Federal Reserve System

About: Federal Reserve System is a other organization based out in Washington D.C., District of Columbia, United States. It is known for research contribution in the topics: Monetary policy & Inflation. The organization has 2373 authors who have published 10301 publications receiving 511979 citations.

Heterogeneous borrowers in quantitative models of sovereign default

Abstract: We extend the model used in recent quantitative studies of sovereign default, allowing policymakers of different types to stochastically alternate in power. We show that a default episode may be triggered by a change in the type of policymaker in office, and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions. Under high political stability, political turnover enables the model to generate a weaker correlation between economic conditions and default decisions, a higher and more volatile spread, and lower borrowing levels after a default episode.

Unemployment, Negative Equity, and Strategic Default

Abstract: Using new household level data, we quantitatively assess the roles that (i) job loss, (ii) negative equity, and (iii) wealth (including unsecured debt, liquid, and illiquid assets) play in default decisions. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We find that individual unemployment increases the probability of default by 5-13 percentage points, ceteris paribus, compared to the sample average default rate of 3.9%. We also find that only 13.9% of defaulters have both negative equity and enough liquid or illiquid assets to make 1 month’s mortgage payment. This suggests that “ruthless,” or “strategic” default during the 2007-2009 recession is relatively rare, and suggests that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages.

Wealth Effects and the Consumption of Leisure: Retirement Decisions During the Stock Market Boom of the 1990s

Abstract: It is well accepted that households increase consumption of goods and services in response to an unexpected increase in wealth. Consensus estimates of this wealth effect are in the range of 3 to 5 cents of additional consumption spending in the long run for each additional dollar of wealth. Economic theory also suggests that consumption of leisure, like consumption of goods and services, should increase with positive shocks to wealth. In this paper, we ask whether the run-up in equity prices during the 1990s led older workers to retire earlier than they had previously planned. We identify the effect by exploiting unique data on retirement expectations from the Health and Retirement Survey. Our econometric results suggest that respondents who held corporate equity immediately prior to the bull market of the 1990s retired, on average, 7 months earlier than other respondents.

High-Frequency Data, Frequency Domain Inference, and Volatility Forecasting

Abstract: Although it is clear that the volatility of asset returns is serially correlated, there is no general agreement as to the most appropriate parametric model for characterizing this temporal dependence. In this paper, we propose a simple way of modeling financial market volatility using high-frequency data. The method avoids using a tight parametric model by instead simply fitting a long autoregression to log-squared, squared, or absolute high-frequency returns. This can either be estimated by the usual time domain method, or alternatively the autoregressive coefficients can be backed out from the smoothed periodogram estimate of the spectrum of log-squared, squared, or absolute returns. We show how this approach can be used to construct volatility forecasts, which compare favorably with some leading alternatives in an out-of-sample forecasting exercise.