bluuebunny/crossref_metadata_2025 huggingface dataset:
A Nonlinear Look at Trend MFP Grwoth and the Business Cycle: Results from a Hybrid Kalman/Markov Switching Model
Authors: French Mark W.
Published: August 2019

The cycle in output and hours worked is not symmetric: it behaves differently around recessions than in expansions. Similarly, the trend in multifactor productivity (MFP) seems to pass through different regimes; there was an extended period of slow MFP growth from about 1973 through 1995, and faster growth thereafter. Typical linear models and linear filters such as the Kalman filter deal poorly with asymmetry and regime changes. This paper attempts to determine more accurately and quickly any shifts in trend MFP growth, using a nonlinear Kalman/Markov filter with a model of the unobserved components of output and hours. This hybrid model incorporates regime-switching in the business cycle and in the trend growth of MFP. Estimation results are promising. The hybrid model and associated filter appear to be faster than the basic Kalman filter in detecting turning points in the smoothed conditional mean estimate of trend MFP growth; in addition, the hybrid model avoids some of the Kalman filter's biases in reconstructing historical business cycles and the MFP trend.
Yesterday's Bad Times are Today's Good Old Times: Retail Price Changes in the 1890s were Smaller, Less Frequent, and More Permanent
Authors: Kackmeister Alan
Published: August 2019

This paper compares nominal price rigidity in retail stores during two 28-month periods: 1889-1891 and 1997-1999. The 1889-1891 microdata price quotes show: 1. a lower frequency of price changes; 2. a smaller average magnitude of price changes; 3. fewer &quot;small&quot; price changes; and, 4. fewer temporary price reductions. These differences are consistent with the 1889-1891 period having a higher cost of changing prices resulting in less adjustment to transitory price shocks. Changes in the retailing environment that may have led to a higher cost of changing prices in 1889-1891 are discussed.
Temporary Partial Expensing in a General-Equilibrium Model
Authors: Edge Rochelle M. , Rudd Jeremy Bay
Published: August 2019

This paper uses a dynamic general-equilibrium model with a nominal tax system to consider the effects of temporary partial expensing allowances on investment and other macroeconomic aggregates.
Gestation Lags and the Relationship Between Investment and Q in Regressions
Authors: Millar Jonathan N.
Published: August 2019

Regressions of investment on Tobin's Q are misspecified in the presence of capital gestation lags because they don't distinguish between the value of existing capital and the value of capital at a future date. Current investment should be determined by the anticipated shadow value of capital at the gestation horizon. Under homogeneity conditions analogous to Hayashi[1982], this value is equal to the forecast of an adjusted version of Q. This misspecification helps to explain many pathologies in the literature: attenuated estimates of the coefficient on Q, low R2, and serially-correlated errors. Regressions using aggregate data suggest that (1) endogeneity problems associated with the standard regression of investment on Q can can be eliminated by reversing the regression, (2) forecastable changes in Q provide additional information about investment not captured in current Q, and (3) specifications that explicitly account for gestation lags yield capital adjustment costs of a more reaso
Has Output Become More Predictable? Changes in Greenbook Forecast Accuracy
Authors: Tulip Peter
Published: August 2019

Several researchers have recently documented a large reduction in output volatility. In contrast, this paper examines whether output has become more predictable. Using forecasts from the Federal Reserve Greenbooks, I find the evidence is somewhat mixed. Output seems to have become more predictable at short horizons, but not necessarily at longer horizons. The reduction in unpredictability is much less than the reduction in volatility. Associated with this, recent forecasts had little predictive power.
Large Investors: Implications for Equilibrium Asset Returns, Shock Absorption, and Liquidity
Authors: Pritsker Matthew
Published: August 2019

The growing share of financial assets that are held and managed by large institutional investors whose desired trades move asset prices is at odds with the traditional competitive assumption that investors are small and take prices as given. This paper relaxes the traditional price-taking assumption and instead presents a dynamic multiple asset model of imperfect competition in asset markets among large investors who differ in their risk aversion. The model is used to study asset price dynamics during an LTCM-like scenario in which market rumors of distressed asset sales are followed at a later date by the sales themselves. Using the model, it is shown that large investors front-run distressed sales; asset prices overshoot their long-run fundamentals; and asset pricing models experience temporary breakdown. During the period of model breakdown assets equilibrium returns are explained by the market portfolio and by transient liquidity factors.
Nowcasting GDP and Inflation: The Real-Time Informational Content of Macroeconomic Data Releases
Authors: Giannone Domenico , Reichlin Lucrezia , Small David H.
Published: August 2019

This paper formalizes the process of updating the nowcast and forecast on output and inflation as new releases of data become available. The marginal contribution of a particular release for the value of the signal and its precision is evaluated by computing ""news"" on the basis of an evolving conditioning information set. The marginal contribution is then split into what is due to timeliness of information and what is due to economic content. We find that the Federal Reserve Bank of Philadelphia surveys have a large marginal impact on the nowcast of both inflation variables and real variables, and this effect is larger than that of the Employment Report. When we control for timeliness of the releases, the effect of hard data becomes sizeable. Prices and quantities affect the precision of the estimates of inflation, while GDP is affected only by real variables and interest rates.
The Effects of Welfare Reform and Related Policies on Single Mothers' Welfare Use and Employment in the 1990s
Authors: Looney Adam
Published: August 2019

This paper examines how changes in tax policy, welfare programs, public health insurance, and economic conditions during the 1990s affected welfare use and employment among single mothers. Drawing on panel data from the Survey of Income and Program Participation, I give new estimates of the effects of specific policy changes and use those estimates to explain changes in economic behavior. The results suggest that Welfare Reform policies, the EITC, and improved economic conditions, in that order, were the primary determinants of changes in welfare use and employment between 1993 and 1999.
Stock Market Volatility and the Great Moderation
Authors: Campbell Sean D.
Published: August 2019

Using data on corporate profits forecasts from the Survey of Professional Forecasters, I decompose real stock returns into a fundamental news component and a return news component and analyze the effects of the Great Moderation on each. Empirically, the response of each component of real stock returns to the Great Moderation has been quite different. The volatility of fundamental news shocks has declined by 50% since the onset of the Great Moderation, suggesting a strong link between underlying fundamentals and the broader macroeconomy. Alternatively, the volatility of return news shocks has remained stable over the Great Moderation period. Since the bulk of stock market volatility is attributable to return shocks, the Great Moderation has not had a significant effect on stock return volatility. These empirical findings are shown to be consistent with Campbell and Cochrane&#x27;s (1999) habit formation asset pricing model. In the face of a large decline in consumption volatility, the volatility of fundamental news shocks declines while the volatility of return shocks stagnate. Ultimately, the effect of a Great Moderation in consumption volatility on overall stock return volatility in the habit formation model is slight.
Term Structure Estimation with Survey Data on Interest Rate Forecasts
Authors: Kim Don H. , Orphanides Athanasios
Published: August 2019

The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as additional input to the estimation to overcome the problem. The three-factor pure-Gaussian model thus estimated with the U.S. Treasury term structure for the 1990-2003 period generates a stable estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.
Monetary Policy with Imperfect Knowledge
Authors: Orphanides Athanasios , Williams John C.
Published: August 2019

We examine the performance and robustness of monetary policy rules when the central bank and the public have imperfect knowledge of the economy and continuously update their estimates of model parameters. We find that versions of the Taylor rule calibrated to perform well under rational expectations with perfect knowledge perform very poorly when agents are learning and the central bank faces uncertainty regarding natural rates. In contrast, difference rules, in which the change in the interest rate is determined by the inflation rate and the change in the unemployment rate, perform well when knowledge is both perfect and imperfect.
Jump-Diffusion Processes and Affine Term Structure Models: Additional Closed-Form Approximate Solutions, Distributional Assumptions for Jumps, and Parameter Estimates
Authors: Durham J. B.
Published: August 2019

Affine term structure models in which the short rate follows a jump-diffusion process are difficult to solve, and the parameters of such models are hard to estimate. Without analytical answers to the partial difference differential equation (PDDE) for bond prices implied by jump-diffusion processes, one must find a numerical solution to the PDDE or exactly solve an approximate PDDE. Although the literature focuses on a single linearization technique to estimate the PDDE, this paper outlines alternative methods that seem to improve accuracy. Also, closed-form solutions, numerical estimates, and closed-form approximations of the PDDE each ultimately depend on the presumed distribution of jump sizes, and this paper explores a broader set of possible densities that may be more consistent with intuition, including a bi-modal Gaussian mixture. GMM and MLE of one- and two-factor jump-diffusion models produce some evidence for jumps, but sensitivity analyses suggest sizeable confidence intervals around the parameters.
Robustifying Learnability
Authors: Tetlow Robert , Von zur Muehlen P.
Published: August 2019

In recent years, the learnability of rational expectations equilibria (REE) and determinacy of economic structures have rightfully joined the usual performance criteria among the sought-after goals of policy design. Some contributions to the literature, including Bullard and Mitra (2001) and Evans and Honkapohja (2002), have made significant headway in establishing certain features of monetary policy rules that facilitate learning. However a treatment of policy design for learnability in worlds where agents have potentially misspecified their learning models has yet to surface. This paper provides such a treatment. We begin with the notion that because the profession has yet to settle on a consensus model of the economy, it is unreasonable to expect private agents to have collective rational expectations. We assume that agents have only an approximate understanding of the workings of the economy and that their learning the reduced forms of the economy is subject to potentially destabilizing perturbations. The issue is then whether a central bank can design policy to account for perturbations and still assure the learnability of the model. Our test case is the standard New Keynesian business cycle model. For different parameterizations of a given policy rule, we use structured singular value analysis (from robust control theory) to find the largest ranges of misspecifications that can be tolerated in a learning model without compromising convergence to an REE.
An Inflation Goal with Multiple Reference Measures
Authors: Whitesell William C.
Published: August 2019

Most inflation-targeting central banks express their inflation objective in terms of a range for a single official inflation measure but generally have not clarified the meaning of the ranges and their implications for policy responses. In formulating policy, all central banks monitor multiple inflation indicators. This paper suggests an alternative approach to communicating an inflation goal: announcing point-values, rather than ranges, for a few key reference measures of inflation that are used in making policy. After reviewing and extending relevant theoretical and empirical studies, the paper argues that the alternative approach could more accurately reflect the concerns of policymakers and provide a better accountability structure for monetary policy performance.
Explaining Credit Default Swap Spreads with the Equity Volatility and Jump Risks of Individual Firms
Authors: Zhang Benjamin Yibin , Zhou Hao , Zhu Haibin
Published: August 2019

A structural model with stochastic volatility and jumps implies specific relationships between observed equity returns and credit spreads. This paper explores such effects in the credit default swap (CDS) market. We use a novel approach to identify the realized jumps of individual equities from high frequency data. Our empirical results suggest that volatility risk alone predicts 50 percent of the variation in CDS spreads, while jump risk alone forecasts 19 percent. After controlling for credit ratings, macroeconomic conditions, and firms' balance sheet information, we can explain 77 percent of the total variation. Moreover, the pricing effects of volatility and jump measures vary consistently across investment-grade and high-yield entities. The estimated nonlinear effects of volatility and jumps are in line with the model-implied relationships between equity returns and credit spreads.
Retail Deposit Fees and Multimarket Banking
Authors: Hannan Timothy H.
Published: August 2019

This paper reports a systematic examination of the determinants of deposit-related retail banking fees using a set of survey data that is unusual for its size, specificity, and sampling properties. The analysis focuses explicitly on six different fees associated with checking accounts and automated teller machine (ATM) usage. A preliminary analysis documents that, on average, multimarket banks charge substantially higher fees than do typically smaller, single-market banks. A more detailed econometric analysis yields results consistent with predictions of recent models. In particular, it finds that the greater the presence of multimarket banks in the local market, the higher are the retail deposit fees of single-market banks (except in highly concentrated markets) and the weaker is the positive relationship between those fees and market concentration.
Modelling Inflation Dynamics: A Critical Review of Recent Research
Authors: Rudd Jeremy Bay , Whelan Karl
Published: August 2019

In recent years, a broad academic consensus has arisen around the use of rational expectations sticky-price models to capture inflation dynamics. These models are seen as providing an empirically reasonable characterization of observed inflation behavior once suitable measures of the output gap are chosen; and, moreover, are perceived to be robust to the Lucas critique in a way that earlier econometric models of inflation are not. We review the principal conclusions of this literature concerning: 1) the ability of these models to fit the data; 2) the importance of rational forward-looking expectations in price setting; and 3) the appropriate measure of inflationary pressures. We argue that existing rational expectations sticky-price models fail to provide a useful empirical description of the inflation process, especially relative to traditional econometric Phillips curves of the sort commonly employed for policy analysis and forecasting.
Using Structural Shocks to Identify Models of Investment
Authors: Roberts John M.
Published: August 2019

This paper uses the response of investment to identified structural shocks to investigate some key issues, including the nature of adjustment costs and investment's responsiveness to user cost. In the estimation, the model parameters are chosen to match as closely as possible the impulse responses from an identified VAR. In the preferred results, both investment- and capital-stock adjustment costs are important; the size of the capital-stock adjustment costs is in line with estimates from firm-level studies; the investment-adjustment costs suggest rapid adjustment of investment to its desired level; and the estimated elasticity of substitution between capital and other inputs is considerably smaller than one. There is, however, an important sensitivity: The VAR's identified aggregate demand shock leads to a large crowding out effect--when output expands, investment falls. When this shock is included among those matched, the elasticity of substitution is near one and only investment adjustment costs are important.
Outstanding Outsourcers: A Firm-and Plant-Level Analysis of Production Sharing
Authors: Kurz Christopher Johann
Published: August 2019

This paper examines the differences in characteristics between outsourcers and non-outsourcers with a particular focus on productivity. The measure of outsourcing comes from a question in the 1987 and 1992 Census of Manufactures regarding plant-level purchases of foreign intermediate materials. There are two key findings. First, outsourcers are "outstanding." That is, all else equal, outsourcers tend to have premia for plant and firm characteristics, such as being larger, more capital intensive, and more productive. One exception to this outsourcing premia is that wages tend to be the same for both outsourcers and non-outsourcers. Second, outsourcing firms, but not plants, have significantly higher productivity growth.
The Yield Curve and Predicting Recessions
Authors: Wright Jonathan H.
Published: August 2019

The slope of the Treasury yield curve has often been cited as a leading economic indicator, with inversion of the curve being thought of as a harbinger of a recession. In this paper, I consider a number of probit models using the yield curve to forecast recessions. Models that use both the level of the federal funds rate and the term spread give better in-sample fit, and better out-of-sample predictive performance, than models with the term spread alone. There is some evidence that controlling for a term premium proxy as well may also help. I discuss the implications of the current shape of the yield curve in the light of these results, and report results of some tests for structural stability and an evaluation of out-of-sample predictive performance.
Inflation Targeting under Imperfect Knowledge
Authors: Orphanides Athanasios , Williams John C.
Published: August 2019

A central tenet of inflation targeting is that establishing and maintaining well-anchored inflation expectations are essential. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an imperfect understanding of the macroeconomic landscape within which the public forms expectations and policymakers must formulate and implement monetary policy. Using an estimated model of the U.S. economy, we show that monetary policy rules that would perform well under the assumption of rational expectations can perform very poorly when we introduce imperfect knowledge. We then examine the performance of an easily implemented policy rule that incorporates three key characteristics of inflation targeting: transparency, commitment to maintaining price stability, and close monitoring of inflation expectations, and find that all three play an important role in assuring its success. Our analysis suggests that simple difference rules in the spirit of Knut Wicksell excel at tethering inflation expectations to the central bank's goal and in so doing achieve superior stabilization of inflation and economic activity in an environment of imperfect knowledge.
Likelihood Ratio Tests on Cointegrating Vectors, Disequilibrium Adjustment Vectors, and their Orthogonal Complements
Authors: Morin Norman
Published: August 2019

Cointegration theory provides a flexible class of statistical models that combine long-run relationships and short-run dynamics. This paper presents three likelihood ratio (LR) tests for simultaneously testing restrictions on cointegrating relationships and on how quickly the system reacts to the deviation from equilibrium implied by the cointegrating relationships. Both the orthogonal complements of the cointegrating vectors and of the vectors of adjustment speeds have been used to define the common stochastic trends of a nonstationary system. The restrictions implicitly placed on the orthogonal complements of the cointegrating vectors and of the adjustment speeds are identified for a class of LR tests, including those developed in this paper. It is shown how these tests can be interpreted as tests for restrictions on the orthogonal complements of the cointegrating relationships and adjustment vectors, which allow one to combine and test for economically meaningful restrictions on cointegrating relationships and on common stochastic trends.
Monetary Policy Implementation Without Averaging or Rate Corridors
Authors: Whitesell William C.
Published: August 2019

Most central banks now implement monetary policy by trying to hit a target overnight interest rate using one of two types of frameworks. The first involves arrangements for depository institutions to hold a minimum account balance over a multi-day averaging period. The second uses the central bank's lending rate as a ceiling and its deposit rate as a floor for overnight interest rates. Either averaging or a rate corridor can help a central bank hit a target interest rate, but each framework can also have weaknesses in achieving that goal and, in some cases, other associated drawbacks. This paper discusses an alternative possible policy implementation regime, involving a specially designed facility for the payment of interest on a daily basis on balances held at the central bank. This new type of regime could potentially allow smooth monetary policy implementation without the problems associated with averaging or a rate corridor.
Explaining Cyclical Movements in Employment: Creative Destruction or Changes in Utilization
Authors: Figura Andrew
Published: August 2019

An important step in understanding why employment fluctuates cyclically is determining the relative importance of cyclical movements in permanent and temporary plant-level employment changes. If movements in permanent employment changes are important, then recessions are times when the destruction of job specific capital picks up and/or investment in new job capital slows. If movements in temporary employment changes are important, then employment fluctuations are related to the temporary movement of workers across activities (e.g., from work to home production or search and back again) as the relative costs/benefits of these activities change. I estimate that in the manufacturing sector temporary employment changes account for approximately 60 percent of the change in employment growth over the cycle. However, if permanent employment changes create and destroy more capital than temporary employment changes, then their economic consequences would be relatively greater. The correlation between gross permanent employment changes and capital intensity across industries supports the hypothesis that permanent employment changes do create and destroy more capital than temporary employment changes.
Are Longer Bankruptcies Really More Costly?
Authors: Covitz Daniel M. , Han Song , Wilson Beth Anne
Published: August 2019

We test the widely held assumption that longer restructurings are more costly. In contrast to earlier studies, we use instrumental variables to control for the endogeneity of restructuring time and creditor return. Instrumenting proves critical to our finding that creditor recovery rates increase with duration for roughly 1Â½ years following default, but decrease thereafter. This, and similar results using the likelihood of reentering bankruptcy, suggest that there may be an optimal time in default. Moreover, the default duration of almost half of our sample is well outside the optimal default duration implied by our estimates. We also find that creditors benefit from more experienced judges and from oversight by only one judge. The results have implications for the reform and design of bankruptcy systems.
The U.S. Treasury Yield Curve: 1961 to the Present
Authors: Gürkaynak Refet S. , Sack Brian , Wright Jonathan H.
Published: August 2019

The discount function, which determines the value of all future nominal payments, is the most basic building block of finance and is usually inferred from the Treasury yield curve. It is therefore surprising that researchers and practitioners do not have available to them a long history of high-frequency yield curve estimates. This paper fills that void by making public the Treasury yield curve estimates of the Federal Reserve Board at a daily frequency from 1961 to the present. We use a well-known and simple smoothing method that is shown to fit the data very well. The resulting estimates can be used to compute yields or forward rates for any horizon. We hope that the data, which are posted on the website http://www.federalreserve.gov/pubs/feds/2006 and which will be updated periodically, will provide a benchmark yield curve that will be useful to applied economists.
GSEs, Mortgage Rates, and Secondary Market Activities
Authors: Lehnert Andreas , Passmore Wayne , Sherlund Shane M.
Published: August 2019

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that securitize mortgages and issue mortgage-backed securities (MBS). In addition, the GSEs are active participants in the secondary mortgage market on behalf of their own investment portfolios. Because these portfolios have grown quite large, portfolio purchases (in addition to MBS issuance) are often thought to be an important force in the mortgage market. Using monthly data from 1993 to 2005 we estimate a VAR model of the relationship between GSE secondary market activities and mortgage interest rate spreads. We find that GSE portfolio purchases have no significant effects on either primary or secondary mortgage rate spreads. Further, we examine GSE activities and mortgage rate spreads in the wake of the 1998 debt crisis, and find that GSE portfolio purchases did little to affect interest rates paid by new mortgage borrowers. This empirical finding is robust to alternative identification assumptions and to alternative model and variable specifications.
Requirements and Prospects for a New Time to Payoff Disclosure for Open End Credit Under Truth in Lending
Authors: Durkin Thomas A.
Published: August 2019

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Public Law 109-8, April 2005) made significant changes to procedures for managing consumer bankruptcy petitions, but it also included amendments to the Truth in Lending Act. Notable among the Truth in Lending changes is a section providing for new disclosures on the length of time it will take consumers to repay open end credit accounts in full if they make only the minimum required payments. This paper explores the range of assumptions necessary for the calculations underlying the new required disclosures, examines the sensitivity of the disclosures to variations in the assumptions, and explores the potential for inaccuracy in the required disclosures based upon consumers' use of their open end credit accounts. For the latter exploration, the paper examines consumer survey evidence and employs a large longitudinal sample of credit card accounts to measure how often consumers' actual patterns of use of their credit card accounts match the assumptions of the new disclosure.
Incorporating Judgement in Fan Charts
Authors: Österholm Par
Published: August 2019

Within a decision-making group, such as the monetary-policy committee of a central bank, group members often hold differing views about the future of key economic variables. Such differences of opinion can be thought of as reflecting differing sets of judgement. This paper suggests modelling each agent's judgement as one scenario in a macroeconomic model. Each judgement set has a specific dynamic impact on the system, and accordingly, a particular predictive density - or fan chart - associated with it. A weighted linear combination of the predictive densities yields a final predictive density that correctly reflects the uncertainty perceived by the agents generating the forecast. In a model-based environment, this framework allows judgement to be incorporated into fan charts in a formalised manner.
An Estimate of the Inflation Risk Premium Using a Three-Factor Affine Term Structure Model
Authors: Durham J. B.
Published: August 2019

This paper decomposes nominal Treasury yields into expected real rates, expected inflation rates, real risk premiums, and inflation risk premiums by separately calibrating a three-factor affine term structure model to the nominal Treasury and TIPS yield curves. Although this particular application seems to produce expected real short rates and inflation rates that are somewhat static, there are theoretical advantages to calibrating the model to nominal and real yields separately. Moreover, the estimates correlate positively with back-of-the-envelope measures of the inflation risk premium. With respect to the current environment, monetary policy uncertainty does not seem to have contributed to the apparent increase in the inflation risk premium since the beginning of 2006. Also, in purely nominal terms, the increase in term premiums thus far this year might be just as much a global as a domestic phenomenon, given that nominal term premiums have also increased in Germany and the United Kingdom.
A Quantitative Comparison of Sticky-Price and Sticky-Information Models of Price Setting
Authors: Kiley Michael T.
Published: August 2019

I estimate sticky-price and sticky-information models of price setting for the United States via maximum-likelihood techniques, reaching several conclusions. First, the sticky-price model fits best, and captures inflation dynamics as well as reduced-form equations once hybrid-behavior is allowed. Second, the importance of hybrid behavior in sticky-price models is potentially consistent with a role for some information imperfections, such as sticky information, as a complement to nominal price rigidities. Finally, the favorable results herein for the hybrid sticky-price model when evaluated by statistics that summarize the relative fit of different models is consistent with the existing literature that is both supportive and dismissive of such models, as this literature has largely ignored fit in evaluating such models. Many previous studies have focused on ancillary issues, such as the standard errors associated with certain parameters or Granger-causality tests that may not provide much information about sticky-price models.
A Primer on the Macroeconomic Implications of Population Aging
Authors: Sichel Daniel E. , Sheiner Louise , Slifman Lawrence
Published: August 2019

In this paper, we discuss the consequences of population aging from a macroeconomic perspective and consider alternative paths the economy could follow in response to population aging. The choices society makes among those alternatives will be closely linked to decisions about how to reform entitlement programs for the elderly.
Rounding and the Impact of News: A Simple Test of Market Rationality
Authors: Beechey Meredith J. , Wright Jonathan H.
Published: August 2019

Certain prominent scheduled macroeconomic news releases contain a rounded number on the first page of the release that is widely cited by newswires and the press and a more precise number in the text of the release. The whole release comes out at once. We propose a simple test of whether markets are paying attention to the rounded or unrounded numbers by studying the high-frequency market reaction to such news announcements. In the case of inflation releases, we find evidence that markets systematically ignore some of the information in the unrounded number. This is most pronounced for core CPI, a prominent release for which the rounding in the headline number is large relative to the information content of the release.
Estimating Probabilities of Recession in Real Time Using GDP and GDI
Authors: Nalewaik Jeremy J.
Published: August 2019

This work estimates Markov switching models on real time data and shows that the growth rate of gross domestic income (GDI), deflated by the GDP deflator, has done a better job recognizing the start of recessions than has the growth rate of real GDP. This result suggests that placing an increased focus on GDI may be useful in assessing the current state of the economy. In addition, the paper shows that the definition of a low-growth phase in the Markov switching models has changed over the past couple of decades. The models increasingly define this phase as an extended period of around zero rather than negative growth, diverging somewhat from the traditional definition of a recession.
Natural Rate Measures in an Estimated DSGE Model of the U.S. Economy
Authors: Edge Rochelle M. , Kiley Michael T. , Laforte Jean-Philippe
Published: August 2019

This paper presents a monetary DSGE model of the U.S. economy. The model captures the most important production, expenditure, and nominal-contracting decisions underlying economic data while remaining sufficiently small to allow it to provide a clear interpretation of the data. We emphasize the role of model-based analyses as vehicles for storytelling by providing several examples--based around the evolution of natural rates of production and interest--of how our model can provide narratives to explain recent macroeconomic fluctuations. The stories obtained from our model are both similar to and quite different from conventional accounts.
Diagnosing and Treating Bifurcations in Perturbation Analysis of Dynamic Macro Models
Authors: Kim Jinill , Levin Andrew , Yun Tack
Published: August 2019

In perturbation analysis of nonlinear dynamic systems, the presence of a bifurcation implies that the first-order behavior of the economy cannot be characterized solely in terms of the first-order derivatives of the model equations. In this paper, we use two simple examples to illustrate how to detect the existence of a bifurcation. Following the general approach of Judd (1998), we then show how to apply l'Hospital's rule to characterize the solution of each model in terms of its higher-order derivatives. We also show that in some cases the bifurcation can be eliminated through renormalization of model variables; furthermore, renormalization may yield a more accurate first-order solution than applying l'Hospital's rule to the original formulation.
Studying Consumption with the Panel Study of Income Dynamics: Comparisons with the Consumer Expenditure Survey and an Application to the Intergenerational Transmission of Well-being
Authors: Charles Kerwin Kofi , Danziger Sheldon , Li Geng , Schoeni Robert F.
Published: August 2019

Beginning in 1999, the Panel Study of Income Dynamics (PSID) added new questions about several categories of consumption expenditure. The PSID now covers items that constitute more than seventy percent of total expenditure measured in the Consumer Expenditure Survey (CE). We show that expenditure for each of the broad categories in the PSID aligns closely with corresponding measures from the CE. Using the new PSID data, we impute total expenditure in the PSID and show that this is also very close to total measured CE expenditure. For several distinct categories and for total consumption, we show that cross-sectional life cycle estimates of household expenditure activity are very similar across the two surveys. Finally, we illustrate the unique research value of the PSID for studying consumption by exploiting the survey&#x27;s longitudinal design and genealogical structure to estimate the intergenerational elasticity of consumption expenditure, which is found to be in the range of 0.32-0.34.
Sectoral Productivity in the United States: Recent Developments and the Role of IT
Authors: Corrado Carol , Lengermann Paul , Bartelsman Eric J. , Beaulieu J. Joseph
Published: August 2019

This paper introduces new estimates of recent productivity developments in the United States, using an appropriate theoretical framework for aggregating industry MFP to sectors and the total economy. Our work sheds light on the sources of the continued strong performance of U.S. productivity since 2000. We find that the major sectoral players in the late 1990s pickup were not contributors to the more recent surge in productivity. Rather, striking gains in MFP in the finance and business service sector, a resurgence in MFP growth in the industrial sector, and an end to drops elsewhere more than account for the aggregate acceleration in productivity in recent years. Further, some evidence is found for a link between IT intensity and the recent productivity acceleration.
Racial Dispersion in Consumer Credit Interest Rates
Authors: Edelberg Wendy
Published: August 2019

Most of the literature exploring racial disparities in consumer credit markets focuses on the issue of access to loans. But the disparate terms on which loans are issued are equally revealing. In this paper, I examine disparities in a variety of consumer loan interest rates using a reduced-form framework. I find that interest rates on loans issued before the 1995 show a statistically significant degree of unexplained racial heterogeneity even after controlling for the financial costs of issuing debt. However, racial dispersion in rates falls off for loans originated after 1995.The unexplainable racial disparity in consumer loan rates issued before 1995 implies that in this earlier period minorities faced unaccountably higher interest-rate premiums on the order of--in two examples--20 basis points for first mortgages and 80 basis points for automobile loans. Overall, evidence of unexplainable racial dispersion in interest rates is more robust among homeowners than renters.
Robust Monetary Policy with Imperfect Knowledge
Authors: Orphanides Athanasios , Williams John C.
Published: August 2019

We examine the performance and robustness properties of monetary policy rules in an estimated macroeconomic model in which the economy undergoes structural change and where private agents and the central bank possess imperfect knowledge about the true structure of the economy. Policymakers follow an interest rate rule aiming to maintain price stability and to minimize fluctuations of unemployment around its natural rate but are uncertain about the economy's natural rates of interest and unemployment and how private agents form expectations. In particular, we consider two models of expectations formation: rational expectations and learning. We show that in this environment the ability to stabilize the real side of the economy is significantly reduced relative to an economy under rational expectations with perfect knowledge. Furthermore, policies that would be optimal under perfect knowledge can perform very poorly if knowledge is imperfect. Efficient policies that take account of private learning and misperceptions of natural rates call for greater policy inertia, a more aggressive response to inflation, and a smaller response to the perceived unemployment gap than would be optimal if everyone had perfect knowledge of the economy. We show that such policies are quite robust to potential misspecification of private sector learning and the magnitude of variation in natural rates.
Housing and the Monetary Transmission Mechanism
Authors: Mishkin Frederic S.
Published: August 2019

The housing market is of central concern to monetary policy makers. To achieve the dual goals of price stability and maximum sustainable employment, monetary policy makers must understand the role that housing plays in the monetary transmission mechanism if they are to set policy instruments appropriately. In this paper, I examine what we know about the role of housing in the monetary transmission mechanism and then explore the implications of this knowledge for the conduct of monetary policy. I begin with a theoretical and empirical review of the main housing-related channels of the transmission mechanism. These channels include the ways interest rates directly influence the user cost of housing capital, expectations of future house-price movements, and housing supply; and indirectly influence the real economy through standard wealth effects from house prices, balance sheet, credit-channel effects on consumer spending, and balance sheet, credit-channel effects on housing demand. I the
Will Monetary Policy Become More of a Science?
Authors: Mishkin Frederic S.
Published: August 2019

This paper reviews the progress that the science of monetary policy has made over recent decades. This progress has significantly expanded the degree to which the practice of monetary policy reflects the application of a core set of "scientific" principles. However, there remains, and will likely always remain, elements of art in the conduct of monetary policy.
Does Health Affect Portfolio Choice?
Authors: Smith Paul A. , Love David A.
Published: August 2019

Previous studies find a strong and positive empirical connection between health status and the share of risky assets held in household portfolios. But is this relationship truly causal, in the sense that households respond to changes in health by altering their portfolio allocation, or does it simply reflect unobserved differences across households? We find that most of the variation by health is on the extensive margin of stock ownership (rather than the marginal allocation conditional on ownership), which more plausibly points to non-causal explanations. Moreover, we find that any link between health and risky assets depends crucially on the econometric treatment of unobserved heterogeneity. Once we account adequately for unobserved household differences, there is no longer a statistically significant relationship between any of our health measures and household portfolio decisions.
Do High Debt Payments Hinder Household Consumption Smoothing?
Authors: Johnson Kathleen W. , Li Geng
Published: August 2019

Recently, U.S. households have committed a rising share of disposable personal income to required principal and interest payments on household debt. Studies of the direct link between the household debt service ratio (DSR) and consumption show mixed resultsâ perhaps because debt may instead alter the relationship between consumption and income. We explore this possibility by comparing the consumption smoothing behavior of households over the DSR distribution. We find that a high DSR alone does not indicate higher sensitivity of consumption to a change in income. However, we find evidence that the DSR may help identify borrowing constrained households. In particular, the consumption of households with low liquid assets and high DSRs is more sensitive than the consumption of other low liquid asset households. Although this effect of high DSR is not precisely estimated, it is large and robust to changes in the specification, suggesting that more work is warranted.
Financial Market Perceptions of Recession Risk
Authors: King Thomas B. , Levin Andrew , Perli Roberto
Published: August 2019

Over the Great Moderation period in the United States, we find that corporate credit spreads embed crucial information about the one-year-ahead probability of recession, as evidenced by both in- and out-of-sample fit. Furthermore, the incidence of "false positive" predictions of recession is dramatically reduced by utilizing a bivariate model that includes a measure of credit spreads along with the slope of the yield curve; indeed, these bivariate models provide much better forecasting performance than any combination of univariate models. We also find that optimal (Bayesian) model combination strongly dominates simple averaging of model forecasts in predicting recessions.
Gauging the Uncertainty of the Economic Outlook from Historical Forecasting Errors
Authors: Reifschneider David , Tulip Peter
Published: August 2019

Participants in meetings of the Federal Open Market Committee (FOMC) regularly produce individual projections of real activity and inflation that are published in summary form. These summaries indicate participants' views about the most likely course for the macroeconomy but, by themselves, are not enough to gauge the full range of possible outcomes -- that is, the uncertainty surrounding the outlook. To this end, FOMC participants will now provide qualitative assessments of how they view the degree of current uncertainty relative to that which prevailed on average in the past. This paper discusses a method for gauging the average magnitude of historical uncertainty using information on the predictive accuracy of a number of private and government forecasters. The results suggest that, if past performance is a reasonable guide to the accuracy of future forecasts, considerable uncertainty surrounds all macroeconomic projections, including those of FOMC participants.
Continuous Time Extraction of a Nonstationary Signal with Illustrations in Continuous Low-pass and Band-pass Filtering
Authors: McElroy Tucker , Trimbur Thomas M.
Published: August 2019

This paper sets out the theoretical foundations for continuous-time signal extraction in econometrics. Continuous-time modeling gives an effective strategy for treating stock and flow data, irregularly spaced data, and changing frequency of observation. We rigorously derive the optimal continuous-lag filter when the signal component is nonstationary, and provide several illustrations, including a new class of continuous-lag Butterworth filters for trend and cycle estimation.
Footnotes Aren't Enough: The Impact of Pension Accounting on Stock Values
Authors: Coronado Julia Lynn , Mitchell Olivia S. , Sharpe Steven A. , Nesbitt S. Blake
Published: August 2019

Some research has suggested that companies with defined benefit (DB) pensions are sometimes significantly misvalued by the market. This is because the measures of pension cost and pension net liabilities embedded in financial statements, taken at face value, can provide a very misleading picture of pension finances. The more pertinent information on pension finances is relegated to footnotes, but this might not receive much attention from portfolio managers. But dramatic swings in the financial conditions of large DB plans around the turn of the decade focused widespread attention on pension accounting practices, and dissatisfaction with current accounting standards has recently prompted the Financial Accounting Standards Board (FASB) to take up a project revamp DB pension accounting. Arguably, the increased attention should have made investors wise to the informational problems, thereby eliminating systematic mispricing in recent years. We test this proposition and conclude that investors continued to misvalue DB pensions, inducing sizable valuation errors in the stock of many companies. Our findings suggest that FASB's current reform efforts could substantially aid the market's ability to value firms with DB pensions.