Reduced Form Estimates Research Articles

Is the slope of the euro area Phillips curve steeper than it seems? Heterogeneity and identification

Heterogeneity in Phillips Curve slopes among members of a monetary union can lead to biased to estimates of the union-wide ‘average’ slope in reduced form regressions. The intuition is that in a monetary union with heterogeneous regional Phillips curve slopes, the central bank, aiming at stabilizing demand shocks, will react stronger to shocks in regions with steep slopes compared to shocks in regions with flat slopes. Using a simple New-Keynesian model of a monetary union we show that when failing to account for this heterogeneity in the estimation, reduced form estimates of the union-wide ‘average’ slope suffer from a sizable bias. Empirically, we show that a similar bias exists in EMU data and slope estimates that adequately control for slope heterogeneity are steeper than those from reduced form OLS regressions.

Macro-financial imbalances and cyclical systemic risk dynamics: understanding the factors driving the financial cycle in the presence of non-linearities

Abstract This paper develops a multivariate filter based on an unobserved component model to estimate the financial cycle. Our model features: (1) a dynamic relationship between the financial cycle and key variables; (2) time-varying shock volatility for trend and cycle components. We demonstrate that our approach not only exhibits superior early warning properties for banking crises but also outperforms commonly used indicators in terms of data fit for decomposition exercises, as evidenced by the higher marginal likelihood. We document three important properties of the financial cycle. First, the sensitivity of the financial cycle to changes in real estate valuations increased during the post-90s period. Second, the sensitivity of the cycle to changes in financial conditions displays volatility and country specificities. Finally, our reduced form estimates suggest that the banking crisis of 1988 was preceded by positive contributions from the risk appetite shock, while the primary source of vulnerabilities emanated from the housing market in the run-up to the Global Financial Crisis.

Migration and the environment: A look across perspectives

The decisions related to migration – where to live, when to move, and where to move – have a long history in economics. Different fields, within economics and outside economics, have developed different empirical methods to study migration and its consequences. However, these literatures rarely cite each other and there is little crossover between them. The purpose of this paper is twofold. First, to provide a simple theoretical framework for understanding general equilibrium effects in migration models that can help researchers think through the specific contexts in which these will be a problem for reduced form estimation. Second, to examine the different literatures in economics that have addressed the question of the effects of environmental amenities on migration with an eye to the differences across them and the way they can complement each other.

European highways and the geographic diffusion of economic activities from agglomerations to less urbanised areas

This paper analyses the impact of highways on the distribution of economic activities between urban agglomerations and peripheral regions in the European Union. In doing so, I use an empirical strategy based on the land use theory employing disaggregated economic and infrastructure data. To address endogeneity, I apply an IV strategy exploiting non-local highway construction as a source of exogenous variation. I find that highways contribute to the diffusion of urban economic activities into surrounding areas, reducing the income gap between European agglomerations and peripheries. Reduced-form estimations suggest that the gap would have been nearly 3% higher in 2020 if the highway networks of European countries had remained at the level of 1990. The study concludes that transportation infrastructure policies can alleviate regional income disparities, increasing economic convergence between urbanised and less urbanised areas.

European highway networks, transportation costs, and regional income

To what extent do highways increase income in the European Union? To answer the question, this paper uses detailed data on the expansion of highways in Europe between 1990 and 2020 combined with time-invariant data on more than 2.3 million roads and 1400 ferry connections. I construct a new network database of highways, roads and ferries depicting a 31-year evolution of the lowest travel times along 51 000 region-to-region routes. To tackle endogeneity, I use non-local highway improvements as a source of exogenous variation. Reduced-form estimations suggest that, through decreasing transportation costs, highways increase aggregate regional income and economic cohesion. The study determines that transportation infrastructure policies can generate substantial economic benefits and reduce income disparities between poor and rich European regions.

Forecasting and stress testing with quantile vector autoregression

SummaryA quantile vector autoregressive (VAR) model, unlike standard VAR, traces the interaction among the endogenous random variables at any quantile. Quantile forecasts are obtained by factorizing the joint distribution in a recursive structure but cannot be obtained from reduced form estimation. Identification strategies and structural quantile impulse response functions are derived as generalization of the VAR model. The model is estimated using real and financial variables for the euro area. The dynamic properties of the system change across quantiles. This is relevant for stress testing exercises, whose goal is to forecast the tail behavior of the economy when hit by large financial and real shocks.

Does compact city shape matter to residents' happiness?

This paper investigates the impact of city shape variation on residents' happiness in Chinese cities. We first measure the city shape index of Chinese cities between 2000 and 2015 using matched data from the European Space Agency Global Land Cover dataset and the Chinese administrative map to delineate the changes in city shape in China's urbanization. Then we use a reduced-form estimation strategy to examine the causality between city shape variation and urban residents' happiness using our city shape dataset and the microsurvey data of CHIP (Chinese Household Income Project). We find that city shape exerts a negative influence on the happiness of urban residents. Such an effect is more pronounced in large cities. However, well-developed public transportation infrastructure can mitigate the negative impact of a non-compact city shape. Turning to the mechanism, commute time to the workplace and amenities is the main channel through which city shape works. We find that bad shape significantly increases the commute time between residential, workplace, and commercial amenities and therefore makes urban residents unhappy.

Wage growth in Lithuania from 2008 to 2020: observed drivers and underlying shocks

ABSTRACT This paper studies the drivers of wage growth in Lithuania over the period 2008–2020. Using administrative data as well as aggregate measures reflecting the state of the economy, we estimate an extended version of a wage Phillips curve. Our reduced-form estimates indicate that nominal wage growth was tightly linked to labor market fluctuation over this period. Labor productivity, changes in the minimum wage, and the composition of employment also contributed to wage dynamics. However, we find little evidence that past inflation has been a push factor. To understand the underlying economic primitives behind our findings, we estimate a structural Bayesian autoregressive model. Our structural analysis reveals a significant contribution from aggregate supply shocks, reflecting a stronger relationship between productivity and wages than implied by our reduced-form estimates. Moreover, a historical decomposition reveals that since 2013, wages grew over and above productivity due to rising aggregate demand and labor market disturbances.

Bank Relationships and the Geography of PPP Lending

I study how bank relationships affected the timing and geographic distribution of Paycheck Protection Program (PPP) lending. Half of banks' PPP loans went to borrowers within 2 miles of a branch, mostly driven by relationship lending. Firms near less active lenders shifted to fintechs and other distant lenders, resulting in delays receiving credit but only slightly lower loan volumes. I estimate a structural model to fit the observed relationship between branch distance, bank PPP activity, and origination timing. I find that banks served relationship borrowers 5 to 9 days before other borrowers, an effect in line with reduced-form estimates using a sample of PPP borrowers with previous SBA lending relationships.

Islam and human capital in historical Spain

We use a unique dataset on Muslim domination between 711-1492 and literacy in 1860 for about 7500 municipalities to study the long-run impact of Islam on human-capital in historical Spain. Reduced-form estimates show a large and robust negative relationship between length of Muslim rule and literacy. We argue that, contrary to local arrangements set up by Christians, Islamic institutions discouraged the rise of the merchant class, blocking local forms of self-government and thereby persistently hindering demand for education. Indeed, results show that a longer Muslim domination in Spain is negatively related to the share of merchants, whereas neither later episodes of trade nor differences in jurisdictions and different stages of the Reconquista affect our main results. Consistent with our interpretation, panel estimates show that cities under Muslim rule missed-out on the critical juncture to establish self-government institutions.

The local health impacts of natural resource booms.

This paper uses novel micro-data on natural resources and administrative health data in Brazil to study how economic booms in minerals affect health at birth. By implementing a reduced-form estimation of shift-share research designs, the identification strategy relies on the exogeneity of global commodity prices to municipality-specific health outcomes. I find that, following changes in international prices, municipalities with historically more endowments have a higher number of premature births and births with low Appearance, Pulse, Grimace, Activity, Respiration scores. The impacts are primarily driven by metallic minerals. Instead, industrial minerals do not appear to have any effect on birth outcomes. Even though booms in metallic minerals generate benefits through resource windfalls-by increasing wealth and generating economic opportunities-the investigation of mechanisms reveals that they also result in costs-due to pollution-which seem to prevail. Hence, some metallic minerals remain a curse more than a blessing.

Competition in online land lease auctions in Ukraine: Reduced-form estimation

An innovative pilot project to facilitate the transparent transfer of rental rights for publicly owned agricultural land via an ascending-price online auction was launched in Ukraine in October 2018. This paper analyses publicly disclosed auction data and investigates how competition, auction design characteristics, and farmland-specific properties influenced the auction outcomes. This information is factored into the probability of the plot being rented (i.e. auction success) and the size of the winning bid (i.e. rental rates). The analysis was conducted using an independent private values framework, employing a mixed-effects model with sample selection. Estimation results confirmed that a higher number of bidders and more active bidding lead to a significantly greater probability of auction success and higher rental rates.

Integrating Structural and Reduced-Form Methods in Empirical Finance

Abstract I discuss various ways in which inference based on the estimation of the parameters of statistical models (reduced-form estimation) can be combined with inference based on the estimation of the parameters of economic models (structural estimation). I discuss five basic categories of integration: directly combining the two methods, using statistical models to simplify structural estimation, using structural estimation to extend the validity of reduced-form results, using reduced-form techniques to assess the external validity of structural estimations, and using structural estimation as a sample selection remedy. I illustrate each of these methods with examples from corporate finance, banking, and personal finance. I conclude by exploring the role of robust estimation techniques in structural estimation in corporate finance.

Gender pension gaps in a private retirement accounts system: A dynamic model of household labor supply and savings

This paper develops and estimates a dynamic model of individuals’ and couples’ labor supply, savings, and retirement decisions to analyze how the design of Chile’s privatized pension system and a reform undertaken in 2008 affect gender pension gaps and old-age poverty. Chile has one of the longest-running private retirements accounts systems in the world, which has served as a model for many countries. The paper estimates the dynamic model using pre-reform data and compares the model’s short-term forecasts with reduced form estimates of the reform’s causal impacts. The model provides accurate forecasts, so it is used to evaluate how actual and counterfactual changes in the pension system design affect men’s and women’s labor supply and savings decisions, pension receipts, and program costs over a longer time horizon. The results show that three design features significantly reduce gender pension gaps: expanding minimum pension benefit eligibility, providing a per-child pension bonus, and increasing women’s retirement age to be equal to men’s. Overall, the 2008 pension reform largely achieved its goals of reducing gender gaps and old age poverty, although the new system costs double that of the old system.

Effects of Early Childhood Exposure to Pollution on Crime: Evidence from 1970 Clean Air Act

Past literature has shown that 1970 amendments to the clean air act (CAA) led to significant reduction in air pollution early 1970s, and that it had positive infant health consequences for the cohorts treated by CAA. Because effects of in-utero and early childhood conditions are persistent, and the health effects can remain latent for years, CAA may impact the future adult outcomes. In this paper, I investigate the impact of the CAA on the future crime. In a difference-in-differences framework, I find that the cohorts that were born in the year of the CAA’s first implementation commit fewer crimes 15–24 years later. The magnitude of this impact is about 6%. Property crimes rather than violent crimes are impacted. I also estimate that CAA reduced the ambient air pollution by 17%. These reduced form estimates suggest that a 1% reduction in air pollution reduces future crime rate by 0.35%.

Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds

AbstractWe study the interaction between tax advantages for municipal bonds and the market structure of auctions for these bonds. We show that this interaction can limit a bidder’s ability to extract information rents and is a crucial determinant of state and local governments’ borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3 pp lowers mean borrowing costs by 9–10$\%$. We estimate a structural auction model to measure markups and to illustrate and quantify how the interaction between tax policy and bidder strategic behaviour determines the impact of tax advantages on municipal borrowing costs. We use the estimated model to evaluate the efficiency of Obama and Trump administration policies that limit the tax advantage for municipal bonds. Because reductions in the tax advantage inflate bidder markups and depress competition, the resulting increase in municipal borrowing costs more than offsets the tax savings to the government. Finally, we use the model to analyse a recent non-tax regulation that affects entry into municipal bond auctions.

Using Variable Slope Total Derivative Estimations to Pick between and Improve Macro Models

Using the same data set, a researcher can obtain very different reduced form estimates just by assuming different macroeconomic models. Reiterative Truncated Projected Least Squares (RTPLS) or Variable Slope Generalized Least Squares (VSGLS) can be used to estimate total derivatives that are not model dependent. These estimates can be used to pick between competing macro models, improve current models, or create new models. A selected survey of RTPLS estimates in the literature reveals several common patterns: (1) as income inequality has surged around the world, the effect of changes in government spending (G), exports (X), and money supply (M-1) on Gross Domestic Product (GDP) have plummeted, (2) decreases in G, X, and M-1 cause GDP to fall more than equal increases in G, X, and M-1 cause GDP to rise, and (3) unusually large increases in G and M-1 cause their effect on GDP to plummet. These common patterns fit with a global glut of savings hypothesis, which predicts that an increase in savings will not cause an increase in production expanding investment. An appropriate model could be built around the idea that investors have a choice between investing to increase production or investing to earn rent or interest.

What are the health consequences associated with differences in medical malpractice liability laws? An instrumental variable analysis of surgery effects on health outcomes for proximal humeral facture across states with different liability rules

BackgroundStates enacted tort reforms to lower medical malpractice liability, which are associated with higher surgery rates among Medicare patients with shoulder conditions. Surgery in this group often entails tradeoffs between improved health and increased risk of morbidity and mortality. We assessed whether differences in surgery rates across states with different liability rules are associated with surgical outcomes among Medicare patients with proximal humeral fracture.MethodsWe obtained data for 67,966 Medicare beneficiaries with a diagnosis of proximal humeral fracture in 2011. Outcome measures included adverse events, mortality, and treatment success rates, defined as surviving the treatment period with < $300 in shoulder-related expenditures. We used existing state-level tort reform rules as instruments for surgical treatment and separately as predictors to answer our research question, both for the full cohort and for stratified subgroups based on age and general health status measured by Charlson Comorbidity Index and Function-Related Indicators.ResultsWe found a 0.32 percentage-point increase (p < 0.05) in treatment success and a 0.21 percentage-point increase (p < 0.01) in mortality for every 1 percentage-point increase in surgery rates among patients in states with lower liability risk. In subgroup analyses, mortality increased among more vulnerable patients, by 0.29 percentage-point (p < 0.01) for patients with Charlson Comorbidity Index > = 2 and by 0.45 percentage-point (p < 0.01) among those patients with Function-Related Indicator scores > = 2. On the other hand, treatment success increased in patients with lower Function-Related Index scores (< 2) by 0.54 percentage-point (p < 0.001). However, younger Medicare patients (< 80 years) experienced an increase in both mortality (0.28 percentage-point, p < 0.01) and treatment success (0.89 percentage-point, p < 0.01). The reduced-form estimates are consistent with our instrumental variable results.ConclusionsA tradeoff exists between increased mortality risk and increased treatment success across states with different malpractice risk levels. These results varied across patient subgroups, with more vulnerable patients generally bearing the brunt of the increased mortality and less vulnerable patients enjoying increased success rates. These findings highlight the important risk-reward scenario associated with different liability environments, especially among patients with different health status.

On reduced form estimation of the effect of policy interventions on the COVID-19 pandemic

Summary Several studies have estimated the effects of various nonpharmaceutical interventions on the COVID-19 pandemic using a ‘reduced form’ approach. In this paper, I show that many different SIR models can generate virtually identical dynamics of the number of reported cases during the early stages of the epidemic and lead to the same reduced form estimates. In some of these models, policy interventions effectively reduce the transmission rate; in others, the growth of the reported number of cases slows down even though policy has little or no effect on the transmission rate. Thus, the effect of policy cannot be uniquely determined based on the reduced form estimates. This result holds regardless of whether time series or panel data is used in reduced form estimation. I also demonstrate that the reduced form estimates of the policy effect based on panel data specifications with two-way fixed effects can have the wrong sign.

Consumer Perceptions of Wine Quality Assurance Programs: An Opportunity for Emerging Wine Markets

Quality assurance programs (QAPs) may add value to wines through reassuring consumers of wine quality prior to purchase and consumption. In Tennessee, the potential to use a wine QAP is being explored as a means to improve the industry’s economic sustainability. To date, several QAPs exist, but studies directly related to their impact on consumer behavior for wines from emerging areas are scarce. We used an online survey instrument to elicit consumer perceptions of QAPs importance on wine purchasing decisions and how the presence of a QAP may impact their purchasing behavior for a wine from an emerging area (e.g., Tennessee). Wine involvement, QAP perceptions, and familiarity were also measured. A mixed-process model was used to estimate the two ordered probit models for importance of QAPs and the influence of QAPs on Tennessee wine purchases, where QAP importance was treated as a latent variable influencing Tennessee wine purchases. Ordinal probit estimates suggest that greater on-site spending and greater perceived benefits of QAPs (as indicators of quality and standardization) resulted in a higher probability of perceived QAP importance when making wine purchasing decisions. Reduced form estimates of the model of Tennessee wine purchases indicated distance to wine producing areas, female gender, and familiarity with Tennessee wines each negatively influenced the potential impact of QAPs on Tennessee wine purchases. However, on-site spending at wineries and perceived benefits of a Tennessee QAP increased likelihood of Tennessee wine purchases.