the presence of the accrual premium contributes significantly to the literature.

Optimal Disability Insurance and Unemployment Insurance with Cyclical Fluctuations

This paper studies the optimal joint design of disability insurance and unemployment insurance in an environment with moral hazard, when an individual’s health status is private information, taking into account cyclical fluctuations. I first show how disability benefits and unemployment benefits vary with aggregate economic conditions in an optimal contract that resolves this information problem. I then consider a calibrated version of the model and study the quantitative implications of changing from the current system to the optimal one. Last, in a special case, I demonstrate that the optimal joint insurance system can be implemented using a relatively simple model: by allowing workers to save or borrow using a bond and by providing flow payments and lump-sum transfers/payments, where the interest rates and the amounts paid/transferred depend on the employment or health status of the agent and the state of the economy. In the optimal system, disability benefits are designed such that the system punishes workers who stay unemployed for a long time, reducing the unemployment rate by roughly 40 percent and incurring substantial cost savings from resolving incentive problems. Using the model to implement the optimal system, I am able to analyze in details the driving forces behind the differences between the current system and the optimal system Under the optimal joint design of these insurance programs, disability insurance serves as an additional tool for the government to provide incentives for the job search. Reductions in unemployment rates and substantial cost savings can be achieved if the optimal system is adopted.

Economic Distress and the Maturity of Debt

This paper explores the relationship between aggregate economic distress and the maturity of debt. I argue that lenders would prefer shorter maturity of debt during periods of economic distress. I develop two lines of argument based on debt contracting to support this prediction, and the rationales rely heavily on the role that default risk and screening plays in lending transactions. In the first line of argument, a lender chooses the debt contract tenor that maximizes her expected profits. In doing so, she weighs the role of capital rotation with the expected margin on each transaction and the probability that the borrower defaults. The probability of the borrower defaulting depends on the aggregate economic conditions. As a result, a shock that reduces economic stability leads the lender to prefer shorter maturities on new debt contracts. The second argument builds on the concept of the lender’s rollover option, which is her opportunity to relend her loanable funds after collection. During times of economic distress this option is more valuable to the lender, who increases her number of options by shortening the maturity of new contracts. Finally, I test these predictions empirically using over twenty years of U.S. bank and public debt issues to show a significant negative relationship between aggregate economic riskiness and maturity of new debt contracts. Moreover, shortening maturities result in changes in the temporal financial structure of public nonfinancial corporations.

Exchange Rate Fluctuations and the Margins of Exports

This paper examines the relationship between exchange rate fluctuations and New Zealand export performance. To isolate the impact of the exchange rate, as opposed to contemporaneous (and related) fluctuations in New Zealand's economic performance or overseas market characteristics, we focus on bilateral export relationships at the firm level and control for both time-invariant country characteristics and changes in aggregate economic conditions. We examine two key margins of export adjustment – the probability of exporting (the extensive margin) and the average value of exports per firm (the intensive margin) – and distinguish between impacts on market incumbents and new or potential entrants. Finally, we specifically take account of the potential for interaction between the level and volatility of the exchange rate to affect exporting, as implied by theories of exchange rate hysteresis.

An Anatomy of Industry Merger Waves

We propose a novel Markov regime-switching Poisson regression model with time-varying transition distributions to test existing theories on determinants of wave-like patterns in same-industry merger and acquisitions (M&As). We show that the dynamics and persistence of merger waves change substantially in the cross section of deals flow. Valuation ratios significantly drive transitions towards periods of abnormally high merger activity for most industries. Except few nuances, the empirical analysis demonstrates that while industry-specific economic shocks do not sensibly determine waves in market transactions, deteriorating aggregate economic conditions are expected to be associated with declining M&A activity across industries.

Earnings Volatility Trends and the Great Moderation: A Multifactor Residual Approach

To explore trends in idiosyncratic income volatility, this paper employs a multifactor residual model to extract macroeconomic factors from individual changes in wages and total family income. The data used in this analysis is a subset of the persistently employed from the Panel Survey of Income Dynamics (PSID). Using this subset expands the income volatility literature by bridging an existing gap between studies using the PSID and others using a continuous work history sample. Improved aggregate economic conditions can explain much of the reduction in unconditional income volatility that took place during the Great Moderation, lasting from the mid-1980s into the 2000s. However, macro factors appear to be making larger contributions to individual and household income volatility following the recent rise in GDP volatility. In contrast, idiosyncratic volatility of income, that which remains after accounting for macroeconomic factors, has generally remained consistent. The stability of idiosyncratic income volatility suggests employment changes in the recent crisis were cyclical rather than structural.

Strategic and Financial Bidders in Takeover Auctions

ABSTRACTUsing data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature, poorly performing companies. We also find that (i) valuations of different strategic bidders are more dispersed and (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.