Economics Commons^™

Forward Guidance Effectiveness In A New Keynesian Model With Housing Frictions, Stephen J. Cole, Sungjun Huh

Economics Faculty Research and Publications

Housing markets are closely related to monetary policy. This paper studies the link between housing frictions and the effectiveness of forward guidance. A housing collateral constraint and forward guidance shocks are incorporated into a standard medium-scale New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. Our main results produce a number of important implications. First, financial frictions emanating from the housing market dampen the effectiveness of forward guidance on the economy. Second, forward guidance shocks generate welfare gains, though the magnitude of these gains declines when housing frictions increase. Housing frictions also attenuate the effect of forward guidance at the zero …

Young Adult Substance Use Following Involuntary Job Loss, Nicholas A. Jolly, Gwendolyn J. Davis

Economics Faculty Research and Publications

This paper uses data from the Panel Study of Income Dynamics to study the relationship between job displacement and substance use among young adults. Results show that displacement is associated with increases in the probability of smoking cigarettes and drinking and the intensity of consuming alcohol and marijuana. Men, whites, and those who live with family/friends at the time of displacement are more likely to use hard drugs after job loss. Findings suggest that government policy designed to aid displaced workers should contain provisions to anticipate and respond to substance use disorders that may arise, particularly among younger job losers.

(Wp 2022-07) Teaching Economics And Ethics, John B. Davis

Economics Working Papers

As an interdisciplinary field, economics and ethics has been taught in many different ways, including in my experience teaching the course over many years. This paper describes the challenges teaching this subject involves and the strategy I ultimately adopted for doing so after trying different approaches. This strategy was meant to address the needs of a heterogenous collection of students, many of whom had limited knowledge of economics and were likely not take many additional courses in it. The course was structured around four modules opposed to one another in two pairs:

(1) Ways economics influences ethics: The market vision …

(Wp 2022-06) Sheila Dow's Open Systems Methodology, John B. Davis

Economics Working Papers

This paper reviews Sheila Dow’s contributions to open systems thinking as a form of methodological argument and as an important foundation for pluralism in economics. It reviews the origins of her thinking in connection with her distinction between Cartesian/Euclidian and Babylonian thinking in the history of economics, discusses the further development of her views regarding open and closed systems in her 2002 Economic Methodology book and in connection with her ‘structured pluralism’ concept, discusses the 2005 paper co-authored with Victoria Chick, “The Meaning of Open Systems” examines Dow’s and Chick’s view and critique of critical realism in regard to the …

Political Differences In Air Pollution Abatement Under The Clean Air Act, Andrew G. Meyer, Zach Raff, Jason M. Walter

Economics Faculty Research and Publications

In this paper, we study how local politics affect state level implementation of a critical federal environmental policy, the Clean Air Act, in the electricity generation sector. The analysis focuses on the installation of capital intensive air pollution abatement technology in highly regulated “nonattainment” areas, which violate federal air quality standards. The primary research design uses a regression discontinuity in the vote share for Republican governors and event study analyses of close elections. In nonattainment areas, Republican gubernatorial control differentially decreases new air pollution abatement capital spending by 90% and the probability of installing the most effective nitrogen oxide abatement …

(Wp 2022-05) Change In And Changing Economics, John B. Davis

Economics Working Papers

Change in economics has likely always been a subject of discussion in economics and political economy. That discussion may have languished in the first post-World War II decades when neoclassicism was ascendent and dominated economics, but the emergence of game theory, more recently behavioral economics, and a variety of other new fields and approaches in economics since the 1980s has re-invigorated interest in the subject so that now there are many views on it. Yet systematic investigation of what change in economics involves has advanced little. Change is clearly always on-going in any discipline, but when it is said there …

(Wp 2022-04) A General Theory Of Social Economic Stratification: Stigmatization, Exclusion, And Capability Shortfalls, John B. Davis

Economics Working Papers

This paper develops a general theory of socio-economic stratification based on the interconnection between a specific micro-level mechanism and a broad macro-level process. At the micro-level, it examines selective social identity stigmatization; at the macro-level it explains social exclusion using the goods taxonomy club goods concept. The paper argues individuals in disadvantaged social groups, particularly by race and gender, suffer two kinds of capability shortfalls: capability devaluations at the micro level and capability deficits and the macro-level. These capability shortfalls mutually reinforce and sustain an overall hierarchical ordering of social groups. Their interconnection is explained using a complexity theory analysis …

The Role Of Paid Family Leave In Labor Supply Responses To A Spouse's Disability Or Health Shock, Priyanka Anand, Laura Dague, Kathryn L. Wagner

Economics Faculty Research and Publications

Disability onset and major health shocks can affect the labor supply of those experiencing the event and their family members, who face a tradeoff between time spent earning income and providing care. This decision could be affected by the availability of paid family leave. We examine the role of paid leave mandates in caregiving and labor supply decisions after a spouse's disability or health shock. Using data from the Survey of Income and Program Participation, we show that paid leave mandates reduce the likelihood that potential caregivers report decreasing their paid work hours to provide caregiving after a spouse's health …

Vocational Rehabilitation And Labor Market Outcomes: Evidence From World War I Veterans, Ethan Schmick

Economics Faculty Research and Publications

This article uses a linked sample of World War I Army veterans from the state of Missouri to study the impact of vocational rehabilitation on labor market outcomes for men wounded and disabled during the war. Veterans’ military service abstracts are linked to the 1940 US Census and a subset are linked to rehabilitation records. This creates a new dataset that contains information on military service, rehabilitation, and labor market outcomes. I find that 70 percent of veterans that were both wounded in action and disabled when discharged from the army participated in the rehabilitation program. These same veterans had …

(Wp 2022-03) Managing Contagion: Covid, Public Health, And Reflexive Behavior, John B. Davis

Economics Working Papers

This paper characterizes a pandemic as one kind of contagion, and defines a contagion as a two-level, two-direction, reflexive feedback loop system. In such a system, experts’ opinions can act as self-fulfilling prophecies that significantly influence social behavior. Also, when multiple experts produce multiple, expert opinions can fragment a society’s response to a pandemic worsening rather than ameliorating it. This paper models this with two competing expert opinions, associates them with club goods and common pool goods types of circumstances, and argues that to combat fragmentation of opinion a focus on public health public good provision needs to be framed …

(Wp 2022-02) Keynes's Treatise On Probability 100 Years Later: Small Vs. Large Worlds And Closed Vs. Open Systems, John B. Davis

Economics Working Papers

The meaning and significance of Keynes’s Treatise on Probability has changed over the 100 years since its publication. Initially it stood on its own as an original contribution to probability theory. After The General Theory some saw the Treatise strengthening Keynes’s later arguments. Yet by the time New Classical Economics became dominant it became largely ignored. This paper attributes that later rejection to the mainstream economics’ reliance on Savage’s subjective expected utility restriction of probability thinking to what he called small worlds. It argues that his small worlds-large worlds distinction produces a small worlds-closed worlds conception of economics the mainstream …

Cafos And Surface Water Quality: Evidence From Wisconsin, Zach Raff, Andrew G. Meyer

Economics Faculty Research and Publications

Concentrated Animal Feeding Operations (CAFOs) – animal feeding operations with over 1,000 animal units in confined spaces – have proliferated over the past 30 years in the United States. CAFOs provide operational cost savings, but higher animal concentrations in confined spaces can generate external costs, e.g., non-point source water pollution. In this study, we improve on previous research designs to estimate the relationship between the growth in CAFOs and surface water quality using longitudinal data on a large spatial scale. We use a panel dataset from 1995-2017 that links CAFO intensity with nearby surface water quality readings in Wisconsin to …

Do Economic Conditions Affect Climate Change Beliefs And Support For Climate Action? Evidence From The Us In The Wake Of The Great Recession, Andrew G. Meyer

Economics Faculty Research and Publications

I show that climate skepticism increases with negative economic shocks and that the effects are concentrated among individuals in the labor force. I primarily employ a panel of US individuals in the period following the Great Recession, but also find consistent results with an alternative instrumental variables strategy. Among labor force participants, a one‐percentage point increase in the local unemployment rate leads to a three to five percentage point decrease in the probability of believing climate change is real and requires action. I conclude that support for climate change policies could depend on labor market conditions.

(Wp 2022-01) Economics As A Normative Discipline: Value Disentanglement In An ‘Objective’ Economics, John B. Davis

Economics Working Papers

This chapter critically evaluates standard economics’ treatment of positive and normative, drawing on Putnam’s (2002) fact-value entanglement argument. It argues that economics is an inherently value-laden discipline but may still be an ‘objective’ one. The means of achieving this is to carry out a programme of value disentanglement that evaluates research approaches according to whether their different value structures are consistent. The method employed assumes that economics and social science disciplines are built around anchor values or normative ideals and additional sets of values concerning what most people in those disciplines see as most valuable and good about human society …

(Wp 2021-08) Deepening And Widening Social Identity Analysis In Economics, John B. Davis

Economics Working Papers

This paper is a contribution to the Erasmus Journal of Economics and Philosophy symposium on Dasgupta and Goyal’s “Narrow Identities” (2019) that models how individuals develop social identities. They do not distinguish categorical and relational social identities, model only social group social identities, minimize intersectionality (having multiple social group identities), and ignore inter-relational, social role social identities. In a club theory-like analysis, they portray the world as locked into polarized social group rivalries, where democracy matters little compared to social group loyalty. A problem with explaining social identity only in terms of social group identity is that the ‘identify with’ …

(Wp 2021-07) Forward Guidance Effectiveness In A New Keynesian Model With Housing Frictions, Stephen J. Cole, Sungjun Huh

Economics Working Papers

Housing markets are closely related to monetary policy. This paper studies the link between housing frictions and the effectiveness of forward guidance. A housing collateral constraint and forward guidance shocks are incorporated into a standard medium-scale New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. Our main results produce a number of important implications. First, financial frictions emanating from the housing market dampen the effectiveness of forward guidance on the economy. Second, forward guidance has asymmetric effects on the welfare of lenders and borrowers when housing frictions increase. Housing frictions also attenuate the effect of forward guidance at the zero lower …

Heterogeneity In Individual Expectations, Sentiment, And Constant-Gain Learning, Stephen J. Cole, Fabio Milani

Economics Faculty Research and Publications

This paper uses adaptive learning to understand the heterogeneity of individual-level expectations. We exploit individual Survey of Professional Forecasters data on output and inflation forecasts. We endow all forecasters with the same information set that they would have as economic agents in a benchmark New Keynesian model. Forecasters are, however, allowed to differ in the constant gain values that they use to update their beliefs and in their sentiments. The latter are defined as the degrees of excess optimism or pessimism about the economy that cannot be justified by the learning model. Our results highlight the heterogeneity in the gain …

Gender Differences In The Returns To Education Over Time For Married Couples, Nikki Brendemuehl, Nicholas A. Jolly

Economics Faculty Research and Publications

Using US Census data from 1960 to 2000 and American Community Survey data from 2010, this paper analyzes gender differences in the return to education for married couples. Results from this analysis show that the return to schooling has increased over time for both genders; however, the relative return to schooling for females has fallen since the 1990s. In 2010, married women who are under age 35 and are in the top 20 percent of the income distribution had lower returns to schooling compared to men. These results are consistent with several demographic shifts that occurred during the last half …

(Wp 2021-06) A Contextualist Approach To Health Economics, John B. Davis, Robert Mcmaster

Economics Working Papers

This paper departs from the standard abstract economics approach to health economics to develop a specifically contextualist approach to the subject emphasizing social and historical circumstances affecting health provision. Following Polanyi, it sees the economy as socially embedded and economic relationships as social relationships. The paper critically examines Grossman’s natural science utility maximization explanation of people’s demand for health and health care, and advances an alternative social science account using a two-way analysis between micro level social relationships and the macro level organization of health in society. Three significant trends affecting the future of health systems are discussed. The paper …

Real Estate And Relative Risk Aversion With Generalized Recursive Preferences, Sungjun Huh, Insu Kim

Economics Faculty Research and Publications

This paper investigates how real estate wealth affects the household’s attitude toward risk, and derives the closed-form expressions for risk aversion with generalized recursive preferences. We find three channels through which real estate wealth affects risk aversion, and these channels are absent in the traditional measure of relative risk aversion as in Arrow (1965) and Pratt (1964). First, illiquidity and fluctuations in real estate value increase consumption risk, thereby increasing risk aversion. Second, real estate as an asset provides a cushion for absorbing negative shocks to households, reducing risk aversion. Third, an increase in real estate prices lowers the profit …

Incorporating Beliefs And Experiences Into Choice Experiment Analysis: Implications For The National Park Service, Sahan T. Dissanayake, Andrew G. Meyer

Economics Faculty Research and Publications

We show that respondents' beliefs about future outcomes and prior recreational experiences affect policy recommendations from choice experiments. For New England residents, we find that willingness to pay for a new national park in Maine differs based on respondents' stated beliefs about the status quo long-term land use. We also find that respondents who do (do not) hunt or snowmobile would pay significantly more (less) for a park allowing these activities. Land managers may find a two-park solution (one allowing the activities and one prohibiting them) would be best; this insight would be missed when neglecting to model conflicting recreational …

(Wp 2021-05) Heterogeneity In Individual Expectations, Sentiment, And Constant-Gain Learning, Stephen J. Cole, Fabio Milani

Economics Working Papers

This paper uses adaptive learning to understand the heterogeneity of individual-level expectations. We exploit individual Survey of Professional Forecasters data on output and inflation forecasts. We endow all forecasters with the same information set that they would have as economic agents in a benchmark New Keynesian model. Forecasters are, however, allowed to differ in the constant gain values that they use to update their beliefs and in their sentiments. The latter are defined as the degrees of excess optimism or pessimism about the economy that cannot be justified by the learning model. Our results highlight the heterogeneity in the gain …

(Wp 2021-03) Social Economics, John B. Davis

Economics Working Papers

This chapter explores the evolution and contribution of social economics to modern political economic analysis. It reviews the origins and early history of social economics, discusses more fully recent postwar social economics, and then identifies new themes in social economics’ current research agenda. Social economics is distinguished from classical political economy and contemporary neoclassical and mainstream economics – and, indeed, from most other political economic approaches – by its goal of explaining and premising the concept of ‘social’ in economics. Its main organising principle is that the economy is embedded in human society rather than vice versa. Second, the chapter …

(Wp 2021-04) John Tomer's Reconceptualization Of The Concept Of Human Capital, John B. Davis

Economics Working Papers

This chapter examines John Tomer’s contributions to our understanding of the concept of human capital. Tomer criticized the standard mainstream view of the concept as narrowly focused on education and training and as seeing investments in human capital as having “an individual, cognitive, and machine-like nature.” A broader concept included attention to the people’s noncognitive development, and employed both social capital and personal capital concepts. This produces a more expansive view of human development, allows for a humanistic psychological perspective, and supports a multi-dimensional, Maslovian understanding of the hierarchy of human needs. Tomer framed his policy thinking regarding investments in …

(Wp 2021-02) Attribute Substitution, Counterfactual Thinking, And Heterodox Economics, John B. Davis, Theodore Koutsobinas

Economics Working Papers

This paper examines how attribute substitution (AS), central to the psychology of choice and behavioral economic reasoning, can be understood when combined with counterfactual thinking (CFT), often called ‘what if’ or ‘if only’ thinking, and how their combination creates important opportunities for the seeing heterodox economics as a single research program alternative to mainstream economics. The first section of the paper discusses AS, CFT, and what a AS-CFT behavioral framework involves, and then emphasizes how this framework departs from fundamental assumptions mainstream rational choice theory employs. The second section reviews the foundations of behavioral thinking regarding AS, describes what it …

Shifts In Precipitation And Agricultural Intensity Increase Phosphorus Concentrations And Loads In An Agricultural Watershed, Donald M. Waller, Andrew G. Meyer, Zach Raff, Steven I. Apfelbaum

Economics Faculty Research and Publications

Fertilizers and manure applied to cropland to increase yields are often lost via surface erosion, soil leaching, and runoff, increasing nutrient loads in surface and sub-surface waters, degrading water quality, and worsening the ‘dead zone’ in the Gulf of Mexico. We leverage spatial and temporal variation in agricultural practices and precipitation events to examine how these factors affect stream total phosphorus (TP) concentrations and loads in the Sugar River (Wisconsin), recently listed as impaired. To perform our analysis, we first collected water quality data from 1995 to 2017 from 40 sites along the Sugar River and its tributaries. Starting in …

Learning And The Effectiveness Of Central Bank Forward Guidance, Stephen J. Cole

Economics Faculty Research and Publications

This paper examines the link between expectations formation and the effectiveness of central bank forward guidance. A standard New Keynesian model is extended to include forward guidance shocks in the monetary policy rule. Agents form expectations about future macro-economic variables via either the standard rational expectations hypothesis or an adaptive learning model. The results show that the assumption of rational expectations overstates the effects of forward guidance relative to adaptive learning during an economic crisis. Thus, if monetary policy is based on a model with rational expectations, the results of forward guidance could be potentially misleading.

The Housing Risk Premium In A Production Economy, Sungjun Huh, Insu Kim

Economics Faculty Research and Publications

This article studies how the housing risk premium is determined in a simple real business cycle model. We present a consumption-based asset pricing model for the housing risk premium and evaluate whether the model is able to explain the observed housing risk premium. Our findings show that a real business cycle model with generalized recursive preferences is able to match the observed housing risk premium. We also find that the volatility of the housing demand shock plays a crucial role in determining the risk–return relationship for housing.

(Wp 2021-01) Counterfactual Thinking And Attribute Substitution In Economic Behavior, John B. Davis, Theodore Koutsobinas

Economics Working Papers

This paper discusses how counterfactual thinking can be incorporated into behavioral economics by relating it to a type of attribution substitution involved in choices people make in conditions of Knightian uncertainty. It draws on Byrne’s ‘rational imagination’ account of counterfactual thinking, evidence from cognitive science regarding the forms it takes, and identifies types of attribution substitution specific to economic behavior. This approach, which elucidates the reflective stage of causal reasoning, is relevant for the explanation of hypothetical causal rules suitable for diverse tasks such as planning, expectations and mental simulations and for behavioural change interventions, which take into account people’s …

Growth Forecast Revisions Over Business Cycles: Evidence From The Survey Of Professional Forecasters, Sungjun Huh, Insu Kim

Economics Faculty Research and Publications

This paper studies how expectations regarding current and future output growth are revised as the state of the economy evolves. We study this issue using GDP growth forecasts from the Survey of Professional Forecasters. We find an asymmetric relationship between forecast revisions and GDP growth. Forecasters make larger forecast revisions during contractions than during expansions when the deviation of the economy from its normal state is controlled for.