Showing papers by "Federal Reserve Bank of St. Louis published in 2009"
TL;DR: In this paper, the authors present new, fully nonparametric estimates of ray-scale and expansion-path scale economies for U.S. banks based on a model of bank costs.
Abstract: This paper presents new, fully nonparametric estimates of ray-scale and expansion-path scale economies for U.S. banks based on a model of bank costs. Unlike prior studies that use models with restrictive parametric assumptions or limited samples, our methodology uses local polynomial estimators and data on all U.S. banks over the period 1984–2006. Our estimates indicate that as recently as 2006, most U.S. banks faced increasing returns to scale, suggesting that scale economies are a plausible (but not necessarily only) reason for the growth in average bank size and that the tendency toward increasing scale is likely to continue unless checked by government intervention.
264 citations
TL;DR: In this paper, the authors analyze the intertemporal stability of returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously published rules.
Abstract: We analyze the intertemporal stability of returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously published rules. The excess returns of the 1970s and 1980s were genuine and not just the result of data mining. But these profit opportunities had disappeared by the mid-1990s for filter and moving average (MA) rules. Returns to less-studied rules, such as channel, ARIMA, genetic programming and Markov rules, also have declined, but have probably not completely disappeared. The volatility of returns makes it difficult to estimate mean returns precisely. The most likely time for a structural break in the MA and filter rule returns is the early 1990s. These regularities are consistent with the Adaptive Markets Hypothesis (Lo, 2004), but not with the Efficient Markets Hypothesis.
213 citations
TL;DR: In this paper, the authors analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously studied rules.
Abstract: We analyze the intertemporal stability of excess returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously studied rules. The excess returns of the 1970s and 1980s were genuine and not just the result of data mining. But these profit opportunities had disappeared by the early 1990s for filter and moving average rules. Returns to less-studied rules also have declined but have probably not completely disappeared. High volatility prevents precise estimation of mean returns. These regularities are consistent with the Adaptive Markets Hypothesis (Lo (2004)), but not with the Efficient Markets Hypothesis.
197 citations
TL;DR: In this paper, the authors analyzed the relationship between tax provisions and subsidies to promote homeownership and the progressivity of income taxation in the context of an overlapping generations model with housing and rental markets.
128 citations
TL;DR: In this paper, the authors investigate international and domestic border barriers in a unified framework and find that crossing an individual state's domestic border entails a larger trade barrier than crossing the international U.S. border.
Abstract: Many studies have found that international borders represent large barriers to trade. But how do international borders compare to domestic border barriers? We investigate international and domestic border barriers in a unified framework. We consider a unique data set of exports from individual U.S. states to foreign countries and combine it with trade flows within and between U.S. states. After controlling for distance and country size, we find that relative to state-to-state trade, crossing an individual U.S. state’s domestic border entails a larger trade barrier than crossing the international U.S. border. This finding highlights the concentration of trade flows at the local level and the importance of factors such as informational barriers and transportation costs even for the relatively short distances associated with state-to-state trade.
122 citations
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TL;DR: This paper analyzed the relationship between housing and the business cycle in a set of 51 U.S. cities and found that declines in house prices are often not followed by declines in employment.
Abstract: We analyze the relationship between housing and the business cycle in a set of 51 U.S. cities. Most surprisingly, we find that declines in house prices are often not followed by declines in employment. We also find that national permits are a better leading indicator for a city’s employment than a city’s own permits.
118 citations
TL;DR: In this article, the authors construct a model with endogenous entry and operation decisions by firms to assess their impact on cross-country differences in output and TFP, and calibrate the model to match the U.S. distribution of employment and firms by size.
108 citations
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TL;DR: The authors developed a framework for inferring common Markov-switching components in a panel data set with large cross-section and time-series dimensions, and applied the framework to studying similarities and differences across U.S. states in the timing of business cycles.
Abstract: This paper develops a framework for inferring common Markov-switching components in a panel data set with large cross-section and time-series dimensions. We apply the framework to studying similarities and differences across U.S. states in the timing of business cycles. We hypothesize that there exists a small number of cluster designations, with individual states in a given cluster sharing certain business cycle characteristics. We find that although oil-producing and agricultural states can sometimes experience a separate recession from the rest of the United States, for the most part, differences across states appear to be a matter of timing, with some states entering recession or recovering before others.
101 citations
01 Jan 2009
TL;DR: In this paper, a model where foreign aid bolsters a developing country's proactive counterterrorism efforts against a resident transnational terrorist group is presented, where the donor country allocates resources to terrorism-fighting tied aid, general assistance, and defensive actions at home.
Abstract: This paper presents a model where foreign aid bolsters a developing country's proactive counterterrorism efforts against a resident transnational terrorist group. In stage 1 of the game, the donor country allocates resources to terrorism-fighting tied aid, general assistance, and defensive actions at home. The recipient country then decides its proactive campaign against the common terrorist threat in stage 2, while the terrorists direct their attacks against the donor and recipient countries in stage 3. Terrorists' choices in the final stage provide a solid microfoundation for the terrorists' likelihood of success function. In stage 2, greater tied aid raises the recipient country's proactive measures and regime instability, while increased general aid reduces these proactive efforts and regime instability. In stage 1, a donor's homeland security decisions are interdependent with its aid package to a recipient country, hosting resident transnational terrorists. This interdependency and its implications have gone unrecognized to date. Copyright 2011 Oxford University Press 2010 All rights reserved, Oxford University Press.
92 citations
TL;DR: This article analyzed the relationship between housing and the business cycle at the MSA-level for a set of 51 US cities and found no consistent statistical relationship suggesting a city's permits or prices influences its business cycle.
82 citations
TL;DR: In this paper, a two-stage game depiction of counterterrorism is presented, where the emphasis is on the interaction between the preemptive and defensive measures taken by two targeted countries facing a common threat.
Abstract: A two-stage game depiction of counterterrorism is presented, where the emphasis is on the interaction between the preemptive and defensive measures taken by two targeted countries facing a common threat. The preemptor is likely to be the high-cost defender with the greater foreign interests. A prime-target country may also assume the preemptor role. The analysis identifies key factors – cost comparisons, foreign interests, targeting risks, and domestic terrorism losses – that determine counterterrorism allocations. The study shows that the market failures associated with preemptive and defensive countermeasures may be jointly ameliorated by a disadvantaged defender. Nevertheless, the subgame perfect equilibrium will still be suboptimal owing to a preemption choice that does not fully internalize the externalities.
TL;DR: It is argued that interest-bearing money is essential when individual money balances are private information and one reason for why it is sufficient (as well as necessary) for interest to be paid only on large money balances is suggested.
TL;DR: This article examined the different effects of this and previous recessions on employment experiences across a range of demographic categories: sex, marital status, race, age, and education level, and found that single people fell at more than twice the rate that it did for married people.
Abstract: The burdens of a recession are not spread evenly across demographic groups. The public and media, for example, noticed that, from the start of the current recession in December 2007 through June 2009, men accounted for more than three quarters of net job losses. Other differences have garnered less attention, but are just as interesting. During the same period, the employment of single people fell at more than twice the rate that it did for married people, while black employment fell at one-and-a-half times the rate that white employment did. To have a more complete understanding about what recessions mean for people, this paper examines the different effects of this and previous recessions on employment experiences across a range of demographic categories: sex, marital status, race, age, and education level.
TL;DR: In this paper, the authors introduce limited liability in a model with a continuum of ex ante identical agents who face aggregate and idiosyncratic income risk, and show that the economy experiences a negative liquidity shock when this growth rate is high and a large fraction of agents face severely binding solvency constraints.
Abstract: We introduce limited liability in a model with a continuum of ex ante identical agents who face aggregate and idiosyncratic income risk. These agents can trade a complete menu of contingent claims, but they cannot commit and shares in a Lucas tree serve as collateral to back up their state-contingent promises. The limited liability option gives rise to a second risk factor, in addition to aggregate consumption growth risk. This liquidity risk is created by binding solvency constraints, and it is measured by the growth rate of one moment of the wealth distribution. The economy is said to experience a negative liquidity shock when this growth rate is high and a large fraction of agents faces severely binding solvency constraints. The adjustment to the Breeden-Lucas stochastic discount factor induces substantial time variation in equity risk premia that is consistent with the data at business cycle frequencies.
TL;DR: The authors review the empirical literature that studies the relationship between foreign direct investment, productivity, and growth using aggregate data and focus on two questions: Is there evidence of a positive relationship between FDI and national growth? And does the output of the "multinational sectors" exhibit higher labor productivity?
Abstract: The authors review the empirical literature that studies the relationship between foreign direct investment, productivity, and growth using aggregate data and focus on two questions: Is there evidence of a positive relationship between foreign direct investment and national growth? And does the output of the "multinational sectors" exhibit higher labor productivity? The authors also briefly discuss how the microeconomic evidence and a number of aggregation and composition problems might help explain the ambiguous results in this literature.
TL;DR: In this article, the authors used a model that allows for data sampling at mixed frequencies to analyze the predictive power of the Beige Book for aggregate output and employment, and found that the national summary and District reports predict GDP and aggregate employment and most District reports provide information content for regional employment.
Abstract: Studies of the predictive ability of the Federal Reserve’s Beige Book for aggregate output and employment have proven inconclusive. This might be attributed, in part, to its irregular release schedule. We use a model that allows for data sampling at mixed frequencies to analyze the predictive power of the Beige Book. We find that the Beige Book’s national summary and District reports predict GDP and aggregate employment and that most District reports provide information content for regional employment. In addition, there appears to be an asymmetry in the predictive content of the Beige Book language.
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TL;DR: In this article, the authors developed a quantitatively-oriented framework to explain cross-country patterns in aggregate and sectoral total factor productivity (TFP) in industrial sectors of the economy, showing that poor countries are particularly unproductive in tradable and investment goods sectors.
Abstract: Income differences across countries primarily reflect differences in total factor productivity (TFP). More disaggregated data show that the TFP gap between rich and poor countries varies systematically across industrial sectors of the economy: Poor countries are particularly unproductive in tradable and investment goods sectors. In this paper, we develop a quantitatively-oriented framework to explain such cross-country patterns in aggregate and sectoral TFP. We start by documenting that an important distinction between sectors is their average establishment size. For example, establishments in tradable and investment goods sectors operate at much larger scales than those in the non-tradable sector. In our model, sectors with larger scales of operation have more financing needs, and are hence disproportionately affected by financial frictions. Our quantitative exercises show that financial frictions account for a substantial part of the observed cross-country patterns in TFP, both at the aggregate and at the sectoral level. Our model also has novel implications for the impact of financial frictions on the relative scale between the tradable and the non-tradable sectors, which are shown to be consistent with the data.
TL;DR: This paper analyzed the forecasts made by each individual member of the FOMC from 1992 to 1998 and identified a handful of patterns in the forecasts related to forecast horizon, whether the individual is a Federal Reserve Bank president, governor, and/or vice chairman.
Abstract: This paper presents empirical evidence on the disagreement among Federal Open Market Committee (FOMC) forecasts. In contrast to earlier studies that analyze the range of FOMC forecasts available in the Monetary Policy Report to the Congress, we analyze the forecasts made by each individual member of the FOMC from 1992 to 1998. This newly available dataset, while rich in detail, is short in duration. Even so, we are able to identify a handful of patterns in the forecasts related to i) forecast horizon; ii) whether the individual is a Federal Reserve Bank president, governor, and/or Vice Chairman; and iii) whether individual is a voting member of the FOMC. Additional comparisons are made between forecasts made by the FOMC and the Survey of Professional Forecasters.
TL;DR: In this paper, an incomplete-horizon general-equilibrium model with speculative bubbles is constructed and conditions under which storable goods, regardless of their intrinsic values, can carry bubbles and agents are willing to invest in such bubbles despite their positive probability of bursting.
Abstract: Asset prices are widely believed to be much more volatile and often detached from their fundamentals. It is also widely believed that the bursting of …nancial bubbles can depress the real economy. This paper addresses these issues by constructing an in…nite-horizon incomplete-market general-equilibrium model with speculative bubbles. We characterize conditions under which storable goods, regardless of their intrinsic values, can carry bubbles and agents are willing to invest in such bubbles despite their positive probability of bursting. We show that systemic risk— perceived changes in the bubbles’probability to burst— can generate boom-bust cycles with hump-shaped output dynamics, and produce asset price movements that are many times more volatile than the economy’s fundamentals, as in the data.
TL;DR: This paper showed that if households face idiosyncratic wealth-income risk and are borrowing constrained, an otherwise-standard growth model can imply that fast-growing economies have not only high saving rates but also low interest rates.
Abstract: Empirical evidence suggests that fast-growing economies tend to have not only high saving rates but also low interest rates. This evidence is di¢ cult to reconcile with standard explanations about the positive linkages between saving and growth. These explanations rely either on high saving to explain high growth or on high growth to explain high saving; but in either case, they must imply and depend on high interest rates to induce high saving rates. Hence, the real puzzle is why households would save excessively to …nance …rms' investment when the interest rate on their savings is so low. This paper shows that if households face idiosyncratic wealth-income risk and are borrowing constrained, an otherwise-standard growth model can imply that fast-growing economies have not only high saving rates but also low interest rates. Precautionary saving under borrowing constraints can make an individual's marginal propensity to consume negatively dependent on her permanent income, so that high income growth can lead to substantially increased saving without high interest rates. The predictions of the model are consistent with the experience of Japan (in the 1960-1970s) and China (in the past 30 years).
01 Jan 2009
TL;DR: The authors showed that the response of Treasury yields to monetary policy actions is considerably weaker than previously estimated, in particular, there is no statistically significant response of longer-term Treasury yields before February 2000 and no statistically consistent response of any Treasury rate after.
Abstract: It is common practice to estimate the response of asset prices to monetary policy actions using market-based measures of monetary policy shocks, such as the federal funds futures rate. I show that because interest rates and market-based measures of monetary policy shocks respond simultaneously to all news and not simply news about monetary policy actions, market-based measures of monetary policy shocks yield biased estimates of the response of interest rates to monetary policy actions. I propose a methodology that corrects for this “joint-response bias.” The results indicate that the response of Treasury yields to monetary policy actions is considerably weaker than previously estimated. In particular, there is no statistically significant response of longer-term Treasury yields before February 2000 and no statistically significant response of any Treasury rate after.
TL;DR: The authors developed methods for testing whether, in a finite sample, forecasts from nested models are equally accurate, and derived the limiting distributions of tests of equal mean square error, and developed a bootstrap for inference.
TL;DR: It is shown that any allocation in the economy with inside bonds can be replicated in the Economy with outside bonds but that the converse is not true, however, the optimal policy in each economy makes the allocations equivalent.
Abstract: When agents are liquidity constrained, two options exist - sell assets or borrow. We compare the allocations arising in two economies: in one, agents can sell government (outside) bonds and in the other they can borrow by issuing (inside) bonds. All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds but that the converse is not true. However, the optimal policy in each economy makes the allocations equivalent.
TL;DR: In this paper, the authors construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy and show that if the central bank pursues a price-level target, it can control inflation expectations and improve welfare by stabilizing short run shocks to the economy.
Abstract: We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a price-level target, it can control inflation expectations and improve welfare by stabilizing short-run shocks to the economy. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states.
TL;DR: In this paper, the authors investigate changes in the efficiency and productivity of US credit unions during 1989-2006 by benchmarking the performance of individual firms against an estimated order-α quantile lying near the efficient frontier.
Abstract: Advances in information-processing technology have eroded the advantages of small scale and proximity to customers that traditionally enabled small lenders to thrive. Nonetheless, the membership and market share of US credit unions have increased, though their average size has also risen. We investigate changes in the efficiency and productivity of US credit unions during 1989–2006 by benchmarking the performance of individual firms against an estimated order- α quantile lying “near” the efficient frontier. We construct a cost analog of the Malmquist productivity index, which we decompose to estimate changes in cost and scale efficiency, and changes in technology. We find that cost-productivity fell on average across all credit unions but especially among smaller credit unions. Smaller credit unions confronted a shift in technology that increased the minimum cost required to produce given amounts of output. All but the largest credit unions also became less scale efficient over time.
TL;DR: This paper provides the most fully comprehensive evidence to date on whether or not monetary aggregates are valuable for forecasting US inflation in the early to mid 2000s by using two non-linear techniques - recurrent neural networks and kernel recursive least squares regression - techniques that are new to macroeconomics.
Abstract: This paper provides the most fully comprehensive evidence to date on whether or not monetary aggregates are valuable for forecasting US inflation in the early to mid 2000s. We explore a wide range of different definitions of money, including different methods of aggregation and different collections of included monetary assets. In our forecasting experiment we use two non-linear techniques, namely, recurrent neural networks and kernel recursive least squares regression - techniques that are new to macroeconomics. Recurrent neural networks operate with potentially unbounded input memory, while the kernel regression technique is a finite memory predictor. The two methodologies compete to find the best fitting US inflation forecasting models and are then compared to forecasts from a naive random walk model. The best models were non-linear autoregressive models based on kernel methods. Our findings do not provide much support for the usefulness of monetary aggregates in forecasting inflation.
TL;DR: In this paper, the effects of money (anticipated inflation) on capital formation are studied. But the authors adopt reduced-form approaches, putting money in the utility function or imposing cash in advance, but use otherwise frictionless models and follow a literature that is more explicit about the frictions making money essential.
Abstract: We study the effects of money (anticipated inflation) on capital formation Previous papers on this topic adopt reduced-form approaches, putting money in the utility function or imposing cash in advance, but use otherwise frictionless models We follow a literature that is more explicit about the frictions making money essential This introduces several new elements, including a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining We show how these elements matter qualitatively and quantitatively Our numerical results differ from findings in the reduced-form literature The analysis reduces the previously large gap between mainstream macro and monetary theory
TL;DR: The authors compare the allocations arising in two economies: in one, agents can sell government (outside) bonds and in the other they can borrow by issuing (inside) bonds, and show that any allocation in the economy with inside bonds can be replicated in an economy with outside bonds but that the converse is not true.
TL;DR: In this paper, the authors extract jumps and cojumps from three types of assets: stock index futures, bond futures, and exchange rates, and characterize the dynamics of these discontinuities and informally relate them to U.S. macroeconomic releases before using limited dependent variable models to formally model how news surprises explain (co)jumps.
Abstract: We use recently proposed tests to extract jumps and cojumps from three types of assets: stock index futures, bond futures, and exchange rates. We then characterize the dynamics of these discontinuities and informally relate them to U.S. macroeconomic releases before using limited dependent variable models to formally model how news surprises explain (co)jumps. Nonfarm payroll and federal funds target announcements are the most important news across asset classes. Trade balance shocks are important for foreign exchange jumps. We relate the size, frequency and timing of jumps across asset classes to the likely sources of shocks and the relation of asset prices to fundamentals in the respective classes.
TL;DR: The authors investigated international and domestic border barriers in a unified framework and found that crossing an individual US state's domestic border appears to entail a larger trade barrier than crossing the international US border.
Abstract: Many studies have found that international borders represent large barriers to trade. But how do international borders compare to domestic border barriers? We investigate international and domestic border barriers in a unified framework. We consider a data set of exports from individual US states to foreign countries and combine it with trade flows between and within US states. After controlling for distance and country size, we estimate that relative to state-to-state trade, crossing an individual US state’s domestic border appears to entail a larger trade barrier than crossing the international US border. Due to the absence of governmental impediments to trade within the United States, this result is surprising. We interpret it as highlighting the concentration of economic activity and trade flows at the local level.