CASH INFLOWS AND BUBBLES IN ASSET MARKETS WITH CONSTANT FUNDAMENTAL VALUES

Previous experimental research on asset markets has reported that the level of cash available to traders does not affect asset prices when fundamentals follow a time trajectory that is constant over time. This contrasts with other research indicating that greater cash levels increase prices when fundamental values are decreasing over time. We report a new experiment in which we show that greater initial cash levels are indeed associated with higher prices when fundamental values are constant over time. Thus, high cash levels will lead to bubbles, if the cash is introduced before the market opens. Our results reconcile the two previous sets of findings. (JEL C90, D03, G02, G12)     

INFLATION EXPECTATIONS AND CONSUMER SPENDING AT THE ZERO BOUND: MICRO EVIDENCE

Standard theoretical models predict that higher inflation expectations generate greater current consumer spending at the zero lower bound of interest rates. However, recent empirical studies using U.S. micro data find negative results for this relationship. We use micro data for Japan, which has experienced low interest rates for a prolonged period, to estimate ordered probit models with a variety of controls. We find robust evidence supporting the prediction of standard models: survey respondents with higher expected inflation tend to indicate that their household has increased real spending compared with 1 year ago but will decrease it in the future. This relationship appears to be stronger for asset holders and older people. (JEL E20, E21, E30, E31, E50, E52)     

A NEW MONETARIST MODEL OF FIAT AND E‐MONEY

We develop a dual payment New Monetarist model, where an electronic money (e‐purse) competes with fiat money (cash). The two payment instruments differ in terms of security, cost, and acceptability. Strategic complementarities lead to multiple monetary equilibria. We establish the conditions under which e‐money can coexist with, or replace fiat money, and explain the reasons for the e‐purse failure/success in a few countries. We also compare welfare when one currency or both circulate. When the risk of theft of cash is endogenous, e‐money cannot replace cash entirely; however, low inflation can facilitate the adoption of e‐money in parallel with fiat money. (JEL D83, E40, E50)     

BETWEEN SCYLLA AND CHARYBDIS: INCOME DISTRIBUTION,CONSUMER CREDIT,AND BUSINESS CYCLES

We introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios. Growing inequality produces debt‐led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend. Instead, when inequality rises but the banking sector is highly regulated, aggregate demand and output fall. Our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy: acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy. (JEL C63, D31, E62, G01)     

INTEGRATED HOUSEHOLD SURVEYS: AN ASSESSMENT OF U.S. METHODS AND AN INNOVATION

We present a vision for improving household financial surveys by integrating responses from questionnaires more completely with financial statements and combining them with payments data from diaries. Integrated household financial accounts—balance sheet, income statement, and statement of cash flows—are used to assess the degree of integration in leading U.S. household surveys, focusing on inconsistencies in measures of the change in cash. Diaries of consumer payment choice can improve dynamic integration. Using payments data, we construct a statement of liquidity flows: a detailed analysis of currency, checking accounts, prepaid cards, credit cards, and other payment instruments, consistent with conventional cash flow measures and the other financial accounts. (JEL D12, D14, E41, E42)     

ASSET DYNAMICS,LIQUIDITY, AND INEQUALITY IN DECENTRALIZED MARKETS

The Kiyotaki and Wright model has exerted a considerable influence on the monetary search literature. We argue that the model also delivers important insights into a broader range of macroeconomic and development issues. The analysis studies how market frictions and the liquidity of assets affect the distribution of income. Experiments illustrate how the economy adjusts to shocks to asset returns and to the matching technology. They also deal with long‐run transition. An experiment interprets the reversal of fortune hypothesis as a situation in which an economy with a low‐return asset takes over a similar economy with a high‐return asset. (JEL C61, C63, E41, E27, D63)     

ASSET PRICE BUBBLES AND TECHNOLOGICAL INNOVATION

We introduce borrowing constraints into a two‐sector Schumpeterian growth model and examine the impact of asset price bubbles on innovation. In this environment, rational bubbles arise when the intermediate good producing R&D sector is faced with adverse productivity shocks. Importantly, these bubbles help alleviate credit constraints and facilitate innovation in the stagnant economy. On the policy front, we make a case for debt financed credit to the R&D sector. Further, we establish that a constant credit growth rule (akin to the Friedman rule) outperforms the often prescribed counter‐cyclical “lean against the wind” credit policy. (JEL E32, E44, O40)     

INFORMATION RIGIDITIES,INFLATION PERCEPTIONS,AND THE MEDIA: LESSONS FROM THE EURO CASH CHANGEOVER

The objective of theoretical models of information rigidities is to capture the fact that people are constrained in their ability to acquire and process all available information. Given that most people obtain their information about the economy from the media, press coverage of the economy may exert an influence on peoples' attitudes. This paper tests for this influence by examining consumers' inflation perceptions in the aftermath of the euro cash changeover, which serves as a natural experiment. Using a new data set, that quantifies the intensity and tone of media reports, we document that media reporting has had a statistically significant and economically meaningful impact on inflation perceptions and contributed to their sharp rise in the aftermath of the euro cash changeover and to the divergence between inflation perceptions and actual inflation rates. (JEL E53, D83)     

SIGNAL EXTRACTION AND RATIONAL INATTENTION

In this paper we examine the implications of two theories of informational frictions, signal extraction (SE) and rational inattention (RI), for optimal decisions and economic dynamics within the linear‐quadratic‐Gaussian (LQG) setting. We first show that if the variance of the noise and channel capacity (or marginal information cost) is fixed exogenously in the SE and RI problems, respectively, the two environments lead to different policy and equilibrium asset pricing implications. Second, we find that if the signal‐to‐noise ratio and capacity in the SE and RI problems are fixed, respectively, the two theories generate the same policy implications in the univariate case, but different policy implications in the multivariate case. We also show that our results do not depend on the presence of correlation between fundamental and noise shocks. We then discuss the applications to macroeconomic models of permanent income and price‐setting. (JEL C61, D81, E21)     

ACCOUNTING FOR URBAN CHINA'S RISING INCOME INEQUALITY: THE ROLES OF LABOR MARKET,HUMAN CAPITAL,AND MARRIAGE MARKET FACTORS

This paper analyzes China's rising family income inequality since the early 1990s when the urban labor market started its transformation from a centrally controlled to a market‐driven one. We document the trends in income inequality over the period of 1992–2009 using the Urban Household Survey data, and adopt the approach recently proposed by Eika et al. (2014) to decompose changes in income inequality. We find that labor market factors accounted for about three‐quarters of the overall increases in income inequality while falling marriage rate contributed the other quarter. Changes in human capital levels and marital assortativeness have not contributed to the rising inequality. (JEL D31, I26, J12)     

Online video sharing: an alternative channel for film distribution? Copyright enforcement,censorship, and Chinese independent cinema

Regarding piracy as the crime of stealing copyright holders’ rightful profits, many creative industries, such as the film, music, and gaming industries, are battling for stricter administrative and legal enforcement against copyright infringement. However, there is a counterargument that piracy could benefit copyright holders in the form of free promotion. Given China’s strict censorship of film content, this paper investigates how online piracy complicates the distribution of independent films in China. The advance of cyber technology and high-speed Internet access has not only fueled the spread of online film sharing, but has also encouraged public participation in the debate on the complex relationship between piracy, copyright, and censorship. Taking Jia Zhangke’s A Touch of Sin (2013) as a case study, this paper evaluates the alternative business models for Chinese independent cinema put forward by Chinese netizens.     

THE GREAT OVERESTIMATION: TAX DATA AND INEQUALITY MEASUREMENTS IN THE UNITED STATES, 1913–1943

Historical measures of income inequality in the United States must grapple with the challenge of data quality. We examine one such problem affecting the well-known estimates of income inequality produced by Piketty and Saez (2003) using the records of the Internal Revenue Service (IRS). Prior to 1943, incomes were self-reported. Combined with lax enforcement on the part of the IRS, self-reporting of incomes could provide a misleading portrait of the income distribution. To test the accuracy of IRS records, we compare them to independently tabulated state income tax returns between 1919 and 1945 from states with more comprehensive and rigorously enforced tax collection procedures. State income tax records show lower overall levels of income inequality than IRS records. However, we still find that top income concentrations declined across the period between 1929 and World War II. These findings attest to the sensitivity of distributional estimation to the reporting selectivity and economic quality of underlying tax data, suggesting that the existing IRS-derived series systematically overstates top-income concentration in the interwar period. (JEL H2, N32, D31, E01)     

Social capital and the reproduction of economic inequality in polarized societies

This paper explores the idea that the distribution of wealth across social groups fundamentally affects the evolution of economic inequality. By providing microfoundations suitable for this exploration, this paper hopes to enhance our understanding of when social forces contribute to the reproduction of economic inequality. In tackling this issue, this paper offers contributions in two domains. First, it models social capital as a real capital asset with direct use and collateral values. Second, it extends the concepts of identity, alienation and polarization originally advanced by Esteban and Ray (Esteban, J.M. and Ray, D.: On the measurement of polarization, Econometrica 62(4) (1994), 819–851). This generalization permits us to consider the multiple characteristics that shape social identity, inclusion and exclusion. It also underwrites a higher-order measure of socio-economic polarization that permits us to explore the hypothesis that economic inequality is most pernicious and persistent when it is socially embedded. Holding constant the initial levels of economic polarization and wealth inequality, we show that higher socio-economic polarization increases subsequent income and wealth inequality. Far from being a distributionally neutral panacea for missing markets, social capital in this model may itself generate exclusion and deepen existing economic cleavages.     

Rurality and Income Inequality in the United States, 1975–2015

Recent events have focused attention on the perceived widening of the economic divide between urban and rural areas, and on the continued rise of national income inequality. We demonstrate that, in fact, the average income gap between urban (metropolitan) and rural (nonmetropolitan) households has not risen over the past 40 years, and makes virtually no contribution to national income inequality. Rising national inequality is driven by rising inequality within both urban and rural America, not by an urban/rural divergence. As is well known, the growing dispersion of household money income is partly driven by rising wage inequality, particularly in urban areas. Less well recognized is the role played by other income sources. We show that a decline in the progressivity of the distribution of social security payments and cash transfers, and an increase in the regressivity of the distribution of retirement incomes, have jointly made a comparably large contribution to rising income inequality. At the same time, the share of income from self-employment has declined, particularly in rural America, and because self-employment income is very unequally distributed, its diminution has retarded the growth of rural inequality. In 2014–15, however, rural inequality increased, cutting the urban/rural inequality gap in half.     

INEQUALITY AND TRUST: NEW EVIDENCE FROM PANEL DATA

We estimate the causal link from income inequality to generalized trust by reconsidering the country‐level evidence on this issue. First, we exploit the panel dimension of the data, thus controlling for any country unobservable time‐invariant variables, and find a negative relationship between the two variables that holds only for developed countries. Second, we focus on these advanced economies and provide instrumental variable estimates using the predicted exposure to technological change as an exogenous driver of inequality. According to our findings, the negative causal effect of inequality on trust is even larger than that coming from ordinary least squares estimation. We also provide new insights on the effects of different dimensions of inequality, exploiting measures of both static inequality—such as the Gini index and top income shares—and dynamic inequality—proxied by intergenerational income mobility. (JEL D31, O15, Z13)     

SPECULATIVE STORAGE, FUTURES MARKETS, AND THE STABILITY OF COMMODITY PRICES

A theoretical dynamic model is developed that integrates the micro-behavior of commodity and futures speculators into the simultaneous determination of cash and futures prices in a storable commodity market. The model is used to demonstrate the way in which the introduction of a futures market, by affecting the decisions of speculative inventory holders, alters the distribution of spot prices and to elucidate the conditions that render futures trading stabilizing for cash prices.     

PIECE‐RATE CONTRACTS FOR OTHER‐REGARDING WORKERS

When workers are paid with piece rates, inequality arises naturally. We consider workers who care about income comparisons and are either status seeking or inequality averse. We identify circumstances under which inequality attitudes lead workers to exert more effort than they would otherwise, and also circumstances under which workers’ inequality attitudes lead firms to set lower piece rates than they would otherwise. The key behavioral assumption for both of these results to hold when workers are identical is behindness aversion, the property that changes in inequality matter more to the worker when he is behind than when he is ahead. (JEL D01, J33, M52)     

Suppressing Asset Price Inflation: The Confederate Experience, 1861–1865

Confederate asset price stabilization policies appear to have increased the velocity of circulation and counterproductively channeled inflationary pressures into other areas of the economy. Three successive monetary reforms encouraged holders of Treasury notes to exchange these notes for bonds by imposing deadlines on their convertibility. We show that Confederate funding acts aimed at precipitating the conversion of currency into bonds did temporarily suppress currency depreciation. These acts also triggered upsurges in commodity prices, however, because note holders rushed to spend the currency before their exchange rights were reduced.     

FAIR ALLOCATION WHEN PLAYERS' PREFERENCES ARE UNKNOWN

Suppose an arbitrator needs to allocate an asset among two players, whose claims on the asset are incompatible. The allocation outcome is said to be fair if the arbitrator awards an outcome that brings the same utility payoff to the two players whenever the two players' claims are symmetric and the allocation set is symmetric. In conjunction with other natural axioms, this fairness requirement implies a unique allocation outcome for any claims problem. We propose a mechanism which can be used by the arbitrator to implement this allocation outcome, even when the players' preferences are unknown to the arbitrator. (JEL C78, D63, J52)     

MEASURING CONSUMER EXPENDITURES WITH PAYMENT DIARIES

Payment diaries measure consumer expenditures by tracking authorization of payments by instrument (cash, check, debit or credit card, etc.). Three notable results emerge from comparing the 2012 Diary of Consumer Payment Choice (DCPC) to other estimates of consumer expenditures: (1) DCPC payments are 75% higher than Consumer Expenditure Survey estimates; (2) DCPC consumption estimates are 17% higher than comparable personal consumption expenditure estimates; and (3) DCPC payments roughly equal comparably adjusted National Income and Product Accounts personal disposable income. The DCPC's relative success stems from measuring expenditures aggregated into lumpy payments (“shopping baskets”), relatively low respondent burden, and effective random sampling. (JEL E21, D12, D14)