Showing papers by "Federal Reserve Bank of St. Louis published in 2018"
TL;DR: In this article, the effects of interregional spillovers from the American Recovery and Reinvestment Act of 2009 (the Recovery Act) were investigated using cross-county commuting data.
Abstract: This article studies the effects of interregional spillovers from the American Recovery and Reinvestment Act of 2009 (the Recovery Act). Using cross-county commuting data, we cluster US counties into local labour markets, each of which we further partition into two subregions. We then compare differential labour market outcomes and Recovery Act spending at the regional and subregional levels. Among pairs of subregions, we find evidence of fiscal policy spillovers. According to our benchmark specification, $1 of Recovery Act spending in a subregion increases its own wage bill by $0.64 and increases the wage bill in its neighbouring subregion by $0.50 during the first two years following the Act's passage. The spillover effect occurs in the service sector, whereas the direct effect occurs in both the services and goods-producing sector.
41 citations
TL;DR: The authors developed a DSGE model of Asia, Latin America, and the Rest of the World that features an open-economy business cycle accounting framework to measure domestic and international distortions, and quantify their con-tributions to international capital flows.
Abstract: Since 1950, the economies of East Asia grew rapidly but received little inter-national capital, while Latin America received considerable international capitaleven as their economies stagnated. The literature typically explains the failureof capital to flow to high growth regions as resulting from international capitalmarket imperfections. This paper proposes a broader thesis that country-specificdistortions, such as domestic labor and capital market distortions, also impactcapital flows. We develop a DSGE model of Asia, Latin America, and the Rest ofthe World that features an open-economy business cycle accounting framework tomeasure these domestic and international distortions, and to quantify their con-tributions to international capital flows. We find that domestic distortions havebeen the predominant drivers of international capital flows, and that the generalequilibrium effects of these distortions are very large. International capital market distortions also matter, but less.
31 citations
TL;DR: This paper developed a model of endogenous sovereign debt maturity that rationalizes various stylized facts about debt maturity and the yield spread curve: first, sovereign debt duration and maturity generally exceed one year, and co-move positively with the business cycle.
31 citations
TL;DR: All record-keeping systems (which include monetary systems) must contend with trust issues and methods of organizing historical information as mentioned in this paper, and trust issues are a major obstacle for all record keeping systems.
Abstract: All record-keeping systems (which include monetary systems) must contend with trust issues and methods of organizing historical information.
30 citations
TL;DR: In this paper, a risk of default model with asymmetric information and costly screening is introduced to study the U.S. unsecured credit market during the information technology revolution.
Abstract: The information technology (IT) revolution coincided with the transformation of the U.S. unsecured credit market. Households' borrowing increased rapidly and there was an even faster increase in bankruptcy filings. A risk of default model with asymmetric information and costly screening is introduced to study this period. When information costs are high, the design of contracts under private information prevents some households from borrowing with a risk of default. As information costs drop, households borrow more and bankruptcy filings increase. Quantitative exercises suggest that the IT revolution may have played an important role in the transformation of the unsecured credit market. (JEL E43, E44, G33)
30 citations
TL;DR: In this paper, the authors investigated how a central bank digital currency can be expected to impact a monopolistic banking sector and found that a properly designed central bank currency is not likely to threaten financial stability.
Abstract: This paper investigates how a central bank digital currency can be expected to impact a monopolistic banking sector. The paper’s framework of analysis combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of a monopoly bank. The paper finds that the introduction of a central bank digital currency has no detrimental effect on bank lending activity and may, in some circumstances, even serve to promote it. Competitive pressure leads to a higher monopoly deposit rate which reduces profit but expands deposit funding through greater financial inclusion and desired saving. An appeal to available theory and evidence suggests that a properly designed central bank digital currency is not likely to threaten financial stability.
26 citations
TL;DR: In this article, the authors show that the relationship between income and fertility has flattened between 1980 and 2010 in the US, a time of increasing inequality, as high income families increased their fertility.
Abstract: A negative relationship between income and fertility has persisted for so long that its existence is often taken for granted. One economic theory builds on this relationship and argues that rising inequality leads to greater differential fertility between rich and poor. We show that the relationship between income and fertility has flattened between 1980 and 2010 in the US, a time of increasing inequality, as high income families increased their fertility. These facts challenge the standard theory. We propose that marketization of parental time costs can explain the changing relationship between income and fertility. We show this result both theoretically and quantitatively, after disciplining the model on US data. We explore implications of changing differential fertility for aggregate human capital. Additionally, policies, such as the minimum wage, that affect the cost of marketization, have a negative effect on the fertility and labor supply of high income women. We end by discussing the insights of this theory to the economics of marital sorting.
26 citations
TL;DR: In this article, the authors employ a regression discontinuity (RD) design, exploiting the income threshold for receiving Marketplace subsidies in states that did not expand Medicaid under the Affordable Care Act, to quantify the effect of subsidized health insurance on rent and mortgage delinquency.
Abstract: We use administrative tax data and survey responses to quantify the effect of subsidized health insurance on rent and mortgage delinquency. We employ a regression discontinuity (RD) design, exploiting the income threshold for receiving Marketplace subsidies in states that did not expand Medicaid under the Affordable Care Act. Among households targeted by the policy, eligibility for subsidies is associated with a roughly 25 percent decline in the delinquency rate and reduced exposure to out-of-pocket medical expenditure risk. IV treatment effects are significant, indicating that the decline in the delinquency rate is related to participation in health insurance. We show that, under plausible assumptions, the social benefits implied by our RD estimates, in terms of fewer evictions and foreclosures, are substantial.
23 citations
TL;DR: In this article, the structural gravity model was used to estimate the effects of terrorism on air passenger traffic between nations affected by terrorism, and then the model was combined with alternative functional forms for trade costs.
Abstract: We present a theoretical model (adapted from the structural gravity model by Anderson and van Wincoop, American Economic Review, 93, 2003, 170) to capture the effects of terrorism on air passenger traffic between nations affected by terrorism. We then use equations derived from this model, in conjunction with alternative functional forms for trade costs, to estimate the effects of terrorism on bilateral air passenger service flows from 58 source countries to 26 destination countries during 2000–14. An additional small‐scale terrorist incident in the origin country and destination country together results in a reduction in bilateral air passenger travel by, at least, 1.3% and 0.81%, respectively, for pairs of countries located 1,000 and 2,000 km or less apart. The adverse impact of transnational terrorism is approximately five times larger. Terrorism adversely impacts bilateral air passenger travel both by reducing national output and especially by increasing psychological distress. Last but not the least, international air passenger travel is found to be extremely sensitive to fatal terrorist attacks and terrorist attacks on targets such as airports, travel or tourists.
21 citations
TL;DR: This paper studied the macroeconomic effects of the US fiscal policy response to the Great Recession, accounting not only for standard tools such as government purchases and transfers but also for financial sector interventions such as bank recapitalization and credit guarantees.
Abstract: What type of fiscal policy is most effective during a financial crisis? I study the macroeconomic effects of the US fiscal policy response to the Great Recession, accounting not only for standard tools such as government purchases and transfers but also for financial sector interventions such as bank recapitalizations and credit guarantees. A nonlinear quantitative model calibrated to the US allows me to study the state-dependent effects of different types of fiscal policies. I combine the model with data on the US fiscal policy response to find that the fall in aggregate consumption would have been 50% worse in the absence of that response with a cumulative loss of 9.16%. Transfers and bank recapitalizations yielded the largest fiscal multipliers at the height of the crisis, due to new transmission channels that arise from linkages between household and bank balance sheets.
20 citations
TL;DR: In this article, the authors find that paying interest on reserves is optimal if the central bank has full fiscal support, and that reducing the reserve size is optimal when no fiscal support is available.
TL;DR: This article studied the role of various frictions to the "high return to schooling" and found that the probability of dropping out of college increases strongly with ability, and that ability selection accounts for about 40% of the measured college wage premium.
Abstract: We study two long-standing questions: (i) What part of the measured return to education is due to selection? (ii) The ex post return to schooling is higher than the return to most financial assets. How large are the contributions of various frictions to the "high" return to schooling? We focus in particular on the roles of college dropout risk, borrowing constraints, and learning about ability. We develop and calibrate a model of school choice. Key model features are: (i) ability heterogeneity, (ii) students learn about their abilities while in college, (iii) borrowing constraints, (iv) dropping out of college is a choice. We find that the probability of graduating from college increases strongly with ability. Most college dropouts are students of intermediate abilities who try college in part to learn about their abilities and in part because of the option value of receiving a large earnings gain upon graduation. Ability selection accounts for about 40% of the measured college wage premium.
TL;DR: In this paper, the authors examine the conduct of monetary policy in a world where the supply of outside money is controlled by the fiscal authority, and derive conditions for determinacy under both fiscal regimes and show that they do not necessarily correspond to the Taylor principle.
TL;DR: In this article, the authors define economic value using the concept of a performance fee, the amount an investor would be willing to pay to have access to an alternative predictive model used to make investment decisions.
Abstract: In this article, we provide analytical, simulation, and empirical evidence on a test of equal economic value from competing predictive models of asset returns. We define economic value using the concept of a performance fee—the amount an investor would be willing to pay to have access to an alternative predictive model used to make investment decisions. We establish that this fee can be asymptotically normal under modest assumptions. Monte Carlo evidence shows that our test can be accurately sized in reasonably large samples. We apply the proposed test to predictions of the U.S. equity premium.
TL;DR: In this article, the authors consider the effects of uncertainty shocks in a nonlinear VAR that allows uncertainty to have amplification effects and find that uncertainty shocks have a more pronounced effect on real economic variables.
Abstract: We consider the effects of uncertainty shocks in a nonlinear VAR that allows uncertainty to have amplification effects. When uncertainty is relatively low, fluctuations in uncertainty have small, linear effects. In periods of high uncertainty, the effect of a further increase in uncertainty is magnified. We find that uncertainty shocks in this environment have a more pronounced effect on real economic variables. We also conduct counterfactual experiments to determine the channels through which uncertainty acts. Uncertainty propagates through both the household consumption channel and through businesses delaying investment, providing substantial contributions to the decline in GDP observed after uncertainty shocks. Finally, we find evidence of the ability of systematic monetary policy to mitigate the adverse effects of uncertainty shocks.
TL;DR: This article showed that the relative size of those with high productivity growth shrinks, reducing their contributions toward aggregate productivity growth and thereby resulting in its slowdown, and that the negative effect of routinization on aggregate productivity became apparent.
TL;DR: In this paper, the authors developed a theory of investment and maturity choices and studied its implications for the macroeconomy, which is an explicit secondary market with trading frictions which leads to a liquidity spread which increases with maturity and generates an upward sloping yield curve.
Abstract: This paper develops a theory of investment and maturity choices and studies its implications for the macroeconomy. The novel ingredient is an explicit secondary market with trading frictions which leads to a liquidity spread which increases with maturity and generates an upward sloping yield curve. As a result, trading frictions induce firms to borrow and invest at shorter horizons than in a frictionless benchmark. Economies with more severe frictions exhibit a steeper yield curve which further affects maturity and investment choices of rms. A model calibrated to match cross-country moments suggests that reductions in trading frictions-a new channel of financial development-can promote economic development. A policy intervention with government-backed financial intermediaries in the secondary market can improve liquidity and reduce the cost of long-term finance which promotes investment in longer-term projects and generates substantial welfare gains.
TL;DR: The authors argue that although the United States and Japan have been global leaders in innovation for a long time, South Korea and China are catching up fast and argue that there is still room for China to improve its innovative activities.
Abstract: Using three measurements of patent quality, we argue that there is still room for China to improve its innovative activities. Comparing the number of patent applications and patent grants across countries, we see that although the United States and Japan have been global leaders in innovation for a long time, South Korea and China are catching up fast. If China sustains its large innovation investment and shifts its focus from quantity to quality, together with an improvement in intellectual property rights, the likelihood of becoming one of the next innovation leaders could be much higher.
TL;DR: In this article, the authors identify the pattern of China's industrial upgrading and compare it with those of other successfully industrialized economies and the failed ones, concluding that correct government-led bottom-up industrial policies are the key to escaping the low and middle-income traps.
Abstract: With rapid industrial upgrading along the global value chain of manufactured goods, China has transformed, within one generation, from an impoverished agrarian society to a middle-income nation as well as the largest manufacturing powerhouse in the world. This article identifies the pattern of China’s industrial upgrading and compares it with those of other successfully industrialized economies and the failed ones. We find that (i) China (since 1978) followed essentially the same path of industrial upgrading as that of Japan and the “Asian Tigers.” These economies succeeded in catching up with the developed western world by going through three developmental stages sequentially; namely, a proto-industrialization in the rural areas, a first industrial revolution featuring mass production of labor-intensive light consumer goods, and then a second industrial revolution featuring mass production of the means of mass production (i.e., capital-intensive heavy industrial good s such as steel, machine tools, electronics, automobiles, communication and transport infrastructures). (ii) In contrast, economies stuck in the low-income trap or middle-income trap did not follow the above sequential stages of industrialization. For example, many Eastern European and Latin American countries after WWII jumped to the stage of heavy industrialization without fully developing their labor-intensive light industries, and thus stagnated in the middle-income trap. Also, there is a clear lack of proto-industrialization in the rural areas for many African economies that have remained in the low-income trap. We believe that laissez-faire and “free market” alone is unable to trigger industrial upgrading. Instead, correct government-led bottom-up industrial policies are the key to escaping the low- and middle-income traps.
TL;DR: Married men earn higher wages than single or married women and single men as mentioned in this paper, while single women earn lower wages than married men and single women in the US, and vice-versa.
Abstract: Married men earn higher wages than single or married women and single men.
TL;DR: In this article, a tractable dynamic general equilibrium model is presented in which constraints on unsecured firm credit preclude an efficient capital allocation among heterogeneous firms, and the authors show that these sunspot shocks are quantitatively important, accounting for around half of output volatility.
Abstract: Unsecured firm credit moves procyclically in the United States and tends to lead gross domestic product, while secured firm credit is acyclical. Shocks to unsecured firm credit explain a far larger fraction of output fluctuations than shocks to secured credit. This article surveys a tractable dynamic general equilibrium model in which constraints on unsecured firm credit preclude an efficient capital allocation among heterogeneous firms. Unsecured credit rests on the value that borrowers attach to a good credit reputation, which is a forward-looking variable. Self-fulfilling beliefs over future credit conditions naturally generate endogenously persistent business cycle dynamics. A dynamic complementarity between current and future borrowing limits permits uncorrelated belief shocks to unsecured debt to trigger persistent aggregate fluctuations in both secured and unsecured debt, factor productivity, and output. The author shows that these sunspot shocks are quantitatively important, accounting for around half of output volatility.
TL;DR: This paper provided a common set of life-cycle earnings statistics using administrative data from the United States, Canada, Denmark and Sweden and found that three qualitative patterns are common across countries: the earnings distribution above the median fans out with age, the extreme right tail becomes thicker with age and growth rate of earnings over the working lifetime is larger for groups with higher lifetime earnings.
Abstract: We provide a common set of life-cycle earnings statistics using administrative data from the United States, Canada, Denmark and Sweden. Three qualitative patterns are common across countries: (1) the earnings distribution above the median fans out with age, (2) the extreme right tail of the earnings distribution becomes thicker with age, and (3) the growth rate of earnings over the working lifetime is larger for groups with higher lifetime earnings. Models of top earners should account for these qualitative patterns and, importantly, for how they quantitatively differ across countries.
TL;DR: This paper found that occupations with large employment and low income have a higher automation probability than those with high income and high education levels, while those with low education and high employment have a lower automation probability.
Abstract: Occupations with large employment and low income have a higher automation probability.
TL;DR: This paper examined how the U.S. banking system responded to the founding of the Federal Reserve System (Fed) in 1914 and found that after the Fed's founding, country national banks were much less dependent on correspondent banks for seasonal liquidity and that peaks in lending by individual Reserve Banks aligned with the liquidity needs of banks in their districts.
Abstract: This article examines how the U.S. banking system responded to the founding of the Federal Reserve System (Fed) in 1914. The Fed was established to bring an end to the frequent crises that plagued the U.S. banking system, which reform proponents attributed to the nation’s “inelastic� currency stock and dependence on interbank relationships to allocate liquidity and operate the payments system. Reform advocates noted that banking panics tended to occur at times of the year when the demands for currency and bank loans were normally at seasonal peaks and money markets were at their tightest. Moreover, they blamed the interbank system, upon which the banking system depended for seasonal accommodation and interregional payments, for transmitting shocks throughout the banking system. The article finds that after the Fed’s founding, country national banks were much less dependent on correspondent banks for seasonal liquidity and that peaks in lending by individual Reserve Banks aligned with the liquidity needs of banks in their districts. Further, the article shows that after the Fed’s founding, banks generally were less liquid and relied more heavily on deposits for funding, consistent with the idea that banks viewed the Fed as a reliable source of liquidity. The return of banking panics during the Great Depression, however, showed that the Fed was not, in fact, up to the challenge of serving as a full-fledged lender of last resort.
TL;DR: De Vroey's important new book on the history of macroeconomics as discussed by the authors, which extends to business cycles an earlier book by the same author on involuntary unemployment, offers a broader non-technical survey of the issues and models that make up modern macroeconomic economics including a reckoning of what we have learned since John Maynard Keynes and of the discoveries that still lie ahead.
Abstract: This essay reviews Michel De Vroey's important new book on the history of macroeconomics, which extends to business cycles an earlier book by the same author on the history of involuntary unemployment. The review also offers a broader nontechnical survey of the issues and models that make up modern macroeconomics, including a reckoning of what we have learned since John Maynard Keynes and of the discoveries that still lie ahead.
TL;DR: In this article, a search-based neoclassical model with variable capacity utilization is proposed to explain the business-cycle properties of used capital, such as the quantity of capital reallocated is procyclical, the prices of used assets are more so than those of new assets, and the benefits to capital allocation are countercyclical.
TL;DR: The relative size of the manufacturing sector in an economy depends on its stage of development as mentioned in this paper, as economies become more industrialized, employment and output increase rapidly, and the contribution of manufacturing sector starts declining in favor of the service sector.
Abstract: The relative size of the manufacturing sector in an economy depends on its stage of development. As economies become more industrialized, employment and output increase rapidly. Eventually, for large-enough levels of development, the contribution of the manufacturing sector starts declining in favor of the service sector.
TL;DR: The authors developed a model of endogenous debt restructuring that captures key facts of sovereign debt and restructuring episodes, and employed dynamic discrete choice methods that allow for smoother decision rules, rendering the problem tractable.
Abstract: Sovereign debt crises involve debt restructurings characterized by a mix of face value haircuts and maturity extensions. The prevalence of maturity extensions has been hard to reconcile with economic theory. We develop a model of endogenous debt restructuring that captures key facts of sovereign debt and restructuring episodes. While debt dilution pushes for negative maturity extensions, three factors are important in overcoming the effects of dilution and generating maturity extensions upon restructurings: income recovery after default, credit exclusion after restructuring, and regulatory costs of book value haircuts. We employ dynamic discrete choice methods that allow for smoother decision rules, rendering the problem tractable.
TL;DR: In this article, the authors survey some of these measures using both full-sample data and real-time data and construct six different measures of potential: a linear trend, a quadratic trend, the Congressional Budget Office measure, and three filtered trends.
Abstract: One of the goals of stabilization policy is to reduce the output gap?the difference between potential and actual output?during downturns. Potential output, however, is an unobserved variable whose definition can vary. For example, some view potential output as the level of output that can be produced when employment is at the natural rate. Others use trend measures of output to measure potential. We survey some of these measures using both full-sample data (all of the data that would be available through June 2017) and real-time data (the actual data that would have been available at different points in the sample). We construct six different measures of potential: a linear trend, a quadratic trend, the Congressional Budget Office measure, and three filtered trends. We compare these measures across methods and across time. We also use the measures to compute the monetary policy prescription in a standard interest rate rule and find very little difference across methods.
TL;DR: In this article, the authors show that international credit markets are subject to self-fulfilling variations in the world real interest rate, which act as global shocks that induce strong cross-country co-movements in both financial and real variables (such as asset prices, GDP, consumption, investment and employment).
Abstract: This paper stresses a new channel through which global financial linkages contribute to the co-movement in economic activity across countries. We show in a two-country setting with borrowing constraints that international credit markets are subject to self-fulfilling variations in the world real interest rate. Those expectation-driven changes in the borrowing cost in turn act as global shocks that induce strong cross-country co-movements in both financial and real variables (such as asset prices, GDP, consumption, investment and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom in both home and abroad. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business-cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor’s intimate link to global financial markets.