Showing papers by "Federal Reserve System published in 2014"
TL;DR: In this paper, the authors analyzed the economic significance of the traditional "wait-and-see" effect of uncertainty shocks and pointed to financial distortions as the main mechanism through which fluctuations in uncertainty affect macroeconomic outcomes.
Abstract: Micro- and macro-level evidence indicates that fluctuations in idiosyncratic uncertainty have a large effect on investment; the impact of uncertainty on investment occurs primarily through changes in credit spreads; and innovations in credit spreads have a strong effect on investment, irrespective of the level of uncertainty. These findings raise a question regarding the economic significance of the traditional "wait-and-see" effect of uncertainty shocks and point to financial distortions as the main mechanism through which fluctuations in uncertainty affect macroeconomic outcomes. The relative importance of these two mechanisms is analyzed within a quantitative general equilibrium model, featuring heterogeneous firms that face time-varying idiosyncratic uncertainty, irreversibility, nonconvex capital adjustment costs, and financial frictions. The model successfully replicates the stylized facts concerning the macroeconomic implications of uncertainty and financial shocks. By influencing the effective supply of credit, both types of shocks exert a powerful effect on investment and generate countercyclical credit spreads and procyclical leverage, dynamics consistent with the data and counter to those implied by the technology-driven real business cycle models.
665 citations
TL;DR: The toolkit as mentioned in this paper adapts a first-order perturbation approach and applies it in a piecewise fashion to solve dynamic models with occasionally binding constraints, such as a real business cycle model with a constraint on the level of investment and a New Keynesian model subject to the zero lower bound on nominal interest rates.
355 citations
TL;DR: The authors argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions, and they reach this conclusion by looking through the lens of an estimated New Keynesian model in which firms face moderate degrees of price rigidities, no nominal rigidities in wages, and a binding zero lower bound constraint on the nominal interest rate.
Abstract: We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions. We reach this conclusion by looking through the lens of an estimated New Keynesian model in which firms face moderate degrees of price rigidities, no nominal rigidities in wages, and a binding zero lower bound constraint on the nominal interest rate. Our model does a good job of accounting for the joint behavior of labor and goods markets, as well as inflation, during the Great Recession. According to the model the observed fall in total factor productivity and the rise in the cost of working capital played critical roles in accounting for the small drop in inflation that occurred during the Great Recession. (JEL E12, E23, E24, E31, E32, E52)
310 citations
TL;DR: In this article, a DSGE model is used to estimate the role of redistribution and other financial shocks that affect leveraged sectors in the Great Recession. But the model assumes that banks hold little equity in excess of regulatory requirements and the losses require them to react immediately, either by recapitalizing or by deleveraging.
302 citations
TL;DR: Rogers et al. as mentioned in this paper examined the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates.
Abstract: This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.
— John H. Rogers, Chiara Scotti and Jonathan H. Wright
298 citations
TL;DR: The authors assess new studies claiming that the standard panel data approach used in much of the "new minimum wage research" is flawed because it fails to account for spatial heterogeneity and conclude that minimum wages in the United States have not reduced employment.
Abstract: We revisit the minimum wage-employment debate, which is as old as the Department of Labor. In particular, we assess new studies claiming that the standard panel data approach used in much of the “new minimum wage research” is flawed because it fails to account for spatial heterogeneity. These new studies use research designs intended to control for this heterogeneity and conclude that minimum wages in the United States have not reduced employment. We explore the ability of these research designs to isolate reliable identifying information and test the untested assumptions in this new research about the construction of better control groups. Our evidence points to serious problems with these research designs. We conclude that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.
272 citations
TL;DR: This paper showed that the share of mortgages on banks' balance sheets doubled in the course of the twentieth century, driven by a sharp rise of mortgage lending to households, and that household debt to asset ratios have risen substantially in many countries.
Abstract: This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the twentieth century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms, which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.
247 citations
TL;DR: In this paper, the optimal degree of progressivity of the tax and transfer system is analyzed for the U.S. economy and a tractable equilibrium model is developed for social welfare.
Abstract: What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preferences, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the externality linked to valued government purchases play quantitatively similar roles in limiting desired progressivity.
240 citations
TL;DR: In this article, the authors provide evidence that a fairly large TIPS liquidity premium existed until recently, using a multifactor no-arbitrage term structure model estimated with nominal and TIPS yields, inflation and survey forecasts of interest rates.
Abstract: TIPS breakeven inflation rate, defined as the difference between nominal and TIPS yields of comparable maturities, is potentially useful as a real-time measure of market inflation expectations. In this paper, we provide evidence that a fairly large TIPS liquidity premium existed until recently, using a multifactor no-arbitrage term structure model estimated with nominal and TIPS yields, inflation and survey forecasts of interest rates. Ignoring the TIPS liquidity premiums leads to counterintuitive implications for inflation expectations and inflation risk premium, and produces large pricing errors for TIPS. In contrast, models incorporating a TIPS liquidity factor generate much better fit for these variables and reveal a TIPS liquidity premium that was until recently quite large (~1%) but has come down in recent years, consistent with the common perception that TIPS market grew and liquidity conditions improved. Our results indicate that after taking proper account of the liquidity conditions in the TIPS market, the movement in TIPS breakeven inflation rate can provide useful information for identifying real yields, expected inflation and inflation risk premium.
223 citations
TL;DR: In this paper, the authors propose an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market.
Abstract: The network pattern of financial linkages is important in many areas of banking and finance. Yet, bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, yielding networks with minimum density. When used in a stress-testing context, the minimum-density solution overestimates contagion, whereas maximum entropy underestimates it. Using the two benchmarks side-by-side defines a useful range that bounds the cost of contagion in the true interbank network when counterparty exposures are unknown.
218 citations
TL;DR: This paper investigated the effects of U.S. unconventional monetary policies on sovereign yields, foreign exchange rates, and stock prices in emerging market economies and found that these effects depend on country-specific characteristics.
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TL;DR: The authors analyzes how fluctuations in uncertainty interact with financial market imperfections in determining economic outcomes and finds strong evidence supporting the notion that financial frictions play a major role in shaping the uncertainty-investment nexus.
Abstract: The canonical framework used to price risky debt implies that the payoff structure of levered equity resembles the payoff of a call option, while the bondholders face a payoff structure that is equivalent to that of an investor writing a put option. As a result, an increase in the payoff uncertainty benefits equity holders at the expense of bondholders, a feature of the debt contract with two potentially important implications for real economic activity: First, to the extent that firms face significant frictions in financial markets, an increase in the default-risk premium implies a higher cost of capital and hence a decrease in investment. Second, a reduction in the supply of credit stemming from an increase in uncertainty hampers the efficient reallocation of capital and causes an endogenous decline in the total factor productivity (TFP) that amplifies the economic downturn. This paper analyzes---both empirically and theoretically---how fluctuations in uncertainty interact with financial market imperfections in determining economic outcomes. Using both aggregate time-series and firm-level data, we find strong evidence supporting the notion that financial frictions play a major role in shaping the uncertainty-investment nexus. We then develop a tractable general equilibrium model in which individual firms face time-varying uncertainty and imperfect capital markets when issuing risky bonds and equity to finance investment projects. We calibrate the uncertainty process using micro-level estimates of shocks to the firms' profits and show that the combination of uncertainty shocks and financial frictions can generate fluctuations in economic activity that are observationally equivalent to the TFP-driven business cycles.
TL;DR: A wide array of local government regulations influences the amount, location, and shape of residential development as discussed by the authors, and many theories have been developed to explain why regulation arises, including the role of homeowners in the local political process, the influence of historical density, and the fiscal and exclusionary motives for zoning.
Abstract: A wide array of local government regulations influences the amount, location, and shape of residential development. In this chapter, we review the literature on the causes and effects of this type of regulation. We begin with a discussion of how researchers measure regulation empirically, which highlights the variety of methods that are used to constrain development. Many theories have been developed to explain why regulation arises, including the role of homeowners in the local political process, the influence of historical density, and the fiscal and exclusionary motives for zoning. As for the effects of regulation, most studies have found substantial effects on the housing market. In particular, regulation appears to raise house prices, reduce construction, reduce the elasticity of housing supply, and alter urban form. Other research has found that regulation influences local labor markets and household sorting across communities. Finally, we discuss the welfare implications of regulation. Although some specific rules clearly mitigate negative externalities, the benefits of more general forms of regulation are very difficult to quantify. On balance, a few recent studies suggest that the overall efficiency losses from binding constraints on residential development could be quite large.
TL;DR: In this paper, the authors quantify the extent to which the self-employed also systematically underreport their income in U.S. household surveys and show that failing to account for such income underreporting leads to biased conclusions in a variety of settings.
Abstract: A large literature shows that the self-employed underreport their income to tax authorities. In this paper, we quantify the extent to which the self-employed also systematically underreport their income in U.S. household surveys. We use the Engel curve describing the relationship between income and expenditures of wage and salary workers to infer the actual income, and thus the reporting gap, of the self-employed based on their reported expenditures. On average, the self-employed underreport their income by about 25%. We show that failing to account for such income underreporting leads to biased conclusions in a variety of settings.
TL;DR: In this paper, a dynamic general equilibrium model for the positive and normative analysis of macro-prudential policies is developed, which shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance.
Abstract: We develop a dynamic general equilibrium model for the positive and normative analysis of macroprudential policies. Optimizing financial intermediaries allocate their scarce net worth together with funds raised from saving households across two lending activities, mortgage and corporate lending. For all borrowers (households, firms, and banks) external financing takes the form of debt which is subject to default risk. This “3D model” shows the interplay between three interconnected net worth channels that cause financial amplification and the distortions due to deposit insurance. We apply it to the analysis of capital regulation.
TL;DR: In this article, the authors used the deaths of directors and chief executive officers as a natural experiment to generate exogenous variation in the time and resources available to independent directors at interlocked firms.
TL;DR: In this article, the authors study the impact of regional and sectoral productivity changes on the U.S. economy, and highlight the role of these elasticities by tracing out the eects of productivity gains in California in the Computers and Electronics industry between 2002 and 2007 on all other states and regions.
Abstract: We study the impact of regional and sectoral productivity changes on the U.S. economy. To that end, we consider an environment that captures the eects of interregional and intersectoral trade in propagating disaggregated productivity changes at the level of a sector in a given U.S. state to the rest of the economy. The quantitative model we develop features pairwise interregional trade across all 50 U.S. states, 26 traded and non-traded industries, labor as a mobile factor, and structures and land as an immobile factor. We allow for sectoral linkages in the form of an intermediate input structure that matches the U.S. input-output matrix. Using data on trade ‡ows by industry between states, as well as other regional and industry data, we obtain the aggregate, regional and sectoral elasticities of measured TFP, GDP, and employment to regional and sectoral productivity changes. We …nd that such elasticities can vary signi…cantly depending on the sectors and regions aected and are importantly determined by the spatial structure of the US economy. We highlight the role of these elasticities by tracing out the eects of productivity gains in California in the Computers and Electronics industry between 2002 and 2007 on all other U.S. sectors and regions.
TL;DR: In this article, the authors introduce a model of monetary policy with downward nominal wage rigidities and show that both the slope and curvature of the Phillips curve depend on the level of inflation and the extent of downward nominal wages.
Abstract: We introduce a model of monetary policy with downward nominal wage rigidities and show that both the slope and curvature of the Phillips curve depend on the level of inflation and the extent of downward nominal wage rigidities. This is true for the both the long-run and the short-run Phillips curve. Comparing simulation results from the model with data on U.S. wage patterns, we show that downward nominal wage rigidities likely have played a role in shaping the dynamics of unemployment and wage growth during the last three recessions and subsequent recoveries.
TL;DR: The authors examined the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates, and found that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.
Abstract: This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.
TL;DR: This paper showed that workers in small firms were more likely to become unemployed during the 2007-2009 recession than comparable workers in large firms, but only if they were employed in industries with high financing needs.
TL;DR: This paper examined the causal impact of the 2002-2007 civil conflict in Cote d'Ivoire on children's health using household surveys collected before, during, and after the conflict, and information on the exact location and date of conflict events.
Abstract: We examine the causal impact of the 2002-2007 civil conflict in Cote d'Ivoire on children's health using household surveys collected before, during, and after the conflict, and information on the exact location and date of conflict events. Our identification strategy relies on exploiting both temporal and spatial variation across birth cohorts to measure children's exposure to the conflict. We find that children from regions more affected by the conflict suffered significant health setbacks compared with children from less affected regions. We further examine possible war impact mechanisms using rich survey data on households' experience of war. Our results suggest that conflict-related household victimization, and in particular economic losses, is an important channel through which armed conflict negatively impacts child health.
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TL;DR: In this paper, the authors use an empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF to find no particular debt threshold above which medium-term growth prospects are dramatically compromised.
Abstract: Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, we find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised. Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as countries with lower debt. Notwithstanding this, we find some evidence that higher debt is associated with a higher degree of output volatility.
TL;DR: In this paper, the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB).
Abstract: This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the two-year Treasury yield around policy announcements and changes in the ten-year Treasury yield that are orthogonal to those in the two-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields. (JEL E31, E43, E44, E52)
TL;DR: In this paper, the authors use property damage as an instrument for lending growth and find credit in unaffected but connected markets declines by a little less than 50 cents per dollar of additional lending in shocked areas.
TL;DR: In this paper, the authors use a variety of approaches to assess reasons for the decline in participation and conclude that much of the decline is structural in nature. But they do not expect the participation rate to substantially increase from current levels as labor market conditions continue to improve.
Abstract: Since 2007, the labor force participation rate has fallen from about 66 percent to about 63 percent. The sources of this decline have been widely debated among academics and policymakers, with some arguing that the participation rate is depressed due to weak labor demand while others argue that the decline was inevitable due to structural forces such as the aging of the population. In this paper, we use a variety of approaches to assess reasons for the decline in participation. Although these approaches yield somewhat different estimates of the extent to which the recent decline in participation reflects cyclical weakness rather than structural factors, our overall assessment is that much of the decline is structural in nature. As a result, while we believe some of the participation rate’s current low level is indicative of labor market slack, we do not expect the rate to substantially increase from current levels as labor market conditions continue to improve.
TL;DR: In this article, the authors show that the level of margins and the amount of funding were surprisingly stable for most borrowers during the crisis, and they also document a sharp decline in the tri-party repo funding of Lehman in September 2008.
Abstract: The repo market has been viewed as a potential source of financial instability since the 2007 to 2009 financial crisis, based in part on findings that margins increased sharply in a segment of this market. This paper provides evidence suggesting that there was no system-wide run on repo. Using confidential data on tri-party repo, a major segment of this market, we show that, the level of margins and the amount of funding were surprisingly stable for most borrowers during the crisis. However, we also document a sharp decline in the tri-party repo funding of Lehman in September 2008.
TL;DR: In this article, the authors investigated how changes in Metropolitan Statistical Area (MSA)-level house prices affect household fertility decisions and found that short-term increases in house prices lead to a decline in births among non-owners and a net increase among owners.
TL;DR: In this paper, the authors evaluate the model risk of models used for forecasting systemic and market risk, which is the potential for different models to provide inconsistent outcomes, is shown to increase with market uncertainty, and particular conclusions on the underlying reasons for the high model risk and the implications for practitioners and policy makers are discussed.
TL;DR: This article proposed a plausible alternative to sticky prices (sticky information), in which monetary multipliers are smaller, positive supply shocks raise output, and greater price flexibility, in the sense of more frequent updating of information, moves the economy's response toward the neoclassical benchmark.
TL;DR: In this paper, the authors exploit a discrete jump in interest rates generated by the conforming loan limit, the maximum loan size eligible for securitization by Fannie Mae and Freddie Mac, to identify the causal link between interest rates and mortgage demand.
Abstract: The relationship between the mortgage interest rate and a household’s demand for mortgage debt has important implications for a host of public policy questions. In this paper, we use detailed data on over 2.7 million mortgages to provide novel estimates of the interest rate elasticity of mortgage demand. Our empirical strategy exploits a discrete jump in interest rates generated by the conforming loan limit|the maximum loan size eligible for securitization by Fannie Mae and Freddie Mac. This discontinuity creates a large
otch" in the intertemporal budget constraint of prospective mortgage borrowers, allowing us to identify the causal link between interest rates and mortgage demand by measuring the extent to which loan amounts bunch at the conforming limit. Under our preferred specications, we estimate that a 1 percentage point increase in the rate on a 30-year xed-rate mortgage reduces rst mortgage demand by between 2 and 3 percent. We also present evidence that about one third of the response is driven by borrowers who take out second mortgages while leaving their total mortgage balance unchanged. Accounting for these borrowers suggests a reduction in total mortgage debt of between 1.5 and 2 percent per percentage point increase in the interest rate. Using these estimates, we predict the changes in mortgage demand implied by past and proposed future increases to the guarantee fees charged by Fannie and Freddie. We conclude that these increases would directly reduce the dollar volume of new mortgage originations by well under 1 percent.