Showing papers by "Federal Reserve System published in 2016"
TL;DR: In this article, the authors study the after-trading cost performance of anomalies and the effectiveness of transaction cost mitigation techniques introducing a buy/hold spread, with more stringent requirements for establishing positions than for maintaining them, is the most effective cost mitigation technique.
Abstract: We study the after-trading-cost performance of anomalies and the effectiveness of transaction cost mitigation techniques Introducing a buy/hold spread, with more stringent requirements for establishing positions than for maintaining them, is the most effective cost mitigation technique Most anomalies with less than 50% turnover per month generate significant net spreads when designed to mitigate transaction costs; few with higher turnover do The extent to which new capital reduces strategy profitability is inversely related to turnover, and strategies based on size, value, and profitability have the greatest capacity to support new capital Transaction costs always reduce strategy profitability, increasing data-snooping concerns
480 citations
TL;DR: This paper applied the Laubach-Williams methodology to the United States and three other advanced economies (Canada, the Euro Area, and the United Kingdom) and found that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies.
446 citations
TL;DR: In this article, a surprise index summarizing recent economic data surprises and measuring optimism/pessimism about the state of the economy was constructed for the United States, euro area, United Kingdom, Canada, and Japan.
272 citations
TL;DR: In this paper, the authors show that the shape of the firm employment growth distribution changes substantially in the post-2000 period and the overall decline reflects a sharp drop in the 90th percentile of the growth rate distribution accounted for by the declining share of young firms and the declining propensity for young firms to be high-growth firms.
235 citations
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TL;DR: In this paper, the authors used U.S. data from 1929 to 2015 to show that elevated credit-market sentiment in year t-2 is associated with a decline in economic activity in years t and t+1.
Abstract: Using U.S. data from 1929 to 2015, we show that elevated credit-market sentiment in year t-2 is associated with a decline in economic activity in years t and t+1. Underlying this result is the existence of predictable mean reversion in credit-market conditions. When credit risk is aggressively priced, spreads subsequently widen. The timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity. Exploring the mechanism, we find that buoyant credit-market sentiment in year t-2 also forecasts a change in the composition of external finance: Net debt issuance falls in year t, while net equity issuance increases, consistent with the reversal in credit-market conditions leading to an inward shift in credit supply. Unlike much of the current literature on the role of financial frictions in macroeconomics, this paper suggests that investor sentiment in credit markets can be an important driver of economic fluctuations.
197 citations
TL;DR: The technology is referred to as some combination of components including peer-to-peer networking, distributed data storage, and cryptography that, among other things, can potentially change the way in which the storage, recordkeeping, and transfer of a digital asset is done.
Abstract: Digital innovations in finance, loosely known as fintech, have garnered a great deal of attention across the financial industry. Distributed ledger technology (DLT) is one such innovation that has been cited as a means of transforming payment, clearing, and settlement (PCS) processes, including how funds are transferred and how securities, commodities, and derivatives are cleared and settled. DLT is a term that has been used by the industry in a variety of ways and so does not have a single definition. Because there is a wide spectrum of possible deployments of DLT, this paper will refer to the technology as some combination of components including peer-to-peer networking, distributed data storage, and cryptography that, among other things, can potentially change the way in which the storage, recordkeeping, and transfer of a digital asset is done.
179 citations
TL;DR: In this article, the authors compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound constraint on nominal interest rates and a full set of stochastic fundamental shocks.
Abstract: We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium, a sunspot shock can move the economy from a regime in which inflation is close to the central bank’s target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A non-linear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s transitioned to a deflation regime. The results are somewhat sensitive to the model specification, but on balance, the answer is affirmative for Japan and negative for the U.S.
174 citations
TL;DR: The authors developed a Bayesian framework to estimate proxy structural vector autoregressions (SVARs) in which monetary policy shocks are identified by exploiting the information contained in high frequency data.
Abstract: This paper studies the interaction between monetary policy, financial markets, and the real economy. We develop a Bayesian framework to estimate proxy structural vector autoregressions (SVARs) in which monetary policy shocks are identified by exploiting the information contained in high frequency data. For the Great Moderation period, we find that monetary policy shocks are key drivers of fluctuations in industrial output and corporate credit spreads, explaining about 20 percent of the volatility of these variables. Central to this result is a systematic component of monetary policy characterized by a direct and economically significant reaction to changes in credit spreads. We show that the failure to account for this endogenous reaction induces an attenuation bias in the response of all variables to monetary shocks.
160 citations
TL;DR: The authors calibrate an overlapping-generations model with a rich demographic structure to observed and projected changes in U.S. population, family composition, life expectancy, and labor market activity.
Abstract: We calibrate an overlapping-generations model with a rich demographic structure to observed and projected changes in U.S. population, family composition, life expectancy, and labor market activity. The model indicates that demographic factors associated with the post-war baby boom pushed up real interest rates and real gross domestic product (GDP) growth from 1960 to the 1980s. Since the 1980s, the model accounts for a little more than a 1-percentage-point decline in both real GDP growth and real interest rates—much of the permanent declines in those variables according to some estimates. Our model predicts GDP growth and interest rates will remain low by historical standards, consistent with a “new normal” for the U.S. economy.
156 citations
TL;DR: In this paper, the authors present a new database that focuses on changes in the intensity in the usage of several widely used prudential tools, taking into account both macro-prudential and micro-priential objectives.
Abstract: This paper documents the features of a new database that focuses on changes in the intensity in the usage of several widely used prudential tools, taking into account both macro-prudential and microprudential objectives. The database coverage is broad, spanning 64 countries, and with quarterly data for the period 2000Q1 through 2014Q4. The five types of prudential instruments in the database are: capital buffers, interbank exposure limits, concentration limits, loan to value (LTV) ratio limits, and reserve requirements. A total of nine prudential tools are constructed since some useful further decompositions are presented, with capital buffers divided into four sub-indices: general capital requirements, real state credit specific capital buffers, consumer credit specific capital buffers, and other specific capital buffers; and with reserve requirements divided into two sub-indices: domestic currency capital requirements and foreign currency capital requirements. While general capital requirements have the most changes from the cross-country perspective, LTV ratio limits and reserve requirements have the largest number of tightening and loosening episodes. We also analyze the instruments’ usage in relation to the evolution of key variables such as credit, policy rates, and house prices, finding substantial differences in the patterns of loosening or tightening of instruments in relation to business and financial cycles.
151 citations
TL;DR: In this article, a New Keynesian business-cycle model with rich household heterogeneity is proposed and the main result is that a majority of households prefer substantial stabilization of unemployment even if this means deviations from price stability.
Abstract: We build a New Keynesian business-cycle model with rich household heterogeneity. A central feature is that matching frictions render labor-market risk countercyclical and endogenous to monetary policy. Our main result is that a majority of households prefer substantial stabilization of unemployment even if this means deviations from price stability. A monetary policy focused on unemployment stabilization helps \Main Street" by providing consumption insurance. It hurts \Wall Street" by reducing precautionary saving and, thus, asset prices. On the aggregate level, household heterogeneity changes the transmission of monetary policy to consumption, but hardly to GDP. Central to this result is allowing for self-insurance and aggregate investment.
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TL;DR: The experience so far suggests that modestly negative policy rates transmit through to money markets and other interest rates for the most part in the same way that positive rates do as mentioned in this paper, and there is great uncertainty about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period.
Abstract: Since mid-2014, four central banks in Europe have moved their policy rates into negative territory. These unconventional moves were by and large implemented within existing operational frameworks. Yet the modalities of implementation have important implications for the costs of holding central bank reserves. The experience so far suggests that modestly negative policy rates transmit through to money markets and other interest rates for the most part in the same way that positive rates do. A key exception is retail deposit rates, which have remained insulated so far, and some mortgage rates, which have perversely increased. Looking ahead, there is great uncertainty about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period.
TL;DR: The authors proposed a new framework for measuring uncertainty and its effects on the economy, based on a large VAR model with errors whose stochastic volatility is driven by two common unobservable factors, representing aggregate macroeconomic and financial uncertainty.
Abstract: We propose a new framework for measuring uncertainty and its effects on the economy, based on a large VAR model with errors whose stochastic volatility is driven by two common unobservable factors, representing aggregate macroeconomic and financial uncertainty The uncertainty measures can also influence the levels of the variables so that, contrary to most existing measures, ours reflect changes in both the conditional mean and volatility of the variables, and their impact on the economy can be assessed within the same framework Moreover, identification of the uncertainty shocks is simplified with respect to standard VAR-based analysis, in line with the FAVAR approach and with heteroskedasticity-based identification Finally, the model, which is also applicable in other contexts, is estimated with a new Bayesian algorithm, which is computationally efficient and allows for jointly modeling many variables, while previous VAR models with stochastic volatility could only handle a handful of variables Empirically, we apply the method to estimate uncertainty and its effects using US data, finding that there is indeed substantial commonality in uncertainty, sizable effects of uncertainty on key macroeconomic and financial variables with responses in line with economic theory
TL;DR: The authors assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model and show that if the rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and longlasting.
Abstract: Persistently low real interest rates have prompted the question whether low interest rates are here to stay. This essay assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model. Since the start of the Great Recession, the estimated natural rate of interest fell sharply and shows no sign of recovering. These results are robust to alternative model specifications. If the natural rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and long-lasting. In addition, uncertainty about the natural rate argues for policy approaches that are more robust to mismeasurement of natural rates.
TL;DR: In this paper, the authors examine the extent to which institutional investors herd in the U.S. corporate bond market and the price impact of their herding behavior and find that the level of institutional herding in corporate bonds is substantially higher than what is documented for equities, and that sell herding is much stronger and more persistent than buy herding.
TL;DR: In this paper, the authors exploit the staggered entry of retail brokerages into partnership with the social trading web platform and compare trader activity before and after exposure to these new social conditions, finding that access to the social network nearly doubles the magnitude of a trader's disposition effect.
Abstract: Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader's disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage.
TL;DR: This article provided new estimates of oil-market elasticities by combining a narrative analysis of episodes of large drops in oil production with country-level instrumental variable regressions, showing that supply and demand shocks play an equally important role in explaining oil prices and oil quantities.
TL;DR: In this paper, the U.S. Securities and Exchange Commission (SEC) Regulation FD is used as an exogenous shock to information dissemination, and the authors find evidence consistent with dedicated institutions having an information advantage.
TL;DR: A growing body of evidence indicates that the U.S. economy has become less dynamic in recent years as discussed by the authors, which is evident in declining rates of gross job and worker flows as well as a declining rate of entrepreneurship and young firm activity.
Abstract: A growing body of evidence indicates that the U.S. economy has become less dynamic in recent years. This trend is evident in declining rates of gross job and worker flows as well as declining rates of entrepreneurship and young firm activity, and the trend is pervasive across industries, regions, and firm size classes. We describe the evidence on these changes in the U.S. economy by reviewing existing research. We then describe new empirical facts about the relationship between establishment-level productivity and employment growth, framing our results in terms of canonical models of firm dynamics and suggesting empirically testable potential explanations.
TL;DR: The authors used a dataset of more than 900,000 news stories to test whether news can predict stock returns and found that daily news predicts stock returns for only one to two days, confirming previous research.
Abstract: The authors used a dataset of more than 900,000 news stories to test whether news can predict stock returns. They measured sentiment with a proprietary Thomson Reuters neural network and found that daily news predicts stock returns for only one to two days, confirming previous research. Weekly news, however, predicts stock returns for one quarter. Positive news stories increase stock returns quickly, but negative stories receive a long-delayed reaction. Much of the delayed response to news occurs around the subsequent earnings announcement.
TL;DR: After 2004, measured growth in labor productivity and total factor productivity slowed. as mentioned in this paper find little evidence that this slowdown arises from growing mismeasurement of the gains from innovation in information technology-related goods and services.
Abstract: After 2004, measured growth in labor productivity and total factor productivity slowed. We find little evidence that this slowdown arises from growing mismeasurement of the gains from innovation in information technology–related goods and services. First, the mismeasurement of information technology hardware is significant preceding the slowdown. Because the domestic production of these products has fallen, the quantitative effect on productivity was larger in the 1995–2004 period than since then, despite mismeasurement worsening for some types of information technology. Hence, our adjustments make the slowdown in labor productivity worse. The effect on total factor productivity is more muted. Second, many of the tremendous consumer benefits from the “new” economy such as smartphones, Google searches, and Facebook are, conceptually, nonmarket: Consumers are more productive in using their nonmarket time to produce services they value. These benefits raise consumer well-being but do not imply that market sector production functions are shifting out more rapidly than measured. Moreover, estimated gains in nonmarket production are too small to compensate for the loss in overall well-being from slower market sector productivity growth. In addition to information technology, other measurement issues that we can quantify (such as increasing globalization and fracking) are also quantitatively small relative to the slowdown.
TL;DR: The authors investigated the hiring process and the relationships among referrals, match quality, wage trajectories, and turnover for a single US corporation and test various predictions of theoretical models of labor market referrals.
Abstract: Using a new firm-level data set that includes explicit information on referrals by current employees, we investigate the hiring process and the relationships among referrals, match quality, wage trajectories, and turnover for a single US corporation and test various predictions of theoretical models of labor market referrals. We find that referred candidates are more likely to be hired; experience an initial wage advantage, which dissipates over time; and have longer tenure in the firm. Further, the variances of the referred and nonreferred wage distributions converge over time. The observed referral effects appear to be stronger at lower skill levels. The data also permit analysis of the role of referrer-referee pair characteristics.
TL;DR: This article found that the likelihood of home equity extraction (borrowing, on average, about $40,000 against one's home) peaked in 2003 when mortgage rates reached historic lows, and that house price growth amplifies this relationship.
Abstract: Credit record panel data from 1999-2010 indicates that the likelihood of home equity extraction (borrowing, on average, about $40,000 against one's home) peaked in 2003 when mortgage rates reached historic lows. We estimate a 27 percent rise in extraction in response to a 100 basis point rate decline, and that house price growth amplifies this relationship. Differential responses to interest rates and home price appreciation by borrower age and credit score provide new evidence of financial frictions. Finally, equity extractions are associated with higher default risk, consistent with the use of borrowed funds for consumption or illiquid investment.
TL;DR: This paper studied the effects of volatility on the probability of financial crises by constructing a cross-country database spanning 211 years and found that volatility is not a significant predictor of crises whereas unexpected high and low volatilities are.
Abstract: We study the effects of volatility on the probability of financial crises by constructing a cross-country database spanning 211 years. We find that volatility is not a significant predictor of crises whereas unexpected high and low volatilities are. Low volatility leads to banking crises and both high and low volatilities make stock market crises more likely, while volatility in any form has little impact on currency crises. The volatility-crisis relationship becomes stronger when financial markets are more prominent and less regulated. Finally, low-risk environments are conducive to greater buildup of risk-taking, providing empirical support for the Minsky hypothesis.
TL;DR: This paper investigated the impact of a large economic shock on mortality and found that counties more exposed to a plausibly exogenous trade liberalization exhibit higher rates of suicide and related causes of death, concentrated among whites.
Abstract: We investigate the impact of a large economic shock on mortality. We find that counties more exposed to a plausibly exogenous trade liberalization exhibit higher rates of suicide and related causes of death, concentrated among whites, especially white males. These trends are consistent with our finding that more-exposed counties experience relative declines in manufacturing employment, a sector in which whites and males are disproportionately employed. We also examine other causes of death that might be related to labor market disruption and find both positive and negative relationships. More-exposed counties, for example, exhibit lower rates of fatal heart attacks.
TL;DR: In this paper, the authors measure the effects of debt dilution on sovereign default risk and study debt covenants that could mitigate these effects and find that dilution accounts for 78 percent of the default risk in the baseline economy and that eliminating dilution increases the optimal duration of sovereign debt.
Abstract: We measure the effects of debt dilution on sovereign default risk and study debt covenants that could mitigate these effects. We calibrate a baseline model with endogenous debt duration and default risk (in which debt can be diluted) using data from Spain. We find that debt dilution accounts for 78 percent of the default risk in the baseline economy and that eliminating dilution increases the optimal duration of sovereign debt by almost 2 years. Eliminating dilution also increases consumption volatility but still produces welfare gains. The debt covenants we study could help enforcing fiscal rules.
TL;DR: In this paper, the authors argue that the diffusion of infant formula played an important auxiliary role in women's labor force participation and fertility in the United States during the mid-1930s to 1960s.
Abstract: Maternal mortality was the second-largest cause of death for women in childbearing years until the mid-1930s in the United States. For each death, 20 times as many mothers suffered pregnancy-related conditions, which made it hard for them to engage in market work. Between 1930 and 1960 there was a remarkable improvement in maternal health. We argue that this development, by enabling women to reconcile work and motherhood, was essential for the joint rise in women’s labor force participation and fertility over this period. We also show that the diffusion of infant formula played an important auxiliary role.
TL;DR: This paper assess the relationship between monetary policy, foreign exchange risk premia and term premia at the zero lower bound and identify monetary policy shocks through a method that uses these surprises as the crucial "external instrument" that achieves identification without having to use implausible short-run restrictions.
Abstract: We assess the relationship between monetary policy, foreign exchange risk premia and term premia at the zero lower bound. We estimate a structural VAR including U.S. and foreign interest rates and exchange rates, and identify monetary policy shocks through a method that uses these surprises as the crucial "external instrument" that achieves identification without having to use implausible short-run restrictions. This allows us to measure effects of policy shocks on expectations, and hence risk premia. U.S. monetary policy easing shocks lower domestic and foreign bond risk premia, lead to dollar depreciation and lower foreign exchange risk premia. We present some evidence that U.S. monetary policy easing surprises at the ZLB shift options-implied skewness in the direction of dollar depreciation and also reduce the demand for the liquidity of short-term U.S. Treasuries. Both of these channels should lower foreign exchange risk premia.
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TL;DR: In this article, the authors use the forward-looking information from the US and global capital markets to estimate the economic impact of global warming, specifically, long-run temperature shifts, and find that global warming carries a positive risk premium that increases with the level of temperature and that has almost doubled over the last 80 years.
Abstract: We use the forward-looking information from the US and global capital markets to estimate the economic impact of global warming, specifically, long-run temperature shifts. We find that global warming carries a positive risk premium that increases with the level of temperature and that has almost doubled over the last 80 years. Consistent with our model, virtually all US equity portfolios have negative exposure (beta) to long-run temperature fluctuations. The elasticity of equity prices to temperature risks across global markets is significantly negative and has been increasing in magnitude over time along with the rise in temperature. We use our empirical evidence to calibrate a long-run risks model with temperature-induced disasters in distant output growth to quantify the social cost of carbon emissions. The model simultaneously matches the projected temperature path, the observed consumption growth dynamics, discount rates provided by the risk-free rate and equity market returns, and the estimated temperature elasticity of equity prices. We find that the long-run impact of temperature on growth implies a significant social cost of carbon emissions.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
TL;DR: This article showed that a one-standard deviation negative shock to a country's letter-of-credit supply reduces US exports to that country by 15 percentage points, driven by countries that are small and where few banks are active.