Dynamics of Monetary Policy Uncertainty and the Impact on the Macroeconomy [pdf]
Abstract: A large literature lauds the benefits of central bank transparency and credibility, but when a central bank like the U.S. Federal Reserve has a dual mandate, is not specific to the extent it targets employment versus price stability, and is not specific to the magnitude interest rates should change in response to these targets, market participants must depend largely on past data to form expectations about monetary policy. We suppose market participants estimate a Taylor-like regression equation to understand the conduct of monetary policy, which likely guides their short-run and long-run expectations. When the Federal Reserve's actions deviate from its historical targets for macroeconomic variables, an environment of greater uncertainty may be the result. We quantify this degree of uncertainty by measuring and aggregating recent deviations of the federal funds rate from econometric forecasts predicted by constant gain learning. We incorporate this measure of uncertainty into a VAR model with ARCH shocks to measure the effect monetary policy uncertainty has on inflation, output growth, unemployment, and the volatility of these variables. We find that a higher degree of uncertainty regarding monetary policy is associated with greater volatility of output growth and unemployment.
Keywords: Uncertainty, learning, volatility, Taylor rule, vector autoregression, ARCH.
Regime Switching and Wages in Major League Baseball under the Reserve Clause (Working Paper Version) [pdf]
Abstract: Over the course of the 20th century American wages increased by a factor of about 100, while the wages of professional baseball players increased by a factor of 450, but that increase was neither smooth nor consistent. We use a unique and expansive dataset of salaries and performance variables of Major League Baseball pitchers that spans over 400 players and 60 years during the reserve clause era to identify factors that determine salaries and examine how the importance of various factors have changed over time. We employ a Markov regime-switching regression model borrowed from the macroeconomics literature which allows regression coefficients to switch exogenously between two or more values as time progresses. This method lets us identify changes in wage determination that may have occurred because of a change in the league's competitiveness, a change in the relative bargaining power between players and teams, or other factors that may be unknown or unobservable. We find that even though Major League Baseball was a tightly controlled monopsony with the reserve clause, there was a significant shift in salary determination that lasted from the Great Depression until after World War II where players' salaries were more highly linked to their recent performance.
Keywords: Major League Baseball, Salary determination, Markov-regime switching.
Academic Benefits of Living On Campus (Working Paper Version) [pdf]
Abstract: We estimate the academic benefits to college students living on campus and investigate why they may perform better in school. This paper addresses two channels to explain why living on campus may improve academic performance. First, we examine whether on-campus students are more likely to take advantage of university provided resources (libraries, tutors, computer technology, university sponsored extracurricular activities, etc) than off-campus students. Secondly, we examine wheterh peer influences and interactions, including collaborative studying with friends and/or classmates and engagement in drug and alcohol consumption. Instrumental variables are used to account for the likely endogeneity of students' living decisions. We find evidence that living on campus causes an increase in student performance while they are living on campus, and in subsequent semesters even if they later move off campus. We identify significant peer-effect channels to explain why students that have lived on campus in the past perform better than others, but largely fail to identify channels explaining why students should immediately perform better while they live on campus.
Keywords: Student performance, dormitory, cross-section analysis, regression, instrumental variables.
Estimating the Effects of Dormitory Living on Student Performance [pdf]
Abstract: Many large universities require freshman to live in dormitories on the basis that living on campus leads to better classroom performance and lower drop out incidence. Large universities also provide a number of academic services in dormitories such as tutoring and student organizations that encourage an environment condusive to learning. A survey was administered to college students at a large state school to determine what impact dormitory living has on student performance. We use a handful of instrumental variable strategies to account for the possibly endogenous decision to live on campus. We find a robust result across model specifications and estimation techniques that on average, living on campus increases GPA by between 0.19 to 0.97. That is, the estimate for the degree of improvement to student performance caused by living on campus ranges between one-fifth to one full letter grade.
Keywords: Student performance, dormitory, cross-section analysis, regression, instrumental variables.
Lesson Study: Developing Students' Thought Processes For Choosing Appropriate Statistical Methods
Abstract: Introductory statistics classes often emphasize computation and implementation procedures for a number of statistical tests. While it is necessary to build these skills before getting to higher-order critical thinking skills, students often struggle in subsequent research methods courses when expected to select appropriate statistical tests to answer research questions. This task requires an understanding of how statistical methods are related to one another; students must develop an advanced organization of knowledge. In this paper we report on a lesson study we conducted to help students build a knowledge organization to help them achieve this task, and to better understand students' thought processes. A lesson study is a teaching improvement activity in which instructors jointly develop a lesson and observe and record student learning, making the learning process visible. This paper makes two significant contributions which can help instructors of research methods courses improve student learning. First, we share our thought process map for selecting a statistical test, report on the impact it had for our students, and offer suggestions for improving this part of the lesson. Secondly, we describe the thought processes students go through, both before and after being exposed to the thought process map, and we describe students' sources of confusion revealed through the lesson study process. Points of confusion included when to apply an independent-samples test versus a paired-samples test, the question of scale of measurement sometimes misled students to the wrong statistical method, sometimes students had difficulty simply recognizing or defining what the variables were, and we identified a number of instances where the use of statistical language and colloquial language was not well understood.
Keywords: Lesson study, introductory statistics, research methods.
Abstract: This paper examines the role of judgment shocks in combination with other structural shocks in explaining post-war economic volatility within the context of a New Keynesian model. Agents form expectations using constant gain learning then augment these forecasts with judgment. These judgments may be interpreted as a reaction to current news stories or policy announcements that would influence people's expectations. I allow for the possibility that these judgments be informatively based on information about structural shocks, but judgment itself may also be subject to its own stochastic shocks. I estimate a standard New Keynesian model that includes these shocks using Bayesian simulation methods. To aid in identifying expectational shocks from other structural shocks I include data on professional forecasts along with data on output gap, inflation, and interest rates. I find judgment is largely not informed by macroeconomic fundamentals; most of the variability in judgment is explained by its own stochastic shocks. Impulse response functions from the estimated model illustrate how shocks to judgment destabilize the economy and explain business cycle fluctuations.
Keywords: Learning, judgment, add-factors, New Keynesian model, Metropolis-Hastings.
Presentation Slides for Midwest Economics Association 2011 annual meeting, March 2011.
A Life Insurance Deterrent to Risky Sexual Behavior in Africa [pdf]
Abstract: The spread of HIV and AIDS and risky sexual behavior continues to be a problem in Sub-Saharan African countries despite government measures to educate people on the risk and severity of the disease and measures to promote safe sex practices such as making condoms readily available at reduced or no cost. We examine whether people decide to engage in risky sexual behavior due to low income and low life expectancy. Sub-Saharan Africa is characterized by conditions that significantly reduce life expectancy such as unsanitary conditions prevalent in poverty stricken areas, inaccessibility to health care, and dangerous working conditions such as those in very poor mining regions. Moreover, since income per capita in these countries is very low, the opportunity cost associated with dying from AIDS and foregoing future consumption is very low. We examine how a government provided life insurance benefit may be an effective means of deterring risky sexual behavior. To evaluate this policy prescription we develop a life-cycle model with personal and family consumption and endogenous probability of survival. In the model, agents can receive life insurance benefits if their death is not the result of AIDS. We demonstrate that excessive risky behavior does result from low life expectancy and low levels of income and illustrate the conditions for which the life insurance benefit can replicate the effects of higher income and life expectancy, deterring risky sexual behavior and reducing the spread of HIV/AIDS.
Keywords: HIV, AIDS, life insurance, overlapping generations.
Abstract: This paper examines the "bad luck" explanation for changing volatility in U.S. inflation and output when agents do not have rational expectations, but instead form expectations through least squares learning with an endogenously changing learning gain. It has been suggested that this type of endogenously changing learning mechanism can create periods of excess volatility without the need for changes in the variance of the underlying shocks. Bad luck is modeled into a standard New Keynesian model by augmenting it with two states that evolve according to a Markov chain, where one state is characterized by large variances for structural shocks, and the other state has relatively smaller variances. To assess whether learning can explain the Great Moderation, the New Keynesian model with volatility regime switching and dynamic gain learning is estimated by maximum likelihood. The results show that learning does lead to lower variances for the shocks in the volatile regime, but changes in regime is still significant in differences in volatility from the 1970s and after the the 1980s.
Keywords: Learning, regime switching, great moderation, New Keynesian model, maximum likelihood.
Abstract: This paper examines how the estimation results for a standard New Keynesian model with constant gain least squares learning is sensitive to the stance taken on agents' beliefs at the beginning of the sample. The New Keynesian model is estimated under rational expectations and under learning with three different frameworks for how expectations are set at the beginning of the sample. The results show that initial beliefs can have an impact on the predictions of an estimated model; in fact previous literature has exposed this sensitivity to explain the changing volatilities of output and inflation in the post-war United States. The results indicate statistical evidence for adaptive learning, however the rational expectations framework performs at least as well as the learning frameworks, if not better, in in-sample and out-of-sample forecast error criteria. Moreover, learning is not found to better explain time varying macroeconomic volatility any better than rational expectations. Finally, impulse response functions from the estimated models show that the dynamics following a structural shock can depend crucially on how expectations are initialized and what information agents are assumed to have.
Keywords: Learning, expectations, New Keynesian model, maximum likelihood.
Abstract: This paper examines the empirical significance of learning, a type of adaptive, boundedly rational expectations, in the U.S. economy within the framework of the New Keynesian model with endogenous capital accumulation. Estimation results for learning models can be sensitive to the choice for agents' initial expectations, so three methods for choosing initial expectations are examined. Maximum likelihood results show that learning under all methods do not significantly improve the fit the model. The evolution of forecast errors show that the learning models do not out perform the rational expectations model during the run-up of inflation in the 1970s and the subsequent decline in the 1980s, a period of U.S. history which others have suggested learning may play a role. Despite the failure of learning models to better explain the data, analysis of the impulse response functions and paths of structural shocks during the sample show that learning can lead to different explanations for the data.
Keywords: Learning, firm-specific capital, New Keynesian model, maximum likelihood.