bluuebunny/crossref_metadata_2025 huggingface dataset:
Estate vs. Capital Gains Taxation: An Evaluation of Prospective Policies for Taxing Wealth at the Time of Death
Authors: Avery Robert B. , Grodzicki Daniel , Moore Kevin B.
Published: August 2019

Debate over the U.S. federal estate tax has intensified recently as a result of the sunset provisions in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 and changes in law passed in conjunction with the 'fiscal cliff' at the end of 2012. Despite recent changes in the law, there remains an open debate regarding the extent to which prospective estates comprise assets that have been taxed previously. Using wealth data on U.S. households, we forecast changes in household wealth in the coming decade and calculate the importance of untaxed wealth in bequeathed estates. Connecting further to the debate, we investigate the impact of various policies on U.S. households. In particular, we compare policies in which the entire estate is taxed at death (estate tax) to those in which only the unrealized capital gains portion is subject to tax (capital gains tax). We estimate that the average unrealized capital gains in estates monotonically increases with the size of the estate, ranging from 13% for estates under $2 million to 55% for estates over $100 million. We also find that policies aimed at taxing the entire estate raise more revenue than those aimed at taxing unrealized gains. However, policies that tax only gains concentrate a larger portion of the tax burden on high wealth households.
The History of Cyclical Macroprudential Policy in the United States
Authors: Elliott Douglas J. , Feldberg Gregory H. , Lehnert Andreas
Published: August 2019

Since the financial crisis of 2007-2009, policymakers have debated the need for a new toolkit of cyclical 'macroprudential' policies to constrain the build-up of risks in financial markets, for example, by dampening credit-fueled asset bubbles. These discussions tend to ignore America's long and varied history with many of the instruments under consideration to smooth the credit cycle, presumably because of their sparse usage in the last three decades. We provide the first comprehensive survey and historic narrative of these efforts. The tools whose background and use we describe include underwriting standards, reserve requirements, deposit rate ceilings, credit growth limits, supervisory pressure, and other financial regulatory policy actions. The contemporary debates over these tools highlighted a variety of concerns, including 'speculation,' undesirable rates of inflation, and high levels of consumer spending, among others. Ongoing statistical work suggests that macroprudential tightening lowers consumer debt but macroprudential easing does not increase it.
Antidumping Duties and Plant-Level Restructuring
Authors: Pierce Justin R.
Published: August 2019

This paper examines the effect of antidumping duties on the restructuring activities of protected plants. Using a dataset that contains the full population of U.S. manufacturers, I find that protected plants increase their capital intensities modestly relative to unprotected plants, but only when antidumping duties have been in place for a sufficient duration. I find little effect of antidumping duties on a proxy for the skilled labor intensity of protected plants.
Optimal Fiscal and Monetary Policy with Occasionally Binding Zero Bound Constraints
Authors: Nakata Taisuke
Published: August 2019

This paper studies optimal government spending and monetary policy when the nominal interest rate is subject to the zero lower bound constraint in a stochastic New Keynesian economy. I find that the government chooses to increase its spending when at the zero lower bound by a substantially larger amount in the stochastic environment than it would in the deterministic environment. The presence of uncertainty creates a unique time-consistency problem if the steady-state is inefficient. Although access to government spending policy increases welfare in the face of a large deflationary shock, it decreases welfare during normal times as the government reduces the nominal interest rate less aggressively before reaching the zero lower bound.
Monetary Policy and Financial Stability Risks
Authors: Clouse James A.
Published: August 2019

The financial crisis and its aftermath have raised numerous questions about the appropriate role of financial stability considerations in the conduct of monetary policy. This paper develops a simple example of the possible connections between financial stability and monetary policy. We find that even without an explicit financial stability goal for monetary policy, financial stability considerations arise naturally in the context of standard models of optimal monetary policy if the potential magnitude of financial stability shocks is affected by the stance of policy. In this case, similar to the classic analysis of Brainard (1967), policymakers may seek to reduce the variance of output by scaling back the level of policy accommodation provided today in response to an aggregate demand shock relative to the level that would otherwise be provided. However, the policy implications of this possible connection between monetary policy and financial stability are complex even in the simple example considered here. In particular, financial stability considerations may also increase the relative benefits of following a commitment policy relative to a discretionary strategy.
Analysis of Wealth using Micro and Macro Data: A Comparison of the Survey of Consumer Finances and Flow of Funds Accounts
Authors: Henriques Alice M. , Hsu Joanne W.
Published: August 2019

Researchers use different types of household balance sheet data to study different aspects of lifecycle saving and wealth accumulation behavior. Macro data from the Flow of Funds Accounts (FFA) are produced at a quarterly frequency and are available in a timely manner, but they can only be used to study the behavior of the household sector as a whole. Micro data from the Survey of Consumer Finances (SCF) are available every three years and only with a lag, but they can be used to address questions that involve differences in behavior over time and across various types of households. Despite the very different approaches to estimating household net worth, the two data sets show the same general patterns wealth changes over the past twenty-five years. Areas where the FFA and SCF diverge in aggregate levels—in categories such as owner-occupied housing, noncorporate equity, and credit cards—may be explained by methodological decisions applied in the production of the data. Those differences do not fundamentally alter one's perception of household wealth dynamics in the period leading up to and following the Great Recession.
The Effect of State and Local Sales Taxes on Employment at State Borders
Authors: Thompson Jeffrey P. , Rohlin Shawn M.
Published: August 2019

This paper estimates the effect of sales taxes on employment at state borders using county-level quarterly data and a newly developed dataset of local tax rates. Sales tax increases, relative to cross-border neighbors, lead to losses of employment, as well as payroll and hiring, but these effects are only found in counties with large shares of residents working in another state. The effects also represent an upper-bound, largely driven by employment shifting across the state border. We also find that employment in food and beverage stores is negatively affected when cross-border neighbors adopt low sales tax rates on food.
Cost of Borrowing Shocks and Fiscal Adjustment
Authors: De Groot Oliver , Holm-Hadulla Fédéric , Leiner-Killinger Nadine
Published: August 2019

Do capital markets impose fiscal discipline on governments? We investigate the responses of fiscal variables to a change in the interest rate paid by governments on their debt in a panel of 14 European countries over four decades. To this end, we estimate a panel vector autoregressive (PVAR) model, using sign restrictions via the penalty function method of Mountford and Uhlig (2009) to identify structural cost of borrowing shocks. Our baseline estimation shows that a 1 percentage point rise in the cost of borrowing leads to a cumulative improvement of the primary balance-to-GDP ratio of approximately 2 percentage points over 10 years, with the fiscal response becoming significantly evident only two years after the shock. We also find that the bulk of fiscal adjustment takes place via a rise in government revenue rather than a cut in primary expenditure. The size of the total fiscal adjustment, however, is insufficient to avoid the gross government debt-to-GDP ratio from rising as a consequence of the shock. Sub-dividing our sample, we also find that for countries participating in Economic and Monetary Union (EMU) the primary balance response to a cost of borrowing shock was stronger in the period after 1992 (the year in which the Maastricht Treaty was signed) than prior to 1992.
Payday Lending Regulation
Authors: Kaufman Alex
Published: August 2019

To date the debate over payday lending has focused on whether access to such lending is on net beneficial or harmful to consumer welfare. However, payday loans are not one product but many, and different forms of lending may have different welfare implications. The current diversity in payday lending stems from the diverse ways in which states have regulated the industry. This paper attempts to quantify the effects that various regulatory approaches have had on lending terms and usage. Using a novel institutional dataset of over 56 million payday loans, covering 26 states for nearly 6 years, I find that price caps tend to be strictly binding, size caps tend to be less binding, and prohibitions on simultaneous borrowing appear to have little effect on the total amount borrowed. Minimum loan terms affect loan length while maximum loan terms do not. Repeat borrowing appears to be negatively related to rollover prohibitions and cooling-off periods, as well as to higher price caps. Several states have used law changes to sharply cut their rate of repeat borrowing. However, this process has been disruptive, leading to lower lending volumes and, in at least one case, higher delinquency.
Broadband in the Labor Market: The Impact of Residential High Speed Internet on Married Women's Labor Force Participation
Authors: Dettling Lisa J.
Published: August 2019

This paper investigates how high-speed home Internet has impacted married women's labor force participation. I estimate the net effect of individual Internet usage on labor supply using an instrumental variables strategy which exploits cross-state variation in supply-side constraints to residential broadband Internet access. Results indicate that married women who use the Internet are more likely to participate in the labor force. The average effects mask substantial heterogeneity and increases in participation are concentrated on women with higher levels of education and children. The results suggest home Internet facilitates work-family balance for highly educated women.
Broadband in the Labor Market: The Impact of Residential High Speed Internet on Married Women's Labor Force Participation
Authors: Dettling Lisa J.
Published: August 2019

This paper investigates how high-speed home Internet has impacted labor supply. Using an instrumental variables strategy that exploits cross-state variation in supply- side constraints to residential broadband Internet access, I find that exogenously determined high-speed Internet usage leads to a 4.1 percentage point increase in labor force participation for married women. There is no corresponding effect on single women or men. Among married women, the largest increases in participation are found among college-educated women with children. Supplemental analyses suggest that Internet use for telework and time saving in home production explain the increase in participation. The results suggest home Internet facilitates work-family balance.
Taxpayer Confusion Over Predictable Tax Liability Changes: Evidence from the Child Tax Credit
Authors: Feldman Naomi E. , Katuscak Peter , Kawano Laura
Published: August 2019

We develop a model of how taxpayers update beliefs over their tax rates when they encounter a non-salient tax liability change. We test the model&amp;#x27;s hypotheses using the loss of the Child Tax Credit when a child turns 17. Because this tax liability change is lump-sum and predictable, there should be no reaction in labor income if taxpayers are fully informed. Using this age discontinuity, we find, however, that losing the credit reduces household labor income. This finding suggests that taxpayers misperceive the source of tax liability changes, leading to under- or over-reactions to changes in marginal tax rates.
Effects of Monetary Policy Shocks Across Time and Across Sectors
Authors: Peneva Ekaterina V.
Published: August 2019

Recent empirical research by Olivei and Tenreyro (2007) demonstrates that the effect of monetary policy shocks on output and prices depends on the shock's timing: in the United States, a monetary policy shock that takes place in the first half of the year has a larger effect on output than on prices, while the opposite is true in the second half of the year. Olivei and Tenreyro argue that this finding reflects the fact that a greater fraction of wage rates are re-contracted in the second half of the year, implying that wages (and prices) are less flexible in the first half. In this paper, I assess this explanation in light of several additional empirical results. Most importantly, I demonstrate that within-year differences in the responses of output and prices following a monetary policy shock are not more pronounced in the service-producing sector, where labor costs represent a larger fraction of total production costs. I also find that movements in prices following a monetary shock tend to lead wage changes. These and other empirical results suggest that something other than uneven wage adjustment might be responsible for the differential within-year effect of monetary policy shocks that Olivei and Tenreyro document.
Yield Curve Impacts of Forward Guidance and Maturity Extension Programs
Authors: Huther Jeff , Seligman Jason S.
Published: August 2019

In 2011 and 2012, the Federal Reserve sold Treasury securities from the short end of the yield curve at the same time it was providing market participants with date-specific assurances that overnight interest rates would not rise. We investigate how these two policies, which had conflicting pricing pressures, were absorbed by the market. We analyze the impacts of sales on the volume and composition of inventories of the Federal Reserve's counterparties, and examine how announcements of accommodative monetary policy affected spreads and prices across maturities. Our results suggest that these two reserve-neutral policies affected interest rates both within and beyond the stated policy periods. The finding that Federal Reserve's sales, conducted during periods of date-based forward guidance, were associated with higher interest rates suggests that the policy effects were not limited to the anticipated path of federal funds rates. We also find that the accumulation of Treasury securities by Federal Reserve counterparties was consistent with the idea that those dealers responded opportunistically to the forward guidance on rates.
Trend Inflation in Advanced Economies
Authors: Mertens Elmar , Garnier Christine , Nelson Edward
Published: August 2019

We derive estimates of trend inflation for fourteen advanced economies from a framework in which trend shocks exhibit stochastic volatility. The estimated specification allows for time-variation in the degree to which longer-term inflation expectations are well anchored in each economy. Our results bring out the effect of changes in monetary regime (such as the adoption of inflation targeting in several countries) on the behavior of trend inflation. Our estimates expand on the previous literature in several dimensions: For each country, we employ a multivariate approach that pools different inflation series in order to identify their common trend. In addition, our estimates of the inflation gap—defined as the difference between trend and observed inflation—are allowed to exhibit considerable persistence. Consequently, the fluctuations in estimates of trend inflation are much lower than those reported in studies that use stochastic volatility models in which inflation gaps are serially uncorrelated. This specification also makes our estimates less sensitive than trend estimates in the literature to the effect of distortions to inflation arising from non-market influences on prices, such as tax changes. A forecast evaluation based on pseudo-real-time estimates documents improvements in inflation forecasts, even though it remains hard to outperform simple random walk forecasts to a statistically significant degree.
The Federal Reserve's Framework for Monetary Policy: Recent Changes and New Questions
Authors: Tetlow Robert , English William B. , López-Salido J. David
Published: August 2019

In recent years, the Federal Reserve has made substantial changes to its framework for monetary policymaking by providing greater clarity regarding its objectives, its intentions regarding the use of monetary policy--including nontraditional policy tools such as forward guidance and asset purchases--in the pursuit of those objectives, and its broader policy strategy. These changes reflected both a response to changes in economists&amp;#x27; understanding of the most effective way to implement monetary policy and a response to specific challenges posed by the financial crisis and its aftermath, particularly the effective lower bound on nominal interest rates. We trace the recent evolution of the Federal Reserve&amp;#x27;s framework, and use a small-scale macro model and a simple static model to help illuminate the approaches taken with nontraditional monetary policy tools. A number of foreign central banks have made similar innovations in response to similar developments. On balance, the Federal Reserve has moved closer to flexible inflation targeting, but the Federal Reserve&amp;#x27;s approach includes a balanced focus on two objectives and the use of a flexible horizon over which policy aims to foster those objectives. Going forward, further changes in central banks&amp;#x27; frameworks may be needed to address issues raised by the financial crisis. For example, some have suggested that the sustained period at the effective lower bound points to the need for central banks to establish a different policy objective, such as a higher inflation target or a nominal income target. We use our small-scale model of the U.S. economy to examine the potential benefits and costs of such changes. We also discuss the broad issue of how central banks should integrate financial stability policy and monetary policy.
Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy
Authors: Wascher William L. , Reifschneider David , Wilcox David W.
Published: August 2019

The recent financial crisis and ensuing recession appear to have put the productive capacity of the economy on a lower and shallower trajectory than the one that seemed to be in place prior to 2007. Using a version of an unobserved components model introduced by Fleischman and Roberts (2011), we estimate that potential GDP is currently about 7 percent below the trajectory it appeared to be on prior to 2007. We also examine the recent performance of the labor market. While the available indicators are still inconclusive, some indicators suggest that hysteresis should be a more present concern now than it has been during previous periods of economic recovery in the United States. We go on to argue that a significant portion of the recent damage to the supply side of the economy plausibly was endogenous to the weakness in aggregate demand—contrary to the conventional view that policymakers must simply accommodate themselves to aggregate supply conditions. Endogeneity of supply with respect to demand provides a strong motivation for a vigorous policy response to a weakening in aggregate demand, and we present optimal-control simulations showing how monetary policy might respond to such endogeneity in the absence of other considerations. We then discuss how other considerations--such as increased risks of financial instability or inflation instability--could cause policymakers to exercise restraint in their response to cyclical weakness.
Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy
Authors: Wascher William L. , Reifschneider David , Wilcox David W.
Published: August 2019

The recent financial crisis and ensuing recession appear to have put the productive capacity of the economy on a lower and shallower trajectory than the one that seemed to be in place prior to 2007. Using a version of an unobserved components model introduced by Fleischman and Roberts (2011), we estimate that potential GDP in late 2014 was about 7 percent below the trajectory it appeared to be on prior to 2007. We argue that a significant portion of the recent damage to the supply side of the economy plausibly was endogenous to the weakness in aggregate demand—contrary to the conventional view that policymakers must simply accommodate themselves to aggregate supply conditions. Endogeneity of supply with respect to demand provides a strong motivation for a vigorous policy response to a weakening in aggregate demand, and we present optimal-control simulations showing how monetary policy might respond to such endogeneity in the absence of other considerations. We then discuss how other considerations—such as increased risks of financial instability or inflation instability—could cause policymakers to exercise restraint in their response to cyclical weakness.
Are Homeowners in Denial about their House Values? Comparing Owner Perceptions with Transaction-Based Indexes
Authors: Henriques Alice M.
Published: August 2019

The boom and bust of the housing market has been a prominent feature of the household financial landscape in recent years. The exact magnitude of the house price swings depends on whether you ask homeowners how much their houses are worth at two points in time or use the change in a transaction-based house price index (HPI). During the boom, owner-reported values rose much more rapidly than the HPI, and after the bust, owner-reported values fell slightly less than the HPI. Individual homeowner errors are estimated to explain about one-third of the different in aggregate changes in the housing stock as measured by the Survey of Consumer Finances and CoreLogic national HPI. In a panel of homeowners surveyed during the housing downturn, owner-reported changes in value do not systematically diverge from local house price index changes.
Unemployment Insurance Experience Rating and Labor Market Dynamics
Authors: Ratner David
Published: August 2019

Unemployment insurance experience rating imposes higher payroll tax rates on firms that have laid off more workers in the past. To analyze the effects of UI tax policy on labor market dynamics, this paper develops a search model of unemployment with heterogeneous firms and realistic UI financing. The model predicts that higher experience rating reduces both job creation and job destruction. Using firm-level data from the Quarterly Census of Employment and Wages, the model is tested by comparing job creation and job destruction across states and industries with different UI tax schedules. The empirical analysis shows a strong negative relationship between job flows and experience rating. Consistent with the empirical results, comparative steady state tax experiments show that a 5% increase in experience rating reduces job flows by an average of 1.4%. While the unemployment rate falls on average by .21 percentage points, the effect on tax revenues is ambiguous. The model has implications for UI financing reform currently being considered at the state and national level. Two alternative reforms that close half of the UI financing gap are considered: the reform that increases experience rating is shown to improve labor market outcomes. In a version of the model with aggregate shocks, higher experience rating dampens the response of layoffs and unemployment over the business cycle. Experience rating also induces nonlinear responses of unemployment to proportionally larger shocks as well as asymmetry in response to booms and busts.
Systemic Risk, International Regulation, and the Limits of Coordination
Authors: Kara Gazi Ishak
Published: August 2019

This paper examines the incentives of national regulators to coordinate regulatory policies in the presence of systemic risk in global financial markets. In a two-country and three-period model, correlated asset fire sales by banks generate systemic risk across national financial markets. Relaxing regulatory standards in one country increases both the cost and the severity of crises for both countries in this framework. In the absence of coordination, independent regulators choose inefficiently low levels of macro-prudential regulation. A central regulator internalizes the systemic risk and thereby can improve the welfare of coordinating countries. Symmetric countries always benefit from coordination. Asymmetric countries choose different levels of macro-prudential regulation when they act independently. Common central regulation will voluntarily emerge only between sufficiently similar countries.
A Robust Capital Asset Pricing Model
Authors: Ruffino Doriana
Published: August 2019

We build a market equilibrium theory of asset prices under Knightian uncertainty. Adopting the mean-variance decision making model of Maccheroni, Marinacci, and Ruffino (2013a), we derive explicit demands for assets and formulate a robust version of the two-fund separation theorem. Upon market clearing, all investors hold ambiguous assets in the same relative proportions as the assets' market values. The resulting uncertainty-return tradeoff is a robust security market line in which the ambiguous return on an asset is measured by its beta (systematic ambiguity). A simple example on portfolio performance measurement illustrates the importance of writing ambitious, robust asset-pricing models.
National bank examinations and operations in the early 1890s
Authors: Calomiris Charles W. , Carey Mark S.
Published: August 2019

We use information from examination reports to enrich our understanding of both the examination process and bank operations for National Banks in the early 1890s, the height of the National Banking Era. We describe the examination process and its frequency, as well as the information contained in the examinations relating to bank ownership and corporate governance, the composition and quality of the loan book, dividend payments made by the banks, and the use of different types of liabilities. Our sample of banks is from the larger cities, including several reserve cities, which allows us to compare similar banks in different regions of the country. There are clear regional differences in banks&#x27; examination experiences, structure, and behavior. On average, banks further West tended to be examined less frequently, displayed higher percentages of manager ownership, employed less formal corporate governance arrangements, made riskier loans, paid higher rates on certificates of deposit, and paid higher dividends less often.
The Insensitivity of Investment to Interest Rates: Evidence from a Survey of CFOs
Authors: Sharpe Steven A. , Suarez Gustavo A.
Published: August 2019

A fundamental tenet of investment theory and the traditional theory of monetary policy transmission is that investment expenditures by businesses are negatively affected by interest rates. Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment. In this paper, we examine the sensitivity of investment plans to interest rates using a set of special questions asked of CFOs in the Global Business Outlook Survey conducted in the third quarter of 2012. Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases. Most CFOs cited ample cash or the low level of interest rates, as explanations for their own insensitivity. We also find that sensitivity to interest rate changes tends to be lower among firms that do not report being concerned about working capital management as well as those that do not expect to borrow over the coming year. Perhaps more surprisingly, we find that investment is also less interest sensitive among firms expecting greater revenue growth. These findings seem to be corroborated by a cursory meta-analysis of average hurdle rates drawn from firm-level surveys at different times over the past 30 years, which exhibit no apparent relation to market interest rates.
Small sample properties of Bayesian estimators of labor income processes
Authors: Nakata Taisuke , Tonetti Christopher
Published: August 2019

There exists an extensive literature estimating idiosyncratic labor income processes. While a wide variety of models are estimated, GMM estimators are almost always used. We examine the validity of using likelihood based estimation in this context by comparing the small sample properties of a Bayesian estimator to those of GMM. Our baseline studies estimators of a commonly used simple earnings process. We extend our analysis to more complex environments, allowing for real world phenomena such as time varying and heterogeneous parameters, missing data, unbalanced panels, and non-normal errors. The Bayesian estimators are demonstrated to have favorable bias and efficiency properties.
Gates, fees, and preemptive runs
Authors: Cipriani Marco , Martin Antoine , McCabe Patrick E. , Parigi Bruno
Published: August 2019

We build a model of a financial intermediary, in the tradition of Diamond and Dybvig (1983), and show that allowing the intermediary to impose redemption fees or gates in a crisis--a form of suspension of convertibility--can lead to preemptive runs. In our model, a fraction of investors (depositors) can become informed about a shock to the return of the intermediary's assets. Later, the informed investors learn the realization of the shock and can choose their redemption behavior based on this information. We prove two results: First, there are situations in which informed investors would wait until the uncertainty is resolved before redeeming if redemption fees or gates cannot be imposed, but those same investors would redeem preemptively, if fees or gates are possible. Second, we show that for the intermediary, which maximizes expected utility of only its own investors, imposing gates or fees can be ex post optimal. These results have important policy implications for intermediaries that are vulnerable to runs, such as money market funds, because the preemptive runs that can be caused by the possibility of gates or fees may have damaging negative externalities.
Fertility Choice in a Life Cycle Model with Idiosyncratic Uninsurable Earnings Risk
Authors: Sommer Kamila
Published: August 2019

This paper studies the link between rising income uncertainty and household fertility patterns in an Aiyagari-Bewley-Huggett framework augmented to include fertility decisions and infertility risk. Building on Becker and Tomes (1976), I model fertility decisions as sequential, irreversible choices over the number of children, accompanied by parental choices of time and money invested toward improving children&#x27;s quality. The calibrated model is used to quantify the contribution of earnings uncertainty to the changes in the key fertility indicators between steady states. I show that realistic increases in uninsurable earnings risk lead to a postponement in births by young households, and are associated with a decline in the total number of births. The linkage between earnings risk and fertility patterns highlights the important role that labor market conditions can play in determining both short-term cyclical fluctuations in fertility (such as those in the recent U.S. data) and longer-term demographic trends (such as persistently depressed fertility rates in Southern Europe where youth unemployment rates are high and unemployment spell are very persistent).
Model Risk of Risk Models
Authors: Danielsson Jon , James Kevin , Valenzuela Marcela , Zer Ilknur
Published: August 2019

This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with and caused by market uncertainty. During calm periods, the underlying risk forecast models produce similar risk readings, hence, model risk is typically negligible. However, the disagreement between the various candidate models increases significantly during market distress, with a no obvious way to identify which method is the best. Finally, we discuss the main problems in risk forecasting for macro prudential purposes and propose an evaluation criteria for such models.
The Credit Crunch and Fall in Employment during the Great Recession
Authors: Haltenhof Samuel , Lee Seung Jung , Stebunovs Viktors
Published: August 2019

We study how a bank credit crunch--a dramatic worsening of firm and consumer access to bank credit, such as the one observed over the Great Recession--translates into job losses in U.S. manufacturing industries. To identify the impact of the recent credit crunch, we rely on differences in the degree of dependence on external finance and of tangibility of assets across manufacturing industries and in the sensitivity of these industries&#x27; output to changes in the supply of consumer credit. We find that, for employment, household access to bank loans matters more than firm access to bank loans. In addition, we show that, over the recent financial crisis, tightening access to commercial and industrial loans and, in particular, consumer installment loans may have contributed significantly to the drop in employment in the manufacturing sector.
Financial Condition and Product Market Cooperation
Authors: Gustafson Matthew , Ivanov Ivan T. , Ritter John
Published: August 2019

We provide evidence that existing studies relating financial condition to product market cooperation produce mixed results because of unique features of the industries examined. In particular, all evidence suggesting that poor financial condition decreases cooperation comes from the airline industry during periods of high idle capacity. Using a unique data set of aggregate airfare hikes and a more recent low-idle-capacity period, we find that poor financial condition is positively associated with product market cooperation. Although financially weak airlines appear to value the immediate cash flows of increased cooperation, only liquidity-constrained firms seem willing to incur the cost of cooperative attempts.
Signaling Status: The Impact of Relative Income on Household Consumption and Financial Decisions
Authors: Bricker Jesse , Ramcharan Rodney , Krimmel Jacob
Published: August 2019

This paper investigates the importance of status in household consumption and financial decisions using household data from the Survey of Consumer Finances (SCF) linked to neighborhood data in the American Community Survey (ACS). We find evidence that a household&#x27;s income rank—its position in the income distribution relative to its close neighbors—is positively associated with its expenditures on high status cars, its level of indebtedness, as well as the riskiness of the household&#x27;s portfolio. More aggregate county-level evidence based on a dataset of every new car sold in each county in the United States since 2002 also suggests that the signaling motive might be important. These results indicate that greater income heterogeneity might have large consequences for household consumption and portfolio decisions.
Inflation Experience and Inflation Expectations: Dispersion and Disagreement Within Demographic Groups
Authors: Johannsen Benjamin K.
Published: August 2019

Using consumption data from the Consumer Expenditure Survey, I document persistent differences across demographic groups in the dispersion of household-specific rates of inflation. Using survey data on inflation expectations, I show that demographic groups with greater dispersion in experienced inflation also disagree more about future inflation. I argue that these results can be rationalized from the perspective of an imperfect information model in which idiosyncratic inflation experience serves as a signal about aggregate inflation. These empirical regularities pose a challenge to several other popular models of the expectations formation process of households.
The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies
Authors: Carlson Mark A. , Duygan-Bump Burcu , Natalucci Fabio M. , Nelson William R. , Ochoa Marcelo , Stein Jeremy C. , Van den Heuvel Skander J.
Published: August 2019

A number of researchers have recently argued that the growth of the shadow banking system in the years preceding the recent U.S. financial crisis was driven by rising demand for &quot;money-like&quot; claims—short-term, safe instruments (STSI)—from institutional investors and nonfinancial firms. These instruments carry a money premium that lowers their yields. While government securities are an important part of the supply of STSI, financial intermediaries also take advantage of this money premium when they issue certain types of low-risk, short-term debt, such as asset-backed commercial paper or repo. In this paper, we take the demand for STSI as given and consider the extent to which central banks can improve financial stability and manage maturity transformation by the private sector through their ability to affect the public supply of STSI. The first part of the paper provides new evidence that complements the existing literature on two key ingredients that are necessary for there to be a role for policy: the extent to which public short-term debt and private short-term debt might be substitutes, and the relationship between the money premium and the supply of STSI. The second part of the paper then builds on this evidence and discusses potential ways a central bank could use its balance sheet and monetary policy implementation framework to affect the quantity and mix of short-term liquid assets that will be available to financial market participants.
Conservatism and Liquidity Traps
Authors: Nakata Taisuke , Schmidt Sebastian
Published: August 2019

Appointing Rogoff's (1985) conservative central banker improves welfare if the economy is subject to large contractionary shocks and the policy rate occasionally falls to the zero lower bound (ZLB). In an economy with occasionally binding ZLB constraints, the anticipation of future ZLB episodes creates a trade-off between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. A conservative central banker mitigates this deflationary bias away from the ZLB, improving allocations both at and away from the ZLB through expectations.
Are Concerns About Leveraged ETFs Overblown?
Authors: Ivanov Ivan T. , Lenkey Stephen L.
Published: August 2019

Leveraged and inverse exchange-traded funds (ETFs) have been heavily criticized for exacerbating volatility in financial markets because it is thought that they mechanically rebalance their portfolios in the same direction as contemporaneous returns. We argue that these criticisms are likely exaggerated because they ignore the effects of capital flows on ETF rebalancing demand. Empirically, we find that capital flows substantially reduce the need for ETFs to rebalance when returns are large in magnitude and, therefore, mitigate the potential for these products to amplify volatility. We also show theoretically that flows can completely eliminate ETF rebalancing in the limit.
Central Banks as Lenders of Last Resort: Experiences During the 2007-10 Crisis and Lessons for the Future
Authors: Domanski Dietrich , Moessner Richhild , Nelson William R.
Published: August 2019

During the 2007-2010 financial crisis, central banks accumulated a vast amount of experience in acting as lender of last resort. This paper reviews the various ways that central banks provided emergency liquidity assistance (ELA) during the crisis, and discusses issues for the design of ELA arising from that experience. In a number of ways, the emergency liquidity assistance since 2007 has largely adhered to Bagehot's dictums of lending freely against good collateral to solvent institutions at a penalty rate. But there were many exceptions to these rules. Those exceptions illuminate the situations where the lender of last resort role of central banks is most difficult. They also highlight key challenges in designing lender of last resort policies going forward.
Modeling Money Market Spreads: What do we Learn about Refinancing Risk?
Authors: Brousseau Vincent , Nikolaou Kleopatra , Pill Huw
Published: August 2019

We quantify the effect of refinancing risk on euro area money market spreads, a major factor driving spreads during the financing crisis. With the advent of the crisis, market participants' perception of their ability to refinance over a given period of time changed radically. As a result, borrowers preferred to obtain funding for longer tenors and lenders were willing to provide funding for shorter tenors. This discrepancy resulted in a need to refinance more frequently in order to borrow over a given horizon, thus increasing refinancing risk. We measure refinancing risk by quantifying the sensitivity of the spread to the refinancing frequency. In order to do so we introduce a model to price EURIBOR-based money market spreads vis-à-vis the overnight index swap. We adopt a methodology akin to a factor model in which the parameters determining the spreads are the intensity of the crisis, its expected half-life, and the sensitivity of spreads to the refinancing frequency. Results suggest that refinancing risk affects the spread significantly across time, albeit in a largely varying manner. Central bank interventions have reduced the spreads as well as the effect of refinancing risk on them.
An Evaluation of the Inflationary Pressure Associated with Short- and Long-Term Unemployment
Authors: Kiley Michael T.
Published: August 2019

In the years following 2009, long-term unemployment has been very elevated while inflation has fallen only moderately, raising the question of whether the long-term unemployed exert less downward pressure on prices than the short-term unemployed, perhaps because such potential workers are disconnected from the labor market. However, empirical evidence is mixed. This analysis demonstrates that the typical approach, using national data, is incapable of discriminating the inflationary pressure exerted by short and long-term unemployment because the series are highly correlated, making inference difficult given the short-span of data used in Phillips-curve estimation. However, application of more data, through the use of regional variation, can discriminate the independent influences of short-and long-term unemployment on price inflation. We present a model illustrating these issues and apply the model to data for U.S. metropolitan regions. We find that that short- and long-term unemployment exert equal downward pressure on price inflation.
Policy Paradoxes in the New Keynesian Model
Authors: Kiley Michael T.
Published: August 2019

The most common New-Keynesian model--with sticky-prices--has potentially implausible implications in a zero-lower bound environment. Fiscal and forward guidance multipliers can be implausibly large. Moreover, the sticky-price model implies that positive supply shocks, such as an increase in productivity, will lower production, and that increased price flexibility can exacerbate such a decline in output (as well as amplifying the effects of other shocks). These results are fragile and disappear under a plausible alternative to sticky prices--sticky information: Fiscal and 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. These results suggest caution in drawing policy lessons from a single, sticky-price framework. Finally, we highlight how strategies akin to nominal-income targeting can enhance the ability of policymakers to affect demand in sticky-price and sticky-information models.
Model Risk of Risk Models
Authors: Zer Ilknur , Danielsson Jon , James Kevin , Valenzuela Marcela
Published: August 2019

This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with and caused by market uncertainty. During calm periods, the underlying risk forecast models produce similar risk readings hence, model risk is typically negligible. However, the disagreement between the various candidate models increases significantly during market distress, with a no obvious way to identify which method is the best. Finally, we discuss the main problems in risk forecasting for macro prudential purposes and propose an evaluation criteria for such models.
When are the Effects of Fiscal Policy Uncertainty Large?
Authors: Johannsen Benjamin K.
Published: August 2019

Using a new-Keynesian model with endogenous capital accumulation, I show that uncertainty about fiscal policy can cause large declines in consumption, investment, and output when the zero lower bound (ZLB) binds, but has modest effects when the monetary authority is not constrained by the ZLB. I study uncertainty about the level of government spending and uncertainty about tax rates on consumption, wages, capital income, and investment. In my model, uncertainty about government spending and the wage tax rate has particularly large effects. I show that the effects of fiscal policy uncertainty are largest when the nominal interest rate is on the cusp of the ZLB and also that delaying fiscal policy uncertainty diminishes its effects only if the resolution of uncertainty occurs after ZLB no longer binds.
Behavioral Economics and Macroeconomic Models
Authors: Driscoll John C. , Holden Steinar
Published: August 2019

Over the past 20 years, macroeconomists have incorporated more and more results from behavioral economics into their models. We argue that doing so has helped fixed deficiencies with standard approaches to modeling the economy--for example, the counterfactual absence of inertia in the standard New Keynesian model of economic fluctuations. We survey efforts to use behavioral economics to improve some of the underpinnings of the New Keynesian model--specifically, consumption, the formation of expectations and determination of wages and employment that underlie aggregate supply, and the possibility of multiple equilibria and asset price bubbles. We also discuss more broadly the advantages and disadvantages of using behavioral economics features in macroeconomic models.