We reexamine the relationship between quality of public schools and house prices and find it to be nonlinear. Unlike most studies in the literature, we find that the price premium parents must pay to buy a house in an area associated with a better school increases as school quality increases. This is true even after controlling for neighborhood characteristics, such as the racial composition of neighborhoods, which is also capitalized into house prices. In contrast to previous studies that use the boundary discontinuity approach, we find that the price premium from school quality remains substantially large, particularly for neighborhoods associated with high-quality schools. (JEL C21, I20, R21)

A currency crisis can be defined as a speculative attack on a country's currency that can result in a forced devaluation and possible debt default. One example of a currency crisis occurred in Russia in 1998 and led to the devaluation of the ruble and the default on public and private debt. 1 Currency crises such as Russia's are often thought to emerge from a variety of economic conditions, such as large deficits and low foreign reserves. They sometimes appear to be triggered by similar crises nearby, although the spillover from these contagious crises does not infect all neighboring economies-only those vulnerable to a crisis themselves.In this paper, we examine the conditions under which an economy can become vulnerable to a currency crisis. We review three models of currency crises, paying particular attention to the events leading up to a speculative attack, including expectations of possible fiscal and monetary responses to impending crises. Specifically, we discuss the symptoms exhibited by Russia prior to the devaluation of the ruble. In addition, we review the measures that were undertaken to avoid the crisis and explain why those steps may have, in fact, hastened the devaluation.The following section reviews the three generations of currency crisis models and summarizes the conditions under which a country becomes vulnerable to speculative attack. The third section examines the events preceding the Russian default of 1998 in the context of a currency crisis. The fourth section applies the aforementioned models to the Russian crisis. CURRENCY CRISES: WHAT DOES MACROECONOMIC THEORY SUGGEST?A currency crisis is defined as a speculative attack on country A's currency, brought about by agents attempting to alter their portfolio by buying another currency with the currency of country A. 2 This might occur because investors fear that the government will finance its high prospective deficit through seigniorage (printing money) or attempt to reduce its nonindexed debt (debt indexed to neither another currency nor inflation) through devaluation. A devaluation occurs when there is market pressure to increase the exchange rate (as measured by domestic currency over foreign currency) because the country either cannot or will not bear the cost of supporting its currency. In order to maintain a lower exchange rate peg, the central bank must buy up its currency with foreign reserves. If the central bank's foreign reserves are depleted, the government must allow the exchange rate to float up-a devaluation of the currency. This causes domestic goods and services to become cheaper relative to foreign goods and services. The devaluation associated with a successful speculative attack can cause a decrease in output, possible inflation, and a disruption in both domestic and foreign financial markets. 3 The standard macroeconomic framework applied by Fleming (1962) and Mundell (1963) to international issues is unable to explain currency crises. In this framework with perfect capital mobility, a fixed exchange rate regim...

No abstract

A currency crisis can be defined as a speculative attack on a country's currency that can result in a forced devaluation and possible debt default. One example of a currency crisis occurred in Russia in 1998 and led to the devaluation of the ruble and the default on public and private debt. 1 Currency crises such as Russia's are often thought to emerge from a variety of economic conditions, such as large deficits and low foreign reserves. They sometimes appear to be triggered by similar crises nearby, although the spillover from these contagious crises does not infect all neighboring economies-only those vulnerable to a crisis themselves.In this paper, we examine the conditions under which an economy can become vulnerable to a currency crisis. We review three models of currency crises, paying particular attention to the events leading up to a speculative attack, including expectations of possible fiscal and monetary responses to impending crises. Specifically, we discuss the symptoms exhibited by Russia prior to the devaluation of the ruble. In addition, we review the measures that were undertaken to avoid the crisis and explain why those steps may have, in fact, hastened the devaluation.The following section reviews the three generations of currency crisis models and summarizes the conditions under which a country becomes vulnerable to speculative attack. The third section examines the events preceding the Russian default of 1998 in the context of a currency crisis. The fourth section applies the aforementioned models to the Russian crisis. CURRENCY CRISES: WHAT DOES MACROECONOMIC THEORY SUGGEST?A currency crisis is defined as a speculative attack on country A's currency, brought about by agents attempting to alter their portfolio by buying another currency with the currency of country A. 2 This might occur because investors fear that the government will finance its high prospective deficit through seigniorage (printing money) or attempt to reduce its nonindexed debt (debt indexed to neither another currency nor inflation) through devaluation. A devaluation occurs when there is market pressure to increase the exchange rate (as measured by domestic currency over foreign currency) because the country either cannot or will not bear the cost of supporting its currency. In order to maintain a lower exchange rate peg, the central bank must buy up its currency with foreign reserves. If the central bank's foreign reserves are depleted, the government must allow the exchange rate to float up-a devaluation of the currency. This causes domestic goods and services to become cheaper relative to foreign goods and services. The devaluation associated with a successful speculative attack can cause a decrease in output, possible inflation, and a disruption in both domestic and foreign financial markets. 3 The standard macroeconomic framework applied by Fleming (1962) and Mundell (1963) to international issues is unable to explain currency crises. In this framework with perfect capital mobility, a fixed exchange rate regim...

We reexamine the relationship between school quality and house prices and find it to be nonlinear. Unlike most studies in the literature, we find that the price premium parents must pay to buy a house associated with a better school increases as school quality increases. This is true even after controlling for neighborhood characteristics, such as the racial composition of neighborhoods, which is also capitalized into house prices. In contrast with previous studies that use the boundary discontinuity approach, we find that the price premium from school quality remains substantially large, particulary for neighborhoods associated with high-quality schools. [JEL: C21, I20, R21]

research has shown that the use of these rules can create different outcomes from what statisticians (and economists) might expect, both in the estimated probabilities and in observed behavioral patterns.Behavioral theories of decisionmaking therefore ask whether economic phenomena may be explained by models in which• Some, but not necessarily all, agents either fail to update their probabilistic beliefs by applying the appropriate statistical rules or subsequently fail to maximize a standard expected utility objective.• The remaining fully rational agents, then, cannot completely exploit and eliminate the biases caused by the actions of agents who are not perfectly rational.While these heuristics are drawn from psychological studies, they may be supported by economic models with boundedly rational agents (Simon, 1955). In other words, agents do not always have the time or the cognitive ability to process all of the data provided by the economic environment with the necessary accuracy. Instead, people might employ these heuristics to arrive at analyses that are less costly to calculate than optimal decisions (Evans and Ramey, 1992); and, often, the optimal decisions themselves are impossible to calculate for difficult problems. Thus, boundedly rational agents do not maximize expected utility as an economist would generally assume. Instead, they maximize perceived expected utility, a quantity based not on actual probabilities but on their beliefs about those probabilities (Rabin, 1998(Rabin, , 2002.In this article, we focus on the nature and application of psychological rules for probability formation and the biases from anticipated economic Subjective Probabilities: Psychological Theories and Economic Applications Abbigail J. Chiodo, Massimo Guidolin, Michael T. Owyang, and Makoto Shimoji C onventional economic analysis of individual behavior begins with the assumption that consumers maximize expected utility, optimizing their planning for the future. Economists incorporate this assumption in models by endowing consumers in those models with the skills of a good statistician-that is, the ability to make rational (and often complicated) calculations. While not always realistic (perhaps never), this assumption facilitates the use of economic models that may work well in the real world. However, in some cases, these models cannot explain some of the evidence uncovered in psychological experiments. In other words, the traditional statistics-based approach sometimes fails to predict individual behavior and aggregate market outcomes that are consistent with the empirical evidence. For instance, observed stock prices and portfolio choices fail to conform to the implications of well-known frameworks, such as the capital asset pricing model (CAPM). Such cases have encouraged a branch of economics that borrows ideas from psychology to explain these discrepancies. 1 In this area of study, researchers replace the assumption that individuals use complicated statistical formulas to maximize expected utility with the likeli...

No abstract

Real-life decision makers are often forced to estimate the likelihood of uncertain future events. Usually, economists assume that agents behave as though they are fully rational, employing statistical rules to assess probabilities, and that they maximize expected utility. Psychological studies, however, have shown that people tend not to adhere to these rationality postulates. We review three rules of thumb taken from the psychology literature that people have been shown to rely on when assessing the likelihood of uncertain events. We construct a simple model of belief formation that incorporates these rules and present one formal and two illustrative applications in which these psychological phenomena cause deviations from anticipated economic outcomes.