Abstracts of research papers produced by the economists at the Philadelphia Fed
FIRM DYNAMICS, PRIVATE INFORMATION, AND THE GENERATION OF NEW TECHNOLOGY
The authors present a theory of spinoffs in which the key ingredient is the originator's private information concerning the quality of his new idea. Because quality is privately observed, by the standard adverse-selection logic, the market can at best offer a price that reflects the average quality of ideas sold. This gives the holders of above-average-quality ideas the incentive to spin off. The authors show that only workers with very good ideas decide to spin off, while workers with mediocre ideas sell them. Entrepreneurs of existing firms pay a price for the ideas sold in the market that implies zero expected profits for them. Hence, firms' project selection is independent of firm size, which, under some additional assumptions, leads to scale-independent growth. The entry and growth process of firms leads to invariant firm-size distributions that resemble the ones for the U.S. economy and most of its individual industries.
Working Paper 08-26, "Spinoffs and the Market for Ideas," Satyajit Chatterjee, Federal Reserve Bank of Philadelphia, and Esteban Rossi-Hansberg, Princeton University, and Visiting Scholar, Federal Reserve Bank of Philadelphia
TESTING FOR DATA RATIONALITY
Rationality of early release data is typically tested using linear regressions. Thus, failure to reject the null does not rule out the possibility of nonlinear dependence. This paper proposes two tests that instead have power against generic nonlinear alternatives. A Monte Carlo study shows that the suggested tests have good finite sample properties. Additionally, the authors carry out an empirical illustration using a real-time data set for money, output, and prices. Overall, they find strong evidence against data rationality. Interestingly, for money stock, the null is not rejected by linear tests but is rejected by the authors' tests.
Working Paper 08-27, "Information in the Revision Process of Real-Time Data Sets," Valentina Corradi, University of Warwick; Andres Fernandez, Rutgers University and Universidad de Los Andes; and Norman Swanson, Rutgers University, and Visiting Scholar, Federal Reserve Bank of Philadelphia
NONRESPONSE BIAS IN CPI MEASURES FOR RENTS
Until the end of 1977, the U.S. consumer price index for rents tended to omit rent increases when units had a change of tenants or were vacant, biasing inflation estimates downward. Beginning in 1978, the Bureau of Labor Statistics (BLS) implemented a series of methodological changes that reduced this nonresponse bias, but substantial bias remained until 1985. The authors set up a model of nonresponse bias, parameterize it, and test it using a BLS micro-data set for rents. From 1940 to 1985, the official BLS CPI-W price index for tenant rents rose 3.6 percent annually; the authors argue that it should have risen 5.0 percent annually. Rents in 1940 should be only half as much as their official relative price; this has important consequences for historical measures of rent-house-price ratios and for the growth of real consumption. (Revision forthcoming in Review of Economics and Statistics.)
Working Paper 08-28, "Rents Have Been Rising, Not Falling, in the Postwar Period," Theodore Crone, Swarthmore College; Leonard I Nakamura, Federal Reserve Bank of Philadelphia; and Richard Voith, Econsult Corporation
DESIGNING MONETARY POLICY FOR THE EURO AREA
In this paper, the authors aim to design aim to design a monetary policy for the euro area that is robust to the high degree of model uncertainty at the start of monetary union and allows for learning about model probabilities. To this end, they compare and ultimately combine Bayesian and worst-case analysis using four reference models estimated with pre-EMU synthetic data. The authors start by computing the cost of insurance against model uncertainty, that is, the relative performance of worst-case or minimax policy versus Bayesian policy. …