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- Altruism, human capital and environmental preservation in a globalized economyPublication . Bouché, Stéphane; Modesto, LeonorThis paper analyzes the impact of trade openness on education and environmental preservation choices in a two country model where both countries only differ in their shares of skilled workers. Parents may invest in their children's education increasing their probability to become skilled and in maintenance investment in order to preserve present and future environmental quality. Under autarky, unskilled individuals in the skill scarce economy are unable to invest in education due to borrowing constraints. Moreover, only skilled individuals of the latter economy choose to invest in environmental preservation. Openness to trade modifies relative factor prices and increases pollution. This allows for human capital convergence between both economies and induces all skilled individuals to contribute to environmental preservation in the free trade equilibrium. However, overall environmental quality decreases, suggesting a potential trade-off between income convergence at the global level and environmental preservation. We also focus on the optimal allocation under free trade and conclude that a maintenance investment subsidy should be implemented for skilled individuals but not necessarily for unskilled ones.
- Bank risk-taking and impaired monetary policy transmissionPublication . Koenig, Philipp; Schliephake, EvaWe consider a standard banking model with agency frictions to simultaneously study the weakening and reversal of monetary transmission and banks’ risk-taking in a low-interest environment. Both, weaker monetary transmission and higher risk-taking arise because lower policy rates impair banks’ net worth.The pass-through to deposit rates, the level of excess reserves and the extent of the agency problem between banks and depositors are crucial determinants of monetary transmission. If the deposit pass-through is sufficiently impaired, a reversal rate exists. For policy rates below the reversal rate further interest rate reductions lead to a disproportionate increase in risk-taking and a contraction in loan supply.
- Crowding and tail risk in momentum returnsPublication . Barroso, Pedro; Edelen, Roger M.; Karehnke, PaulSeveral theoretical studies suggest that coordination problems can cause arbitrageur crowding to push asset prices beyond fundamental value as investors feedback trade on each others' emands. Using this logic we develop a crowding model for momentum returns that predicts tail risk when arbitrageurs ignore feedback effects. However, crowding does not generate tail risk when arbitrageurs rationally condition on feedback. Consistent with rational demands, our empirical analysis generally finds a negative relation between crowding proxies constructed from institutional holdings and expected crash risk. Thus our analysis casts both theoretical and empirical doubt on crowding as a stand-alone source of tail risk.
- Expressions of gratitude applied to business: a lesson for managing online reviewsPublication . Simão, Claudia; Farias, Ana Rita; Reis, JoanaOnline reviews are critical for business thriving, but their management is not often effective. Using data from one Social Media platform, with more than 600 observations of public online interactions between business owners and customers, we showed that a strategic management of online reviews predicts a positive increment of online reputation. Publicly expressing gratitude (Study 1), and specifically, directing these expressions towards beneficial online reviews (Study 2), are effective strategies supporting a general increase of the business online score. These findings identify public expressions of gratitude as a responsive, attentive gesture that signals care and consideration towards customers. Such gesture promotes the online reputation through satisfaction between business-community relationships.
- How do people respond to small probability events with large, negative consequences?Publication . Eichenbaum, Martin; Matos, Miguel Godinho de; Lima, Francisco; Trabandt, Mathias; Rebelo, SergioWe study how people react to small probability events with large negative consequences using the outbreak of the COVID-19 epidemic as a natural experiment. Our analysis is based on a unique administrative data set with anonymized monthly expenditures at the individual level. We find that older consumers reduced their spending by more than younger consumers in a way that mirrors the age dependency in COVID-19 case-fatality rates. This differential expenditure reduction is much more prominent for high-contact goods than for low-contact goods and more pronounced in periods with high COVID-19 cases. Our results are consistent with the hypothesis that people react to the risk of contracting COVID-19 in a way that is consistent with a canonical model of risk taking.
- Human capital spillovers and returns to educationPublication . Portugal, Pedro; Reis, Hugo; Guimarães, Paulo; Cardoso, Ana RuteIn this paper, we quantify the impact of co-workers’ human capital on a worker’s productivity and, more specifically, the spillovers of co-workers’ education within the workplace. We identify the impact of peer quality and provide an unambiguous decomposition of the impact of unobserved heterogeneity on the estimated returns to education. We find that peer effects are quite sizeable. A one standard deviation increase in the measure of peer quality leads to a wage increase of 2.1 percent. We also unveil that an additional year of average education of co-workers yields a 0.5 percent increase in the individual own wage.
- Is macroprudential policy driving savings?Publication . Teixeira, André; Venter, ZoëThis paper assesses the impact of macroprudential policy (MaPP) on aggregate demand in the EU between 2000-2019. Using a difference-in-differences approach, we find that MaPP reduces household consumption and increases firm investment. These effects are relatively mild in the short run but become more pronounced in the long run. Our findings point to a weaker macroeconomic impact than suggested in previous studies.
- Learning in bank runsPublication . Schliephake, Eva; Shapiro, JoelWe examine a model in which depositor learning exacerbates bank runs. Informed depositors can quickly withdraw when the bank has low-quality assets. Uninformed depositors may decide to wait, which allows them to learn by observing informed depositors' actions. However, learning that the bank has low-quality assets will spark a run ex-post, which increases the incentives of uninformed depositors to run ex-ante. Moreover, when there are more informed depositors, uninformed depositors have a fear of missing out, which also makes preemptive runs more likely. Learning may, thus, increase the likelihood of panic runs and decrease surplus.
- Learning through repetition? A dynamic evaluation of grade retention in PortugalPublication . Boghesan, Emilio; Reis, Hugo; Todd, Petra E.High rates of grade retention are a matter of much controversy and debate worldwide. Although some students may learn more with extended classroom time, other students get discouraged and drop out of school. This paper develops and implements a dynamic value-added modeling approach for estimating grade retention effects in Portuguese high schools where over 40% of students were retained. The statistical model is derived from an education production function that describes how knowledge cumulates with sequential years of school attendance, including repeated grades. Model parameters are obtained using simulated method of moments applied to nationwide administrative test score data. The estimated model is used to simulate achievement in math and Portuguese under the existing grade retention and compulsory schooling policies and under alternative policies. Results show that the average impact of the current policy on 12th grade test scores of retained students is positive, 0.2 standard deviations in math and 0.5 s.d. in Portuguese. However, we find that the test score impacts are heterogeneous and roughly one third of students experience learning loss. Retention also significantly increases school dropout, especially for male youth and older students. We compute policy-relevant treatment effects for retention’s effects on lifetime earnings, taking into account retention’s simultaneous effects on educational attainment, knowledge, and age of labor market entry, and we solve for the optimal retention policy that maximizes average lifetime earnings in the population.
- Lest we forget: learn from out-of-sample errors when optimizing portfoliosPublication . Barroso, Pedro; Saxena, KonarkPortfolio optimization often struggles in realistic out-of-sample contexts. We de-construct this stylized fact, comparing historical forecasts of portfolio optimization inputs with subsequent out of sample values. We confirm that historical forecasts are imprecise guides of subsequent values but also find the resulting forecast errors are not entirely random. They have predictable patterns and can be partially reduced using their own history. Learning from past forecast errors to calibrate inputs (akin to empirical Bayesian learning) results in portfolio performance that reinforces the case for optimization. Furthermore, the portfolios achieve performance that meets expectations, a desirable yet elusive feature of optimization methods.