• Time-Varying Employment Risks, Consumption Composition, and Fiscal Policy
  Kazufumi YamanaMakoto NireiSanjib Sarker

  Abstract

  This study examines the response of aggregate consumption to active labor market policies that reduce unemployment. We develop a dynamic general equilibrium model with heterogeneous agents and uninsurable unemployment as well as policy regime shocks to quantify the consumption effects of policy. By implementing numerical experiments using the model, we demonstrate a positive effect on aggregate consumption even when the policy serves as a pure transfer from the employed to the unemployed. The positive effect on consumption results from the reduced precautionary savings of the households who indirectly benefit from the policy by a decreased unemployment hazard in future.

  Introduction

  The impact of the recent recession on the labor market was so severe that the unemployment rate in the U.S. is still above normal and the duration of unemployment remains unprecedentedly large. There is a growing interest in labor market policies as effective macroeconomic policy instruments to combat such high unemployment (Nie and Struby (2011)) that has been used conservatively to help the unemployed. Two major questions presented in this literature are as follows: (i) What is the effect of the policy on the labor market performance of program participants? and (ii) What is the general equilibrium consequence of such policy? While there have been extensive microeconometric evaluations and discussions that have led to a consensus on the first question, the second question is unanswered because the indirect effects of the programs on nonparticipants via general equilibrium adjustments are inconclusive. Heckman, Lalonde and Smith (1999) pointed out that the commonly used partial equilibrium approach implicitly assumes that the indirect effects are negligible and can therefore produce misleading estimates when the indirect effects are substantial. Moreover, Calmfors (1994) investigated several indirect effects, and concluded that microeconometric estimates merely provide partial knowledge about the entire policy impact of such programs.

  2014.12

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• Beauty Contests and Fat Tails in Financial Markets
  Makoto NireiTsutomu Watanabe

  Abstract

  Using a simultaneous-move herding model of rational traders who infer other traders’ private information on the value of an asset by observing their aggregate actions, this study seeks to explain the emergence of fat-tailed distributions of transaction volumes and asset returns in financial markets. Without making any parametric assumptions on private information, we analytically show that traders’ aggregate actions follow a power law distribution. We also provide simulation results to show that our model successfully reproduces the empirical distributions of asset returns. We argue that our model is similar to Keynes’s beauty contest in the sense that traders, who are assumed to be homogeneous, have an incentive to mimic the average trader, leading to a situation similar to the indeterminacy of equilibrium. In this situation, a trader’s buying action causes a stochastic chain-reaction, resulting in power laws for financial fluctuations. Keywords: Herd behavior, transaction volume, stock return, fat tail, power law JEL classification code: G14

  Introduction

  Since Mandelbrot [25] and Fama [13], it has been well established that stock returns exhibit fat-tailed and leptokurtic distributions. Jansen and de Vries [19], for example, have shown empirically that the power law exponent for stock returns is in the range of 3 to 5, which guarantees that the variance is finite but the distribution deviates substantially from the normal distribution in terms of the fourth moment. Such an anomaly in the tail shape, as well as kurtosis, has been regarded as one reason for the excess volatility of stock returns.

  2014.06

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• Zipf’s Law, Pareto’s Law, and the Evolution of Top Incomes in the U.S.
  Makoto NireiShuhei Aoki

  Abstract

  This paper presents a tractable dynamic general equilibrium model of income and firm-size distributions. The size and value of firms result from idiosyncratic, firm-level productivity shocks. CEOs can invest in their own firms’ risky stocks or in risk-free assets, implying that the CEO’s asset and income also depend on firm-level productivity shocks. We analytically show that this model generates the Pareto distribution of top income earners and Zipf’s law of firms in the steady state. Using the model, we evaluate how changes in tax rates can account for the recent evolution of top incomes in the U.S. The model matches the decline in the Pareto exponent of income distribution and the trend of the top 1% income share in the U.S. in recent decades. In the model, the lower marginal income tax for CEOs strengthens their incentive to increase the share of their firms’ risky stocks in their own asset portfolios. This leads to both higher dispersion and concentration of income in the top income group.

  Introduction

  For the last three decades, there has been a secular trend of concentration of income among the top earners in the U.S. economy. According to Alvaredo et al. (2013), the top 1% income share, the share of total income going to the richest top 1% of the population, declined from around 18% to 8% after the 1930s, but the trend was reversed during the 1970s. Since then, the income share of the top 1% has grown and had reached 18% by 2010, on par with the prewar level.

  2014.04

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• Beauty Contests and Fat Tails in Financial Markets
  Makoto Nirei

  Abstract

  This paper demonstrates that fat-tailed distributions of trade volume and stock returns emerge in a simultaneous-move herding model of rational traders who infer other traders’ private information on the value of assets by observing aggregate actions. Without parametric assumptions on the private information, I analytically show that the traders’ aggregate actions follow a power-law distribution with exponential truncation. Numerical simulations show that the model is able to generate the fat-tailed distributions of returns as observed empirically. I argue that the learning among a large number of traders leads to a criticality condition for the power-law clustering of actions.

  Introduction

  Since Mandelbrot [27] and Fama [14], it has been well established that the short-term stock returns exhibit a fat-tailed, leptokurtic distribution. Jansen and de Vries [20], for example, estimated the exponent of the power-law tail to be in the range 3 to 5, which warrants a finite variance and yet deviates greatly from the normal distribution in the fourth moment. This anomaly in the tail and kurtosis has been considered as a reason for the excess volatility of stock returns.

  2011.08

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• Stochastic Herding by Institutional Investment Managers
  Makoto NireiVladyslav Sushko

  Abstract

  This paper demonstrates that the behavior of institutional investors around the downturn of the U.S. equity markets in 2007 is consistent with stochastic herding in attempts to time the market. We consider a model of large number of institutional investment managers who simultaneously decide whether to remain invested in an assets or liquidate their positions. Each fund manager receives imperfect information about the market’s ability to supply liquidity and chooses whether or not to sell the security based on her private information as well as the actions of others. Due to feedback effects the equilibrium is stochastic and the “aggregate action” is characterized by a power-law probability distribution with exponential truncation predicting occasional “explosive” sell-out events. We examine highly disaggregated institutional ownership data of publicly traded stocks to find that stochastic herding explains the underlying data generating mechanism. Furthermore, consistent with market-timing considerations, the distribution parameter measuring the degree of herding rises sharply immediately prior the sell-out phase. The sell-out phase is consistent with the transition from subcritical to supercritical phase, whereby the system swings sharply to a new equilibrium. Specifically, exponential truncation vanishes as the distribution of fund manager actions becomes centered around the same action – all sell.

  Introduction

  Many apparent violations of the efficient market hypothesis, such as bubbles, crashes and “fat tails” in the distribution of returns have been attributed to the tendency of investors to herd. Particularly, in a situation where traders may have private information related to the payoff of a financial assets their individual actions may trigger a cascade of similar actions by other traders. While the mechanism of a chain reaction through information revelation can potentially explain a number of stylized facts in finance, such behavior remains notoriously difficult to identify empirically. This is partly because many theoretical underpinnings of herding, such as informational asymmetry, are unobservable and partly because the complex agent-based models of herding do not yield closedform solutions to be used for direct econometric tests.

  2010.11

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• Closely Competing Firms and Price Adjustment: Some Findings from an Online Marketplace
  Makoto NireiTakayuki MizunoTsutomu Watanabe

  Abstract

  We investigate retailers’ price setting behavior using a unique dataset containing by-the-second records of prices offered by closely competing retailers on a major Japanese price comparison website. First, we find that, when the average price of a product across retailers falls rapidly, the frequency of price adjustments increases, and the size of price adjustments becomes larger. Second, we find positive autocorrelation in the frequency of price adjustments, implying that there tends to be clustering where price adjustments occur in succession. In contrast, there is no such autocorrelation in the size of price adjustments. These two findings indicate that the behavior of competing retailers is characterized by state-dependent pricing rather than time-dependent pricing.

  Introduction

  Since the seminal study by Bils and Klenow (2004), there has been extensive research on price stickiness using micro price data. One vein of research along these lines concentrates on price adjustment events and examines the frequency with which such events occur. An important finding of such studies is that price adjustment events occur quite frequently. Using raw data of the U.S. consumer price index (CPI), Bils and Klenow (2004) report that the median frequency of price adjustments is 4.3 months. Using the same U.S. CPI raw data, Nakamura and Steinsson (2008) report that when sales are excluded, prices are adjusted with a frequency of once every 8 to 11 months. Similar studies focusing on other countries include Dhyne et al. (2006) for the euro area and Higo and Saita (2007) for Japan.

  2010.06

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• Competing Firms and Price Adjustment: Evidence from an Online Marketplace
  Makoto NireiTakayuki MizunoTsutomu Watanabe

  Abstract

  We investigate retailers’ price setting behavior, and in particular strategic interaction between retailers, using a unique dataset containing by-the-second records of prices offered by competing retailers on a major Japanese price comparison website. First, we find that, when the average price of a product across retailers falls rapidly, the frequency of price adjustments is high, while the size of adjustments remains largely unchanged. Second, we find a positive autocorrelation in the frequency of price adjustments, implying that there tends to be a clustering where once a price adjustment occurs, such adjustments occur in succession. In contrast, there is no such autocorrelation in the size of price adjustments. These two findings indicate that the behavior of competing retailers is characterized by state-dependent pricing, rather than time-dependent pricing, especially when prices fall rapidly, and that strategic complementarities play an important role when retailers decide to adjust (or not to adjust) their prices.

  Introduction

  Since Bils and Klenow’s (2004) seminal study, there has been extensive research on price stickiness using micro price data. One vein of research along these lines concentrates on price adjustment events and examines the frequency with which such events occur. An important finding of such studies is that price adjustment events occur quite frequently. For example, using raw data of the U.S. consumer price index (CPI), Bils and Klenow (2004) report that the median frequency of price adjustments is 4.3 months. Using the same U.S. CPI raw data, Nakamura and Steinsson (2008) report that when sales are excluded, prices are adjusted with a frequency of once every 8 to 11 months. Similar studies focusing on other countries include Dhyne et al. (2006) for the euro area and Higo and Saita (2007) for Japan.

  2010.04

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• Real Rigidities: Evidence from an Online Marketplace
  Makoto NireiTakayuki MizunoTsutomu Watanabe

  Abstract

  Are prices sticky due to the presence of strategic complementarity in price setting? If so, to what extent? To address these questions, we investigate retailers’ price setting behavior, and in particular strategic interaction between retailers, using a unique dataset containing by-the-second records of prices offered by retailers on a major Japanese price comparison website. We focus on fluctuations in the lowest price among retailers, rather than the average price, examining how quickly the lowest price is updated in response to changes in marginal costs. First, we find that, when the lowest price falls rapidly, the frequency of changes in the lowest price is high, while the size of downward price adjustments remains largely unchanged. Second, we find a positive autocorrelation in the frequency of changes in the lowest price, and that there tends to be a clustering where once a change in the lowest price occurs, such changes occur in succession. In contrast, there is no such autocorrelation in the size of changes in the lowest price. These findings suggest that retailers imitate each other when deciding to adjust (or not to adjust) their prices, and that the extensive margin plays a much more important role than the intensive margin in such strategic complementarity in price setting.

  Introduction

  Since Bils and Klenow’s (2004) seminal study, there has been extensive research on price stickiness using micro price data. One vein of research along these lines concentrates on price adjustment events and examines the frequency with which such events occur. An important finding of such studies is that price adjustment events occur quite frequently. For example, using raw data of the U.S. consumer price index (CPI), Bils and Klenow (2004) report that the median frequency of price adjustments is 4.3 months. Using the same U.S. CPI raw data, Nakamura and Steinsson (2008) report that when sales are excluded, prices are adjusted with a frequency of once every 8 to 11 months. Similar studies focusing on other countries include Dhyne et al. (2006) for the euro area and Higo and Saita (2007) for Japan.

  2009.08

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