Zvi Hercowitz

The Role of Collateralized Household Debt in Macroeconomic Stabilization

A novel method of reclaiming cured polyurethane elastomers comprises milling particulate cured polyurethane elastomer under shear sufficient to increase the temperature of the elastomer for a time sufficient to form the elastomer into a cohesive mass and then continuing the milling at elevated temperature and pressure in the presence of a selected devulcanizing agent until a uniform, continuous, cohesive, partially devulcanized product is obtained. The novel product has properties which are improved over those of the cured starting material including improved heat resistance, abrasion resistance and tensile strength.

Welfare implications of the transition to high household debt

Aggressive deregulation of the mortgage market in the early 1980s triggered innovations that greatly reduced the required home equity of U.S. households. This allowed households to cash-out a large part of accumulated equity, which equaled 71 percent of GDP in 1982. A borrowing surge followed: Household debt increased from 43 to 62 percent of GDP in the 1982- 2000 period. What are the welfare implications of such a reform for borrowers and savers? This paper uses a calibrated general equilibrium model of lending from the wealthy to the middle class to evaluate these effects quantitatively.

Money stock revisions and unanticipated money growth

An important empirical regularity is the strong positive effect of money shocks on output and employment. One strand of business cycle theory relates this finding to temporary confusions between absolute and relative price changes. These models predict positive output effects of unperceived monetary movements, but the quantitative importance of unperceived shifts in nominal aggregates is subject to question. Another strand of theory, based on long-term nominal contracts and analogous price-setting institutions, generates output effects from unanticipated, but not necessarily contemporaneously unperceived, money shocks. However, the real effects of unpredicted, but contemporaneously understood, monetary changes are not obviously consistent with efficient institutional arrangements. The present paper provides some empirical evidence on the two types of theories by analyzing the output effects associated with revisions in the money stock data, where the revisions are interpreted as components of unperceived monetary movements. The revisions turn out to have no significant explanatory power for output. Previous findings that innovations from an estimated money growth equation have a significant output effect remain intact when the revisions are included as separate explanatory variables. Overall, the study provides a small amount of evidence against the special role of unperceived, as opposed to unanticipated, money movements as a determinant of business fluctuations.

Equipment Investment and the Relative Demand for Skilled Labor: International Evidence

This paper estimates the effects of equipment investment on relative wages and employment of skilled labor and explores their dynamics. The basic hypothesis is that they are positive, due to either equipment-skill complementarity or to skill advantage in technology adoption. Using a panel data set with a wide rage of countries, the relative wage and relative employment of skilled workers are regressed on lagged investment in machinery and other relevant variables. The results indicate a strong, positive effect of machinery investment on the relative demand for skilled labor.

The Dynamics of Work and Debt

This paper characterizes the labor supply and borrowing of a household facing collateral requirements that limit its debt and compel it to accumulate equity in its durable goods stock. The households discount rate exceeds the market rate of interest, so it would otherwise finance increased current consumption by borrowing against future wages. Collateral constraints generate a positive comovement between the households debt, the stock of durable goods and labor supply following wage or interest rate shocks---as the households labor supply adjusts to finance downpayments on new durable good purchases and the subsequent debt repayment. Increasing the speed of debt repayment amplifies these movements.

Liquidity Constraints of the Middle Class

Consumption of households with liquid financial assets responds much more to transitory income shocks than the permanent-income hypothesis predicts. That is, middle class households act as if they face liquidity constraints. This paper addresses this puzzling observation with a model of impatient households that face a large recurring expenditure. In spite of impatience, they save as this expenditure draws near. We call such saving made in preparation for a foreseeable event term saving. Under precautionary saving, good luck drives wealth accumulation, so a high asset level implies an abundance of liquidity. With term saving, assets indicate an impending need for funds and a shortage of liquidity. The borrowing constraint will bind at the time of the expenditure. This separates planning up to that time from the rest of the households lifetime and thereby shortens its effective horizon. Intertemporal substitution over such a limited period generates strong consumption responses to temporary income changes. As the expenditure approaches, the effective horizon shortens further as the household accumulates assets. Hence, households with more assets have larger consumption responses. We compare a calibrated version of a model that embodies both term saving and precautionary saving motives with observed consumption responses to the 2001 U.S. tax rebate. The model replicates these observations well and also generates excess smoothness of aggregate consumption.

The Financial Labor Supply Accelerator

The financial labor supply accelerator links hours worked to minimum down payments for durable good purchases. When these constrain a households debt, a persistent wage increase generates a liquidity shortage. This limits the income effect, so hours worked grow. The mechanism generates a positive comovement of labor supply and household debt, the strength of which depends positively on the minimum down-payment rate. Its potential macroeconomic importance comes from these labor supply fluctuations procyclicality. This paper examines the comovement of hours worked and debt at the household level with PSID data before and after the financial deregulation of the early 1980s which reduced effective down payments and compares the evidence with results from model-generated data. The household-level data displays positive co-movement between hours worked and debt, which weakens after the financial reforms. An empirically realistic reduction of the models required down payments generates a quantitatively similar weakening.

Government-Spending Adjustment: The OECD Since the Nineties

This paper investigates the drastic reduction in public spending in OECD countries during the 1990s. Using a panel data set of 18 countries, we find this adjustment to be a general OECD development, beginning in 1994, and that participation in the Maastricht Treaty or in the Stability and Growth Pact does not introduce additional effects. In the long run, this adjustment is estimated to reduce the ratio of primary government spending to output by about 4 percentage points. There is no evidence of differential adjustment in expansions or recessions. We also find that declines in interest payments on public debt are followed by increases in primary expenditures by about the same amount. The econometric framework makes it possible to compute the long-run ratios of government expenditures to GDP in the 18 OECD countries in the sample.

Government Spending Adjustment: The OECD Since the 1990s

This paper investigates the drastic reduction in public spending in OECD countries during the 1990s. Using a panel data set of 18 countries, we find this adjustment to be a general OECD development, beginning in 1994, and that participation in the Maastricht Treaty or in the Stability and Growth Pact does not introduce additional effects. In the long run, this adjustment is estimated to reduce the ratio of primary government spending to output by about 4 percentage points. There is no evidence of differential adjustment in expansions or recessions. We also find that declines in interest payments on public debt are followed by increases in primary expenditures by about the same amount. The econometric framework makes it possible to compute the long-run ratios of government expenditures to GDP in the 18 OECD countries in the sample.