bluuebunny/crossref_metadata_2025 huggingface dataset:
Dynamic Equilibrium Economies: A Framework for Comparing Models and Data
Authors: Diebold Francis X. , Ohanian Lee E. , Berkowitz Jeremy
Published: August 2019

We propose a constructive, multivariate framework for assessing agreement between (generally misspecified) dynamic equilibrium models and data, which enables a complete second-order comparison of the dynamic properties of models and data. We use bootstrap algorithms to evaluate the significance of deviations between models and data, and we use goodness-of-fit criteria to produce estimators that optimize economically relevant loss functions. We provide a detailed illustrative application to modeling the U.S. cattle cycle.
Small Business Lending by Banks Involved in Mergers
Authors: Walraven Nicholas Alan
Published: August 2019

The paper uses data on the volume outstanding of small business loans from the midyear Call Reports to summarize the nature of small business lending at banks that were involved in mergers between June 1993 and June 1996. Then a model of gradual adjustment by the consolidated bank following the merger is estimated to determine whether the portfolio share of small business loans at the consolidated bank tends to move over time toward either the pre-merger share at the acquiring bank or the typical share at other banks of roughly the same size as the consolidated bank.
Nonparametric Density Estimation and Tests of Continuous Time Interest Rate Models
Authors: Pritsker Matthew
Published: August 2019

Nonparametric kernel density estimation has recently been used to estimate and test short-term interest rate models, but inference has been based on asymptotics. We derive finite sample properties of kernel density estimates of the ergodic distribution of the short-rate when it follows a continuous time AR(1) as in Vasicek. We find that the asymptotic distribution substantially understates finite sample bias, variance, and correlation. Also, estimator quality and bandwidth choice depend strongly on the persistence of the interest rate process and on the span of the data, but not on sampling frequency. We also examine the size and power of one of Ait-Sahalia's nonparametric tests of continuous time interest rate models. The test rejects too often. This is probably because the quality of the nonparametric density estimate depends on persistence, but the asymptotic distribution of the test does not. After critical values are adjusted for size, the test has low power in distinguishing between the Vasicek and Cox-Ingersoll-Ross models relative to a conditional moment-based specification test.
Racial Differences in Short-Run Earnings Stability and Implications for Credit Markets
Authors: Bostic Raphael W.
Published: August 2019

This paper examines the claim that observed racial differences in rejection rates for mortgage applications, which persist after controlling for many relevant factors, are due to racial differences in short-run earnings stability, which has not typically been included in empirical tests. The evidence does not support the proposition that blacks suffer from greater earnings instability than comparable whites, as few consistent significant differences between black and white earnings volatility are found. Only in the case of drastic earnings shocks with persistent effects does the possibility of significant racial differences reasonably remain. In general, racial differences in earnings stability appear to be minor and are unlikely to result in substantial differences in creditworthiness.
A Quantitative Exploration of the Opportunistic Approach to Disinflation
Authors: Orphanides Athanasios , Small David H. , Wieland Volker W. , Wilcox David W.
Published: August 2019

A number of observers have advocated recently that the Federal Reserve take an "opportunistic" approach to the conduct of monetary policy. A hallmark of this approach is that the central bank focuses on fighting inflation when inflation is high, but focuses on stabilizing output when inflation is low. The implied policy rule is nonlinear. This paper compares the behavior of inflation and output under opportunistic and conventional linear policies. Using stochastic simulations of a small-scale rational expectations model, we study the cost and time required to achieve a given disinflation, as well as the steady-state distributions of inflation and output under the various rules.
Internal Capital Markets and Investment: Do the Cash Flow Constraints Really Bind?
Authors: Schnure Calvin
Published: August 2019

Lamont (1997) claims to find evidence of credit market imperfections that distort financing and investment decisions of a sample of oil-dependent firms, as investment by non-oil units fell when oil cash flow dropped. However, a simple test reveals that few of these firms behaved in a fashion consistent with binding cash flow constraints. In addition, most were cash rich. The data provide strong evidence against the hypothesis that investment decisions by non-oil units were significantly affected by oil cash flow, or that credit market imperfections are an important factor for this set of firms.
The Supply of Skilled Labor and Skill-Biased Technological Progress
Authors: Kiley Michael T.
Published: August 2019

Rising inequality in the relative wages of skilled and unskilled labor is often attributed to skill-biased technological progress. This paper presents a model in which the adoption of skill-biased or "unskilled-biased" technologies is endogenous. Conventional wisdom states that an increase in the supply of skilled labor lowers the relative wage of skilled to unskilled labor. In this paper, an increase in the supply of skilled labor leads to temporary stagnation in the wages of unskilled workers and an expanding gap between the wages of skilled and unskilled workers through an acceleration of skill-biased technological change.
Consistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods
Authors: Bauer Paul W. , Berger Allen N. , Ferrier Gary D. , Humphrey David B.
Published: August 2019

We propose a set of consistency conditions that frontier efficiency measures should meet to be most useful for regulatory analysis or other purposes. The efficiency estimates should be consistent in their efficiency levels, rankings, and identification of best and worst firms; consistent over time and with competitive conditions in the market; and consistent with standard nonfrontier measures of performance. We provide evidence on these conditions by evaluating and comparing efficiency estimates on U.S. bank efficiency from variants of all four of the major approaches--DEA, SFA, TFA, and DFA--and find mixed results.
Cleaning up the Errors in the Monthly "Employment Situation" Report: A Multivariate State-Space Approach
Authors: French Mark W.
Published: August 2019

This paper examines the underlying state of the labor market, assuming data in the monthly "Employment Situation" are contaminated by measurement error and other transient noise. To better filter out unobserved noise, the methodology exploits correlations among labor-market series. Household employment and labor force have cross-correlated sampling errors; establishment employment and hours-worked may, also. The Kalman filtering procedure also exploits fundamental economic relationships among these series. Error cross-correlations and economic relationships shape a multivariate labor-market model where observed variables embody unobserved components: trend, cycle and noise. Maximum-likelihood estimation enables construction of labor series from which noise components have been removed.
Government Debt
Authors: Elmendorf Douglas W. , Mankiw N. Gregory
Published: August 2019

This paper surveys the literature on the macroeconomic effects of government debt. It begins by discussing the data on debt and deficits, including the historical time series, measurement issues, and projections of future fiscal policy. The paper then presents the conventional theory of government debt, which emphasizes aggregate demand in the short run and crowding out in the long run. It next examines the theoretical and empirical debate over the theory of debt neutrality called Ricardian equivalence. Finally, the paper considers the various normative perspectives about how the government should use its ability to borrow.
The Effects of Social Security Privatization on Household Saving: Evidence from the Chilean Experience
Authors: Coronado Julia Lynn
Published: August 2019

In recent years, a handful of countries have converted the financing of their social security systems from pay-as-you-go (PAYGO) to partial or full funding. Privatization is viewed as one way to insulate social security from the political and demographic pressures that currently threaten the financial stability of PAYGO systems. However, privatization would improve a nation's situation only if such a reform increases domestic saving. In this paper I use evidence from Chile, where social security was privatized in 1981, to assess the impact of such a reform on household saving rates. I find that the reform provided a significant stimulus for saving among higher income households, increasing their saving rates by more than seven percentage points. This increase in saving at the household level translates into an increase in national saving of more than two percent of GDP.
Does the Fed Act Gradually? A VAR Analysis
Authors: Sack Brian
Published: August 2019

The tendency for changes in the federal funds rate to be implemented gradually has been considered evidence of an interest-rate smoothing objective for the Federal Reserve. This paper investigates whether gradual movements in the federal funds rate can be explained by the dynamic structure of the economy and the uncertainty that the Fed faces regarding this structure, without recourse to including an ad-hoc interest rate smoothing argument in the objective function of the Fed. The analysis calculates the optimal funds rate policy given the structural form of the economy estimated in a VAR. In the absence of parameter uncertainty, the calculated policy responds more aggressively to changes in the economy than the observed policy, resulting in a substantially higher volatility of the funds rate than observed. Parameter uncertainty, however, limits the willingness of the Fed to deviate from the policy rule that has been previously implemented. Because the Fed has historically smoothed interest rates, the calculated policy under parameter uncertainty can account for a considerable portion of the gradualism observed in funds rate movements.
Dealer Polling in the Presence of Possibly Noisy Reporting
Authors: Berkowitz Jeremy
Published: August 2019

The value of a vast array of financial assets are functions of rates or prices determined in OTC, interbank, or other off-exchange markets. In order to price such derivative assets, underlying rate and price indexes are routinely sampled and estimated. To guard against misreporting, whether unintentional or for market manipulation, many standard contracts utilize a technique known as trimmed-means. This paper points out that this polling problem falls within the statistical framework of robust estimation. Intuitive criteria for choosing among robust valuation procedures are discussed. In particular, the approach taken is to minimize the worst-case scenario arising from a false report. The finite sample performance of the procedures that qualify, the trimmed-mean and the Huber-estimator, are examined in a set of simulation experiments.
Consumption and Asset Prices with Recursive Preferences
Authors: Fisher Mark , Gilles Christian
Published: August 2019

We analyze consumption and asset pricing with recursive preferences given by Kreps--Porteus stochastic differential utility (K--P SDU). We show that utility depends on two state variables: current consumption and a second variable (related to the wealth--consumption ratio) that captures all information about future opportunities. This representation of utility reduces the internal consistency condition for K--P SDU to a restriction on the second variable in terms of the dynamics of a forcing process (consumption, the state--price deflator, or the return on the market portfolio). Solving the model for (i) optimal consumption, (ii) the optimal portfolio, and (iii) asset prices in general equilibrium amounts to finding the process for the second variable that satisfies this restriction. We show that the wealth--consumption ratio is the value of an annuity when the numeraire is changed from units of the consumption good to units of the consumption process, and we characterize certain features of the solution in a non-Markovian setting. In a Markovian setting, we provide a solution method that is quite general and can be used to produce fast, accurate numerical solutions that converge to the Taylor expansion.
Currency Ratios and U.S. Underground Economic Activity
Authors: Porter Richard D. , Weinbach Gretchen Cope
Published: August 2019

Cagan's classic currency ratio suggests that underground economic activity in the United States surged starting in 1994. In contrast, we show that a ratio adjusted to take care of two distorting developments -- retail sweep programs and overseas demand for U.S. currency -- did not surge and that movements in the adjusted ratio to result primarily from the differential effects of interest rates on currency and checkable deposits. As a result, we are skeptical of monetary-based claims that the underground economy has expanded significantly in recent years and believe that any claims that it has must rely on other evidence.
Models of Sectoral Reallocation
Authors: Swanson Eric T.
Published: August 2019

This paper demonstrates several strengths and shortcomings of models of sectoral reallocation. Although such models demonstrate that sectoral reallocation can be an important amplification and propagation mechanism for exogenous shocks, they are essentially unable to explain any effects of sectoral reallocation on aggregate productivity or related quantities (such as the real wage or observations of aggregate increasing returns to scale), unless a wedge is introduced into the model that drives the marginal products of inputs in different sectors apart in steady state. In particular, costs of adjustment and lags to adjustment are not sufficient. This paper offers a solution to the problem in the form of variable sectoral capital utilization, the marginal product of which can differ across sectors in steady state. Reallocations of production between sectors in this setting are then shown to have first-order effects on aggregate productivity and real wages, and can explain the procyclicality of these variables without reliance on large, exogenous, and persistent shocks to technology.
Why Does the Change in Shares Predict Stock Returns
Authors: Nelson William R.
Published: August 2019

The stock of firms that issue equity has, on average, performed poorly in subsequent years, while the stock of firms that repurchase has typically done well. One explanation for this pattern is that firms are exploiting their superior knowledge about the value of their stock by buying it when it is undervalued and selling it when it is overvalued. This paper presents supporting evidence for this explanation of the excess returns: The change in shares outstanding is positively correlated with proxies for the deviation of current stock price from fundamental value; the excess returns following the change in shares remain significant after controlling for these proxies; and the changes in shares that can be explained by the proxies predict stock returns more powerfully than changes in shares explained by other reasons.
The Aggregate Change in Shares and the Level of Stock Prices
Authors: Nelson William R.
Published: August 2019

The average change in shares of equity is negatively correlated with estimates of the equity premium calculated using the dividend-ratio model of Campbell and Shiller, as well as with a variant of the model written in terms of the earnings-price ratio. This correlation is consistent with corporations issuing equity when it is a relatively inexpensive source of finance and repurchasing equity when it is a relatively good investment. However, when the retirement of shares resulting from mergers are included, the average change in shares is no longer significantly correlated with the equity premium.
Asymmetric Information in the Labor Market: New Evidence on Layoffs, Recalls, and Unemployment
Authors: Rodriguez-Planas Nuria
Published: August 2019

In the United States, many laid-off workers are recalled to their former employer. I develop an asymmetric information model of layoffs in which high-productivity workers are more likely to be recalled and may choose to remain unemployed rather than accept a low-wage job. In this case, unemployment can serve as a signal of productivity, and unemployment duration may be positively related to post-layoff wages even among workers who are not recalled. In contrast, since workers whose plant closed cannot be recalled, longer unemployment duration should not have a positive signaling benefit for such workers. Analysis of the data from January 1988-1992 Displaced Workers Supplements to the Current Population Survey reveals that the wage/unemployment duration relation differs between the two groups in the predicted way, and finds evidence consistent with asymmetric information in the U.S. labor market.
Simplicity versus Optimality: The Choice of Monetary Policy Rules When Agents Must Learn
Authors: Tetlow Robert , Von zur Muehlen P.
Published: August 2019

The monetary policy rules that are widely discussed--notably the Taylor rule--are remarkable for their simplicity. One reason for the apparant preference for simple ad hoc rules over optimal rules might be the assumption of full information maintained in the computation of an optimal rule. Arguably this makes optimal control rules less robust to model specification errors. In this paper, we drop the full-information assumption and investigate the choice of policy rules when agents must learn the rule that is in use. To do this, we conduct stochastic simulations on a small, estimated forward-looking model, with agents following a strategy of least- squares learning or discounted least-squares learning. We find that the costs of learning a new rule can, under some circumstances, be substantial. These circumstances vary with the preferences of the monetary authority and with the rule initially in place. Policymakers with strong preferences for inflation control must incur substantial costs when they change the rule; but they are nearly always willing to bear those costs. Policymakers with weak preferences for inflation control, on the other hand, may actually benefit from agents' prior belief that a strong rule is in place.
What Explains the Dramatic Changes in Cost and Profit Performance of the U.S. Banking Industry?
Authors: Berger Allen N. , Mester Loretta Jean
Published: August 2019

We investigate the sources of recent changes in the performance of U.S. banks using concepts and techniques borrowed from the cross-section efficiency literature. Our most striking result is that during 1991-1997, cost productivity worsened while profit productivity improved substantially, particularly for banks engaging in mergers. The data are consistent with the hypothesis that banks tried to maximize profits by raising revenues as well as reducing costs, and that banks provided additional services or higher service quality that raised costs but also raised revenues by more than the cost increases. The results suggest that methods that exclude revenues may be misleading.
Short Rate Expectations, Term Premiums, and Central Bank Use of Derivatives to Reduce Policy Uncertainty
Authors: Tinsley Peter A.
Published: August 2019

The term structure of interest rates is the primary transmission channel of monetary policy. Under the expectations hypothesis, anticipated settings of the short-term interest rate controlled by the central bank are the main determinants of nominal bond rates. Historical experience suggests that bond rates may remain relatively high even if the short-term interest rate is reduced to zero, in part due to term premiums reflecting uncertainty about future policy. Term spreads due to policy uncertainty may be reduced by central bank trading desk options that provide insurance against future deviations from an announced interest rate policy.
Net Migration and State Labor Market Dynamics
Authors: Gallin Joshua Hojvat
Published: August 2019

I present a simple model of migration in which the net migration rate into a state depends on the expected present value of labor market conditions and amenities. I show that though this is a common model, existing empirical estimates do not separately identify the underlying parameters. The identification problem can be thought of as an omitted variable bias because no explicit measure of expected future labor market conditions is included. I use state-level data to estimate empirical models in which the underlying parameters are identified. I find that high wages and low unemployment encourage in-migration, but that the omitted variable bias can be large. For example, when I control for future conditions in one model, the strength of the relationship between current wages and net migration is less than half as large. I integrate the migration model into a simple labor supply and demand framework and use my estimates of the migration model to simulate a labor market&#x27;s response to permanent and transitory demand shocks. In the short run, net migration responds more to permanent shocks and current wages and employment rates respond more to transitory ones.
Health Care Costs, Wages, and Aging
Authors: Sheiner Louise
Published: August 2019

While economists generally agree that workers pay for their health insurance costs through reduced wages, there has been little thought devoted to the level at which these costs are passed on: Is each employee's wage reduced by the amount of his or her own health costs, by the average health costs of employees in the firm, or by some amount in between? This paper analyzes one dimension of the question of how firms pass health costs to workers. Using cross-city variation in health costs, I test whether older workers pay for their higher health costs in the form of lower wages. I find that in cities where health insurance costs are high, the age/wage profile is flatter, indicating that older workers do pay for their higher health costs in the form of reduced wages. This finding is robust to the inclusion of several other city-specific variables that might also affect age/wage profiles and that could be correlated with health insurance costs. I also find that workers who choose family health insurance coverage pay for the added employer costs through reduced wages.
Wage Rigidity: A Look Inside the Firm
Authors: Wilson Beth Anne
Published: August 2019

This paper tests for nominal salary rigidity using panel data from two large service-sector firms. Distributions of the firms&amp;#x27; salary changes exhibit nominal rigidity: few nominal pay cuts, a pile-up of observations at zero, and positive skewness and asymmetry. In addition, these characteristics become more pronounced in periods of low inflation. These results are much stronger than those found in the previous literature. Further analysis shows that the sizable measurement error in the PSID and the fact that establishment surveys typically follow average wages within jobs may bias the results in the previous literature toward rejecting downward nominal wage rigidity.
Corporate Payout Policy and Managerial Stock Incentives
Authors: Fenn George W. , Liang J. Nellie
Published: August 2019

We examine how corporate payout policy is affected by managerial stock incentives using data on more than 1100 nonfinancial firms during 1993-97. We find that management share ownership encourages higher payouts by firms with potentially the greatest agency problems--those with low market-to-book ratios and low management stock ownership. We also find that management stock options change the composition of payouts. We find a strong negative relationship between dividends and management stock options, as predicted by Lambert, Lannen, and Larcker (1989), and a positive relatinship between repurchases and management stock options. Our results suggest that the growth in stock options may help to explain the rise in repurchases at the expense of dividends.
Consumption Smoothing among Working-Class American Families before Social Insurance
Authors: Palumbo Michael G. , James John A. , Thomas Mark
Published: August 2019

This paper examines whether the saving decisions of a large sample of working-class American families around the turn of the twentieth century are consistent with consumption smoothing tendencies in the spirit of the permanent income hypothesis. We develop two econometric models to decompose reported annual incomes from micro-data into expected and unexpected components, then we estimate marginal propensities to save out of each component of income. The two methodologies deliver similar regression estimates and reveal empirical patterns consistent with those reported in other recent research based on quite different contemporary household data. Marginal propensities to save out of unexpected income shocks are large relative to propensities based on expected income movements, though the former lie much below one and the latter much above zero. While these data reject strict parameterizations of the permanent income hypothesis, we nonetheless conclude that families' saving decisions in the historical period look quite "modern."
An Analysis of Government Spending in the Frequency Domain
Authors: Cohen Darrel
Published: August 2019

This paper utilizes frequency-domain techniques to identify and characterize economically important properties of government spending. Using post-war data for the United States, the paper first identifies peaks in the estimated spectra of the major components of fiscal spending. Second, the paper examines the relationship between these fiscal variables and various measures of aggregate economic activity. The analysis reveals that defense spending is best modeled as exogenous with respect to the aggregate economy and that nondefense spending (growth) appears to be white noise. Further, the unemployment rate has a very high coherency at the business cycle frequencies with unemployment insurance but far smaller coherency with other transfer payments. Finally, the paper finds a moderate degree of direct substitutability between certain types of government spending and private consumption and in the process illustrates how spectral techniques can be readily combined with a standard intertemporal optimizing model.
Why Are Bank Profits So Persistent? The Roles of Product Market Competition, Informational Opacity, and Regional/Macroeconomic Shocks
Authors: Berger Allen N. , Bonime Seth D. , Covitz Daniel M. , Hancock Diana
Published: August 2019

We investigate how banking market competition, informational opacity, and sensitivity to shocks have changed over the last three decades by examining the persistence of firm-level rents. We develop propagation mechanisms with testable implications to isolate the sources of persistence. Our analysis suggests that different processes underlie persistent performance at the high and low ends of the distribution. Our tests suggest that impediments to competition and informational opacity continue to be strong determinants of performance; that the reduction in geographic regulatory restrictions had little effect on competitiveness; and that performance remains sensitive to regional/macroeconomic shocks. The findings also suggest reasons for the recent record profitability of the industry.
A Coherent Framework for Stress-Testing
Authors: Berkowitz Jeremy
Published: August 2019

In recent months and years both practitioners and regulators have embraced the ideal of supplementing VaR estimates with "stress-testing". Risk managers are beginning to place an emphasis and expend resources on developing more and better stress-tests. In the present paper, we hold the standard approach to stress-testing up to a critical light. The current practice is to stress-test outside the basic risk model. Such an approach yields two sets of forecasts -- one from the stress-tests and one from the basic model. The stress scenarios, conducted outside the model, are never explicitly assigned probabilities. As such, there is no guidance as to the importance or revelance of the results of stress-tests. Moreover, how to combine the two forecasts into a usable risk metric is not known. Instead, we suggest folding the stress-tests into the risk model, thereby requiring all scenarios to be assigned probabilities.
Errors in the Measurement of the Output Gap and the Design of Monetary Policy
Authors: Tetlow Robert , Orphanides Athanasios , Porter Richard D. , Reifschneider David , Finan Frederico
Published: August 2019

We exploit data on historical revisions to real-time estimates of the output gap to examine the implications of measurement error for the design of monetary policy, using the Federal Reserve&#x27;s model of the U.S. economy, FRB/US. Measurement error brings about a substantial deterioration in economic performance, although the problem can be mitigated somewhat by reducing the coefficient on the output gap in policy rules. We also show that it is usually optimal to place some weight on the level of the output gap in the conduct of policy, but under extreme conditions it may be preferable to focus on output growth.
Minimum Wage Careers?
Authors: Fallick Bruce , Carrington William J.
Published: August 2019

This paper investigates the extent to which people spend careers on minimum wage jobs. We find that a small but non-trivial number of NLSY respondents spend 25%, 50%, or even 75% of the first ten years of their career on minimum or near-minimum wage jobs. Workers with these minimum wage careers tend to be drawn from groups such as women, blacks, and the less-educated that are generally overrepresented in the low-wage population. The results indicate that lifetime incomes of some workers may be supported by a minimum wage. At the same time, these same groups would be disproportionately affected by any minimum wage-induced disemployment. The results suggest that minimum wage legislation has non-negligible effects on the lifetime opportunities of a significant minority of workers.
Option Prices with Uncertain Fundamentals Theory and Evidence on the Dynamics of Implied Volatilities
Authors: David Alexander , Veronesi Pietro
Published: August 2019

In an incomplete information model, investors' uncertainty about the underlying drift rate of a firm's fundamentals affects option prices through (i) endogenous and belief-dependent stochastic volatility, (ii) stochastic covariance between returns and volatility, and (iii) a market price of "belief risk." For the special case where the drift takes only two values, we provide an option pricing formula using Fourier Transforms. The model calibrated to 1960-1998 S&P; 500 real earnings growth shows that investors' uncertainty explains intertemporal variation in the slope and curvature of implied volatility curves as well as the conditional moments of the state-return density obtained from option data. The calibrated model generates hedging `violations' of one-factor markov and deterministic volatility function models with roughly empirical frequencies.
Monetary Policy, Parameter Uncertainty and Optimal Learning
Authors: Wieland Volker W.
Published: August 2019

Since central banks have limited information concerning the transmission channel of monetary policy, they are faced with the difficult task of simultaneously controlling the policy target and estimating the impact of policy actions. A tradeoff between estimation and control arises because policy actions influence estimation and provide information which may improve future performance. I analyze this tradeoff in a simple model with parameter uncertainty and conduct dynamics simulations of the policymaker's decision problem in the presence of the type of uncertainties that arose in the wake of German reunification. A policy that separates learning from control may induce a persistent upward bias in money growth and inflation, just as observed after unification. In contrast, the optimal learning strategy which exploits the tradeoff between control and estimation significantly improves stabilization performance and reduces the likelihood of inflationary bias.
Optimal Control of Large, Forward-Looking Models: Efficient Solutions and Two Examples
Authors: Finan Frederico , Tetlow Robert
Published: August 2019

An optimal control tool is described that is particularly useful for computing rules of large-scale models where users might otherwise have difficulty determining the state vector a priori and where the inversion of large, sparse matrices is involved. A small-scale demonstration is presented, as are data on performance with the Board of Governors large-scale rational expectations macroeconometric model, FRB/US.
The Evolution of the Demand for Temporary Help Supply Employment in the United States
Authors: Estevao Marcello M. , Lach Saul
Published: August 2019

The level of temporary help supply (THS) employment surged during the late 1980s and the 1990s. However, we know little about where these workers were placed and, thus, there is a gap in our understanding of cyclical and trend industry employment in the U.S. To close this gap, we estimate the proportion of THS employees in each major U.S. industry during 1977-97 using information from input-output tables and from the Contingent Worker Supplements to the CPS surveys of February 1995 and February 1997. Our estimates indicate that almost all of the growth in THS employment is attributed to a change in the hiring behavior of firms, rather than to a disproportional increase in the size of more THS-intensive industries. In fact, the proportion of THS employees in each major American industry, except the public sector, increased during our sample period. These increases were particularly large in services and in manufacturing where by 1997 close to 4 percent of all employees were THS workers. The public sector, which had demanded almost 40 percent of all THS workers in 1982, hired a negligibly small number of THS workers in 1997.
Consumer Sentiment and the Stock Market
Authors: Otoo Maria Ward
Published: August 2019

This paper examines the relationship between movements in consumer sentiment and stock prices. At the aggregate level, the two share a strong contemporaneous relationship: an increase in equity values boosts sentiment. However, I examined the nature of the relationship between the two. Does an increase in stock prices raise aggregate sentiment because people are wealthier or because they use movements in stock prices as an indicator of future economic activity and potential labor income growth? Using individual observations from the Michigan survey I found results more consistent with the view that people use movements in equity prices as a leading indicator. Although the findings do not rule out a traditional wealth effect, they do raise some questions about the causal role of wealth in aggregate spending.
Temporary Employment and the Natural Rate of Unemployment
Authors: Otoo Maria Ward
Published: August 2019

This paper examines the determinants of the natural rate of unemployment using a combined cross section and time series data set. The results suggest that industry composition affects the natural rate. In particular, a higher share of temporary employment in a local labor market tends to lower the natural rate of unemployment--most likely through the matching function. The results suggest that the increase in the share of temporary employment may have reduced the natural rate as much as 1/4 percentage point. The results also indicate that unemployment insurance benefits tend to boost the natural rate, while having a more highly educated work force tends to lower it. However, the degree of union presence in a local labor market had little impact on the natural rate.
Efficient Monetary Policy Design Near Price Stability
Authors: Wieland Volker W. , Orphanides Athanasios
Published: August 2019

We study the design of monetary policy in a low inflation environment taking into account the limitations imposed by the zero bound on nominal interest rates. Using numerical dynamic programming methods, we compute optimal policies in a simple, calibrated open-economy model and evaluate the effect of the liquidity trap generated by the zero bound. We consider the possibility that the quantity of base money may affect output and inflation even when the interest rate is constrained at zero and explicitly account for the substantial degree of uncertainty regarding such quantity effects. As an example of such a quantity effect, we focus on the portfolio balance channel through which changes in relative money supplies influence the exchange rate. We find that the optimal policy near price stability is asymmetric, that is, as inflation declines, policy turns expansionary sooner and more aggressively than would be optimal in the absence of the zero bound. As a consequence, the average level of inflation is biased upwards. These results indicate that policymakers are faced with a tradeoff between the level of inflation and economic stabilization performance when the economy is operating near the zero bound. Finally, we discuss operational issues associated with the interpretation and implementation of policy at the zero bound in relation to the recent situation in Japan.
Real Wage Dynamics and the Phillips Curve
Authors: Whelan Karl
Published: August 2019

Since Friedman (1968), the traditional derivation of the accelerationist Phillips curve has related expected real wage inflation to the unemployment rate and then invoked markup pricing and adaptive expectations to generate the accelerationist price inflation equation. Blanchflower and Oswald (1994) have argued that microeconomic evidence of a low autoregression coefficient in real wage regressions invalidates this approach, a conclusion that has been disputed widely on the grounds that the true autoregression coefficient is close to one. This paper shows that the accelerationist relationship between the change in price inflation and the unemployment rate is consistent with any type of microeconomic real wage dynamics. However, these dynamics will determine how supply shocks affect inflation. Evidence on supply shocks and inflation points against the traditional real wage formulation. Implications for the recent behavior of the NAIRU are explored.
The Effects of Weather on Retail Sales
Authors: Starr-McCluer Martha
Published: August 2019

Monthly fluctuations in consumer spending are often attributed to the weather. This paper presents a model in which weather affects the productivity of time in nonmarket activities (such as shopping or recreation), and so, via time and budget constraints, may induce substitution in spending across goods and over time. Using monthly data on retail sales and weather data from the National Weather Service, I find that unusual weather has a modest but significant role in explaining monthly sales fluctuations. However, lagged effects often offset original effects, so that weather's influence tends to wash out at a quarterly frequency.
The Timing of Debt Issuance and Rating Migrations: Theory and Evidence
Authors: Harrison Paul , Covitz Daniel M.
Published: August 2019

This paper develops and tests a recursive model of debt issuance and rating migration. We examine a signaling game with firms who have private information about their probability distribution of future rating migration. A key assumption of the model is that rating agencies reveal information over time, creating a recursive information problem, which in turn generates an adverse selection problem in debt issuance similar to that for equity issuance in Myers and Majluf (1984). This adverse selection model predicts that debt issuance provides a negative signal of rating migration, and that the signal strengthens with economic downturns. Another prediction regarding the maturity of debt issuance is that long maturity debt sends a negative signal relative to short maturity debt (Flannery 1986). Using data from 1980 to 1998 on straight bond issuance and Moody's ratings, and controlling for firm and issue-specific factors, we find that debt issuance sends a negative signal of a firm's default probability, and that this signal intensifies with a decline in economic activity and with an increase in debt maturity.
Dimensions of Credit Risk and Their Relationship to Economic Capital Requirements
Authors: Carey Mark S.
Published: August 2019

Now in prospect is a major revision of international bank capital regulations that would embody recent advances in credit risk measurement and management. Previous regulations have been simpler in structure, with a primary goal of getting capital requirements right on average, and thus have largely ignored the difference between average and marginal. This paper presents evidence that explicit treatment in new regulations of several important dimensions of credit risk is necessary to limit banks' incentives to engage in capital arbitrage activities. Such activities, if unchecked, may lead to an increase in bank failure rates over time.
Purchasing Power Parity: Three Stakes Through the Heart of the Unit Root Null
Authors: Higgins Matthew , Zakrajšek Egon
Published: August 2019

We provide a comprehensive analysis of the purchasing power parity hypothesis, relying on a linear panel data framework. First, we consider two panel unit root tests, based on transformations of country-specific statistics, which allow for parameter heterogeneity across countries. Using GLS techniques, we modify the two tests to eliminate the upward size distortion induced by cross-sectional dependence among contemporaneous real exchange rate innovations. Second, we consider two tests based on a fixed-effects specification: these tests allow for cross-sectional dependence but impose parameter homogeneity. Three of the four tests provide emphatic support for real exchange rate stationary during the post-Bretton Woods era among relatively open economies. Monte Carlo experiments indicate that the three tests have considerable power against the unit root null. One test allowing parameter heterogeneity provides mixed support for stationarity, but has only limited power against the null.
Assessing the Productivity of Public Capital with a Locational Equilibrium Model
Authors: Rudd Jeremy Bay
Published: August 2019

This paper employs Roback's locational-equilibrium model of public-goods pricing, cross-sectional data from the Census of Population and Housing, and SMSA-level estimates of public capital stocks in order to examine the productive contribution of public capital. I find that public capital has a small positive impact on private output.
Improving Grid-Based Methods for Estimating Value at Risk of Fixed-Income Portfolios
Authors: Gibson Michael S. , Pritsker Matthew
Published: August 2019

Jamshidian and Zhu (1997) propose a discrete grid method for simplifying the computation of Value at Risk (VaR) for fixed-income portfolios. Their method relies on two simplifications. First, the value of fixed income instruments is modeled as depending on a small number of risk factors chosen using principal components analysis. Second, they use a discrete approximation to the distribution of the portfolio&#x27;s value. We show that their method has two serious shortcomings which imply it cannot accurately estimate VaR for some fixed-income portfolios. First, risk factors chosen using principal components analysis will explain the variation in the yield curve, but they may not explain the variation in the portfolio&#x27;s value. This will be especially problematic for portfolios that are hedged. Second, their discrete distribution of portfolio value can be a poor approximation to the true continuous distribution. We propose two refinements to their method to correct these two shortcomings. First, we propose choosing risk factors according to their ability to explain the portfolio&#x27;s value. To do this, instead of generating risk factors with principal components analysis, we generate them with a statistical technique called partial least squares. Second, we compute VaR with a &quot;Grid Monte Carlo&quot; method that uses continuous risk factor distributions while maintaining the computational simplicity of a grid method for pricing. We illustrate our points with several example portfolios where the Jamshidian-Zhu method fails to accurately estimate VaR, while our refinements succeed.
Robust Monetary Policy with Misspecified Models: Does Model Uncertainty Always Call for Attenuated Policy?
Authors: Tetlow Robert , Von zur Muehlen P.
Published: August 2019

This paper explores Knightian model uncertainty as a possible explanation of the considerable difference between estimated interest rate rules and optimal feedback descriptions of monetary policy. We focus on two types of uncertainty: (i) unstructured model uncertainty reflected in additive shock error processes that result from omitted-variable misspecifications, and (ii) structured model uncertainty, where one or more parameters are identified as the source of misspecification. For an estimated forward-looking model of the U.S. economy, we find that rules that are robust against uncertainty, the nature of which is unspecifiable, or against one-time parametric shifts, are more aggressive than the optimal linear quadratic rule. However, policies designed to protect the economy against the worst-case consequences of misspecified dynamics are less aggressive and turn out to be good approximations of the estimated rule. A possible drawback of such policies is that the losses incurred from protecting against worst-case scenarios are concentrated among the same business cycle frequencies that normally occupy the attention of policymakers.
A Real Options Approach to Housing Investment
Authors: Downing Chris , Wallace Nancy
Published: August 2019

In this paper, we study investments by existing homeowners to improve their homes. The value of a house is modeled as the expected net present value of a perpetual stream of service flows emanating from the attributes of the house. An important innovation in our model is that the set of house attributes evolves over time according to the investment decisions of the homeowner. The homeowner's decisions to invest in house attributes are modeled as real options. Our model of investment embeds a multi-factor term structure model and a general model of the evolution of service flows. We employ numeric simulations to explore the properties of the investment model, and to motivate our empirical test of the model. Using a panel from the American Housing Survey, we test two implications of the real option theory. We test whether investment is more likely when the spread between the return to housing and the cost of capital is wide, and we test whether greater spread volatility depresses investment. The results indicate that homeowner investment behavior is consistent with the theory, even after controlling for business cycle, aging, tenure and for-sale influences.