A Federal Reserve System Conference on Research in Applied Microeconomics

Article excerpt

This article summarizes some of the papers presented at the System Applied Microeconomics Conference organized and hosted by the Federal Reserve Bank of St. Louis on May 5-6, 2011. This annual conference brings together economists from the Federal Reserve District Banks across the Federal Reserve System and the Federal Reserve Board to present their latest economic research.

Federal Reserve Bank of St. Louis Review, November/December 2011, 93(6), pp. 455-62.

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The Federal Reserve Bank of St. Louis hosted the annual System Applied Microeconomics Conference on May 5-6, 2011. The papers presented at the conference, some of which are summarized in this article, showcased research in the areas of public policy, education and human capital, labor markets, and housing and consumer finance during the Great Recession. (1)

ANALYSIS OF PUBLIC POLICY

The first group of papers focused on public policy issues. In "Assessing the Evidence on Neighborhood Effects from Moving to Opportunity," Aliprantis provides a new framework and a robust instrument to estimate neighborhood effects using data from the Moving to Opportunity for Fair Housing (MTO) program. The MTO program, a 10-year research project, combines tenant-based rental subsidies with housing counseling to help poor families move from poor urban areas to less-poor neighborhoods. Aliprantis's framework improves on earlier methods for studying the effects of housing mobility programs by distinguishing between program and neighborhood effect.

In "The Spending and Debt Response to Minimum Wage Hikes," Aaronson, Agarwal, and French explore how minimum wage increases influence spending and debt accumulation by minimum wage earners. They find that (i) both consumer spending and debt accumulation increase after a minimum wage increase and (ii) most spending induced by such an increase goes toward financing durables. The authors' empirical findings are consistent with an augmented buffer-stock model in which households are collateral constrained.

Given the recent decline in aid from state to local governments, in "Designing Formulas for Distributing State Aid Reductions," Zhao and Coyne develop a new formula for allocation of such funds. Their formula improves on other methods because it is based on the underlying fiscal health of local governments rather than commonly used ad hoc measures.

HUMAN CAPITAL

A second group of papers focused on the topic of human capital. In "The Role of Schools in the Production of Achievement," Canon states that previous research has been unable to simultaneously consider the three types of inputs believed to influence student skills: ability, family inputs, and school inputs. Canon uses parents' savings for higher education as a measure of ability in an empirical framework that corrects for the endogeneity of the three inputs. Unlike earlier studies that do not address the simultaneity among the three inputs, Canon presents evidence that school inputs are important for the formation of student skills when controlling for the ability to learn.

In "Economic Literacy and Inflation Expectations: Evidence from a Laboratory Experiment," Burke and Manz present new experimental evidence on heterogeneity in the formation of inflation expectations. They conduct a laboratory experiment in which subjects complete a set of inflation-forecasting exercises in a simulated economic environment. They find that the subjects' demographic characteristics play a small role in the variation of their inflation expectations, but economic literacy plays a large role in explaining the accuracy of inflation forecasts.

In "Financial Literacy and Mortgage Equity Withdrawals," Duca and Kumar examine whether an individual's financial literacy influences the decision to make or not make mortgage equity withdrawals. Their results indicate that the financially literate are 3 to 5 percentage points less likely to withdraw housing equity but that this result does not apply to home equity lines of credit. …