AIER Working Papers
The American Institute for Economic Research (AIER) conducts independent, scientific economic research. The working papers of our researchers are the basis for AIER reports and publications offering insights into business cycles, money and inflation, the economics of government policy, and topics that affect the lives of consumers and public policy choices.
The Bankruptcy Safe Harbor in Light of Government Bailouts: Reifying the Significance of Bankruptcy as a Backstop to Financial Risk
By Jodie Kirshner, Esq.
If the recent financial crisis was a test of the bankruptcy system and its ability to deal with the risks posed by modern finance, the bankruptcy system failed. Well-designed financial networks have circuit breakers, but the exemption of securitized assets and derivatives trades from the bankruptcy process left bankruptcy law unable to stop runs on financial contracts held by financial institutions. The more effective the bankruptcy law, the greater the ability to build from it to create specialized resolution regimes or to use it to resolve even financial firms, which would increase certainty among creditors and the public. This article emphasizes the importance of effective bankruptcy law as a backstop to systemic risk.
Confirming the Value of Rising Equity Glide Paths: Evidence from a Utility Model
By Luke F. Delorme
Rising equity glide paths during retirement can offer equal or improved financial outcomes compared with static allocations. This study confirms the 2012 work by Michael Kitces and Wade Pfau using a utility model of constant relative risk aversion. As retirees age, pension income (in the form of employer pensions and Social Security) will likely become more important as financial savings dwindle. As a consequence, it is optimal for retirees to increase risk tolerance to withdrawal amounts and equity allocation later in retirement. This finding aligns with the benefits of a rising equity glide path. This paper also finds that increased pension income may encourage retirees to tolerate more risk with non-pension assets such as retirement savings.
Link (pdf) WP003
Co-Movements between Financial Markets and the Real Economy
By Jia Liu and Lyudmyla Kompaniyets
The long-term relationship between financial markets and economic conditions is unclear. This paper aims to investigate how movements in the financial markets interact with the broader economy in the long term. Dynamic factor models are implemented to capture unobserved factors—common factor and sector factors. The common factor represents the co-movement between the real economy and the financial markets, and the sector factors indicate co-movements within the economy or within the financial markets. Variance decomposition is performed to show how much of variation in each variable can be explained by the co-movements. The results show that bond indexes are highly co-moved with money/credit related economic indicators, but stock indexes seem only to co-move with one another, and a big portion of variation in the stock market remains unexplained.
Capturing the Inflation that People Experience: The Everyday Price Index versus the Consumer Price Index
By Polina Vlasenko and Steven R. Cunningham
This paper presents the Everyday Price Index – an index designed to capture the changes in prices of the goods and services people buy frequently. These prices tend to exert a stronger influence on the perception of inflation, and their volatility represents an important risk to household budgets. The comparison of the Everyday Price Index and the Consumer Prices Index reveal that the indexes began to diverge starting in the late-2000s, while also becoming more volatile. This divergence suggests that the everyday prices no longer follow the same trend as the overall price level does. The Everyday Price Index may be better than the Consumer Price Index at reflecting the concept of “prices in general” held by the public. Our analysis shows that the Everyday Price Index has better predictive power for inflation expectations than does the Consumer Price Index, when those expectations are derived from surveys of the general public.
The Economics-Across-the-Curriculum approach encourages the integration of economic concepts into various disciplines. This helps teachers and students to experience the beauty of interdisciplinary connections among topics and to engage in intellectual inquiry beyond the impermeable walls of a single-subject area. The paper contributes to the literature on economic education by describing the results of a multi-day program of the American Institute for Economic Research that uses the Economics- Across-the-Curriculum approach. The program appeals not only to economics teachers but also to teachers of English Language Arts, social studies, math, and foreign languages. The participants’ diversity generates a cross-pollination of ideas, dynamism, and an interdisciplinary approach to teaching. The integration of economic concepts into various subjects helps students develop critical thinking, informational text analysis, real-world application, and other skills that are transferable to various fields of study, academia, and the workplace.
A Blueprint for Retirement Spending
By Luke F. Delorme
Research on retirement spending strategies usually focuses on what is optimal or sustainable. We select from this body of work in order to frame a strategy based on individual household characteristics and preferences. Financial planners and clients can construct a spending strategy foundation based on annual spending flexibility and whether the client is best served by safe or optimized spending. Once this foundation is established, several key determinants help inform the spending strategy blueprint. The first is an appropriate planning horizon, which should be adjusted for marital status, sex, health, and retirement age. The second determinant of the blueprint is the relative amount of pension and annuity income that the client expects to receive. Third, planners should offer a range of possible return assumptions in order to understand the array of possible outcomes. Return assumptions used in any research model have huge effects on outcomes. Finally, it is important to assess a client’s tolerance for holding equities, bequest motive, and expected portfolio management fees to properly adjust the blueprint.
Applied Economic Research: Integration of Academia and the Workplace
By Natalia V. Smirnova and Lorri A. Halverson
Education literature suggests that the nature of a student’s participation in workplace activities has a major impact on that student’s knowledge acquisition. In order to maximize the potential of those activities for all stakeholders, hosting organizations are encouraged to develop mechanisms to optimize learning opportunities that will help workplace programs to be viewed as long-term human and social capital investments.The nugget of our idea of an optimal learning mechanism is that the classroom walls are permeable. That is, classroom learning can support the internship experience, and the internship experience can support classroom learning. In our pilot program with the University of Sioux Falls, we brought economists from the American Institute for Economic Research (AIER) into the classroom and the university professor into the workplace.This kind of collaborative arrangement between an academic institution and a practitioner is an innovative approach not only to improving undergraduate economic education but also to exposing students to the economic research process and substantiating the theoretical base they have established in prior courses. This exposure helps undergraduates to broaden their knowledge, gain practical experience, and become successful participants in the global workforce.
Preparing Students to Practice Economic Research
By Natalia V. Smirnova, American Institute for Economic Research, Lorri A. Halverson, University of Sioux Falls
This paper is a practical guide for implementation of a collaborative experiential learning exercise. In 2016, our program brought economists from the American Institute for Economic Research (AIER) into the classrooms of the University of Sioux Falls and Missouri University of Science and Technology, and students of those classes into the workplace. This program engages students in topical economic research, walks them through the research process, substantiating the theoretical base they had established in prior courses.
The contribution of this paper is two-fold. The first contribution is the development of the ten-steps guide on how to build a new partnership. This guide provides a starting point for new university-practitioner partnerships in various fields of study. The second contribution is the illustration of the theoretical transmission mechanism from experiential learning through intuition to executive arts.
The students in university classrooms today are the employees and leaders of the next decade. By investing time in developing partnerships between academic institutions and practitioners, we are integrating the academy and the workplace, broadening the base of experiences on which potential employees will draw, and preparing students to practice economic research.
Economics Across the Curriculum: Impact on Knowledge Acquisition
By Natalia V. Smirnova, American Institute for Economic Research
The Economics-Across-the-Curriculum approach encourages the infusion of economic concepts into various disciplines. This paper describes the results of field tested lessons generated at the professional development workshops for middle and high school teachers. Based on the assessment data, the impact on teachers’ and students’ knowledge acquisition is deemed to be positive. The conclusion is reached that this approach is useful for teachers’ professional development. The paper contributes to the literature by showcasing the economics-across-the-curriculum approach and proposing new ways of student engagement.