Showing papers by "Federal Reserve Bank of Dallas published in 2013"

Absorptive Capacity and the Growth and Investment Effects of Regional Transfers: A Regression Discontinuity Design with Heterogeneous Treatment Effects

Abstract: Transfers to individuals, firms, and regions are often regulated by threshold rules, giving rise to a regression discontinuity design. An example are transfers provided by the European Commission to regions of EU member states below a certain income level. Researchers have focused on estimation of the average treatment effect of this program, assuming that it does not vary in a systematic way across units. We suggest a regression discontinuity design which allows for parametric or nonparametric identification of heterogeneous average treatment effects that systematically vary with observable characteristics in order to shed light on the role of absorptive capacity in determining the impact of regional transfers on economic growth across regions in the European Union. The results suggest that only about 47% of the regions, namely those with a sufficiently high endowment with human capital and a high quality of government, are able to turn transfers under the Union's Objective 1 Structural Funds programme into faster growth. Those regions are the ones which are responsible for a positive average effect of the programme.

Common Correlated Effects Estimation of Heterogenous Dynamic Panel Data Models with Weakly Exogenous Regressors

Abstract: This paper extends the Common Correlated Effects (CCE) approach developed by Pesaran (2006) to heterogeneous panel data models with lagged dependent variable and/or weakly exogenous regressors. We show that the CCE mean group estimator continues to be valid but the following two conditions must be satisfied to deal with the dynamics: a sufficient number of lags of cross section averages must be included in individual equations of the panel, and the number of cross section averages must be at least as large as the number of unobserved common factors. We establish consistency rates, derive the asymptotic distribution, suggest using covariates to deal with the effects of multiple unobserved common factors, and consider jackknife and recursive de-meaning bias correction procedures to mitigate the small sample time series bias. Theoretical findings are accompanied by extensive Monte Carlo experiments, which show that the proposed estimators perform well so long as the time series dimension of the panel is sufficiently large.

Inflation in the Great Recession and New Keynesian Models

Abstract: It has been argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent Great Recession, and that models in which inflation depends on economic slack cannot explain the recent muted behavior of inflation, given the sharp drop in output that occurred in 2008-09. In this paper, we use a standard DSGE model available prior to the recent crisis and estimated with data up to the third quarter of 2008 to explain the behavior of key macroeconomic variables since the crisis. We show that as soon as the financial stress jumped in the fourth quarter of 2008, the model successfully predicts a sharp contraction in economic activity along with a modest and more protracted decline in inflation. The model does so even though inflation remains very dependent on the evolution of both economic activity and monetary policy. We conclude that while the model considered does not capture all short-term fluctuations in key macroeconomic variables, it has proven surprisingly accurate during the recent crisis and the subsequent recovery.

Large Panel Data Models with Cross-Sectional Dependence: A Survey

Abstract: This paper provides an overview of the recent literature on estimation and inference in large panel data models with cross-sectional dependence. It reviews panel data models with strictly exogenous regressors as well as dynamic models with weakly exogenous regressors. The paper begins with a review of the concepts of weak and strong cross-sectional dependence, and discusses the exponent of cross-sectional dependence that characterizes the different degrees of cross-sectional dependence. It considers a number of alternative estimators for static and dynamic panel data models, distinguishing between factor and spatial models of cross-sectional dependence. The paper also provides an overview of tests of independence and weak cross-sectional dependence.

Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit

Abstract: This paper extends the analysis of in…nite dimensional vector autoregressive models (IVAR) proposed in Chudik and Pesaran (2010) to the case where one of the variables or the cross section units in the IVAR model is dominant or pervasive. This extension is not straightforward and involves several technical di¢ culties. The dominant unit in‡uences the rest of the variables in

Debt, Inflation and Growth: Robust Estimation of Long-Run Effects in Dynamic Panel Data Models

Abstract: This paper investigates the long-run effects of public debt and infl‡ation on economic growth. Our contribution is both theoretical and empirical. On the theoretical side, we develop a cross-sectionally augmented distributed lag (CS-DL) approach to the estimation of long-run effects in dynamic heterogeneous panel data models with cross-sectionally dependent errors. The relative merits of the CS-DL approach and other existing approaches in the literature are discussed and illustrated with small sample evidence obtained by means of Monte Carlo simulations. On the empirical side, using data on a sample of 40 countries over the 1965-2010 period, we fi nd signifi cant negative long-run effects of public debt and in‡flation on growth. Our results indicate that, if the debt to GDP ratio is raised and this increase turns out to be permanent, then it will have negative effects on economic growth in the long run. But if the increase is temporary, then there are no long-run growth effects so long as debt to GDP is brought back to its normal level. We do not fi nd a universally applicable threshold effect in the relationship between public debt and growth. We only find statistically signifi cant threshold effects in the case of countries with rising debt to GDP ratios.

Structural vector autoregressions

Abstract: Structural vector autoregressive (VAR) models were introduced in 1980 as an alternative to traditional large-scale macroeconometric models when the theoretical and empirical support for these models became increasingly doubtful. Initial applications of the structural VAR methodology often were atheoretical in that users paid insufficient attention to the conditions required for identifying causal effects in the data. In response to ongoing questions about the validity of widely used identifying assumptions the structural VAR literature has continuously evolved since the 1980s. This survey traces the evolution of this literature. It focuses on alternative approaches to the identification of structural shocks within the framework of a reduced-form VAR model, highlighting the conditions under which each approach is valid and discussing potential limitations of commonly employed methods.

The FRBNY DSGE Model

Abstract: The goal of this paper is to present the dynamic stochastic general equilibrium (DSGE) model developed and used at the Federal Reserve Bank of New York. The paper describes how the model works, how it is estimated, how it rationalizes past history, including the Great Recession, and how it is used for forecasting and policy analysis.

Household inflation expectations and consumer spending: evidence from panel data

Abstract: With nominal interest rates at the zero lower bound, an important question for monetary policy is whether, as predicted in prior theoretical work, an increase in inflation expectations would boost current consumer spending. Using survey panel data for the period from April 2009 to November 2012, we examine the relationship between a household's inflation expectations and its current spending, taking into account other factors such as the household's wage growth expectations, the uncertainty surrounding its inflation expectations, macroeconomic conditions, and unobserved heterogeneity at the household level. We examine spending behavior for large consumer durables as well as for nondurable goods. No evidence is found that consumers increase their spending on large home appliances and electronics in response to an increase in their inflation expectations. In most models, the estimated effects are small, negative, and statistically insignificant. However, consumers do appear more likely to purchase a car as their short-run inflation expectations rise. Additionally, in some models, spending on nondurable goods increases with short-run expected inflation. These estimated effects on nondurables spending are modest, not highly robust, and appear to be driven by the behavior of homeowners who did not have a mortgage. These findings are surprising because theory predicts that consumption of durable goods should be more sensitive to real interest rates than consumption of nondurable goods. In addition, consumers in our sample, on average, did not expect their nominal income growth to match inflation, and therefore an increase in expected inflation would create a negative income effect that discourages spending in both the present and the future. The findings suggest that, as a policy measure, raising inflation expectations may not be effective in boosting present consumption.

The Long-Run Macroeconomic Impacts of Fuel Subsidies

Abstract: Many developing and emerging market countries have subsidies on fuel products. Using a small open economy model with a non-traded sector I show how these subsidies impact the steady state levels of macroeconomic aggregates such as consumption, labor supply, and aggregate welfare. These subsidies can lead to crowding out of non-oil consumption, inefficient inter-sectoral allocations of labor, and other distortions in macroeconomic variables. Across steady states aggregate welfare is reduced by these subsidies. This result holds for a country with no oil production and for a net exporter of oil. The distortions in relative prices introduced by the subsidy create most of the welfare losses. How the subsidy is financed is of secondary importance. Aggregate welfare is significantly higher if the subsidies are replaced by lump-sum transfers of equal value.

Industrialization and the Demand for Mineral Commodities

Abstract: What drives the long-term demand for mineral commodities? This paper provides empirical evidence on the long-run demand for mineral commodities since 1840 I extend the partial adjustment model to account for country-specific structures and technological change I find that a one percent increase in manufacturing output leads to a 15 percent increase in the demand for aluminum and a one percent increase in the demand for copper The estimated manufacturing output elasticities of demand for lead, tin, and zinc are far below one The estimated price elasticities of demand are highly inelastic for all mineral commodities in the long run My results suggest that industrialization in China, for example, will cause the consumption of aluminum and copper to increase at a considerably higher rate than the one of lead, tin, and zinc All variables adjust slowly to equilibrium, which helps to explain the extended fluctuation in these markets

Leverage and the Foreclosure Crisis

Abstract: How much of the recent rise in foreclosures can be explained by the large number of high-leverage mortgage contracts originated during the housing boom? We present a model where heterogeneous households select from a set of mortgage contracts and choose whether to default on their payments given realizations of income and housing price shocks. The set of mortgage contracts consists of loans with high downpayments and loans with low downpayments. We run an experiment where the use of low downpayment loans is initially limited by payment-to-income requirements but then becomes unrestricted for 8 years. The relaxation of approval standards causes homeownership rates, high-leverage originations and the frequency of high interest rate loans to rise much like they did in the US between 1998-2006. When home values fall by the magnitude observed in the US from 2007-08, default rates increase by over 180% as they do in the data. Two distinct counterfactual experiments where approval standards remain the same throughout suggest that the increased availability of high-leverage loans prior to the crisis can explain between 40% to 65% of the initial rise in foreclosure rates. Furthermore, we run policy experiments which suggest that recourse could have had significant dampening effects during the crisis.

Monitoring Housing Markets for Episodes of Exuberance: An Application of the Phillips Et Al. (2012, 2013) GSADF Test on the Dallas Fed International House Price Database

Abstract: The detection of explosive behavior in house prices and the implementation of early warning diagnosis tests are of great importance for policy-making. This paper applies the GSADF test developed by Phillips et al. (2012) and Phillips et al. (2013), a novel procedure for testing, detection and date-stamping of explosive behavior, to the data from the Dallas Fed International House Price Database documented in Mack and Martinez-Garcia (2011). We discuss the use of the GSADF test to monitor international housing markets. We assess the international boom and bust cycle experienced during the past 15 years through this lens — with special attention to the United States, the United Kingdom, and Spain. Our empirical results suggest that these three countries experienced a period of exuberance in housing prices during the late 90s and the first half of the 2000s that cannot be attributed solely to the behavior of fundamentals. Looking at all 22 countries covered in the International House Price Database, we detect a pattern of synchronized explosive behavior during the last international house boom-bust episode not seen before.

Investment and real exchange rates in sticky price models

Abstract: This paper investigates how the inclusion of capital in the workhorse new open economy macro model affects its ability to generate volatile and persistent real exchange rates We show that capital accumulation facilitates intertemporal consumption smoothing and significantly reduces the volatility of the real exchange rate Nonetheless, monetary and investment-specific technology (IST) shocks still induce more real exchange rate volatility and less consumption comovement than productivity shocks (with or without capital) We find that endogenous persistence is particularly sensitive to the inertia of the monetary policy rule even with persistent exogenous shocks However, irrespective of whether capital is present, productivity and IST shocks trigger highly persistent real exchange rates, whereas monetary shocks do not Moreover, we point out that IST shocks tend to generate countercyclical real exchange rates—unlike productivity or monetary shocks—but have the counterfactual effect of also producing excessive investment volatility and countercyclical consumption

Dynamic Effects of Credit Shocks in a Data-Rich Environment

Abstract: We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. The identified credit shocks, interpreted as unexpected deteriorations of credit market conditions, immediately increase credit spreads, decrease rates on Treasury securities, and cause large and persistent downturns in the activity of many economic sectors. Such shocks are found to have important effects on real activity measures, aggregate prices, leading indicators, and credit spreads. Our identification procedure does not require any timing restrictions between the financial and macroeconomic factors, and yields interpretable estimated factors.

Database of Global Economic Indicators (DGEI): A Methodological Note

Abstract: The Database of Global Economic Indicators (DGEI) from the Federal Reserve Bank of Dallas is aimed at standardizing and disseminating world economic indicators for policy analysis and scholarly work on the role of globalization. The purpose of DGEI is to offer a broad perspective on how economic developments around the world influence the U.S. economy with a wide selection of indicators. DGEI is automated within an Excel-VBA and E-views framework for the processing and aggregation of multiple country time series. It includes a core sample of 40 countries with available indicators and broad coverage. Country groupings include rest of the world (ex. the U.S.) aggregates and subgroups of countries by development attainment and trade openness. The indicators currently tracked include real GDP, industrial production (IP), Purchasing Managers’ Index (PMI), merchandise exports and imports, headline CPI, CPI (ex. food and energy), PPI/WPI inflation, nominal and real exchange rates, official/policy interest rates, and long-term interest rates. All series are monthly, with the exception of real GDP which is reported at a quarterly frequency. Aggregation is based on trade shares with the U.S. The Globalization and Monetary Policy Institute publishes the aggregate indicators as well as additional country detail on its website with an accompanying slideshow on Global Economic Conditions. This note provides a technical description of the methodology implemented to construct the DGEI.

The Balance Sheet Channel

Abstract: In this paper, we study the role of the credit channel of monetary policy in the context of a DSGE model. Through the use of a regulated banking sector subject to a regulatory capital constraint on lending, we provide alternative interpretations that can potentially explain differences in the implementation of monetary policy without appealing to ad-hoc central bank preferences. This is accomplished through the characterization of the external finance premium as a function of bank leverage and systemic aggregate risk.

The Devil's in the Tail: Residential Mortgage Finance and the U.S. Treasury

Abstract: This paper seeks to contribute to the US housing finance reform conversation by providing a critical assessment of the various types of policy proposals that have been offered. There appears to be a broad consensus to maintain explicit government guarantees for certain narrowly defined borrower populations, such as Federal Housing Administration (FHA) insurance guarantees for low- and moderate-income and first-time homebuyers. However, the expected role of the federal government in the broader housing finance system is in dispute: ranging from no role; to insuring against only extreme or tail events; to insuring against all losses.However, most proposals agree that any public insurance be priced and available only for loans that meet prespecified criteria in an effort to limit taxpayer exposure.

Unemloyment and Unobserved Credit Risk in the FHA Single Family Mortgage Insurance Fund

Abstract: Empirical models of mortgage default typically find that the influence of unemployment is negligible compared to other well known risk factors such as high borrower leverage or low borrower FICO scores. This is at odds with theory, which assigns a critical role to unemployment status in the decision to stop payment on a mortgage. We help reconcile this divergence by employing a novel empirical strategy involving simulated unemployment histories to measure the severity of attenuation bias in loan-level estimations of default risk due to a borrower becoming unemployed. Attenuation bias results because individual data on unemployment status is unobserved, requiring that a market-wide unemployment rate be used as a proxy. Attenuation is extreme, with our results suggesting that the use of an aggregate unemployment rate in lieu of actual borrower unemployment status results in default risk from a borrower becoming unemployed being underestimated by a factor of 100 or more. Correcting for this indicates unemployment is more powerful than other well-known factors such as extremely high leverage or extremely low FICO scores in predicting individual borrower default. Our simulated data indicate that adding the unemployment rate as a proxy for the missing borrower-specific unemployment indicator does not improve the accuracy of the estimated model over the specification without the proxy variable included.

Dynamic Effects of Credit Shocks in a Data-Rich Environment

Abstract: We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. The identified credit shocks, interpreted as unexpected deteriorations of credit market conditions, immediately increase credit spreads, decrease rates on Treasury securities, and cause large and persistent downturns in the activity of many economic sectors. Such shocks are found to have important effects on real activity measures, aggregate prices, leading indicators, and credit spreads. Our identification procedure does not require any timing restrictions between the financial and macroeconomic factors and yields interpretable estimated factors.

Was Stalin Necessary for RussiaAS Economic Development

Abstract: This paper studies structural transformation of Soviet Russia in 1928-1940 from an agrarian to an industrial economy through the lens of a two-sector neoclassical growth model. We construct a large dataset that covers Soviet Russia during 1928-1940 and Tsarist Russia during 1885-1913. We use a two-sector growth model to compute sectoral TFPs as well as distortions and wedges in the capital, labor and product markets. We find that most wedges substantially increased in 1928-1935 and then fell in 1936-1940 relative to their 1885-1913 levels, while TFP remained generally below pre-WWI trends. Under the neoclassical growth model, projections of these estimated wedges imply that Stalin's economic policies led to welfare loss of -24 percent of consumption in 1928-1940, but a +16 percent welfare gain after 1941. A representative consumer born at the start of Stalin's policies in 1928 experiences a reduction in welfare of -1 percent of consumption, a number that does not take into account additional costs of political repression during this time period. We provide three additional counterfactuals: comparison with Japan, comparison with the New Economic Policy (NEP), and assuming alternative post-1940 growth scenarios.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.