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by Jessica Schultz
This paper explores how people track inflation over their lifetimes while facing tradeoffs between attention and certainty. It first employs a flexible modification of the Recursive Least Squares Learning approach from Malmendier and Nagel (MN) (2016) to find that households place weight on each inflation observation in a hump-shaped pattern over age when using past observations to set expectations about the future. This finding departs from MN, which models a strictly increasing weighting scheme with age. This paper then uses these findings to motivate a theory of Rational Inattention (RI) in inflation: as households age and accumulate wealth, their knowledge of the inflation rate becomes more important in their financial decisions–so they pay more attention to inflation. Consequently, as they decumulate wealth during their retirement, they have less reason to track inflation as accurately.
This paper subsequently formalizes this theory in a two-period RI model in which inflation-driven uncertainty in the interest rate between a working period and a retirement period can be reduced at a cost; this reduction in uncertainty occurs through observing an endogenously chosen signal that is correlated with the interest rate. It finds that as wealth increases before retirement, the optimal choice of signal precision increases as well. These findings help explain the hump-shaped weighting scheme for inflation observations in the empirical section, assuming changes in these weights over age are related in part to changes in household wealth. Ultimately, these findings suggest that monetary policy that focuses on long-term inflation stability or accounts for this heterogeneity may be most effective in anchoring consumer inflation expectations and increasing consumer welfare.
Advisors: Professor Francesco Bianchi, Professor Michelle Connolly | JEL Codes: E2, E21, E31
By Priyanka Venkannagari
The paper uses 2011 Indian Human Development Survey data to assess the impact of 5 categories of variables on health outcomes. It uses OLS models, interaction terms, instrumental variable models, fixed effects and random effects to investigate the existence of a neighborhood effect on health outcomes for women in urban India. This paper finds that various aspects of health practices, empowerment, amenities and financial security are relevant when looking at health outcomes. Interventions looking to address health outcomes should consider these variables and the compounding neighborhood effect.
Advisor: Charles Becker | JEL Codes: C36, I1, I12, O18
By Brian Pollack
This paper aims to assess the efficiency of the Major League Baseball contract market in the past decade, given that teams are employing more analytical approaches to player evaluation. First, analysis of team-level data reveals the most important determinants of run scoring and run prevention, respectively. Models of player contract value, controlling for player-specific variables and environmental factors, then determine what is most significantly rewarded on the free agent market. Overall, teams have identified the individual skills that are most important and compensated them accordingly, and there is evidence to suggest teams are becoming smarter about this in recent years.
Advisor: James Roberts | JEL Codes: D7, O3, Z2
By Eric Ramoutar
Currency crises – large and sudden depreciations in the value of a country’s currency – have been an unfortunate by-product of increased financial openness over the last half century. This study extends the already vast literature on the impact of currency crises by estimating how currency crises affect domestic investment in emerging markets. Specifically, the study uses panel data with fixed effects and various robust standard errors as well as a generalized method of moments estimator to investigate the impact of currency crises on domestic investment in a sample of 14 countries that experienced currency crises between 1994 and 2015 and 10 that did not. The results of the analysis initially indicate that, after controlling for a host of macroeconomic fundamentals, currency crises contribute significantly to dampened domestic investment. Ultimately, after controlling for banking crises, the study concludes that relatively severe, but not all, currency crises have a significant depressing effect on investment. The results further indicate that all currency crises should not be treated equally; those involving exceptionally large depreciations lead to an even greater decline in domestic investment.
Advisor: Cosmin Ilut | JEL Codes: E4, F3, F4, E42, F31, F32, F41, G01
By Daniel Dorchuck
This study explores variation in US bank holding companies’ (BHCs) net inter-est margins (NIMs) and the eﬀects of interest rate risk exposure on NIMs. Interest rate risk (IRR) is intrinsic in maturity transformation and ﬁnancial intermediation as banks take on short-term liabilities in the form of deposits and create assets in the form of loans with longer maturities and diﬀerent repricing proﬁles. Accordingly, interest rate risk is necessary for bank holding companies (BHCs) to be proﬁtable in ﬁnancial intermediation, and net interest margins are chosen as a variable of inter-est because they are an isolated measure of bank’ proﬁtability from interest earning assets. Naturally, BHCs employ maturity pairing and derivative hedging to mitigate IRR and ultimately increase and smooth earnings. Synthesizing banks’ balance sheet and income statement data, macroeconomic variables, credit conditions, and interest rate environment variables, this study hopes to expand on existing work by provid-ing insight on the determinants of NIMs as well as interest rate derivatives’ eﬃcacy in increasing and stabilizing net interest margins. The models presented establish links between long term rate exposure, risk-averse capital positions, and increased margins. Additionally, the models suggest that banks earn smaller spreads (NIMs) in higher interest rate environments but beneﬁt from steeper yield curves.
Advisor: Mary Beth Fisher, Kent Kimbrough | JEL Codes:
By Jayanth Ganesan
I test whether an investor can increase the returns on their portfolio over the long-term by timing the market using measures of market value, such as the Tobin’s q ratio and the Cyclically Adjusted Price Earnings (CAPE or Shiller-CAPE). To test this proposition, I examine contrarian investor strategies proposed by Smithers and Wright (2000) and investor strategies based on different equity-fixed income combination portfolios. I seek to determine whether these strategies produce higher risk-adjusted returns than buy-and-hold equity strategies such as those proposed by Siegel (2014) for long-term portfolios. I also examine whether Siegel’s theory that stocks are better investment vehicles than bonds for investment horizons greater than 20 years. In my study, buy-and-hold portfolios composed of the S&P 500 have additional annualized returns of 1.5% than portfolios which reallocate funds in alternative securities based on CAPE and q thresholds. I conclude that for long-term investment horizons, an investor is unlikely to increase portfolio returns by reallocating funds to an alternative asset class when stocks are overvalued. However, I do not find that stocks are better investment vehicles compared to bonds as portfolio with bonds have a lower portfolio risk in my sample. I believe that the effectiveness q ratios for market timing is likely to be independent of how the q ratio is calculated. As suggested by Asness (2015), I find that portfolios that utilize both value and trend investing principles with CAPE and q may outperform portfolios that utilize only value-based market timing strategies. I conclude that CAPE and q based timing strategies are difficult to implement without detailed knowledge of future stock valuations.
By Jennifer Garand
This paper aims to investigate the relationship between peoples’ decisions to marry or cohabit and their economic circumstances – both personal, as measured by their employment status, and peripheral, as measured by the unemployment rate in their local county. This paper will look at the role economic factors, as well as demographic and personal factors, play in the decision of whether or not to marry, cohabit, or stay single.
Advisor: Marjorie McElroy, Michelle Connolly | JEL Codes: D1, J12, J16 |
By Suhani Jalota
As the population of urban poor living in slums increases, governments are trying to relocate people into government–provided free housing. Slum redevelopment affects every part of a household’s livelihood, but most importantly the health and wellbeing of younger generations. This paper investigates the effect of slum redevelopment schemes on child stunting levels. Data was collected in forty–one buildings under the slum–redevelopment program in Mumbai. The study demonstrates through a fixed effect regression analysis that an additional year of living in the building is associated with an increase in the height–for–age Z–score by 0.124 standard deviations. Possible explanations include an improvement in the overall hygienic environment, sanitation conditions, indoor air pollution, and access to health and water facilities. However, anecdotal evidence suggests that water contamination, loss of livelihood and increased expenses could worsen health outcomes for residents. This study prompts more research on the health effects of slum redevelopment projects, which are becoming increasingly common in the rapidly urbanizing developing world.
Advisor: Erica Field, Michelle Connolly | JEL Codes: O12, O14, O17, O18, O22 | Tagged:
By Shafiq Haris, Alexander Prezioso, Michael Temple, Logan Turner, Kevin Zipf, Elizabeth Di Giulio, and Joseph Ueland
This paper analyzes the impact of exogenous shifts in the labor market on the marriage market. The relationship between these two markets is complicated by their reverse causality. That is to say, labor market decisions play into marriage market decisions, and vice versa. In order to mitigate this simultaneous determination, this paper adopts and furthers a methodology utilized by Autor, Dorn and Hansen (2015). Henceforth referred to as ADH, the authors analyze the effects of trade on local labor markets between 1980 and 2007. All 722 commuting zones in the continental United States were evaluated with respect to their level of exposure to increasing competition from Chinese imports, and the share of jobs within the commuting zone considered “routine,” and thus susceptible to computerization and/or mechanization. The authors analyze the impact of these independent variables on labor force participation. This paper takes Autor, et al’s analysis one step further by using the routinization and trade variables as instruments through which we can observe the exogenous impact of the labor market on marital status shares. This paper progresses through two specifications before ultimately utilizing a Two–Stage Least Squares analysis with Autor et al’s instruments to isolate the impact of decadal changes in the labor market on decadal changes in male and female marital status shares. Analysis is performed on different age groups, as both the marriage and labor market are different for people of different ages. The first specification applies Autor, et. al’s right–hand side with marital status shares as dependent variables. The second specification adds labor market ratios, which relate male and female labor market status. The previously mentioned final specification offers easily interpreted results and is the most encompassing model. Overall, we find that the labor market affects the marriage market much like the current literature would suggest. For example, as male employment increases, the share of females never married decreases and the share of females married increases. This relationship is consistent with existing marriage market theory. However, the results suggest that the literature does not hold in the oldest age group in the data, as power dynamics in the marriage market shift. Our methodology and findings are unique, as we explore this field through a new lens. Future research can expand upon this by incorporating a dataset with information regarding cohabitation habits and consistent longitudinal variable measurements for controls.
Advisor: Marjorie McElroy | JEL Codes: J1, J12, J21 | Tagged: Employment, Marriage
By Kelly Lessard
This study explores the relationship between body mass and job quality in the United States labor force using five variables to represent job quality: hourly wage, training in the past year, desire for training, expectations for success, and job satisfaction. I use the National Longitudinal Survey of Youth 1979 data from 1994 to calculate BMI and assess the job quality indicators. Like past research, I find BMI is negatively associated with wages for the obese population, most significantly for women. Women also suffer a greater body mass penalty for job training and demonstrate lower job satisfaction at a higher BMI.
Advisor: Alison Hagy, Tracy Falba | JEL Codes: J7, J31, J71 | Tagged: