bluuebunny/crossref_metadata_2025 huggingface dataset:
Historical Monetary Policy Analysis and the Taylor Rule
Authors: Orphanides Athanasios
Published: August 2019

This study examines the usefulness of the Taylor-rule framework as an organizing device for describing the policy debate and evolution of monetary policy in the United States. Monetary policy during the 1920s and since the 1951 Treasury-Federal Reserve Accord can be broadly interpreted in terms of this framework with rather surprising consistency. In broad terms, during these periods policy has been generally formulated in a forward-looking manner with price stability and economic stability serving as implicit or explicit guides. As early as the 1920s, measures of real economic activity relative to "normal" or "potential" supply appear to have influenced policy analysis and deliberations. Confidence in such measures as guides for activist monetary policy proved counterproductive at times, resulting in excessive activism, such as during the Great Inflation and at the brink of the Great Depression. Policy during the past two decades is broadly consistent with natural-growth targeting variants of the Taylor rule that exhibit less activism.
Inflation Scares and Forecast-Based Monetary Policy
Authors: Orphanides Athanasios , Williams John C.
Published: August 2019

Central banks pay close attention to inflation expectations. In standard models, however, inflation expectations are tied down by the assumption of rational expectations and should be of little independent interest to policy makers. In this paper, we relax the assumption of rational expectations with perfect knowledge and reexamine the role of inflation expectations in the economy and in the conduct of monetary policy. Agents are assumed to have imperfect knowledge of the precise structure of the economy and the policymakers' preferences. Expectations are governed by a perpetual learning technology. With learning, disturbances can give rise to endogenous inflation scares, that is, significant and persistent deviations of inflation expectations from those implied by rational expectations. The presence of learning increases the sensitivity of inflation expectations and the term structure of interest rates to economic shocks, in line with the empirical evidence. We also explore the role of private inflation expectations for the conduct of efficient monetary policy. Under rational expectations, inflation expectations equal a linear combination of macroeconomic variables and as such provide no additional information to the policy maker. In contrast, under learning, private inflation expectations follow a time-varying process and provide useful information for the conduct of monetary policy.
An Empirical Test of a Two-Factor Mortgage Valuation Model: How Much Do House Prices Matter?
Authors: Downing Chris , Stanton Richard , Wallace Nancy
Published: August 2019

Mortgage-backed securities, with their relative structural simplicity and their lack of recovery rate uncertainty if default occurs, are particularly suitable for developing and testing risky debt valuation models. In this paper, we develop a two-factor structural mortgage pricing model in which rational mortgage-holders endogenously choose when to prepay and default subject to i. explicit frictions (transaction costs) payable when terminating their mortgages, ii. exogenous background terminations, and iii. a credit-related impact of the loan-to-value ratio (LTV) on prepayment. We estimate the model using pool-level mortgage termination data for Freddie Mac Participation Certificates, and find that the effect of the house price factor on the results is both statistically and economically significant. Out-of-sample estimates of MBS prices produce option adjusted spreads of between 5 and 25 basis points, well within quoted values for these securities.
The Effect of Restructuring on Unemployment
Authors: Figura Andrew
Published: August 2019

This paper finds that the permanent job losses associated with industrial restructuring have significantly boosted the variance of unemployment, causing it to rise much higher in recessions than it would have without cyclically correlated restructuring. Moreover, the influence of restructuring has increased noticeably in the 1980s and 1990s, acting to increase economic instability at a time when other factors were operating to reduce it.
Getting Bad News Out Early: Does it Really Help Stock Prices?
Authors: Downing Chris , Sharpe Steven A.
Published: August 2019

In this paper, we examine the stock price benefit of meeting or beating earnings expectations. Using a general methodology, we find no evidence that the timing of earnings news has any benefit for firms' stock returns. In fact, in many cases we find firms attempting to engineer positive earnings surprises by beating down expectations only to discover that their efforts are counterproductive. Our results appear to overturn the findings of previous authors who, using less general methodologies, have suggested that firms can boost their stock returns by getting bad news out early. Our results are robust across time periods, for different scaling factors on earnings revisions and surprises, when controlling for firm size and growth prospects, and when conditioned on past earnings news.
Forecasting Exogenous Fiscal Variables in the United States
Authors: Cohen Darrel , Follette Glenn
Published: August 2019

This paper provides an introduction to the practice of forecasting "exogenous" components of federal government taxes and spending-policy actions, for short--in the United States. First, we estimate simple models of defense expenditures that are useful for constructing current-quarter forecasts based on incoming daily and monthly spending data. Also, we discuss forecasting policy changes in the context of extending recent empirical work of Alan Auerbach (2002, 2003) on fiscal reaction functions. Forecasts of exogenous fiscal actions are an important input into forecasts of the budget deficit, and we compare the forecasts of the budget deficit prepared by the Congressional Budget Office (CBO), the President's Office of Management and Budget (OMB), and the staff o the Federal Reserve Board (FRB). To our knowledge, analysis of the FRB forecasts has not been done before.
Cash Balance Pension Plan Conversions and the New Economy
Authors: Coronado Julia Lynn , Copeland Phillip C.
Published: August 2019

Many firms that sponsor traditional defined benefit pensions have converted their plans to cash balance plans in the last ten years. Cash balance plans combine features of defined benefit (DB) and defined contribution (DC) plans, and yet their introduction has proven considerably more controversial than has the increasing popularity of DC plans. The goal of this study is to estimate a hierarchy of the influences on the decision of a firm to convert its traditional defined benefit pension plan to a cash balance plan. Our results indicate that cash balance conversions have been undertaken in competitive industries with tight labor markets and can be viewed largely as a response to better compensate a more mobile labor force. Indeed, many firms appear to increase their pension liabilities through such conversions. The results also shed light on the possible determinants of the broader shift from DB to DC pension coverage.
The GSE Implicit Subsidy and Value of Government Ambiguity
Authors: Passmore Wayne
Published: August 2019

The housing-related government-sponsored enterprises Fannie Mae and Freddie Mac (the "GSEs") have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this paper, I estimate how much GSE shareholders gain from this ambiguous government relationship. I find that (1) the federal government's implicit subsidy of Fannie Mae and Freddie Mac has resulted in a funding advantage for the GSEs over private sector institutions, (2) the actions of GSEs result in slightly lower mortgage rates for some homeowners, (3) the government's ambiguous relationship with Fannie Mae and Freddie Mac imparts a substantial implicit subsidy to GSE shareholders, (4) the implicit government subsidy accounts for much of the GSEs' market value, (5) the GSEs would hold far fewer of their mortgage-backed securities in portfolio and their capital-to-asset ratios would be higher if they were purely private, and (6) the GSEs' implicit subsidy does not appear to have substantially increased homeownership or homebuilding.
The Responses of Wages and Prices to Technology Shocks
Authors: Edge Rochelle M. , Laubach Thomas , Williams John C.
Published: August 2019

This paper reexamines wage and price dynamics in response to permanent shocks to productivity. We estimate a micro-founded dynamic general equilibrium (DGE) model of the U.S. economy with sticky wages and sticky prices using impulse responses to technology and monetary policy shocks. We utilize a flexible specification for wage- and price-setting that allows for the sluggish adjustment of both the levels of these variables-as in standard contracting models-as well as intrinsic inertia in wage and price inflation. On the price front, we find that in our VAR inflation jumps in response to an identified permanent technology shock, implying that, on average, prices adjust quickly and that there is little evidence for any intrinsic inflation inertia like that commonly found in models used for monetary policy evaluation. On the wage front, we find evidence for significant inertia in wages and some intrinsic inertia in nominal wage inflation. Our results provide support for the standard sticky-price specification of the New Keynesian model; however, the evidence on the high degree of wage inertia presents a challenge for standard models of wage setting.
Monetary Policy in Deflation: The Liquidity Trap in History and Practice
Authors: Orphanides Athanasios
Published: August 2019

The experience of the U.S. economy during the mid-1930s, when short-term nominal interest rates were continuously close to zero, is sometimes taken as evidence that monetary policy was ineffective and the economy was in a "liquidity trap." Close examination of the historical policy record for the period indicates that the evidence does not support such assertions. The incomplete and erratic recovery from the Great Depression can be traced to a failure to pursue consistently expansionary policy resulting from an incorrect understanding of monetary policy in an environment of very low short-term nominal interest rates. Commonalities with the Japanese experience during the late 1990s and the inadequacy of short-term interest rates as indicators of the stance of monetary policy are discussed, and a robust operating procedure for implementing monetary policy in a low interest rate environment by adjusting the maturity of targeted interest rate instruments is described.
Market Structure and Competition Among Retail Depository Institutions
Authors: Cohen Andrew M. , Mazzeo Michael
Published: August 2019

We assess the competitive impact that single-market banks and thrift institutions have on multi-market banks (and vice-versa) in 1,884 non- MSA markets. We estimate a model of equilibrium market structure which endogenizes entry for three types: multi-market banks, single-market banks, and thrift institutions. Observed market structures and the solution to an entry-type game identify the parameters of a latent (unobserved) profit function. We find significant evidence of product differentiation-- particularly in the case of thrifts. Furthermore, product differentiation appears to depend upon differences in market geography.
Potential Competitive Effects of Basel II on Banks in SME Credit Markets in the United States
Authors: Berger Allen N.
Published: August 2019

We examine the likely competitive effects of the proposed implementation of the Basel II capital requirements on banks in the market for credit to SMEs in the U.S. Specifically, we address whether reduced risk weights for SME credits extended by large banking organizations that adopt the Advanced Internal Ratings-Based (A-IRB) approach of Basel II might significantly adversely affect the competitive positions of organizations that do not adopt A-IRB. The analyses suggest only a relatively minor competitive effect on the majority of community banks primarily because the organizations that are likely to adopt A-IRB tend to make very different types of SME loans to different types of borrowers than community banks. However, the analyses suggest the possibility of significant adverse effects on the competitive positions of large banking organizations that do not adopt A-IRB because the data do not suggest any strong segmentation in SME credit markets among large organizations.
Will the Proposed Application of Basel II in the United States Encourage Increased Bank Merger Activity? Evidence from Past Merger Activity
Authors: Hannan Timothy H. , Pilloff Steven J.
Published: August 2019

This paper presents two tests of the hypothesis that adoption of the internal ratings-based approach to determining minimum capital requirements, as proposed in applying the Basel II capital accord in the United States, will cause adopting banking organizations to increase acquisition activity. The first test estimates the relationship between excess regulatory capital and subsequent merger activity, including organization and time fixed effects, while the second test employs a "difference in difference" analysis of the change in merger activity that occurred the last time regulatory capital standards were changed. Estimated coefficients and observed differences have signs consistent with the hypothesis, but results are either statistically insignificant or imply differences that are small in magnitude.
The Term Structure of Commercial Paper Rates
Authors: Downing Chris , Oliner Stephen D.
Published: August 2019

This paper tests the expectations hypothesis in the market for commercial paper. Our main dataset, which is new to the literature, consists of daily indexes constructed from the actual market yields for nearly all commercial paper issued by U.S. corporations between January 1998 and August 2003. We show that the term premia built into commercial paper yields rise dramatically at year-end, causing the expectations hypothesis to be rejected. However, once we control for these predictable year-end effects, we find the reverse--that commercial paper yields largely conform with the expectations hypothesis.
What Does the Yield on Subordinated Bank Debt Measure?
Authors: Birchler Urs W. , Hancock Diana
Published: August 2019

We provide evidence that a bank's subordinated debt yield spread is not, by itself, a sufficient measure of default risk. We use a model in which subordinated debt is held by investors with superior knowledge ("informed investor hypothesis"). First, we show that in theory the yield spread on subordinated debt must compensate investors for expected loss plus give them an incentive not to prefer senior debt. Second we present strong empirical evidence in favor of the informed investor hypothesis and of the existence of the incentive premium predicted by the model. Using data on the timing and pricing of public debt issues made by large U.S. banking organizations during the 1985-2002 period, we find that banks issue relatively more subordinated debt in good times, i.e. when informed investors have good news. Spreads at issuance (corrected for sample selection bias) react to (superior) private and to public information, in line with the comparative statics of the postulated incentive premium. Interestingly, as the model predicts, the influence of sophisticated investors' information on the subordinated yield spread became weaker after the introduction of prompt corrective action and depositor preference reforms, while the influence of public risk perception grew stronger. Finally, our model explains anomalies from the empirical literature on subordinated debt spreads and from market interviews (e.g. limited sensitivity to bank-specific risk and the "ballooning" of spreads in bad times). We conclude that a bank's subordinated yield spread conveys important information if interpreted together with its senior spread and with other banks' subordinated yield spreads.
Learning and Shifts in Long-Run Productivity Growth
Authors: Edge Rochelle M. , Laubach Thomas , Williams John C.
Published: August 2019

Shifts in the long-run rate of productivity growth--such as those experienced by the U.S. economy in the 1970s and 1990s--are difficult, in real time, to distinguish from transitory fluctuations. In this paper, we analyze the evolution of forecasts of long-run productivity growth during the 1970s and 1990s and examine in the context of a dynamic general equilibrium model the consequences of gradual real-time learning on the responses to shifts in the long-run productivity growth rate. We find that a simple updating rule based on an estimated Kalman filter model using real-time data describes economists' long-run productivity growth forecasts during these periods extremely well. We then show that incorporating this process of learning has profound implications for the effects of shifts in trend productivity growth and can dramatically improve the model's ability to generate responses that resemble historical experience. If immediately recognized, an increase in the long-run growth rate causes long-term interest rates to rise and produces a sharp decline in employment and investment, contrary to the experiences of the 1970s and 1990s. In contrast, with learning, a rise in the long-run rate of productivity growth sets off a sustained boom in employment and investment, with long-term interest rates rising only gradually. We find the characterization of learning to be crucial regardless of whether shifts in long-run productivity growth owe to movements in TFP growth concentrated in the investment goods sector or economy-wide TFP.
Commercial Lending and Distance: Evidence from Community Reinvestment Act Data
Authors: Brevoort Kenneth P. , Hannan Timothy H.
Published: August 2019

Innovations such as credit scoring have increased the ability of banks to lend to distant business borrowers, which could expand the geographic market for small business loans. However, if this effect is limited to a few large banks, the market may become segmented and lending distance at local banks actually decreases. This paper, using a new data source and a spatial econometric model, empirically estimates the relationship between distance and commercial lending and how this relationship is evolving over time. We find distance is negatively associated with the likelihood of a local commercial loan being made and that the deterrent effect of distance is consistently more important, the smaller the size of the bank. We find no evidence that distance is becoming less important in the United States in recent years. In fact, the bulk of the evidence suggests that distance may be of increasing importance in local market lending.
Optimal Inflation in an Open Economy with Imperfect Competition
Authors: Arseneau David M.
Published: August 2019

This paper uses a two-country, monetary general equilibrium model with imperfect competition to study the optimal rate of inflation in an open economy. In contrast with the closed economy literature, when policy is set non-cooperatively in the open economy, the optimality of the Friedman rule is not a general result. Monetary authorities face an incentive to use the inflation tax to gain a "beggar-thy-neighbor" advantage over the terms of trade. Strategic use of the inflation tax, however, results in coordination failure. International monetary cooperation helps to mitigate this coordination failure and, as a result, can lead to more efficient equilibria. Monetary union ensures the maximum gain from cooperation by restoring the optimality of the global Friedman rule, placing the world economy at the Pareto frontier.
The Decline in Household Saving and the Wealth Effect
Authors: Juster F. Thomas , Lupton Joseph P. , Smith James P. , Stafford Frank
Published: August 2019

Using a unique set of household level panel data, we estimate the effect of capital gains on saving by asset type, controlling for observable and unobservable household specific fixed effects. The results suggest that the decline in the personal saving rate since 1984 is largely due to the significant capital gains in corporate equities experienced over this period. Over five-year periods, the effect of capital gains in corporate equities on saving is substantially larger than the effect of capital gains in housing or other assets. Failure to differentiate wealth affects across asset types results in a significant understatement or overstatement of the size of their impact, depending on the asset.
Integrating Expenditure and Income Data: What To Do With the Statistical Discrepancy?
Authors: Bartelsman Eric J. , Beaulieu J. Joseph
Published: August 2019

The purpose of this paper is to build consistent, integrated datasets to investigate whether various disaggregated data can shed light on the possible sources of the statistical discrepancy. Our strategy is first to use disaggregated data to estimate consistent sets of input-output models that sum to either GDP or GDI and compare the two in order to see where the discrepancy resides. We find a few "problem" industries that appear to explain most of the statistical discrepancy. Second, we explore what combination of the expenditure data and the income data seem to produce the most sensible data according to a few economic criteria. A mixture of data that do not aggregate either to GDP or to GDI appears optimal.
Expectation Traps in a New Keynesian Open Economy Model
Authors: Arseneau David M.
Published: August 2019

This paper illustrates that the introduction of a money demand distortion into an otherwise standard New Keynesian Open Economy model generates multiple discretionary equilibria. These equilibria arise in the form of expectations traps whereby the monetary authority is trapped into validating expectations of the private sector because failing to do so is costly. One implication of the model is that provided initial inflation expectations are sufficiently anchored the global Friedman rule emerges as an equilibrium under discretion. It is therefore a time-consistent outcome and hence fully sustainable even in absence of a commitment device or reputational considerations.
Estimating Capacity Utilization from Survey Data
Authors: Morin Norman , Stevens John J.
Published: August 2019

In this paper, we review the history and concepts behind the Federal Reserve&#x27;s measures of capacity and capacity utilization, summarize the methods used to construct the measures, and describe the principal source data for these measures--the Census Bureau&#x27;s Survey of Plant Capacity. We show that the aggregate manufacturing utilization rate from the Survey of Plant Capacity does not exhibit the &quot;cyclical bias&quot; possessed by utilization rates from the less statistically rigorous utilization rate surveys previously used to estimate the Federal Reserve&#x27;s measures. At the detailed industry level, utilization rates from the Survey of Plant Capacity for several industries do appear to possess a cyclical bias, but we demonstrate that this bias is removed in the construction of the Federal Reserve capacity measures. We further show that the Federal Reserve measures, by combining the Census survey utilization rates with other indicators of capacity, do not discard significant information contained in the Census rates. In fact, the Federal Reserve procedures add to the predictive content of the Census utilization rates in models of capital spending, capacity expansion, and changes in price inflation.
Consumer Sentiment, the Economy, and the News Media
Authors: Doms Mark E. , Morin Norman
Published: August 2019

The news media affect consumers' perceptions of the economy through three channels. First, the news media convey the latest economic data and the opinions of professionals to consumers. Second, consumers receive a signal about the economy through the tone and volume of economic reporting. Last, the greater the volume of news about the economy, the greater the likelihood that consumers will update their expectations about the economy. We find evidence that all three of these channels affect consumer sentiment. We derive measures of the tone and volume of economic reporting, building upon the R-word index of The Economist. We find that there are periods when reporting on the economy has not been consistent with actual economic events, especially during the early 1990s. As a consequence, there are times during which consumer sentiment is driven away from what economic fundamentals would suggest. We also find evidence supporting that consumers update their expectations about the economy much more frequently during periods of high news coverage than in periods of low news coverage; high news coverage of the economy is concentrated during recessions and immediately after recessions, implying that "stickiness" in expectations is countercyclical. Finally, because the model of consumer sentiment is highly nonlinear, month-to-month changes in sentiment are difficult to interpret. For instance, although an increase in the number of articles that mention "recession" typically is associated with a decline in sentiment, under certain conditions it can actually result in an increase in various sentiment indexes.
Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities
Authors: Bollerslev Tim , Gibson Michael S. , Zhou Hao
Published: August 2019

This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option-implied volatility measures. A small-scale Monte Carlo experiment suggests that the procedure works well in practice. Implementing the procedure with actual S&amp;P500 option-implied volatilities and high-frequency five-minute-based realized volatilities results in significant temporal dependencies in the estimated stochastic volatility risk premium, which we in turn relate to a set of underlying macro-finance state variables. We also find that the extracted volatility risk premium helps predict future stock market returns.
Workweek Flexibility and Hours Variation
Authors: Figura Andrew
Published: August 2019

I use the term workweek flexibility to describe the ease of changing output by altering the number of hours per worker. Despite the fact that workweek flexibility is potentially important for understanding the cyclical behavior of marginal cost and prices, as well as cyclical movements in hours and output, it has received little attention. Using insights from a simple model of employment and the workweek, I use mean workweek levels to identify the effect of workweek flexibility and then show that it is an important determinant of firms' marginal cost schedules and the variance of industry workweeks and hours. I use the same identification scheme with panel data to see if an increase in workweek flexibility has been behind the rise in hours per worker over the past 30 years and find that it has not.
Debt Maturity, Risk, and Asymmetric Information
Authors: Berger Allen N. , Espinosa-Vega Marco A. , Frame W. Scott , Miller Nathan H.
Published: August 2019

We test the implications of Flannery's (1986) and Diamond's (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data on over 6,000 commercial loans from 53 large U.S. banks. Our results for low-risk firms are consistent with the predictions of both theoretical models, but our findings for high-risk firms conflict with the predictions of Diamond's model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.
The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time
Authors: Orphanides Athanasios , Van Norden Simon
Published: August 2019

A stable predictive relationship between inflation and the output gap, often referred to as a Phillips curve, provides the basis for countercyclical monetary policy in many models. In this paper, we evaluate the usefulness of alternative univariate and multivariate estimates of the output gap for predicting inflation. Many of the ex post output gap measures we examine appear to be quite useful for predicting inflation. However, forecasts using real-time estimates of the same measures do not perform nearly as well. The relative usefulness of real-time output gap estimates diminishes further when compared to simple bivariate forecasting models which use past inflation and output growth. Forecast performance also appears to be unstable over time, with models often performing differently over periods of high and low inflation. These results call into question the practical usefulness of the output gap concept for forecasting inflation.
Precautionary Savings Motives and Tax Efficiency of Household Portfolios: An Empirical Analysis
Authors: Amromin Gene
Published: August 2019

Tax efficiency is the dominant consideration in theoretical portfolio models that allow for both taxable and tax-deferred accounts (TDAs). Investors are advised to locate higher-tax assets in their tax-deferred accounts, which in the Unites States commonly translates into "holding bonds inside TDAs and holding equities outside." Yet, observed portfolio allocations are not tax efficient. This paper empirically evaluates the predictions of a recent model designed to bridge the existing gap by explicitly incorporating uninsurable labor income risk and limited accessibility of TDA assets in household decisions [Amromin, 2003]. Together, these elements create tension between household's desire to maintain tax efficient allocations and its concern over the need to make costly TDA withdrawals in the event of bad income draws. This leads some borrowing-constrained households facing labor income risk and TDA access penalties to forgo tax efficiency in favor of allocations that provide more liquidity in bad income states--an outcome labeled as "precautionary portfolio choice." The empirical results based on household-level portfolio data from the Survey of Consumer Finances provide evidence that both the choice of whether to hold a tax efficient portfolio and the degree of portfolio tax inefficiency are related to the presence and severity of precautionary motives.
The Effects of Competition from Large, Multimarket Firms on the Performance of Small, Single-Market Firms: Evidence from the Banking Industry
Authors: Berger Allen N. , Dick Astrid A. , Goldberg Lawrence G. , White Lawrence J.
Published: August 2019

We offer and test two competing hypotheses for the consolidation trend in banking using U.S. banking industry data over the period 1982-2000. Under the efficiency hypothesis, technological progress improved the performance of large, multimarket firms relative to small, single-market firms, whereas under the hubris hypothesis, consolidation was largely driven by corporate hubris. Our results are consistent with an empirical dominance of the efficiency hypothesis over the hubris hypothesis-on net, technological progress allowed large, multimarket banks to compete more effectively against small, single-market banks in the 1990s than in the 1980s. We also isolate the extent to which technological progress occurred through scale versus geographic effects and how they affected the performance of small, single-market banks through revenues versus costs. The results may shed light as well on some of the research and policy issues related to community banking, and on the question of how community banks should be defined.
Are Firms or Workers Behind the Shift Away from DB Pension Plans?
Authors: Aaronson Stephanie , Coronado Julia Lynn
Published: August 2019

One of the most striking changes in the composition of household retirement savings over the past 20 years has been the shift from defined benefit to defined contribution pension plans. Understanding the factors underlying this shift is important for determining its impact on retirement saving adequacy. Yet previous research, which has mostly focused on factors affecting all firms, such as regulation or increased longevity, has yielded little consensus. In this study we estimate the contribution of changing workforce characteristics and production environments to the shift in pension coverage. Our findings suggest that, while aggregate factors explain a large part of the movement, changes in worker demand, due to evolving workforce characteristics, also contributed notably. On the supply side, we find support for the theory that technical change has reduced the value of DB plans. These supply and demand factors are particularly important for explaining the significant variation in cross-industry trends in pension coverage.
Gestation Lags for Capital, Cash Flows, and Tobins's Q
Authors: Millar Jonathan N.
Published: August 2019

Investment models typically assume that capital becomes productive almost immediately after purchase and that there is no lead time needed to plan. In the case, marginal q is usually sufficient for investment. This paper develops a model of aggregate investment where competitive firms face no adjustment costs other than building and planning delays. In this context, both Tobin's Q and cash flow can be noisy indicators of investment because some shocks fail to outlast the combined gestation lag. The paper demonstrates some empirical facts that challenge prevailing theories of investment but are consistent with gestation requirements. Regressions using aggregate data suggest that it takes at least four quarters for investment to respond to technology shocks and as many as eight additional quarters before productive capacity is affected. Estimates from structural VARs show that only permanent shocks affect investment, but that cash flow and Q react to both permanent and transitory shocks.
From the Horse's Mouth: Gauging Conditional Expected Stock Returns from Investor Surveys
Authors: Amromin Gene , Sharpe Steven A.
Published: August 2019

We use data obtained from a series of Michigan Surveys of Consumer Attitudes to study stock market beliefs and portfolio choices of individual investors. We find that expected returns over the medium- and long-term horizon appear to be extrapolated from past realized returns. The findings also indicate that a more optimistic assessment of macroeconomic conditions coincides with higher expected returns and lower expected volatility, implying strongly procyclical Sharpe ratios. These results are given added credence by the empirical finding that reported portfolio concentrations in equities tend to be higher for respondents who anticipate higher returns and lower uncertainty. Overall, our empirical results lend support to the hypothesis that equity valuations are lower during recessions--and subsequent returns are higher--because of undue pessimism about future returns, rather than high risk aversion.
Why and When do Spot Prices of Crude Oil Revert to Futures Price Levels?
Authors: French Mark W.
Published: August 2019

Recent studies of crude oil price formation emphasize the role of interest rates and convenience yield (the adjusted spot-futures spread), confirming that spot prices mean-revert and normally exceed discounted futures. However, these studies don't explain why such "backwardation" is normal. Also, models derived in these studies typically explain only about 1 percent of daily returns, suggesting other factors are important, too. In this paper, I specify a structural oil-market model that links returns to convenience yield, inventory news, and revisions of expected production cost (growth of which is related to backwardation). Although its predictive power is only a marginal improvement, the model fits the data far better. In addition, I find reversion of spot to futures prices only when backwardation is severe. Convenience yield behaves nonlinearly, but price response to convenience yield is also nonlinear. Equivalently, futures are informative about future spot prices only when spot prices substantially exceed futures.
The Household Spending Response to the 2003 Tax Cut: Evidence from Survey Data
Authors: Coronado Julia Lynn , Lupton Joseph P. , Sheiner Louise
Published: August 2019

The Jobs and Growth Tax Relief and Reconciliation Act of 2003 has been described as textbook fiscal stimulus. Using household survey data on the self-reported qualitative response to the tax cuts, we estimate that the boost to aggregate personal consumption expenditures from the child credit rebate and the reduction in withholdings raised the average level of real GDP in the second half of 2003 by 0.2 percent and by 0.3 percent in the first half of 2004. We also show that households in the survey were well aware of their tax cuts and tended to spend equally out of the child credit rebate and the reduced withholdings, a result that is contrary to the conventional wisdom.
Optimal Policy Projections
Authors: Svensson Lars E.O. , Tetlow Robert
Published: August 2019

We outline a method to provide advice on optimal monetary policy while taking policymakers' judgment into account. The method constructs optimal policy projections (OPPs) by extracting the judgment terms that allow a model, such as the Federal Reserve Board staff economic model, FRB/US, to reproduce a forecast, such as the Greenbook forecast. Given an intertemporal loss function that represents monetary policy objectives, OPPs are the projections---of target variables, instruments, and other variables of interest---that minimize that loss function for given judgment terms. The method is illustrated by revisiting the economy of early 1997 as seen in the Greenbook forecasts of February 1997 and November 1999. In both cases, we use the vintage of the FRB/US model that was in place at that time. These two particular forecasts were chosen, in part, because they were at the beginning and the peak, respectively, of the late 1990s boom period. As such, they differ markedly in their implied judgments of the state of the world in 1997 and our OPPs illustrate this difference. For a conventional loss function, our OPPs provide significantly better performance than Taylor-rule simulations.
A Computationally Efficient Characterization of Pure Strategy Nash Equilibria in Large Entry Games
Authors: Cohen Andrew M.
Published: August 2019

This note presents a simple algorithm for characterizing the set of pure strategy Nash equilibria in a broad class of entry games. The algorithm alleviates much of the computational burden associated with recently developed econometric techniques for estimating payoff functions inferred from entry games with multiple equlibria.
Do Nonfinancial Firms Use Interest Rate Derivatives to Hedge?
Authors: Covitz Daniel M. , Sharpe Steven A.
Published: August 2019

We compile and analyzed detailed information on the debt structure and interest rate derivative positions of nonfinancial firms in 2000 and 2002. We find that differences in debt structure across firms and time tend to be counterbalanced by difference in derivative positions. In particular, among derivative users, smaller firms tend to have relatively more interest rate exposure from liabilities than larger firms and tend to use derivatives that offset these exposures. Larger firms also tend to limit their interest rate exposures, but they do so through their choice of debt structure rather than with derivatives. On the other hand, we find that a large fraction of the change in derivative positions over time cannot be explained by changes in debt structure. Finally, we find no evidence that nonfinancial firms hedge interest rate exposures from their operating assets, but do not see this as supporting the hypothesis that firms use derivatives to speculate.
Risk, Uncertainty, and Asset Prices
Authors: Bekaert Geert , Engstrom Eric , Xing Yuhang
Published: August 2019

We identify the relative importance of changes in the conditional variance of fundamentals (which we call 'uncertainty') and changes in risk aversion ('risk' for short) in the determination of the term structure, equity prices, and risk premiums. Theoretically, we introduce persistent time-varying uncertainty about the fundamentals in an external habit model. The model matches the dynamics of dividend and consumption growth, including their volatility dynamics and many salient asset market phenomena. While the variation in dividend yields and the equity risk premium is primarily driven by risk, uncertainty plays a large role in the term structure and is the driver of counter-cyclical volatility of asset returns.
The Effect of Anticipated Tax Changes on Intertemporal Labor Supply and the Realization of Taxable Income
Authors: Looney Adam , Singhal Monica
Published: August 2019

We use anticipated changes in tax rates associated with changes in family composition to estimate intertemporal labor supply elasticities and elasticities of taxable income with respect to the net-of-tax wage rate. A number of provisions of the tax code are tied explicitly to child age and dependent status. Changes in the ages of children can thus affect marginal tax rates through phase-in or phase-out provisions of tax credits or by shifting individuals across tax brackets. We identify the response of labor and income to these tax changes by comparing families who experienced a tax rate change to families who had a similar change in dependents but no resulting tax rate change. A primary advantage of our approach is that the changes are anticipated and therefore should not cause re-evaluations of lifetime income. The estimates of substitution effects should consequently not be confounded by life-cycle income effects. The empirical design also allows us to compare similar families and can be used to estimate elasticities across the income distribution. In particular, we provide estimates for low and middle income families. Using data from the Survey of Income and Program Participation (SIPP), we estimate an intertemporal elasticity of family labor earnings close to one for families earning between $30,000 and $75,000. Our estimates for families in the EITC phase-out range are lower but still substantial. Estimates from the IRS-NBER individual tax panel are consistent with the SIPP estimates. Tests using alternate control groups and simulated ""placebo"" tax schedules support our identifying assumptions. The high-end estimates suggest substantial efficiency costs of taxation.
ATM Surcharge Bans and Bank Market Structure: The Case of Iowa and its Neighbors
Authors: Hannan Timothy H.
Published: August 2019

It is frequently claimed that high ATM surcharges actually attract customers to the banks that impose them, particularly if they operate large ATM networks. By exploiting as "natural experiments" two events associated with the lifting of surcharge bans in Iowa and in the states that neighbor Iowa, this paper seeks to test for the implications of this phenomenon as it applies to the market shares of banking institutions and to several aspects of market structure. Consistent with these implications, results of "difference-in-difference" analyses suggest that the shares of larger market participants increase, the shares of smaller market participants decrease, market concentration increases, and the number of market competitors decreases after the lifting of surcharge bans.
Solving Stochastic Money-in-the-Utility-Function Models
Authors: Nesmith Travis D.
Published: August 2019

This paper analyzes the necessary and sufficient conditions for solving money-in-the-utility-function models when contemporaneous asset returns are uncertain. A unique solution to such models is shown to exist under certain measurability conditions. Stochastic Euler equations, whose existence is normally assumed in these models, are then formally derived. The regularity conditions are weak, and economically innocuous. The results apply to the broad range of discrete-time monetary and financial models that are special cases of the model used in this paper. The method is also applicable to other dynamic models that incorporate contemporaneous uncertainty.
Alternative Central Bank Credit Policies for Liquidity Provision in a Model of Payments
Authors: Mills David C.
Published: August 2019

I explore alternative central bank policies for liquidity provision in a model of payments. I use a mechanism design approach so that agents' incentives to default are explicit and contingent on the credit policy designed. In the first policy, the central bank invests in costly enforcement and charges an interest rate to recover costs. I show that the second best solution is not distortionary. In the second policy, the central bank requires collateral. If collateral does not bear an opportunity cost, then the solution is first best. Otherwise, the second best is distortionary because collateral serves as a binding credit constraint.
How Did the 2003 Dividend Tax Cut Affect Stock Prices and Corporate Payout Policy?
Authors: Amromin Gene , Harrison Paul , Liang J. Nellie , Sharpe Steven A.
Published: August 2019

We examine the effects of the 2003 dividend tax cut on U.S. stock prices and corporate payout policies. First, using an event-study methodology, we compare the performance of U.S. stocks to that of other securities that should not have benefited from the tax change. We find that U.S. large-cap and small-cap indexes do not outperform their European counterparts, nor REIT stocks, over the event windows, suggesting little if any aggregate stock market effect from the tax change. In cross-sectional analysis, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the event windows. On the other hand, non-dividend paying stocks are found to have outperformed the overall market by a small margin, but this result does not appear specific to the event windows, suggesting that non-tax factors were at play. Second, the tax change did appear to induce an increase in dividends, especially at firms where executive compensation was weighted more heavily toward stock than options. However, the effect on total payouts was more muted, as many firms scaled back share repurchases.
The Sustainability of Health Spending Growth
Authors: Follette Glenn , Sheiner Louise
Published: August 2019

We evaluate the long-run sustainability of health spending growth. Under the criterion that non-health consumption does not fall, one percent excess cost growth appears to be an upper bound for the economy as a whole when the projection horizon extends over the century, although some groups would experience declines in non-health consumption. More generally, the increase in health spending as a share of income may lead to a significant expansion of public sector financing, as has been the case historically. Extrapolation of historical trends also suggests that higher health spending will lead to insurance contracts with lower out-of-pocket payment shares, putting further upward pressure on health care expenditures.