Mortgage-backed securities market has recently become the largest capital market for investors in the U.S. Not surprisingly, a large volume of literature studies mortgage borrowers’ prepayment and default behavior and its impact on the pricing of mortgage backed securities. However, due to errors in variables or limited availability of borrower characteristics, most empirical studies find a substantial discrepancy between the theoretically derived optimal behavior and the observed decisions. (See, for example, Deng, Quigley and Van Order [1996] and Stanton [1996]). This paper attempts to reconcile the theoretical option-based models of mortgage terminations with the empirical experience of mortgage terminations by refinancing, sale and default.
From a theoretical perspective, we explicitly model the borrower’s costs associated with mortgage terminations and recognize that those costs vary across individuals and termination causes. Consistent with this approach, we empirically separate the three major causes of mortgage termination: refinancing, selling of the property, and default. Furthermore, since borrowers of similar characteristics (education, income, culture and ethnic background, etc.) tend to cluster together in neighborhoods, many of the omitted variables and measurement errors are spatially correlated. Recognizing this spatial correlation we empirically model the variability of the mortgage termination costs through the use of the physical location of the properties. This approach gives raise to a competing risks hazard framework with spatially correlated errors.
What explains the observed real effect of money on the economy and is money not neutral? This is perhaps the most debated question of our time. Empirical evidence has demonstrated that monetary policy, unanticipated and anticipated (e.g. Mishkin (1982)), has real effects and virtually all countries established economic stabilization as the main goal of central bank policy. However, if we seek a scientific justification for this policy, we find sharp differences in models, assumptions and methods used to arrive at this conclusion.
On one side is the standard rational expectations (in short, RE) based real business cycle theory which holds that all real fluctuations are caused by exogenous real technological shocks, money is neutral and only relative prices matter for economic allocation. Under this theory, anticipated monetary policy cannot have real effect and hence stabilizing monetary policy cannot provide any long term and consistent social benefits (e.g. see Lucas (1972), Sargent and Wallace (1978)).
Offshoring, i.e. the transfer of domestic jobs to overseas plants, is often blamed for the degradation of job conditions among unskilled workers in developed countries. This paper looks at this issue in a special light by focusing on a two-skill model of production with heterogeneous firms, where workers are effectively barred from moving across sectors and skill levels. In doing so, the model mimics the lack of evidence on massive inter-sectoral reallocation of workers even during recessions. The heterogeneity of firms makes mixed offshoring, where only a fraction of firms set up overseas operation, a feasible and important outcome when trade opens.
