Markets do not always efficiently incorporate news, particularly when information is complex or ambiguous. Traditional text analysis methods fail to capture the economic structure of information and its firm-specific implications. We propose a novel methodology that guides LLMs to systematically identify and classify firm-specific economic shocks in news articles according to their type, magnitude, and direction. This economically-informed classification allows for a more nuanced understanding of how markets process complex information. Using a simple trading strategy, we demonstrate that our LLM-based classification significantly outperforms a benchmark based on clustering vector embeddings, generating consistent profits out-of-sample while maintaining transparent and durable trading signals. The results suggest that LLMs, when properly guided by economic frameworks, can effectively identify persistent patterns in how markets react to different types of firm-specific news. Our findings contribute to understanding market efficiency and information processing, while offering a promising new tool for analyzing financial narratives.

The EM principle implies the moments underlying the information matrix test for multivariate Markov switching autoregressive models with covariate-dependent transition probabilities are the smoothed values of the moments we would test were the latent Markov chain observed. Thus, we identify components related to the heteroskedasticity, skewness and kurtosis of the multivariate regression residuals for each of the regimes, the neglected multivariate heteroskedasticity of the generalised residuals for each of the columns of the transition matrix, and a final component that assesses the conditional independence of these generalised residuals and the regression residuals, their squares and cross-products given the observed variables.

We propose a causal framework for applications where the outcome of interest is a unit-specific response to events, which first needs to be measured from the data. We suggest a two-step procedure: first, estimate unit-level event studies (ULES) by comparing pre- and post-event outcomes of each unit to a suitable control group; second, use the ULES in causal analysis. We outline the theoretical conditions under which this two-step procedure produces interpretable results, highlighting the underlying statistical challenges. Our method overcomes the limitations of regression-based approaches prevalent in the empirical literature, allowing for a deeper examination of heterogeneity and dynamic effects. We apply this framework to analyze the impact of childcare provision reform on the magnitude of child penalties in the Netherlands, illustrating its ability to reveal nuanced positive relationships between childcare provision and parental labor supply. In contrast, traditional regression-based analysis delivers negative effects, thereby emphasizing the benefits of our two-step approach.

How substantial are means-tested transfers in the United States? How have these transfers evolved over time, and what is their impact on the income distribution? We use microdata from the Survey of Income and Program Participation to document the scope of the main means-tested programs for households headed by working-age adults. We report key features of these programs, their generosity, and coverage by household income, marital status, and the number and age of children in the household. We also assess the role of the transfer system in reducing income inequality and document its changing magnitude and effects in recent years. Finally, we provide parametric estimates of transfers as a function of income and household characteristics for use in applied work in macroeconomics and public finance.

This paper quantifies the aggregate costs of political connections using a general equilibrium model in which politically connected firms benefit from output subsidies and endogenously spend resources on rent-seeking activities. The model is structurally estimated using rich firm-level data for the Indonesian manufacturing sector and a firm-level measure of political connectedness based on a natural experiment from the authoritarian rule of Suharto at the end of the 1990s. A major innovation is to flexibly identify the distribution of output subsidies from relative total factor productivity (TFPQ) distributions across connected and non-connected firms. While only 1.3% of firms are connected, I find that connections impose large costs, with permanent consumption losses of 7.4% and output losses of 2.7%. 2/3 of costs are driven by too much dispersion in subsidies across connected firms, while 1/3 are driven by an excessive level of subsidies.

This paper presents a model of the interaction between a bank and a supervisor. The bank privately chooses the risk of its investment portfolio and the supervisor collects nonverifiable information on the future solvency of the bank and, based on of this information, may decide on its early liquidation. The paper characterizes the liquidation decision of the supervisor and the risk-taking decision of the bank. In line with recent empirical literature, the paper shows that supervision is effective in ameliorating the bank’s risk-shifting incentives, and that a tougher supervisor leads to lower risk-taking. It also shows that higher noise in the supervisory information may be conducive to lower risk-taking, but that it always reduces welfare.

We examine the interaction between banks and money market funds (MMFs) in a setup where the latter can experience large redemptions following an aggregate liquidity shock (as in March 2020). In the model MMFs and bank deposits are alternatives for firms’management of their cash holdings. MMFs experiencing correlated redemptions get forced to sell assets to banks in narrow markets, producing asset price declines. Ex post the price declines damage firms’ capacity to cover their needs with the redeemed shares. Ex ante the prospect of such an effect reduces the attractiveness of MMFs relative to bank deposits. Yet the equilibrium allocation of firms’ savings exhibits an excessive reliance on MMFs since firms fail to internalize their effect on the size of the pecuniary externalities caused by future redemptions. This provides a rationale, distinct from first mover advantages, for the macroprudential regulation of the investment in MMFs.

The Great Recession prompted a shift in accounting standards for banks’ loan loss provisioning from an incurred loss approach to an expected credit loss approach. This paper develops and calibrates a dynamic banking model featuring a recursive ratings-migration structure for loan credit quality to evaluate the impact of the new standards on bank performance. We quantify the implications for bank lending, including its increased sensitivity to economic conditions, and examine the trade-offs involved in using Basel III’s countercyclical capital buffer as a stabilizing policy tool.

This paper provides the first causal test of the widely debated hypothesis that British colonial institutions promoted sexual prejudice—defined as negative attitudes toward sexual minorities—in postcolonial societies. We document five main findings. First, after accounting for differences in contemporary economic development, OLS estimates from a cross-country sample of former European colonies reveal that former British colonies exhibit higher sexual prejudice than those of other European powers. Second, Geo-RDD estimates show that former British colonies have significantly greater sexual prejudice than former Portuguese colonies in Southern and Eastern Africa, where local norms did not systematically condemn same-sex relations. Third, Geo-RDD estimates indicate that former British and French colonies display similar levels of sexual prejudice in Western Africa, where a higher share of the population adheres to religious norms condemning same-sex acts. Fourth, additional evidence from areas in South America and Southeast Asia not characterized by homophobic social norms before colonization reinforces the external validity of our findings from Southeastern Africa. Finally, mechanisms analysis suggests that the persistence of sodomy laws fully accounts for the negative association between British colonial origin and contemporary sexual prejudice across countries. Overall, our results indicate that British colonial origin notably increased sexual prejudice in societies with social norms different from the penal codes imposed by colonizers.

We propose a nonlinear framework to study the dynamic transmission of aggregate and idiosyncratic shocks to household income that exploits both macro and micro data. Our approach allows us to examine empirically the following questions: (a) How do business-cycle fluctuations modulate the persistence of heterogeneous individual histories and the risk faced by households? (b) How do aggregate and idiosyncratic shocks propagate over time for households in different macro and micro states? (c) How do these shocks shape the cost of business-cycle risk? We develop new identification and estimation techniques, and provide a detailed empirical analysis combining macro time series for the U.S. and a time series of household panels from the PSID.

Two facts distinctively separate exporter dynamics from firm dynamics. One is the strikingly low survival rate of new entrants into export markets. The second is that new entrants survive less than re-entrants. We argue that these two facts are critical to discipline exporter dynamics models because many sources of firm heterogeneity (e.g. fixed costs) do not affect survival rates when firms time their entry decision optimally. We extend a standard exporter dynamics model by positing that firms experiment to resolve an uncertain component in foreign-market profitability. We estimate the model using customs data from Peru. Despite its parsimony, having only four relevant parameters, the model matches the survival profile of entrants and re-entrants. It is also sufficiently rich to deliver predictions about many exporter dynamics facts highlighted in the literature. Finally, we exploit variation across products and markets to provide additional evidence supporting the model’s experimentation mechanism.

The role of friends in the US opioid epidemic is examined. Using data from the National Longitudinal Survey of Adolescent Health (Add Health), adults aged 25-34 and their high school best friends are focused on. An instrumental variable technique is employed to estimate peer effects in opioid misuse. Severe injuries in the previous year are used as an instrument for opioid misuse in order to estimate the causal impact of a person’s best friends’ opioid misuse on their own misuse. The estimated peer effects are significant: Having a best friend who misuses opioids following a serious injury increases the probability of own opioid misuse by around 7 percentage points in a population where 17 percent ever misuses opioids. The effect is concentrated among non-college graduates and peers with strong ties who are central in their friendship networks. Peer opioid misuse eventually leads to deteriorating health and opioid addiction.

This paper examines the limitations of spot markets in providing adequate investment incentives to support zero-carbon investments in electricity markets. In contrast, properly designed long-term contracts have the potential to mitigate price volatility and facilitate the funding of the investments. A theoretical model is developed to analyze contract design under conditions of moral hazard and adverse selection, emphasizing the trade-offs that arise when exposing firms to price and quantity risk. The findings inform optimal contract design for nuclear and renewable energy projects, offering policy recommendations to enhance investment incentives while minimizing productive inefficiencies and excessive rents.

Decarbonizing the power sector requires major investments in renewables and storage. Though often seen as complementary, these technologies can act as substitutes from an economic perspective. When renewable output correlates positively with demand and capacity is low, storage may lower renewable profits, and viceversa, especially with strategic thermal producers. In markets with negatively correlated renewable availabilities, like solar and wind, storage can benefit one while disadvantaging the other. These findings inform policies on the timing and effectiveness of mandates or subsidies, suggesting that solar investments may need an initial push before supporting storage. Simulations of the Spanish market show that, at high solar penetration, storage boosts solar but reduces wind profits.

This paper investigates the implications of counterparty risk - stemming from potential defaults or renegotiations by buyers - on long-term contract markets. It develops a theoretical model highlighting how opportunistic buyer behavior leads to higher contract prices and underinvestment, potentially leading to the collapse of the contract market. The paper also evaluates public-policy interventions, including public subsidies, financial guarantees, regulator-backed contracts, and collateral requirements. While these measures can reduce price-related inefficiencies and promote investment, they involve trade-offs such as moral hazard or the reliance on costly public funds. These findings are particularly relevant for sectors with capital-intensive, long-lived assets exposed to price volatility, especially electricity markets, where underinvestment in renewable energy could delay the energy transition and hinder carbon-abatement goals. Simulations using data for the Spanish electricity market are used to quantify the theoretical predictions of the model.