Working papers from the Federal Reserve Bank of Dallas are preliminary drafts circulated for professional comment.

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2010 Working Papers

1009
The Impact of Hurricanes on Housing Prices: Evidence from U.S. Coastal Cities
Anthony Murphy and Eric Strobl
Abstract: We investigate the effect of hurricane strikes on housing prices in U.S. coastal cities. To this end, we construct a new index of hurricane destruction which varies over time and space. Using this index and an annual, two equation, dynamic equilibrium correction panel model with area and time fixed effects, we model the effects of hurricanes on real house process and real incomes. In our model hurricanes have a direct effect on house prices and an indirect effect via a fall in local incomes. Our results show that the typical hurricane strike raises real house prices for a number of years, with a maximum effect of between 3% to 4 % three years after occurrence. There is also a small negative effect on real incomes. These results are stable across models and subsamples.

1008
Yield Spreads As Predictors of Economic Activity: A Real-Time VAR Analysis
N. Kundan Kishor and Evan F. Koenig
Abstract: We undertake a real-time VAR analysis of the usefulness of the term spread, the junk-bond spread, the ISM's New Orders Index, and broker/dealer equity for predicting growth in non-farm employment. To get around the "apples and oranges" problem described by Koenig, Dolmas and Piger (2003), we augment each VAR we consider with a flexible state-space model of employment revisions. This methodology produces jobs forecasts consistently superior to those obtained using conventional VAR analysis. They are also superior to Federal Reserve Greenbook forecasts and to median forecasts from the Survey of Professional Forecasters. The junk-bond spread is by far the best single predictor of future jobs growth. However, the term spread has some incremental predictive power at medium-to-long horizons. The incremental predictive power of broker/dealer equity, while small, exceeds that of the ISM index at every horizon.

1007
Do Remittances Boost Economic Development? Evidence From Mexican States
Pia M. Orrenius, Madeline Zavodny, Jesús Cañas and Roberto Coronado
Abstract: Remittances have been promoted as a development tool because they can raise incomes and reduce poverty rates in developing countries. Remittances may also promote development by providing funds that recipients can spend on education or health care or invest in entrepreneurial activities. From a macroeconomic perspective, remittances can boost aggregate demand and thereby GDP as well as spur economic growth. However, remittances may also have adverse macroeconomic impacts by increasing income inequality and reducing labor supply among recipients. We use state-level data from Mexico during 2003–07 to examine the aggregate effect of remittances on employment, wages, unemployment rates, the wage distribution, and school enrollment rates. While employment, wages and school enrollment have risen over time in Mexican states, these trends are not accounted for by increasing remittances. However, two-stage least squares specifications among central Mexican states suggest that remittances shift the wage distribution to the right, reducing the fraction of workers earning the minimum wage or less.

1006
The Impact of LIHTC Program on Local Schools
Wenhua Di and James C. Murdoch
Abstract: The low-income housing tax credit (LIHTC) program has developed over two million rental homes for low-income households since 1986. The perception of deterioration in school quality has been a main reason for community opposition to LIHTC projects in middle-and upper-income areas. In this paper, we examine the impact of LIHTC projects on the nearby school performance. The LIHTC projects tend to have positive and statistically significant impacts on school performance the year they are placed in service and this finding is robust to various specifications. Offsetting these, the one year lag effects are negative and of similar or smaller magnitude.

1005
Rationally Inattentive Macroeconomic Wedges
Antonella Tutino
Abstract: This paper argues that the solution to a dynamic optimization problem of consumption and labor under finite information-processing capacity can simultaneously explain the intertemporal and intratemporal labor wedges. It presents a partial equilibrium model, where a representative risk adverse consumer chooses information about wealth with limited attention. The paper compares ex-post realizations of models with finite and infinite capacity. The model produces macroeconomic wedges and measures of elasticity consistent with the literature. These findings suggest that a consumption-labor model with information-processing constraints can explain the difference between predicted and observed consumption and employment behavior.

1004
The Labor Wedge as a Matching Friction
Anton A. Cheremukhin and Paulina Restrepo-Echavarria
Abstract: The labor wedge accounts for a large fraction of business cycle fluctuations. This paper uses a search and matching model to decompose the labor wedge into three classes of labor market frictions and evaluate their role. We find that frictions to job destruction and bargaining commonly considered in the search literature are not helpful in explaining the labor wedge. We also identify an asymmetric effect of separation, bargaining and matching frictions on unemployment, as well as a potential solution to Shimer's puzzle.

1003
Oil Price Shocks and U.S. Economic Activity: An International Perspective
Nathan S. Balke, Stephen P.A. Brown and Mine K. Yücel
Abstract: Oil price shocks are thought to have played a prominent role in U.S. economic activity. In this paper, we employ Bayesian methods with a dynamic stochastic general equilibrium model of world economic activity to identify the various sources of oil price shocks and economic fluctuation and to assess their effects on U.S. economic activity. We find that changes in oil prices are best understood as endogenous. Oil price shocks in the 1970s and early 1980s and the 2000s reflect differing mixes of shifts in oil supply and demand, and differing sources of oil price shocks have differing effects on economic activity. We also find that U.S. output fluctuations owe mostly to domestic shocks, with productivity shocks contributing to weakness in the 1970s and 1980s and strength in the 2000s.

1002
Credit, Housing Collateral and Consumption: Evidence from the U.K., Japan and the U.S.
Janine Aron, John V. Duca, John Muellbauer, Keiko Murata and Anthony Murphy
Abstract: The consumption behaviour of U.K., U.S. and Japanese households is examined and compared using a modern Ando-Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for U.K. and U.S. but not Japanese households has undergone large shifts since 1980. The average consumption-to-income ratio shifted up in the U.K. and U.S. as mortgage downpayment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is roughly similar in the U.S. and U.K., while land prices in Japan still have a negative effect on consumer spending. Together with evidence for negative real interest rate effects in the U.K. and U.S. and positive ones in Japan, this suggests important differences in the transmission of monetary and credit shocks between Japan and the U.S., U.K. and other credit-liberalized economies.

1001
An Analysis of the Neighborhood Impacts of a Mortgage Assistance Program: A Spatial Hedonic Model
Wenhua Di, Jielai Ma, James C. Murdoch
Abstract: Down-payment or closing-cost assistance is an effective program in addressing the wealth constraints of low- and moderate-income homebuyers. However, the spillover effect of such programs on the neighborhood is unknown. This paper estimates the impact of the City of Dallas Mortgage Assistance Program (MAP) on nearby home values using a hedonic model of home sales from 1990 to 2006. We define neighborhoods of 1,000 feet around each sale and estimate the average differences in sales prices between neighborhoods with various numbers of MAP properties before and after their appearance. We find that MAP properties tend to locate in neighborhoods with lower property values; however, unless a concentration of MAP properties forms, the infusion of MAP properties has little detrimental impact on neighboring property values. Moreover, low concentration of MAP properties has a modest positive impact on surrounding property values.