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Brown Bag Seminars

2016-17

Fall

Time & Location of Seminars:
Wednesdays 12:001:05 p.m.
499 Engineering II

October 19
Greg Laughlin, Yale University
"Leveraging the Speed of Light — The Dynamics and Economics of Ultra-Low Latency Trading"
ABSTRACT: The past decade has been characterized by a rapid evolution of the network infrastructure that supports electronic trading. Tick data is now routinely time-stamped to nanosecond precision, and inter-exchange messaging occurs at nearly the speed of light in vacuum. In this talk, I will review how high-frequency traders have adopted these technological innovations. I will argue that cross-correlation of trading activity at microsecond resolution, across physically separated venues, is a powerful tool for understanding liquidity provision, market dynamics, and price formation. I will provide quantitative estimates of the overall profitability of low-latency trading, and I will illustrate how the dissemination of major economic news releases are rapidly incorporated into consensus prices.


October 12
Jae Choi
"Capital Controls and Foreign Exchange Market Intervention"


October 19
Greg Laughlin, Yale University "Leveraging the Speed of Light — The Dynamics and Economics of Ultra-Low Latency Trading"
ABSTRACT: The past decade has been characterized by a rapid evolution of the network infrastructure that supports electronic trading. Tick data is now routinely time-stamped to nanosecond precision, and inter-exchange messaging occurs at nearly the speed of light in vacuum. In this talk, I will review how high-frequency traders have adopted these technological innovations. I will argue that cross-correlation of trading activity at microsecond resolution, across physically separated venues, is a powerful tool for understanding liquidity provision, market dynamics, and price formation. I will provide quantitative estimates of the overall profitability of low-latency trading, and I will illustrate how the dissemination of major economic news releases are rapidly incorporated into consensus prices.


October 26
Jessica Leight, Williams College
"Complementarity between non-agricultural and agricultural shocks in rural industrialization: Evidence from China"
ABSTRACT: This paper analyzes patterns of structural transformation in China between 2000 and 2010, seeking to estimate the impact of shocks to labor demand in the secondary (industrial and mining) sector on local economic outcomes, and analyze whether there is any evidence of complementarity between these shocks and agricultural productivity shocks, proxied by county-level rainfall. I employ a newly assembled panel including a nationwide sample of 2000 counties, and construct secondary labor demand shocks following Bartik (1991), using the baseline composition of county employment and national employment fluctuations by subsector. The empirical results indicate that first, there is a robust response to secondary labor demand shocks in terms of increased employment, GDP and value added in the secondary sector, and increases in total GDP. Second, there is evidence of significant complementarity between these shocks and agricultural shocks, but this pattern is restricted to counties that are less industrialized in baseline. In these counties, non-agricultural growth is observed only following positive shocks to both the non-agricultural and agricultural sectors. Further exploration suggests this pattern may be driven by capital constraints in heavily agricultural regions.


November 2
Jongchan Lee 
"Effectiveness of Precautionary Capital Controls - Generalized Propensity Score Approach"
ABSTRACT: This paper investigates the effect of ex-ante capital controls in mitigating the output cost of the Global Financial Crisis (GFC) 2008-2009. Restrictions on capital accounts are accepted as a tool for financial stability purpose among the policy community after the GFC, but empirical evidence of capital controls' usefulness is not clearly verified yet. We employ Imbens (2000)'s generalized propensity score (GPS) analysis using 88 cross-country data to handle this issue. GPS analysis is designed to find average treatment effect where the treatment is in continuous form. GPS approach combined with balancing property can remove all the biases from country characteristics related with capital controls. We found indeterminate evidence that pre-crisis inflow capital controls were successful to lessen the GDP cost of the GFC. Also, we found a partial result that pre-crisis outflow capital controls even worsened crisis severity of the GFC.


November 9
Dan Freidman, Eric Aldrich, and Kristian Lopez Vargas
"High-Frequency Trading Experiments"
ABSTRACT: High-frequency trading (HFT) firms, with latency-driven algorithms, now account for a large and increasing fraction of trades at major financial exchanges worldwide. Some experts say that HFT helps increase market liquidity and reduce transaction costs. But others argue that HFT hurts ordinary investors and provides illusory liquidity. Existing data is insufficient to resolve these controversies since it is gathered using only a single market format, the continuous double auction. Using laboratory experiments, we study the performance of existing and alternative market formats in the presence HFT. The baseline market format is the Continuous Double Auction (CDA), also known as the Continuous Limit Order Book, which organizes trade in most modern exchanges around the world. Second, we study the newly-launched IEX format, which is intended to reduce the incentives for HFT. The IEX market delays all incoming orders and allows hidden, “pegged” orders to move automatically with the National Best Bid and Offer prices. Third we study a format used by Electronic Broking Services (EBS), one of the largest currency exchanges. Within a narrow time-window, the new EBS format randomizes the sequence in which orders are processed. Finally, we study the frequent batch auction (FBA) -- also known as the multiple call market -- as proposed in Budish et al. (2015). This format gives equal priority to all orders received in the same batching period (of, say, a tenth of a second), and, in theory, reduces the incentive for investment on speed and restores primacy to competition on price. These formats are implemented in a simplified laboratory environment based on the Budish et al. (2015, BCS) model. In the experiments, human participants tune algorithms that automatically submit orders to a financial exchange on their behalf. We compare performance across formats in metrics associated with liquidity, stability and transactions costs, among others. We have already developed the basic experimental interfaces and started running pilots. In Wednesday’s Brown Bag we present a first set of results comparing CDA to HFT performance in a BCS laboratory environment. Later we plan to conduct a high-profile, public tournament using a specially developed exchange that will compare all four market formats in a realistic, yet controlled setting.


November 16
Luke Lindsay, University of Exeter
"Avoidable Costs and Market Design"
ABSTRACT: In many laboratory settings, the continuous double auction gives highly efficient outcomes. However, in markets where sellers have avoidable costs, van Boening and Wilcox (1996) observed wild price and efficiency dynamics. Subsequent studies have tested a range of other market designs in this setting; however, mechanisms that reliably deliver high efficiency in markets with avoidable costs have remained elusive. We experimentally test four market mechanisms. First, a continuous double auction where the order book is hidden. Second, a continuous double auction where the order book is visible to traders. Third, a call market where sellers submit supply schedules and buyers submit demand schedules. Fourth, a mechanism where traders submit schedules in continuous time. Provisional transactions are shown and traders may update their schedules subject to an improvement rule. The market closes when no improved schedules have been submitted for a period of time and at this point the standing provisional transactions are executed. The main result is that the mechanisms where traders submit schedules give higher efficiency than the double auctions, with the mechanism that allows for updating schedules delivering the highest efficiency overall.


November 23
Michael Hutchison, Evan Miao, and Mahir Binici
"Down But Not Out: Do Credit Rating Agencies Provide Valuable Information in Market Evaluation of Sovereign Default Risk?"
ABSTRACT: This paper assesses the information value of the three largest credit rating agencies’ (CRA) announcements of sovereign credit rating changes, “outlook” changes and “watch” changes on market pricing of country default risk as embedded in credit default swap (CDS) spreads. An event study framework is employed for 56 advanced and emerging-market countries and daily data over January 2005 through June 2014. We find marked asymmetries in market impact from watch and outlook designations; negative and positive watch/outlook designations; credit upgrades and downgrades; and across different CRA announcements. Credit rating downgrades and negative watch announcements have a large impact on CDS spreads. Credit upgrades and positive watch/outlook announcements, by contrast, have little impact on market prices. We also investigate whether rating changes and other announcements from CRAs have the same "news" impact on markets before and after the global financial crisis (GFC). We find that CRA announcements have similar qualitative effects before and after the GFC, but that the magnitude of the effects were larger prior to the global financial crisis.


November 30
Justin Marion
"Customer Discrimination and the Effects of Segregation on Business in the Jim Crow Era"

Winter

Time & Location of Seminars:
Wednesdays 12:001:05 p.m.
499 Engineering II

February 22
Grace Gu
"The pricing of sovereign risk under costly information"
ABSTRACT: When investors' information acquisition and the sovereign's default decision are jointly endogenous, sovereign bond spread exhibits significant time-variation in its volatility. Without considering such state-contingent investor attention allocation, model-based estimates of default risk from spread data could be negatively biased during crisis periods.


March 1
Dario Pozzoli, Copenhagen Business School
"Coordination of Hours within the Firm"
ABSTRACT: Teamwork has become increasingly important in many firms, yet little is known about how coordination of hours among heterogeneous coworkers affects pay, productivity and labor supply. In this paper we propose a framework where differently productive firms choose whether or not to coordinate hours in exchange for productivity gains. In this framework, we show that more productive firms select into coordinating hours and pay compensating wage differentials, leading to attenuated labor supply responses and spillovers from tax changes. Next, we bring the model predictions to the data using linked employer-employee registers in Denmark. We first document evidence of positive correlations between wages, productivity and the degree of hours coordination - measured as the dispersion of hours - within firms. We estimate that hours coordination can explain around 4\% of the variance of firm-level wages. We then estimate labor supply elasticities using changes to the personal income tax schedule in 2010 which affected high-wage earners differently. We find evidence of higher labor supply elasticity in firms with lower hours coordination. Furthermore, we find evidence of spillover effects on hours worked by coworkers not directly affected by the reform that are consistent with our model of firm level coordination of hours.


March 15
Ajay Shenoy
"Climate and Power: The Political Consequences of Climate Change"
ABSTRACT: Climate change is predicted to shift economic power away from vulnerable populations. We study whether there is likewise a shift in political representation. We estimate the impact of a permanent change in the weather---a shift in the probability distribution of rainfall and temperature---on the representation of disadvantaged castes in India. We show that trends in climate are endogenous, ruling out a simple reduced-form comparison across places with different trends. We propose instead to exploit exogenous variation in weather shocks. The reduced-form impact of these shocks cannot simulate the effect of a permanent change in climate. Instead we use them to estimate a structural model, which can then simulate the counterfactual world in which the weather distribution has permanently changed.

Spring

April 12
Tamon Asonuma (IMF)
"Sovereign Bond Prices, Haircuts and Maturity"
ABSTRACT: Rejecting a common assumption in the sovereign debt literature, we document that creditor losses (“haircuts”) during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999–2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.


April 26
Jeremy West
"Competition and technology diffusion in automobiles"
ABSTRACT: Theories since Schumpeter (1942) posit how competition affects the innovation and diffusion of new technologies, but empirical identification is complicated because firms' technology and competitive positioning are endogenous. This study evaluates the importance of competitive position in automobile engineering using a regression discontinuity design based on 5-Star Safety Ratings of crash test injury risk. We assess whether vehicles discontinuously positioned less-favorably in the market are more likely to introduce new safety technologies or to speed the diffusion of technologies from other vehicle models. (Note this is very early work and we look forward to your comments.)


May 3
Kristian Lopez Vargas
"Voice Messages and Timely Vaccination in the Dominican Republic"
ABSTRACT: While immunization-related infrastructure has improved in the developing world in the last decades, demand for vaccination is still clearly suboptimal. In that context, we study an intervention aimed to boost demand for timely vaccination in the Dominican Republic. In particular, we conduct a randomized field experiment in the metropolitan area of Santo Domingo. A sample of seven thousand low-income households with 0-5 year-old children or pregnant women were assigned into one control group and two treatment groups. Treatment consisted of a cocktail of voice messages delivered by phone that contained information on the benefits of vaccination, the risks of lack of vaccination, and encouragement (social-norm and affect related) messages. Treatment group 1 received the messages recorded by a standard, radio, female voice. Treatment group 2 received the same messages except recorded the Vice president of the country (also female). A total of 24 messages over a span of six months (approximately one per week) were delivered. The outcomes of study are: the number of vaccine-related visits to health centers, the number of immunizations, timely vaccination, immunization delays. We find no evidence of impact at the intent-to-treat level, when we look at the whole intervention period plus the three months that followed. Further analysis to deal with partial compliance and potential spillovers is in progress.


May 10
Nate Higer (Brown)
"Upward Mobility and Discrimination: the Case of Asian Americans"
ABSTRACT: Asian Americans are the only non-white US racial group to experience long-term, institutional discrimination and subsequently exhibit high income. I re-examine this puzzle in California, where most Asians settled historically. Asians achieved extraordinary upward mobility relative to blacks and whites for every cohort born in California since 1920. This mobility stemmed primarily from gains in earnings conditional on education, rather than unusual educational mobility. Historical test score and prejudice data suggest low initial earnings for Asians, unlike blacks, reflected prejudice rather than skills. Post-war declines in discrimination interacting with previously uncompensated skills can account for Asians' extraordinary upward mobility.


May 17
Elira Kuka (SMU)
"Women's Enfranchisement and Children's Education: the Long-Run Impact of the U.S. Suffrage Movement"
ABSTRACT: While a growing literature has shown that empowering women leads to increased short-term investments in children, little is known about its long-term effects. Exploiting plausibly exogenous variation in U.S. state and federal suffrage laws, we show that exposure to women’s political empowerment during childhood leads to large increases in educational attainment for children from economically disadvantaged backgrounds, in particular blacks and Southern whites. We also find improvements in employment outcomes among this group. An investigation into the mechanisms behind these effects suggests that the educational gains are plausibly driven by the rise in public expenditures following suffrage.


May 24
Hikaru Saijo
"Redistribution and Fiscal Uncertainty Shock"


May 31
Chris Limnios (Providence College)
"On the empirical plausibility of financing constraints and the persistence of vacancy posting in labor search models"

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Macroeconomics & International Finance

2016-17

Fall

Time & Location of Seminars:
Tuesday 1:40-3:00 PM
499 Engineering II


Note different day/time: Thursday September 15, 2:00 - 3:30 pm

James Costain, Economist, Bank of Spain
"Fiscal Delegation in a Monetary Union: Instrument Assignment and Stabilization Properties"
ABSTRACT: Motivated by the failure of fiscal rules to eliminate deficit bias in Europe, this paper analyzes an alternative policy regime in which each member state government delegates at least one fiscal instrument to an independent authority with a mandate to avoid excessive debt. Other fiscal decisions remain in the hands of member governments, including the allocation of spending across different public goods, and the composition of taxation.
We compare long run debt accumulation and the response to public spending shocks in dynamic games representing several different institutional configurations, including a status quo monetary union scenario with many local governments, a monetary union with a single federal government, and various fiscal delegation scenarios, as well as a social planner's solution.
In our numerical simulations, delegation of budget balance responsibilities to a national or union-wide fiscal authority implies large long-run welfare gains due to much lower steady-state debt. The presence of the fiscal authority also reduces the welfare cost of fluctuations in the demand for public spending, in spite of the fact that the authority imposes considerable "austerity" when it responds to fiscal shocks.


October 11
Adrien Auclert, Stanford University
"Inequality and Aggregate Demand"
Host: Carl Walsh
ABSTRACT: We explore the effects of transitory and persistent increases in income inequality on the level of economic activity in the context of a Bewley-Huggett-Aiyagari model in its Keynesian regime of constant real interest rates. A temporary rise in inequality lowers output modestly because the covariance between changes in income and marginal propensities to consume is negative but small in the model and the data. A permanent rise in inequality leads to a permanent Keynesian recession whose magnitude depends on the elasticity of aggregate savings to idiosyncratic uncertainty—a potentially much larger effect. Economic slumps create endogenous redistribution and give rise to an inequality multiplier. By reducing the marginal product of capital, they also lead to declines in investment that further amplify the recession. Government spending and public debt issuances are expansionary and crowd capital in. Our methodology separates sufficient statistics from general equilibrium multipliers and is applicable to the study of all macroeconomic models of aggregate demand.


October 18
Oscar Jorda, UC Davis / SF Fed
"Large and State-Dependent Effects of Quasi-Random Monetary Experiments"
Host: Ken Kletzer


October 25
Jennifer La'O, Columbia University
"Optimal Fiscal and Monetary Policy with Informational Frictions"
Host: Ajay Shenoy


November 8
Raul Tadle, UC Santa Cruz
"FOMC Sentiment Extraction and its Transmission to Financial Markets"
Host: Carl Walsh
ABSTRACT: Since 2005, the Federal Open Market Committee (FOMC) has regularly released its minutes three weeks after its meetings. Previous research has found that the volatility of different financial market returns react to these releases, and the nature of the reaction may depend on the information the minutes contain. In this paper, I use Automated Content Analysis adopted from computational linguistics and political science to derive sentiments acquired from these FOMC meeting documents. I assign an index to the minutes in order to determine if the sentiments obtained from the information therein can be classified as hawkish (analogous to improving economic conditions and inflationary concerns) or dovish (related to deteriorating economic outlook and subdued price changes). I compare the sentiments of the discussions in the minutes to the sentiments of information in corresponding FOMC statements released immediately after the meetings and calculate the surprise component of the relative sentiments. I then evaluate how this news shock in the minutes impacts broad equity and real estate investment trust indices as well as the exchange rate valuation of different world currencies against the U.S. Dollar. My findings indicate that financial assets respond to the minutes based on the type of news shock they contain and that financial markets react more significantly during the FOMC's implementation of date-based Forward Guidance.


November 15
Zach Bethune, University of Virginia
"Asset Supply and Private Information in Over-the Counter Markets"
Host: Carl Walsh
ABSTRACT: This paper studies asset issuance and trading dynamics in a decentralized market with incomplete information. New assets are issued in a primary market through efficient auctions and then trade amongst investors who have heterogeneous valuations in an over-the-counter (OTC) secondary market. The innovation regarding the OTC market literature is that, in all trades, investors’ valuations for the asset are private information. The innovation regarding the literature on trade under private information is that the distribution of investors’ valuations is endogenous—it depends on trading dynamics in the OTC secondary market. We calibrate the model to match features of the U.S. municipal bond market between 2005-2014 and examine the effects of private information on key financial market indicators such as trade volume, asset issuance, secondary market liquidity, and welfare.


November 29 *NOTE different time: 9:00AM*
Dirk Niepelt, University of Bern
"Domestic and External Debt and Default"
Host Carl Walsh
ABSTRACT: We develop a general equilibrium model with defaultable domestic and external debt. Overlapping generations work, consume, accumulate capital and public debt. Successive, democratically elected governments choose taxes, public goods spending, domestic and external debt issuance and repayment. In politico-economic equilibrium, inter generational conflict strengthens debt capacity and lowers the fundamental conflict between creditor groups. Default decisions may or may not be correlated across debt tranches. Minimum debt returns raise the cost of public funds ex post and render default on other tranches more likely; ex ante, they crowd out capital. Under standard functional form assumptions the model is solved in closed form. Demographic ageing increases domestic debt capacity but has only modest effects on external debt capacity. Equilibrium default offers risk sharing possibilities, but only for select types of shocks.

Winter

Time & Location of Seminars:
Tuesday 1:30-3:00 PM
499 Engineering II

January 18 (Note different day)
Nelson Lind, UC San DIego
"Credit Regimes and the Seeds of Crisis"
Host: Hikaru Saijo
ABSTRACT: This paper presents a theory of mortgage credit that explains (1) the rise of non-prime lending during the early 2000’s, (2) the simultaneous housing boom, and (3) the subsequent crisis. The theory is built on rational and competitive behavior by lenders in response to asymmetric information about borrower income risk. Two possible credit regimes may arise. In the “screening” regime, lenders ration credit through documentation requirements (screening contracts) and down-payment requirements (separating contracts). In the alternative “pooling” regime, risky borrowers gain access to low-doc low-down mortgages (pooling contracts). Joint housing and mortgage market equilibrium implies a tipping point phenomenon — a fall in income risk can trigger the pooling regime, lead to a sudden fall in documentation requirements, and, due to an indifference condition switching effect, generate a rapid appreciation in home prices. A housing crisis follows this credit-fueled boom once fundamentals revert and the screening regime returns. The theory matches microeconomic evidence on the allocation of credit during the mid-2000’s, explains why mortgage rates fell relative to treasury yields during 2003, and provides a framework to assess policies intended to rule out future housing crises.


January 23 (Note different day)
Sanjay Singh, Brown University
"Output Hysteresis and Optimal Monetary Policy"
Host: Carl Walsh
ABSTRACT: We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon termed as output hysteresis. We incorporate Schumpeterian endogenous growth into a business cycle model with nominal rigidities. In the model, incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing R&D and producing a permanent loss in output. Output hysteresis arises under a standard Taylor rule, but not under a strict inflation targeting rule when the nominal interest rate is away from the zero lower bound (ZLB). In a calibrated medium-scale DSGE model, we find that a ZLB episode lasting six quarters permanently reduces output by 2.70% relative to the deterministic trend. At the ZLB, a central bank unable to commit to future policy actions suffers from hysteresis bias: it does not offset past losses in potential output. A new policy rule that targets zero output hysteresis approximates the optimal policy by keeping output at the first-best level. However, it is optimal to deviate from the deterministic trend when the economy is hit by both TFP and demand shocks.


January 31
Caio, Machado
"Financial Crises, Coordination Failures and Disasters"
Host: Carl Walsh


February 1 (Note different day)
Leland Farmer
"The Discretization Filter: A Simple Way to Estimate Nonlinear State Space Models"
Host: Hikaru Saijo


February 28 (Note different time and location - 3:30 - 5:00 pm, E2, room 180)
John C. Williams, Federal Reserve Bank of San Francisco
"Measuring the Natural Rate of Interest: International Trends and Determinants"
Host: Carl Walsh
ABSTRACT: U.S. estimates of the natural rate of interest – the real short-term interest rate that would prevail absent transitory disturbances – have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there into 2016. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies –Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.


March 7
Gregor Jarosch, Stanford University
"Intermediation as Rent Extraction"
Host: Carl Walsh
ABSTRACT: This paper develops a theory of asset intermediation as a pure rent extraction activity. Agents meet bilaterally in a random fashion. Agents differ with respect to their valuation of the asset's dividends and with respect to their ability to commit to take-it-or-leave-it offers. In equilibrium, agents with commitment behave as intermediaries, while agents without commitment behave as end users. Agents with commitment intermediate the asset market only because they can extract more of the gains from trade when reselling or repurchasing the asset. We study the extent of intermediation as a rent extraction activity by examining the agents' decision to invest in a technology that gives them commitment. We find that multiple equilibria may emerge, with different levels of intermediation and with lower welfare in equilibria with more intermediation. We find that a decline in trading frictions leads to more intermediation and typically lower welfare, and so does a decline in the opportunity cost of acquiring commitment. A transaction tax can restore efficiency.

Spring

Time & Location of Seminars:
Tuesday 1:40-3:00 p.m.
499 Engineering II

April 11
Betty Daniel, University of Albany-SUNY
"Why Don’t Rich Countries Default? Explaining Debt/GDP and Sovereign Debt Crises"
Host: Carl Walsh
ABSTRACT: Incentives for default are different for a rich sovereign than for a poor one. Rich countries have well-developed financial systems with government debt as a central anchor. Strategic default would destroy the assets and trust upon which the financial system is based, inflicting a massive punishment. We introduce a debt contract, which explicitly incorporates the different incentives faced by a rich sovereign. The implicit contract contains the threat of massive punishment for a sovereign who fails to pay what she is able, but no punishment, even in default, for a sovereign who pays what she is able. The central planner uses this debt contract to smooth consumption in the face of persistent output with stochastic shocks. We calibrate to the default experience of Greece in its 2010 debt crisis. This alternative debt contract can explain why: 1) countries with debt/GDP ratios higher than the value of standard default punishments do not default; 2) a sovereign in default always repays something; 3) crises follow an increase in debt which sometimes ends in a sudden stop; 4) debt becomes risky for different countries at different levels of debt/GDP; 5) haircuts and default duration are highly heterogeneous across default events.


April 18
Darrell Duffie, Stanford University
"Efficient Contracting in Network Financial Markets"
Host: Eric Aldrich
ABSTRACT: We model bargaining in over-the-counter network markets over the terms and prices of contracts. Of concern is whether bilateral non-cooperative bargaining is sufficient to achieve efficiency in this multilateral setting. For example, will market participants assign insolvency-based seniority in a socially efficient manner, or should bankruptcy laws override contractual terms with an automatic stay? We provide conditions under which bilateral bargaining over contingent contracts is efficient for a network of market participants. Examples include seniority assignment, close-out netting and collateral rights, secured debt liens, and leverage-based covenants. Given the ability to use covenants and other contingent contract terms, central market participants efficiently internalize the costs and benefits of their counterparties through the pricing of contracts. We provide counterexamples to efficiency for less contingent forms of bargaining coordination.


April 25
James Cloyne, UC Davis
"The Effect of House Prices on Household Borrowing: A New Approach"
Host: Hikaru Saijo
ABSTRACT: We investigate the effect of house prices on household borrowing using administrative mortgage data from the UK and a new empirical approach. The data contain household-level information on house prices and borrowing in a panel of homeowners, who refinance at regular and quasi-exogenous intervals. The data and setting allow us to develop an empirical approach that exploits house price variation coming from idiosyncratic and exogenous timing of refinance events around the Great Recession. We present two main results. First, there is a clear and robust effect of house prices on borrowing, but the responsiveness is smaller than recent US estimates. Second, the effect of house prices on borrowing can be explained largely by collateral effects. We study the collateral channel in two ways: through a multivariate heterogeneity analysis of proxies for collateral and wealth effects, and through a test that exploits interest rate notches that depend on housing collateral.


April 28 **NOTE DIFFERENT DAY**
VINCENZO QUADRINI, USC
"The Politics of Sovereign Default Under Financial Integration"
Host: Grace Gu
ABSTRACT: In this paper we study the role of portfolio diversification on optimal default of sovereign debt in a two-country model with large economies that are financially integrated.  Financial integration increases the incentives to default not only because part of the defaulted debt is owned by foreigners (the standard redistribution channel), but also because the endogenous macroeconomic cost for the defaulting country is smaller when financial markets are integrated.  We show that the sovereign default of one country may be triggered by higher debt (liquidity) issued by other countries.  Because the macroeconomic costs of default spill to other countries, creditor countries may find it beneficial ex-post to bail-out debtor countries.  Although bailouts create moral hazard problems, they can be welfare improving also ex-ante.


May 2
Jonathan Wright, Johns Hopkins
"Extracting Density Forecasts from Asset Prices"
Host: Eric Aldrich


May 16
Jim Nason, NC State University
"Inflation and Professional Forecast Dynamics: An Evaluation of Stickiness, Persistence, and Volatility
ABSTRACT: This paper studies the joint dynamics of U.S. inflation and average inflation predictions of the Survey of Professional Forecasters (SPF) on a sample from 1968Q4 to 2016Q1. The joint data generating process (DGP) is the unobserved components (UC) model of Stock and Watson (2007, “Why has US inflation become harder to forecast?,” Journal of Money, Credit and Banking 39(S1), 3–33) and the Coibion and Gorodnichenko (2015, “Information rigidity and the expectations formation process: A simple framework and new facts,” American Economic Review 105, 2644–2678) version of the sticky information (SI) model of Mankiw and Reis (2002, “Sticky information versus sticky prices: A proposal to replace the New Keynesian Phillips curve,” Quarterly Journal of Economics 117, 1295–1328). We add drift to gap inflation persistence in the Stock and Watson (SW)-UC model and place a time-varying frequency of forecast updating into the SI model. The joint DGP is a nonlinear state space model, which is estimated using Bayesian tools grounded in the auxiliary particle filter, particle learning, and the particle smoother. Estimates of trend inflation, which peak at about seven percent during the 1981–1982 recession, depend on the average SPF inflation predictions, especially at longer horizons. Gap inflation is estimated at nearly nine percent in 1975Q1, which is almost three times larger than at any other time in the sample. We also report that gap inflation stochastic volatility (SV) spikes during the 1973–1975 recession while the peak in trend inflation SV occurs during the 1981–1982 recession. These estimates of SV display co-movement with time-variation in SI inflation updating because it occurs frequently during the inflation of the 1970s and Volcker disinflation while updating becomes less frequent in the 1990s. We conclude the average member of the SPF is sensitive to the impact of permanent shocks on the conditional mean of inflation.
Disclaimer: "The views herein are those of the authors and do not represent the views of the Bank for International Settlements."


May 25 **NOTE DIFFERENT DAY**
Ivalina Kalcheva, UC Riverside
"Make and Take Fees in the U.S. Equity Market"
Host: Eric Aldrich
ABSTRACT: We study the effect of liquidity-based trading fees charged by the U.S. stock exchanges, on market outcomes for the period 2008-2010. Our exchange-level analysis reveals that an exchange's trading volume is decreasing in its net fee, relative to the net fee of other exchanges. Further, an increase in the take fee decreases trading volume relatively more than an increase in the make fee. At the exchange level, these changes in trading volume are not accompanied by changes in quoted or net-of-fees spreads.


June 6
Bill Branch, UC Irvine
"Asset Prices, Unemployment and Monetary Policy when Households Lack Commitment"
Host: Hikaru Saijo
ABSTRACT:
We study a Mortensen-Pissarides economy with a single twist: households who receive uninsurable idiosyncratic preference shocks, due to limited commitment, self-insure by accumulating claims on firms' profits.  The model can generate multiple steady states across which employment, the real interest rate, and market capitalization are positively correlated.  The model explains secular stagnation as a self fulfilling equilibrium where households are liquidity constrained, and both the real interest rate and the employment rate are low.  Under constant gain learning, the economy is recurrently drawn towards the secular stagnation equilibrium with the possibility of extended periods with low real interest and employment rates.  An extension of the model to include money and nominal bonds as assets implies the existence of a ``trap'' equilibrium where nominal interest rates are at an endogenous lower bound and the economy exhibits secular stagnation.  Learning dynamics imply that a financial sector shock, or a shock to beliefs, will generate endogenous escapes to the trap equilibrium.

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Microeconomics & International Trade

2016-17

Fall

Time & Location of Seminars:
Thursdays 1:403:00 p.m.
499 Engineering II

September 22
Brian Giera, UC Santa Cruz
"The Reinvestment Puzzle: Evidence from a Field Experiment with Micro-Entrepreneurs in Urban Ethiopia"
Host: Ajay Shenoy
ABSTRACT: We use data from a field experiment with micro-entrepreneurs in Ethiopia to look at what prevents small firms from realizing high marginal returns to investment in their business. We put forward two explanations: (1) shop owners have trouble saving marginal profits to reinvest the following day and (2) shop owners make complex business decisions subject to informational and attention constraints. To test these ideas, we provided firms with an informal savings device (a leather wallet) to help earmark savings for the following day, and a rule-of-thumb informational poster to be placed in their business to help alleviate inattention/informational frictions. We found the wallet led to increased business savings, increased separation of personal and household money, and a 32% increase in profits over the previous month. The poster was found to increase hours worked, customers per day, investment per day, and daily/monthly profits ranging from 10-14%. We conclude that simplified and convenient management information can bring the performance of their micro-enterprise to the ``top of mind'', both during the day while they run their business, and at night when they head home. 


 

September 29
Melissa Dell, MIT
"Nation Building Through Foreign Intervention: Evidence from Discontinuities in Military Strategies"
Host: Ajay Shenoy
ABSTRACT: This study uses discontinuities in U.S. strategies employed during the Vietnam War to estimate their causal impacts. It identifies the effects of bombing by exploiting rounding thresholds in an algorithm used to target air strikes. Bombing increased the military and political activities of the communist insurgency, weakened local governance, and reduced non-communist civic engagement. The study also exploits a spatial discontinuity across neighboring military regions, which pursued different counterinsurgency strategies. A strategy emphasizing overwhelming firepower plausibly increased insurgent attacks and worsened attitudes towards the U.S. and South Vietnamese government, relative to a hearts and minds oriented approach.


October 13
Joseph Kuehn, Cal State-East Bay
"Estimating Auctions with Externalities:  The Case of USFS Timber Auctions"
Host: Justin Marion
ABSTRACT: This paper studies how bidding strategies and auction outcomes are affected by downstream competition, particularly for USFS timber auctions. This is done by extending the auction estimation literature to a model where outside competition affects bidding behavior in that bidders are then not only concerned with whether they win the auction, but also the identity of the winner if it is not them. Applying the estimation technique to the case of timber auctions, I find that downstream competition in the lumber industry affects the bidding behavior of mill bidders, sometimes leading to the misallocation of timber tracts.


November 10
Isaac Sorkin, Stanford University
"Ranking Firms Using Revealed Preference"
Host: Ajay Shenoy
ABSTRACT: Firms account for a substantial share of earnings inequality. Although the standard explanation is that search frictions support an equilibrium with rents, this paper finds a significant role for compensating differentials. To reach this finding, this paper develops a structural search model and estimates it on U.S. administrative data. The model analyzes how workers move between firms. Compensating differentials are revealed when workers systematically move to lower-paying firms, while rents are revealed when workers systematically move to higher-paying firms.Hope you all can make it.


November 17
Mattjew Gentzkow, Stanford University
"Measuring Polarization in High-Dimensional Data: Method and Application to Congressional Speech"
Host: Ajay Shenoy
ABSTRACT: We study trends in the partisanship of Congressional speech from 1873 to 2009. We define partisanship to be the ease with which an observer could infer a congressperson’s party from a fixed amount of speech, and we estimate it using a structural choice model and methods from machine learning. The estimates reveal that partisanship is far greater today than at any point in the past. Partisanship was low and roughly constant from 1873 to the early 1990s, then increased dramatically in subsequent years. Evidence suggests innovation in political persuasion beginning with the Contract with America, possibly reinforced by changes in the media environment, as a likely cause. Naive estimates of partisanship are subject to a severe finite-sample bias and imply substantially different conclusions.


December 1
Judson Boomhower, Stanford University
"Do Energy Efficiency Investments Deliver at the Right Time"
Host: Jeremy West
ABSTRACT: Electricity cannot be cost-effectively stored even for short periods of time. Consequently, wholesale electricity prices vary widely across hours of the day with peak prices frequently exceeding off-peak prices by a factor of ten or more. Most analyses of energy-efficiency policies ignore this variation, focusing on total energy savings without regard to when those savings occur. In this paper we demonstrate the importance of this distinction using novel evidence from a rebate program for air conditioners in Southern California. We estimate electricity savings using hourly smart-meter data and show that savings tend to occur during hours when the value of electricity is high. This significantly increases the overall value of the program, especially once we account for the large capacity payments received by generators to guarantee their availability in high-demand hours. We then compare this estimated savings profile with engineering-based estimates for this program as well as a variety of alternative energy-efficiency investments. The results illustrate a surprisingly large amount of variation in economic value across investments. 

Winter

Time and Location of Seminars:
Thursday 1:303:00 p.m.
499 Engineering II

January 17 (Note different day)
Lauren Bergquist, UC Berkeley
"Pass-through, Competition, and Entry in Agricultural Markets: Experimental Evidence from Kenya"
Host: Alan Spearot
ABSTRACT: African agricultural markets are characterized by low revenues for smallholder farmers and high food prices for consumers. There has long been concern that this price wedge between farmers and consumers – and the resulting loss in producer and consumer welfare – are driven in part by imperfect competition among the intermediaries that connect them. In this paper, I implement three randomized control trials that are tightly linked to a model of market competition in order to estimate key parameters governing the competitive environment of Kenyan agricultural markets. First, I reduce the marginal costs of traders in randomly selected markets, and find that only 22% of this cost reduction is passed through to consumers. Second, to elicit the shape of consumer demand that these traders face, I randomize price discounts and measure the quantities that customers purchase at these prices. Taken together, these estimates reveal a high degree of collusion among intermediaries, with large implied losses to consumer welfare and overall market efficiency. Third, given that a natural policy response to limited competition is to encourage greater firm entry, I randomly incentivize the entry of new traders into markets. By capturing the resulting effect on local market prices, I identify the implied change in the competitive environment due to entry. The findings have implications for the incidence of technological and infrastructure changes in African agriculture and for the policy responses aimed at improving the market environment.


January 19
Yulong Wang, Princeton
"Inference in the Threshold Model"
Host: Carlos Dobkin
ABSTRACT: This paper studies inference about the values of the parameters in the threshold model in a generalized method of moments (GMM) framework. First, we establish that the extensively studied least squares method leads to substantially oversized tests and confidence intervals when the coefficient change is not large. Second, by re-ordering the data to recast the threshold model as a structural break problem, we construct tests that control size under a large range of empirically relevant moderate coefficient changes and are approximately efficient in a well-defined sense. Finally, we modify our approach to encompass inference problems in a variety of additional widely studied models. The accuracy of the asymptotic approximations is evaluated by Monte Carlo simulations. The empirical applicability is illustrated through two applications: (i) testing if there exists a threshold effect of public debt on economic growth; (ii) constructing a confidence interval on the tipping point in the segregation problem studied by Card, Mas, and Rothstein (2008).


January 24 (Note different day)
Jessie Li, Stanford University
"The Numerical Delta Method and Bootstrap"
Host: Carlos Dobkin
ABSTRACT: This joint paper with Han Hong studies inference on nondifferentiable functions using methods based on numerical differentiation. The first part of the talk will show how the numerical delta method provides consistent inference for nondifferentiable functions that are directionally differentiable. The motivating example will be dominance testing on quantile treatment effects in the Tennessee STAR experiment. Other examples of directionally differentiable functions arise in economic applications such as threshold regression, incomplete auction models, and models with partially identified parameters. The second part of the talk will discuss a numerical bootstrap method that can consistently estimate the limiting distribution of estimators in many cases where the conventional bootstrap is known to fail. Examples include the maximum score estimator, LASSO, and 1-norm Support Vector Machine regression.


January 25 (Note different day)
Roy Allen, UC San Diego
"Identification of Average Demand Models"
Host: Carlos Dobkin
ABSTRACT: This paper, coauthored with John Rehbeck (UCSD), studies the nonparametric identification of a model of average demand with multiple goods, once unobservable heterogeneity has been integrated out. The model can be used for bundles, decisions under uncertainty, stochastic choice, and other examples. Optimizing behavior implies an analogue of Slutsky symmetry, which we exploit to show nonparametric identification of the model. Our main results do not rely on special regressors or identification at infinity. As a special case we provide new conditions for identification of additive random utility models (ARUM). These conditions also apply to a stochastic choice model allowing bounded rationality. In an illustrative application, we refute ARUM in favor of this more general model.


January 26
Yatang Lin, London School of Economics
"The Long Shadow of Industrial Pollution: Environmental Amenities and the Distribution of Skills"
Host: Alan Spearot
ABSTRACT: This paper presents theory and evidence on the role of environmental amenities in shaping the competitiveness of post-industrial cities. I assemble a rich database at a fine spatial resolution to examine the impact of historical pollution on the distribution of skilled workers and residents within cities today.  I find that census tracts downwind of highly polluted 1970s industrial sites were associated with higher pollution levels in the 1970s but not after 2000. However, they were less skilled and had lower wage and housing values in 2000, a pattern which became more prominent between 1980 and 2000. These findings suggest the presence of skill sorting on pollution and strong subsequent agglomeration effects.  To quantify the contribution of different mechanisms, I build and estimate a multi-sector spatial equilibrium framework that introduces heterogeneity in local productivity and workers' valuation for local amenities across sectors, and allows initial sorting to be magnified by production and residential externalities. Estimation of the model suggests that historical pollution is associated with lower current productivity and amenity levels. The effects are more pronounced for productivity, more skilled sectors and central tracts. I use the framework to evaluate the impact of counterfactual pollution cuts in different parts of cities on nationwide welfare and the cross-city distribution of skills.


January 27 (Note different day)
Matthew Grant, Yale University
"Why Special Economic Zones? Using Trade Policy to Discriminate Across Importers"
Host: Alan Spearot
ABSTRACT: Special economic zones (SEZs) are a common and economically important policy tool used around the world to lower tariffs on intermediate goods for selected manufacturers. Why would governments want to do this? In contrast to existing models of trade policy, which assume that the tariff on a good is uniform across all importers, I provide a theoretical framework in which tariff discrimination across importers is optimal policy for a government motivated by both political and welfare considerations. Optimal policy follows a simple two-tiered tariff rule, in which some importers are charged the prevailing tariff, and other firms are charged a reduced tariff. This policy is implemented in practice through selective permission to produce in SEZs. The model offers predictions about the relationship between SEZ size and import volumes in equilibrium. It also predicts that the final goods industries prioritized for duty-reduced access to a particular intermediate through SEZs will be politically influential, elastic users of the intermediate, and protected in equilibrium by a low ad-valorem equivalent final goods tariff. Using a novel data set I constructed from public records covering the universe of active SEZs in the United States, I show that the model's predictions about the size and industrial composition of SEZs are consistent with the way they are implemented in practice.


February 6 (Note different day)
Sharat Ganapati
"The Modern Wholesaler: Global Sourcing, Domestic Distribution, and Scale Economies"
Host: Alan Spearot


February 7 (Note different day)
Heitor Pellegrina, Brown University
"The Causes and Consequences of Agricultural Specialization in Brazil"
Host: Alan Spearot


February 23
Joel Sobel, UC San Diego
"Iterative Weak Dominance and Interval-Dominance Supermodular Games"
Host: Natalia Lazzati
ABSTRACT: This paper extends Milgrom and Robert's treatment of supermodular games in two ways.  It points out that their main characterization result holds under a weaker assumption. It refines the arguments to provide bounds on the set of strategies that survive iterative deletion of weakly dominated strategies. I derive the bounds by iterating the best-response correspondence. I give conditions under which they are independent of the order of deletion of dominated strategies. The results have implications for equilibrium selection and dynamic stability in games.


March 9
Gabriela Rubio, UC Merced
"How Love Conquered Marriage: Economic Development and the Disappearance of Arranged Marriages"
Host: Ajay Shenoy


March 16
Katherine Casey, Stanford University
"Debates: Voting and Expenditure Responses to Political Communication"
Host: Ajay Shenoy
ABSTRACT: Candidate debates have a rich history and remain integral to contemporary campaign strategy. There is, however, no evidence that they affect voter behavior. The scarcity of political information in the developing world offers an attractive testing ground. Using experimental variation in Sierra Leone, we find that public debate screenings build political knowledge that changes the way people vote, which triggers a campaign expenditure response by candidates, and fosters accountability pressure that disciplines the subsequent spending of elected officials.  We parse the effects of information conveyed about policy versus charisma, and find that both matter.  The results show how political communication can trigger a chain of events that begins with voters and ultimately influences policy.

Spring

Time & Location of Seminars:
Thursday 1:403:00 p.m.
499 Engineering II

April 6
Tarun Sabarwal, University of Kansas
"Directional Monotone Comparative Statics"

ABSTRACT: Many questions of interest in economics can be stated in terms of monotone comparative statics: If a parameter of a constrained optimization problem increases, when does its solution increase as well. This paper characterizes monotone comparative statics in different directions in finite-dimensional Euclidean space. These new characterizations are ordinal and retain the same flavor as their counterparts in the standard theory, showing new connections to the standard theory. The results are highlighted by several applications in consumer theory, producer theory and game theory. These applications were previously outside the scope of the standard theory of monotone comparative statics.  



April 20
Kelly Bedard, UC Santa Barbara
"Equal but Inequitable: Who Benefits from Gender-Neutral Tenure Clock Stopping Policies?"
Host: Rob Fairlie
ABSTRACT: Many skilled professional occupations are characterized by an early period of intensive skill accumulation and career establishment. Examples include law firm associates, surgical residents, and untenured faculty at research-intensive universities. High female exit rates are sometimes blamed on the inability of new mothers to survive the sustained negative productivity shock associated with childbearing and early childrearing in these environments. Gender-neutral family policies have been adopted in some professions in an attempt to “level the playing field.” The gender-neutral tenure clock stopping policies adopted by the majority of research-intensive universities in the United States in recent decades are an excellent example. But to date, there io empirical evidence showing that these policies help women. Using a unique data set on the universe of assistant professor hires at top-50 economics departments from 1985-2004, we show that the adoption of gender-neutral tenure clock stopping policies substantially reduced female tenure rates while substantially increasing male tenure rates.


April 27
James Sallee, UC Berkeley
"Corrective Policy and Goodhart’s Law: The Case of Carbon Emissions from Automobiles"
Host: Justin Marion
ABSTRACT: Firms sometimes comply with externality-correcting policies by gaming the measure that determines policy. We show theoretically that such gaming can benefit consumers, even when it induces them to make mistakes, because gaming leads to lower prices by reducing costs. We use our insights to quantify the welfare effect of gaming in fuel-consumption ratings for automobiles, which we show increased sharply following aggressive policy reforms. We estimate a structural model of the car market and derive empirical analogs of the price effects and choice distortions identified by theory. We find that price effects outweigh distortions; on net, consumers benefit from gaming.


May 4
Teevrat Garg, UC San Diego
"Human Capital Costs of Climate Change: Evidence from Test Scores in India"
Host: Ajay Shenoy
ABSTRACT: We present estimates of the effect of temperature on cognitive performance, and find that an additional 10 days in a year above 29C reduces math and reading test scores by 0.03 and 0.02 standard deviations respectively. However, in contrast to prior work, we find evidence for an income mechanism - hot days during the growing season reduce agricultural yields and test score performance with comparatively modest effects of hot days in the non-growing season. The roll-out of a conditional cash transfer program, by providing a safety net for the poor, weakens the link between temperature and test scores. Our results suggest that climate change will have disproportionate and large negative impacts on human capital accumulation of poor populations in agrarian economies, likely increasing the persistence of poverty.


May 11
Matt Jackson, Stanford University
"Gossip: Identifying Central Individuals in a Social Network"
Host: Ajay Shenoy
ABSTRACT: Is it possible to identify individuals who are highly central in a community without gathering any network information, simply by asking a few people?   If we use people's nominees as seeds for a diffusion process, will it be successful? We explore these questions theoretically, via surveys, and via field experiments. We show via a model of information flow how members of a community can, just by tracking gossip about others, identify highly central individuals in their network. Asking villagers in rural Indian villages to name good seeds for diffusion, we find that they accurately nominate those who are central according to a measure tailored for diffusion -- not just  those with many friends or in powerful positions. Finally, we run a randomized field experiment in 213 other villages that tests how effective it is to use such nominations as seeds for a diffusion process. Relative to random seeds or those with high social status, hitting at least one seed nominated by villagers leads to more than a 65% increase in the spread of information.


May 11
Matt Jackson, Stanford University
"Gossip: Identifying Central Individuals in a Social Network"
Host: Ajay Shenoy
ABSTRACT: Is it possible to identify individuals who are highly central in a community without gathering any network information, simply by asking a few people?   If we use people's nominees as seeds for a diffusion process, will it be successful? We explore these questions theoretically, via surveys, and via field experiments. We show via a model of information flow how members of a community can, just by tracking gossip about others, identify highly central individuals in their network. Asking villagers in rural Indian villages to name good seeds for diffusion, we find that they accurately nominate those who are central according to a measure tailored for diffusion -- not just  those with many friends or in powerful positions. Finally, we run a randomized field experiment in 213 other villages that tests how effective it is to use such nominations as seeds for a diffusion process. Relative to random seeds or those with high social status, hitting at least one seed nominated by villagers leads to more than a 65% increase in the spread of information.


May 30
Melanie Morten, Stanford University
"Migration and Walls: US-Mexico Migration between 2005-2014"
Host: Jon Robinson

ABSTRACT:
The labor market impacts of immigration have been hotly debated by economists. We study a period of wall-building along the Mexico-US border between 2006-2010 and novel bilateral migration data to show how the border wall changed migration patterns of Mexican migrants and affected both destination labor markets in the US and source labor markets in Mexico.

June 8
Elana Asparouhova, University of Utah
"Competitive Off-equilibrium: Theory and Experiment"
Host: Dan Friedman
ABSTRACT:
We propose a Marshallian model for price and quantity adjustment in parallel continuous double auctions. Investors submit orders only for small quantities, and at prices that maximize the local utility improvements. Pareto optimality, on which equilibrium asset pricing theory is built, is eventually reached. Experiments designed with the CAPM in mind show that, consistent with the theory (i) contrary to the standard Walrasian price adjustment model, price changes cross-autocorrelate with excess demands depending on covariances of liquidating dividends; (ii) a risk-weighted endowment portfolio is closer to mean-variance optimality than the market portfolio; (iii) individual portfolios are under-diversified, and more so when dividend covariances are positive.

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