Why mandate young borrowers to contribute to their retirement accounts?

February 21, 2017

By Troebn M. Andersen and Joydeep Bhattacharya

http://d.repec.org/n?u=RePEc:isu:genstf:201609260700001016&r=dge

Many countries, in an effort to address the problem that too many retirees have too little saved up, impose mandatory contributions into retirement accounts, that too, in an age-independent manner. This is puzzling because such funded pension schemes effectively mandate the young, who wish to borrow, to save for retirement. Further, if agents are present-biased, they disagree with the intent of such schemes and attempt to undo them by reducing their own saving or even borrowing against retirement wealth. We establish a welfare case for mandating the middle-aged and the young to contribute to their retirement accounts, even with age-independent contribution rates. We find, somewhat counter-intuitively, that pitted against laissez faire, mandatory pensions succeed by incentivizing the young to borrow more and the middle-aged to save nothing on their own, in effect, rendering the latter’s present-biasedness inconsequential.

This paper challenges your intuition. The story is more complex than what the abstract can convey, so do read the paper to find how the twisted logic of cornering the middle-aged to save nothing on their own and making the young borrow like crazy ends up with the old being able to afford a comfortable retirement, even though everybody exhibits a bias for the present.

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Jobless Recoveries: The Interaction between Financial and Search Frictions

February 16, 2017

By Dennis Wesselbaum

http://d.repec.org/n?u=RePEc:otg:wpaper:1603&r=dge

This paper establishes a link between labor market frictions and financial market frictions. We present empirical evidence about the relation between search and financial frictions. Then, we build a stylized DSGE model that features this channel. Simulation excercises show that the model with this channel generates a strong internal propagation mechanism, replicates stylized labor market effects of the Great Recession, and, most importantly, creates a jobless recovery.

Nice to see a paper that ties together the jobless recoveries of the last few cycles with the financial frictions that have been so important in the last one.


February 2017 calls for papers

February 13, 2017

Some of them have really close deadlines, so do not delay your submissions!


Flipping in the Housing Market

February 9, 2017

Charles Ka Yui Leung and Chung-Yi Tse

http://d.repec.org/n?u=RePEc:dpr:wpaper:0989&r=dge

We add arbitraging middlemen — investors who attempt to profit from buying low and selling high — to a canonical housing market search model. Flipping tends to take place in sluggish and tight, but not in moderate, markets. To follow is the possibility of multiple equilibria. In one equilibrium, most, if not all, transactions are intermediated, resulting in rapid turnover, a high vacancy rate, and high housing prices. In another equilibrium, few houses are bought and sold by middlemen. Turnover is slow, few houses are vacant, and prices are moderate. Moreover, flippers can enter and exit en masse in response to the smallest interest rate shock. The housing market can then be intrinsically unstable even when all flippers are akin to the arbitraging middlemen in classical finance theory. In speeding up turnover, the flipping that takes place in a sluggish and illiquid market tends to be socially beneficial. The flipping that takes place in a tight and liquid market can be wasteful as the efficiency gain from any faster turnover is unlikely to be large enough to offset the loss from more houses being left vacant in the hands of flippers. Based on our calibrated model, which matches several stylized facts of the U.S. housing market, we show that the housing price response to interest rate change is very non-linear, suggesting cautions to policy attempt to “stabilize” the housing market through monetary policy.

Interesting. The next question is then: can flippers trigger a bubble?