This paper shows that the wording of Federal Reserve communication affects expectations and other economic variables over and above the effects of setting the federal funds rate. Adapting neural network methods for text analysis from the computer science literature, I analyze how the wording in FOMC impacts fed funds futures (FFF) prices when these statements are announced. Using text analysis on FOMC statements and internal meeting materials, I create a new monetary policy “text shock” series for 2005-2014 that isolates the variation of FFF prices that are not generated by asymmetric information. I also find that the impact of on real interest rates is twice as large when using text shocks over other measures, like changes in FFF prices. Furthermore, the text shock produces responses in output and inflation qualitatively consistent with workhorse macroeconomic models, whereas changes in FFF prices do not.

In each experiment, the inflation rate is increased from 10 percent to 20 percent.

While there has been a substantial effort to understand the Demographic Transition alongside the transition to sustained economic growth, fertility fluctuations have not been analyzed in the business cycle literature. This paper builds a model of fertility choice with dynastic altruism, age-structured population and aggregate productivity shocks. We show that, under reasonable parameter values, fertility is pro-cyclical and that, following a shock, fertility continues to cycle. Applied to the U.S. experience in the 20th century, the Great Depression generates a baby bust of 58% of that seen in the U.S. in the 1930s, followed by a Baby Boom of 77% of that seen in the U.S. in the 1950s. As observed in U.S. estate data, the model predicts that small cohorts receive relatively large per child transfers from parents. Finally, statistical analysis across countries in the 1930s and 1950s further supports our theory.

We study the large observed changes in labor supply by married women in the United States over the post-World War II period, a period that saw little change in the labor supply by single women. We investigate the effects of changes in the gender wage gap, the quantitative impact of technological improvements in the production of nonmarket goods, and the potential inferiority of nonmarket goods in explaining the dramatic change in labor supply. We find that small decreases in the gender wage gap can simultaneously explain the significant increases in the average hours worked by married women and the relative constancy in the hours worked by single women and by single and married men. We also find that the impact of technological improvements in the household on married female hours and on the relative wage of females to males is too small for realistic values. Some specifications of the inferiority of home goods match the hours patterns, but they have counterfactual predictions for wages and expenditure patterns.

The data show that an increase in government provided old-age pensions is strongly correlated with a reduction in fertility. What type of model is consistent with this finding? We explore this question using two models of fertility, the one by Barro and Becker (1989), and the one inspired by Caldwell and developed by Boldrin and Jones (2002). In the Barro and Becker model parents have children because they perceive their children's lives as a continuation of their own. In the Boldrin and Jones' framework parents procreate because the children care about their old parents' utility, and thus provide them with old age transfers. The effect of increases in government provided pensions on fertility in the Barro and Becker model is very small, and inconsistent with the empirical findings. The effect on fertility in the Boldrin and Jones model is sizeable and accounts for between 55 and 65% of the observed Europe-US fertility differences both across countries and across time and over 80% of the observed variation seen in a broad cross section of countries. Another key factor affecting fertility the Boldrin and Jones model is the access to capital markets, which can account for the other half of the observed change in fertility in developed countries over the last 70 years.

Households hold vastly heterogenous amounts of wealth when they reach retirement, and differences in lifetime earnings explain only part of this variation. This paper studies the role of intergenerational transmission of ability, voluntary bequest motives, and the recipiency of accidental and intended bequests (both in terms of timing and size), in generating wealth dispersion at retirement, in the context of a rich quantitative model. Modeling voluntary bequests, and realistically calibrating them, not only generates more wealth dispersion at retirement and reduces the correlation between retirement wealth and lifetime income, but also generates a skewed bequest distribution that is close to the one in the observed data. Mariacristina De Nardi Federal Reserve Bank of Chicago 230 South LaSalle St. Chicago, IL 60604 and University College London and also NBER denardim@nber.org Fang Yang Louisiana State University Department of Economics, 2322 Business Education Complex, Nicholson Extension Baton Rouge, LA 70803 Email: fyang@lsu.edu fyang@albany.edu

We use a Barro–Becker model of endogenous fertility, in which parents are subject to idiosyncratic shocks that are private information (either to labor productivity or taste for leisure), to study the efficient degree of consumption inequality in the long run. The planner uses the trade-off between family size and future consumption and leisure, to provide incentives for workers to reveal their shocks. We show that in this environment, the optimal dynamic contract no longer features immiseration in consumption. We also discuss the implications of the model on the long run properties of family size in the optimal contract and show that the long run trend in dynasty size can be either positive or negative depending on parameters.

In this paper we study the efficient allocation of health resources across individuals.We focus on the relation between health resources and income (taken as a proxy for productivity).In particular we determine the efficient level of the health care social safety net for the indigent.We assume that individuals have different life cycle profiles of productivity.Health care increases survival probability.We adopt the classical approach of welfare economics by considering how a central planner with an egalitarian (ex-ante) perspective would allocate resources.We show that, under the efficient allocation, health care spending increases with labor productivity, but only during the working years.Post retirement, everyone would get the same health care.Quantitatively, we find that the amount of inequality across the income distribution in the data is larger that what would be justified solely on the basis of production efficiency, but not drastically so.As a rough summary, in U.S. data top to bottom spending ratios are about 1.5 for most of the life cycle.Efficiency implies a decline from about 2 (at age 25) to 1 at retirement.We find larger inefficiencies in the lower part of the income distribution and in post retirement ages.

We use a Barro-Becker model of endogenous fertility, in which parents are subject to idiosyncratic shocks that are private information (either to labor productivity or taste for leisure), to study the efficient degree of consumption inequality in the long run. The planner uses the trade off between family size and future consumption and leisure, in addition to the usual variables, to provide incentives for workers to reveal their shocks. We show that in this environment, the optimal dynamic contract no longer features immiseration in consumption. We also discuss the implications of the model on the long run properties of family size in the optimal contract and show that the long run trend in dynasty size can be either positive or negative depending on parameters.

Demographers emphasize decreased mortality and “economic development” as the main contributors generating the demographic transition. Contrary to previous findings, we show that simple dynastic models à la Barro–Becker can reproduce observed changes in fertility in response to decreased mortality and increased productivity growth if the intertemporal elasticity of substitution is low enough. We show that this is largely due to number and welfare of children being substitutes in the utility of parents in this case. We find that with an IES of one‐third, model predictions of changes in fertility amount to two‐thirds of those observed in U.S. data since 1800.

We use an extended Barro-Becker model of endogenous fertility, in which parents are heterogeneous in their labor productivity, to study the efficient degree of consumption inequality in the long run. In our environment a utilitarian planner allows for consumption inequality even when labor productivity is public information. We show that adding private information does not alter this result. We also show that the informationally constrained optimal insurance contract has a resetting property–whenever a family line experiences the highest shock, the continuation utility of each child is reset to a (high) level that is independent of history. This implies that there is a non-trivial, stationary distribution over continuation utilities and there is no mass at misery. The novelty of our approach is that the no-immiseration result is achieved without requiring that the objectives of the planner and the private agents disagree. Because there is no discrepancy between planner and private agents’ objectives, the policy implications for implementation of the efficient allocation differ from previous results in the literature. Two examples of these are: 1) estate taxes are positive and 2) there are positive taxes on family size. ∗Hosseini: Arizona State University, email: rhossein@asu.edu; Jones: University of Minnesota and Federal Reserve Bank of Minneapolis, email: lej@umn.edu; Shourideh: University of Minnesota and Federal Reserve Bank of Minneapolis, email: shour004@umn.edu. We are indebted to Alice Schoonbroodt for all of her helpful comments and suggestions at various stages of this project. We would also like to thank V.V. Chari, Chris Phelan, and Ariel Zetlin-Jones for comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

We use an extended Barro-Becker model of endogenous fertility, in which parents are heterogeneous in their labor productivity, to study the efficient degree of consumption inequality in the long run. In our environment a utilitarian planner allows for consumption inequality even when labor productivity is public information. We show that adding private information does not alter this result. We also show that the informationally constrained optimal insurance contract has a resetting property—whenever a family line experiences the highest shock, the continuation utility of each child is reset to a (high) level that is independent of history. This implies that there is a non-trivial, stationary distribution over continuation utilities and there is no mass at misery. The novelty of our approach is that the no-immiseration result is achieved without requiring that the objectives of the planner and the private agents disagree. Because there is no discrepancy between planner and private agents' objectives, the policy implications for implementation of the efficient allocation differ from previous results in the literature. Two examples of these are: 1) estate taxes are positive and 2) there are positive taxes on family size.

This note provides a formal justification for the Friedman and Savage nonconcavity in the utility of money. This is based on the possibility of indivisibilities in the consumption possibilities set. A precise characterization of when gambling is optimal (and the optimal type) is provided in one special case. Some possible limitations are considered.

In this chapter we revisit the relationship between income and fertility.There is overwhelming empirical evidence that fertility is negatively related to income in most countries at most times.Several theories have been proposed in the literature to explain this somewhat puzzling fact.The most common one is based on the opportunity cost of time being higher for individuals with higher earnings.Alternatively, people might differ in their desire to procreate and accordingly some people invest more in children and less in market-specific human capital and thus have lower earnings.We revisit these and other possible explanations.We find that these theories are not as robust as is commonly believed.That is, several special assumptions are needed to generate the negative relationship.Not all assumptions are equally plausible.Such findings will be useful to distinguish alternative theories.We conclude that further research along these lines is needed.