Fernholz, Ricardo T. “The Distributional Effects of Progressive Capital Taxes.” Journal of Economic Policy Reform, vol. 20, issue 2, 2017, pp. 99-112.
Abstract: Rising income and wealth inequality since the 1980s has spurred much research examining the underlying causes and potential policy responses. Among the more controversial, Piketty (2014) proposes a progressive capital tax as a response to rising top wealth shares around the world. This paper introduces rank-based econometric methods for dynamic power laws as a tool for estimating the effect of progressive capital taxes on the distribution of wealth. We use available data to approximate the shaping econometric factors of the U.S. wealth distribution, and then consider the effects of progressive capital taxes on these shaping factors. This yields empirical estimates of the distributional effects of progressive capital taxes under different assumptions about the impact of these taxes on household behavior. In most scenarios, we find that a small tax levied on just 1% of households would substantially reshape the U.S. wealth distribution and reduce inequality.
Fernholz, Ricardo T. “Nonparametric Methods and Local-Time-Based Estimation for Dynamic Power Law Distributions.” Journal of Applied Econometrics, vol. 32, issue 7, 2017, pp. 1244-1260.
Abstract: This paper introduces nonparametric econometric methods that characterize general power law distributions under basic stability conditions. These methods extend the literature on power laws in the social sciences in several directions. First, we show that any stationary distribution in a random growth setting is shaped entirely by two factors: the idiosyncratic volatilities and reversion rates (a measure of cross-sectional mean reversion) for different ranks in the distribution. This result is valid regardless of how growth rates and volatilities vary across different economic agents, and hence applies to Gibrat's law and its extensions. Second, we present techniques to estimate these two factors using panel data. Third, we describe how our results imply predictability as higher-ranked processes must on average grow more slowly than lower-ranked processes. We employ our empirical methods using data on commodity prices and show that our techniques accurately describe the empirical distribution of relative commodity prices. We also show that rank-based out-of-sample forecasts of future commodity prices outperform random-walk forecasts at a 1-month horizon.
Fernholz, Ricardo T., and Christoffer Koch. “Bank Asset Concentration Not Necessarily Cause for Worry.” Federal Reserve Bank of Dallas Economic Letter, vol. 12, issue 7, 2017, pp. 1-4.
Abstract: U.S. banking assets have become substantially more concentrated within a few large institutions. However, decreasing relative rates of big-bank growth and of idiosyncratic volatility—an indicator of individual bank susceptibility to shocks and a resulting redistribution of assets—suggest a reduction in systemic financial system risk through contagion.
Fernholz, Ricardo T., and Christoffer Koch. “Big Banks, Idiosyncratic Volatility, and Systemic Risk.” American Economic Review: Papers & Proceedings, vol. 107, no. 5, 2017, pp. 603-607.
Abstract: Starting in the 1990s, US bank assets grew more concentrated among a few large institutions. We explore the changing role of idiosyncratic volatility as a shaping force of the bank asset power law distribution. Our results reveal that idiosyncratic asset volatilities for bank-holding companies declined since the 1990s. To the extent that firm-specific shocks can have significant macroeconomic consequences, this result implies that even as one obvious source of aggregate risk and contagion--bank asset concentration--has increased, another important source--idiosyncratic volatility--has diminished.
Fernholz, Ricardo T., Kris James Mitchener, and Marc Weidenmier. “Pulling Up the Tarnished Anchor: The End of Silver as a Global Unit of Account.” Journal of International Money and Finance, vol. 74, 2017, pp. 209-228.
Abstract: We use the demise of silver-based standards in the 19th century to explore price dynamics when a commodity-based money ceases to function as a global unit of account. We develop a general equilibrium model of the global economy with gold and silver money. Calibration of the model shows that silver ceased functioning as a global price anchor in the mid-1890s--the price of silver is positively correlated with agricultural commodities through the mid-1890s, but not thereafter. In contrast to Fisher (1911) and Friedman (1990), both of whom predict greater price stability under bimetallism, our model suggests that a global bimetallic system, in which the gold price of silver fluctuates, has higher price volatility than a global monometallic system. We confirm this result using agricultural commodity price data for 1870-1913.