bluuebunny/crossref_metadata_2025 huggingface dataset:
Credit Derivatives and Risk Management
Authors: Gibson Michael S.
Published: August 2019

The striking growth of credit derivatives suggests that market participants find them to be useful tools for risk management. I illustrate the value of credit derivatives with three examples. A commercial bank can use credit derivatives to manage the risk of its loan portfolio. An investment bank can use credit derivatives to manage the risks it incurs when underwriting securities. An investor, such as an insurance company, asset manager, or hedge fund, can use credit derivatives to align its credit risk exposure with its desired credit risk profile.However, credit derivatives pose risk management challenges of their own. I discuss five of these challenges. Credit derivatives can transform credit risk in intricate ways that may not be easy to understand. They can create counterparty credit risk that itself must be managed. Complex credit derivatives rely on complex models, leading to model risk. Credit rating agencies interpret this complexity for investors, but their ratings can be misunderstood, creating rating agency risk. The settlement of a credit derivative contract following a default can have its own complications, creating settlement risk. For the credit derivatives market to continue its rapid growth, market participants must meet these risk management challenges.
The Effects of Past Entry, Market Consolidation, and Expansion by Incumbents on the Probability of Entry
Authors: Adams Robert M. , Amel Dean F.
Published: August 2019

The threat of entry is an important factor in the evaluation of the potential competitive effects of proposed mergers and acquisitions. In the evaluation of proposed bank mergers, a high probability of entry, or strong potential competition, is often found to mitigate the potential anticompetitive effect of a proposed horizontal merger. Because the probability of entry is not directly observed for each local market, variables such as per capita income, population growth and past entry are typically used to predict the probability of future entry. This study extends previous research on the determinants of entry into local banking markets. In addition to variables considered by past research, such as market demographic characteristics, branching deregulation and past merger activity, this study considers the effects on future entry of past entry and strategic barriers to entry, which are proxied by changes in incumbent branching, the presence of small incumbent firms and market concentr
Implied Interest Rate Skew, Term Premiums, and the "Conundrum"
Authors: Durham J. B.
Published: August 2019

The skew, irrespective of the mean and variance, of investors' interest rate expectations may affect required bond yields over expected short rates. Indeed, evidence suggests that the near-term skew of the option-implied distribution of expected short-term interest rates correlates with distant-horizon term premiums, as derived from a latent-factor affine term structure model (ATSM). Reduced-form models that include skew generally fit the data well and actually better ""explain"" variation in the term premium during the so-called ""conundrum"" than during other periods of the May 1989 to May 2006 sample. Moreover, estimates suggest that skew accounts for over half of the movement in term premiums during the ""conundrum,"" considerably more than any other correlate. Caveats regard the term structure of skew as well as alternative measures of the term premium. Indeed, regression analysis of movements in term premiums is plagued by specification bias on both the left- and right-hand-side
Two Pitfalls of Linearization Methods
Authors: Kim Jinill , Kim Sunghyun H.
Published: August 2019

This paper illustrates two types of pitfalls in using linearization methods. First, if constraints are linearized before deriving optimality conditions, the derived conditions are not correct up to first order. Second, even when the behavior of the economy is correct to the first order, applying this behavior to welfare implications may lead to incorrect results.
How Much Does Risk Tolerance Change?
Authors: Sahm Claudia R.
Published: August 2019

Stability of preferences is central to how economists study behavior. This paper uses panel data on hypothetical gambles over lifetime income in the Health and Retirement Study to quantify changes in risk tolerance over time and differences across individuals. The maximum-likelihood estimation of a correlated random effects model utilizes information from 12,000 respondents in the 1992-2002 HRS. The results are consistent with constant relative risk aversion and career selection based on preferences. While risk tolerance changes with age and macroeconomic conditions, persistent differences across individuals account for 73% of the systematic variation.
Recent Trends in the Number and Size of Bank Branches: An Examination of Likely Determinants
Authors: Hannan Timothy H. , Hanweck Gerald A.
Published: August 2019

In this paper, we examine the role of market characteristics in explaining the much discussed phenomenon of growth in the number of banking institution branches over time, and the much less discussed phenomenon of decline in the size of the average branch. We note first that substitution of bank branches in the US for thrift branches accounts for much of the sharp rise observed for bank branches over time. Using a panel data set that consists of over 2,000 markets observed from 1988 to 2004, we report a number of findings regarding the market characteristics that are associated with the number of branches (of both commercial banks and savings associations) in a market and the average employment size of those branches.
Monetary Policy in a Forward-Looking Input-Output Economy
Authors: Strum Brad Everett
Published: August 2019

This paper examines the implications for monetary policy of sticky prices in both final and intermediate goods in a New Keynesian model. Both optimal policy under commitment and discretionary policy, which is the minimization of a simple loss function, are studied. Consumer utility losses under alternative simple loss functions are compared, including their robustness to model and shock misperceptions, and parameter uncertainty. Targeting inflation in both consumer and intermediate goods performs better than targeting a single price index; price-level targeting of both consumer and intermediate goods prices performs significantly better. Moreover, targeting prices in both sectors yields superior robustness properties.
The Rigidity of Choice: Lifecycle Savings with Information-Processing Limits
Authors: Tutino Antonella
Published: August 2019

This paper studies the implications of information-processing limits on the consumption and savings behavior of households through time. It presents a dynamic model in which consumers rationally choose the size and scope of the information they want to process concerning their financial possibilities, constrained by a Shannon channel. The model predicts that people with higher degrees of risk aversion rationally choose more information. This happens for precautionary reasons since, with finite processing rate, risk averse consumers prefer to be well informed about their financial possibilities before implementing a consumption plan. Moreover, numerical results show that consumers with processing capacity constraints have asymmetric responses to shocks, with negative shocks producing more persistent effects than positive ones. This asymmetry results in more savings. I show that the predictions of the model can be effectively used to study the impact of tax reforms on consumers spending.
GSE Activity and Mortgage Supply in Lower-Income and Minority Neighborhoods: The Effect of the Affordable Housing Goals
Authors: Bhutta Neil
Published: August 2019

I estimate the credit supply effect of the Underserved Areas Goal(UAG), which establishes GSE purchase goals for mortgages to lower-income and minority neighborhoods. Taking advantage of discontinuous census tract eligibility rules and abrupt changes in tract eligibility in 2005, I find evidence of a small UAG effect on GSE activity, and this increase does not appear to crowd-out FHA and subprime lending. The results also indicate that the GSEs exploit the law's lack of precision targeting, yielding effects that might diverge from the law's intent.
Should Risky Firms Offer Risk-Free DB Pensions?
Authors: Love David A. , Smith Paul A. , Wilcox David W.
Published: August 2019

We develop a simple model of pension financing to study the effects of pension risk on shareholder value. In the model, firms minimize costs, total compensation must clear the labor market, and a government pension insurer guarantees a portion of promised benefits. We find that in the absence of mispriced pension insurance, the optimal pension strategy under most specifications is to immunize all sources of market risk. Mispriced pension insurance, however, gives firms the incentive to introduce risk into their pension promises, offering an explanation for some of the observed prevalence of risky pensions in the real world.
Do Constraints on Market Work Hours Change Home Production Efforts?
Authors: Li Geng
Published: August 2019

We study variations in housework time and leisure consumption when workers are subject to labor market work hours constraints that prevent them from working the optimal number of hours. Using data from two large nationwide longitudinal surveys, we first document that such constraints are widespread--about 50 percent of all households in our sample had been bound by such constraints in at least one year, highlighting the significance of studying household behaviors in labor markets under binding constraints. Our analysis reveals strong heterogeneity and asymmetry in workers&#x27; reactions to this type of market constraint that are difficult to reconcile with standard preferences and home production technology. In particular, we find that the ceilings on market work hours induce workers to increase time spent on housework, including cooking, and to reduce vacation time. In contrast, floors on market work hours do not significantly affect time spent on housework, but may boost vacation time. On net, workers constrained by hours ceilings (floors) appear to have more (less) leisure time. Meanwhile, the response to hours ceilings are more pronounced among unmarried households. We also find some evidence that the magnitude of the effects of market hours constraints increases with the persistence of these constraints. Our results are robust to a number of variations in measurement metrics, econometric specifications, sample selection criteria, and data sources. We argue that the empirical results documented in this paper can be taken as additional moments conditions against which equilibrium models with home production are calibrated.
Whither the Liquidity Effect: The Impact of Federal Reserve Open Market Operations in Recent Years
Authors: Judson Ruth A. , Klee Elizabeth
Published: August 2019

Previous research indicated that the daily liquidity effect, or the change in the federal funds rate associated with an exogenous change in Fed balances, varies with several factors including the day of the maintenance period. In this paper, we examine the data over the recent period of increased Federal Reserve transparency and find that the liquidity effect stabilized across days of the maintenance period. Rather, the liquidity effect may be a function of the uncertainty about banks' end-of-day balances. Moreover, we find that increased transparency led to a larger liquidity effect on the days prior to an FOMC meeting.
Bayesian Analysis of Stochastic Volatility Models with Levy Jumps: Application to Risk Analysis
Authors: Szerszen Pawel J.
Published: August 2019

In this paper I analyze a broad class of continuous-time jump diffusion models of asset returns. In the models, stochastic volatility can arise either from a diffusion part, or a jump part, or both. The jump component includes either compound Poisson or Lévy [alpha]-stable jumps. To be able to estimate the models with latent Lévy [alpha]-stable jumps, I construct a new Markov chain Monte Carlo algorithm. I estimate all model specifications with S&amp;P500 daily returns. I find that models with Lévy [alpha]-stable jumps perform well in capturing return characteristics if diffusion is a source of stochastic volatility. Models with stochastic volatility from jumps and models with Poisson jumps cannot represent excess kurtosis and tails of return distribution. In density forecast and VaR analysis, the model with Lévy [alpha]-stable jumps and joint stochastic volatility performs the best among all other specifications, since both diffusion and infinite activity jump part provide information about latent volatility.
Assessing the Systemic Risk of a Heterogeneous Portfolio of Banks During the Recent Financial Crisis
Authors: Huang Xin , Zhou Hao , Zhu Haibin
Published: August 2019

This paper extends the approach of measuring and stress-testing the systemic risk of a banking sector in Huang, Zhou, and Zhu (2009) to identifying various sources of financial instability and to allocating systemic risk to individual financial institutions. The systemic risk measure, defined as the insurance cost to protect against distressed losses in a banking system, is a risk-neutral concept of capital based on publicly available information that can be appropriately aggregated across different subsets. An application of our methodology to a portfolio of twenty-two major banks in Asia and the Pacific illustrates the dynamics of the spillover effects of the global financial crisis to the region. The increase in the perceived systemic risk, particularly after the failure of Lehman Brothers, was mainly driven by the heightened risk aversion and the squeezed liquidity. The analysis on the marginal contribution of individual banks to the systemic risk suggests that &#x27;too-big-to-fail&#x27; is a valid concern from a macroprudential perspective of bank regulation.
Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage-Amenity Decision
Authors: Shan Hui , Powell David
Published: August 2019

The link between taxes and occupational choices is central for understanding the welfare impacts of income taxes. Just as taxes distort the labor-leisure decision, they also distort the wage-amenity decision. Yet, there are no estimates of the full response on this margin. When tax rates increase, workers favor jobs with lower wages and more non-taxable amenities. We introduce a two-step methodology which uses compensating differentials to characterize the tax elasticity of occupational choice. We estimate a significant compensated elasticity of 0.05, implying that a 10% increase in the net-of-tax rate causes workers to change to a 0.5% higher wage job.
Financial Statistics for the United States and the Crisis: What Did They Get Right, What Did They Miss, and How Should They Change?
Authors: Eichner Matthew J. , Kohn Donald L. , Palumbo Michael G.
Published: August 2019

Although the instruments and transactions most closely associated with the financial crisis of 2008 and 2009 were novel, the underlying themes that played out in the crisis were familiar from previous episodes: Competitive dynamics resulted in excessive leverage and risk-taking by large, interconnected firms, in heavy reliance on short-term sources of funding to finance long-term and ultimately terribly illiquid positions, and in common exposures being shared by many major financial institutions. Understandably, in the wake of the crisis, financial supervisors and policymakers want to obtain better and earlier indications regarding these critical, and apparently recurring, core vulnerabilities in the financial system. Indeed, gaps in data and analysis, in a sense, defined the shadows in which the 'shadow banking system' associated with the buildup in financial risks grew. We agree that more comprehensive real-time data is necessary, but we also emphasize that collecting more data is only part of the process of developing early warning systems. More fundamental, in our view, is the need to use data in a different way--in a way that integrates the ongoing analysis of macro data to identify areas of interest with the development of highly specialized information to illuminate those areas, including the relevant instruments and transactional forms. In this paper, we describe why we are concerned that specifying this second stage generically and prior to processing the first-stage signals will not be fruitful: we can easily imagine specifying ex ante a program of data collection that would look for vulnerabilities in the wrong place, particularly if the actual act of looking by macro- or microprudential supervisors causes the locus of activity to shift into a new shadow somewhere else--something we argue occurred during the buildup of risks ahead of this crisis.
An Alternative Theory of the Plant Size Distribution with an Application to Trade
Authors: Holmes John A. , Stevens John J.
Published: August 2019

There is wide variation in the sizes of manufacturing plants, even within the most narrowly defined industry classifications used by statistical agencies. Standard theories attribute all such size differences to productivity differences. This paper develops an alternative theory in which industries are made up of large plants producing standardized goods and small plants making custom or specialty goods. It uses confidential Census data to estimate the parameters of the model, including estimates of plant counts in the standardized and specialty segments by industry. The estimated model fits the data relatively well compared with estimates based on standard approaches. In particular, the predictions of the model for the impacts of a surge in imports from China are consistent with what happened to U.S. manufacturing industries that experienced such a surge over the period 1997-2007. Large-scale standardized plants were decimated, while small-scale specialty plants were relatively less impacted.
Mortgage Contract Choice in Subprime Mortgage Markets
Authors: Elliehausen Gregory E. , Hwang Min
Published: August 2019

The boom in the subprime mortgage market yielded many loans with high LTV ratios. From a large proprietary database on subprime mortgages, we find that choice of mortgage rate type is not linear in loan sizes. A fixed rate mortgage contract is a popular choice when loan size, measured by LTV ratio, is small. As LTV ratio increases, borrowers become more likely to choose adjustable rate mortgage contracts. However, when LTV reaches a certain level, borrowers start to switch back to fixed rate contracts. For these high LTV loans, fixed rate mortgages dominate borrowers' choices. We present a very simple model that explains this 'nonlinear' pattern in mortgage instrument choice. The model shows that the choice of mortgage rate type depends on two opposing effects: a 'term structure' effect and an 'interest rate volatility' effect. When the loan size is small, the term structure effect dominates: rising LTV ratios making ARM loans less costly, and more attractive. However, when the loan size is large enough, the interest volatility effect dominates: rising LTV ratios making FRM loans less costly and preferable. We present strong empirical evidence in support of the model predictions.
Are Household Surveys Like Tax Forms: Evidence from Income Underreporting of the Self-Employed
Authors: Hurst Erik , Li Geng , Pugsley Benjamin
Published: August 2019

There is a large literature showing that the self-employed underreport their income to tax authorities. In this paper, we quantify the extent to which the self-employed also systematically underreport their income in U.S. household surveys. To do so, we use the Engel curve describing the relationship between income and expenditures of wage and salary workers to infer the actual income, and thus the reporting gap, of the self-employed based on their reported expenditures. We find that the self-employed underreport their income by about 30 percent. This result is remarkably robust across data sources and alternative model specifications. Failing to account for such income underreporting leads to biased conclusions. We document this bias in existing measures of earnings differentials, wealth differentials, precautionary savings, lifecycle earnings profiles, and earnings variation across MSAs. Our results show that it is naive for researchers to take it for granted that individuals will provide unbiased information to household surveys given their demonstrated tendency of providing distorted reports of the same information to other administrative sources.
The Expected Real Return to Equity
Authors: Warusawitharana Missaka
Published: August 2019

The expected return to equity--typically measured as a historical average--is a key variable in the decision making of investors. A recent literature based on analysts' forecasts and practitioner surveys finds estimates of expected returns that are sometimes much lower than historical averages. This study presents a novel method that estimates the expected return to equity using only observable data. The method builds on a present value relationship that links dividends, earnings, and investment to market values via expected returns. Given a model that captures this relationship, one can infer the expected return. Using this method, the estimated expected real return to equity ranges from 4 to 5.5 percent. Furthermore, the analysis indicates that expected returns have declined by about 2 percentage points over the past forty years. These results indicate that future returns to equity may be lower than past realized returns.
Cointegration Test with Stationary Covariates and the CDS-Bond Basis during the Financial Crisis
Authors: Wu Jason J. , Game Aaron L.
Published: August 2019

This paper proposes a residual based cointegration test with improved power. Based on the idea of Hansen (1995) and Elliott & Jansson (2003) in the unit root testing case, stationary covariates are used to improve the power of the residual based Augmented Dickey Fuller (ADF) test. The asymptotic null distribution contains difficult to estimate nuisance parameters for which there is no obvious method of estimation, therefore we propose a bootstrap methodology to obtain test critical values. Local-to-unity asymptotics and Monte Carlo simulations are used to evaluate the power of the test in large and small samples, respectively. These exercises show that the addition of covariates increases power relative to the ADF and Johansen tests, and that the power depends on the long-run correlation between the covariates and the cointegration candidates. The new test is used to test for cointegration between Credit Default Swap (CDS) and corporate bond spreads for a panel of U.S. firms during the 2007-2009 financial crisis. The new test finds stronger evidence for cointegration between the two spreads for more firms, relative to ADF and Johansen tests.
Dynamic Factor Value-at-Risk for Large, Heteroskedastic Portfolios
Authors: Aramonte Sirio , Rodriguez Marius del Giudice , Wu Jason J.
Published: August 2019

Trading portfolios at financial institutions are typically driven by a large number of financial variables. These variables are often correlated with each other and exhibit by time-varying volatilities. We propose a computationally efficient Value-at-Risk (VaR) methodology based on Dynamic Factor Models (DFM) that can be applied to portfolios with time-varying weights, and that, unlike the popular Historical Simulation (HS) and Filtered Historical Simulation (FHS) methodologies, can handle time-varying volatilities and correlations for a large set of financial variables. We test the DFM-VaR on three stock portfolios that cover the 2007-2009 financial crisis, and find that it reduces the number and average size of back-testing breaches relative to HS-VaR and FHS-VaR. DFM-VaR also outperforms HS-VaR when applied risk measurement of individual stocks that are exposed to systematic risk.
Capital Ratios and Bank Lending: A Matched Bank Approach
Authors: Carlson Mark A. , Shan Hui , Warusawitharana Missaka
Published: August 2019

This paper examines the impact of bank capital ratios on bank lending by comparing differences in loan growth to differences in capital ratios at sets of banks that are matched based on geographic area as well as size and various business characteristics. We argue that such comparisons are most effective at controlling for local loan demand and other environmental factors. For comparison we also control for local factors using MSA fixed effects. We find, based on data from 2001 to 2009, that the relationship between capital ratios and bank lending is insignificant until the recent financial crisis. We also find that the effect of capital ratios on loan growth varies by type of loan, with some of the strongest effects in recent years being for commercial real estate loans. Finally, we show that the elasticity of bank lending with respect to capital ratios is higher when capital ratios are relatively low, suggesting that the effect of capital ratio on bank lending is nonlinear.
Stock Return Predictability and Variance Risk Premia: Statistical Inference and International Evidence
Authors: Bollerslev Tim , Marrone James , Xu Lai , Zhou Hao
Published: August 2019

Recent empirical evidence suggests that the variance risk premium, or the difference between risk-neutral and statistical expectations of the future return variation, predicts aggregate stock market returns, with the predictability especially strong at the 2-4 month horizons. We provide extensive Monte Carlo simulation evidence that statistical finite sample biases in the overlapping return regressions underlying these findings can not 'explain' this apparent predictability. Further corroborating the existing empirical evidence, we show that the patterns in the predictability across different return horizons estimated from country specific regressions for France, Germany, Japan, Switzerland and the U.K. are remarkably similar to the pattern previously documented for the U.S. Defining a 'global' variance risk premium, we uncover even stronger predictability and almost identical cross-country patterns through the use of panel regressions that effectively restrict the compensation for world-wide variance risk to be the same across countries. Our findings are broadly consistent with the implications from a stylized two-country general equilibrium model explicitly incorporating the effects of world-wide time-varying economic uncertainty.
The Usefulness of Core PCE Inflation Measures
Authors: Detmeister Alan K.
Published: August 2019

This paper examines a number of alternative PCE price inflation measures including overall PCE inflation, PCE inflation excluding food and energy, trimmed mean PCE inflation, component-smoothed inflation, variance-weighted inflation, inflation with weights based on disaggregated regressions, and survey measures of inflation expectations. When averaging across a handful of specifications based on the primary uses of a core inflation measure three conclusions arise: 1. Inflation rates for nearly all the measures best track ex-post trend inflation or predict future overall inflation when they are averaged over a considerable number of months. Overall PCE price inflation should be averaged over 18 months or longer. A shorter averaging period is appropriate for core measures, often on the order of 12 months. 2. Even after appropriately averaging each index, core inflation indexes generally perform better than overall inflation. 3. Exclusion indexes, such as PCE excluding food and energy, perform slightly worse than many other possible core inflation measures trimmed mean PCE, or a variance-weighted index, may be better choice for a summary inflation measure.
A Review of Allan Meltzer's 'A History of the Federal Reserve, Volume 2'
Authors: Nelson Edward
Published: August 2019

This paper reviews Allan H. Meltzer's 'A History of the Federal Reserve, Volume 2.' This two-book volume covers Federal Reserve policies from 1951 to 1986. The book represents an enormous achievement in synthesizing a great amount of archival information into a historical account grounded on economic analysis. At the same time, Meltzer's interpretation of specific eras is open to question. He does not appear to acknowledge adequately the degree to which 1950s monetary policy decisions had a solid analytical foundation. Furthermore, Meltzer's account of the shift from the 1970s inflation to the 1980s disinflation implausibly stresses a shift in policymakers' objective function. The crucial change over this period, both in the United States and other countries, is more likely to have been policymakers' improved grasp of the connections between monetary policy and inflation. The review also takes issue with Meltzer's account, in his book's epilogue, of the financial crisis from 2007 to 2009. In this epilogue, Meltzer understates the degree to which the Federal Reserve's reaction to the financial crisis was in line with the historical practice of the Federal Reserve and other central banks.
The Effect of Endogenous Human Capital Accumulation on Optimal Taxation
Authors: Chauvet Marcelle , Senyuz Zeynep
Published: August 2019

This paper considers the impact of endogenous human capital accumulation on optimal tax policy in a life cycle model. Including endogenous human capital accumulation, either through learning-by-doing or learning-or-doing, is analytically shown to create a motive for the government to use age-dependent labor income taxes. If the government cannot condition taxes on age, then it is optimal to use a tax on capital in order to mimic such taxes. Quantitatively, introducing learning-by-doing or learning-or-doing increases the optimal tax on capital by forty or four percent, respectively. Overall, the optimal tax on capital is thirty five percent higher in the model with learning-by-doing compared to the model with learning-or-doing implying that how human capital accumulates is of significant importance when determining the optimal tax policy.
Inflation Risk Premium: Evidence from the TIPS Market
Authors: Grishchenko Olesya V. , Huang Jing-zhi
Published: August 2019

In this paper we study the term structure of real interest rates, expected inflation and inflation risk premia using data on prices of Treasury Inflation Protected Securities (TIPS) over the period 2000-2008. The approach we use to estimate inflation risk premium is arbitrage free, largely model free, and easy to implement. We also make distinction between TIPS yields and real yields and take into account explicitly the three-month indexation lag of TIPS in the analysis. In addition, we propose a new liquidity measure based on TIPS prices. Accounting for it, we find that the inflation risk premium is time-varying: it is negative (positive) in the first (second) half of the sample period. The average 10-year inflation risk premium ranges from -16 to 10 basis points over the full sample depending on the proxy used for expected inflation. More specifically, the estimates of the 10-year inflation risk premium range between 14 and 19 basis points for 2004-2008 period.
Examining the Impact of Credit Access on Small Firm Survivability
Authors: Mach Traci L. , Wong Vivian
Published: August 2019

This paper examines the effects of credit availability on small firm survivability over the period 2004 to 2008 for non-publicly traded small enterprises. Using data from the 2003 Survey of Small Business Finances, we develop failure prediction models for a sample of small firms that were confirmed to have been in business as of December 2003, with particular attention to the impact of credit constraints. We find that credit constrained firms were significantly more likely to go out of business than non constrained firms. Moreover, credit constraint and credit access variables appear to be among the most important factors predicting which small U.S. firms went out of business during the 2004-2008 period even though an extensive set of firm, owner, and market characteristics were also included as explanatory factors.
The relationship between information asymmetry and dividend policy
Authors: Vojtech Cindy M.
Published: August 2019

This paper examines how the quality of firm information disclosure affects shareholders' use of dividends to mitigate agency problems. Managerial compensation is linked to firm value. However, because the manager and shareholders are asymmetrically informed, the manager can manipulate the firm's accounting information to increase perceived firm value. Dividends can limit such practices by adding to the cost faced by a manager manipulating earnings. Empirical tests match model predictions. Dividend-paying firms show less evidence of earnings management. Furthermore, nondividend payers changed earnings announcement behavior more than dividend payers following the Sarbanes-Oxley Act, a law that increased financial disclosures.
How Does Social Security Claiming Respond to Incentives? Considering Husbands' and Wives' Benefits Separately
Authors: Henriques Alice M.
Published: August 2019

A majority of women receive most of their Social Security benefits based upon their husbands' earnings history, but previous research has shown that husbands' benefit claiming is inconsistent with maximizing lifetime benefits for the couple. However, that research assumes husbands choose their claim age based on all Social Security incentives facing the household. I show that husbands' claiming behavior responds to the actuarial incentives built into their own retired worker benefit formula, but not to the incentives built into the spouse and survivor formulas that determine their wives' benefits. This failure to incorporate spouses' incentives reduces wives' lifetime benefits. Variation in incentives comes from rule changes to the Social Security benefit calculation in addition to the age difference between spouses and the relative strength of the wife's labor force history. A variety of robustness checks looking at segments of the population predicted to be more responsive to incentives provide similar results to the main specification.
The Government-Sponsored Enterprises and the Mortgage Crisis: The Role of the Affordable Housing Goals
Authors: Bolotnyy Valentin
Published: August 2019

The U.S. mortgage crisis that began in 2007 generated questions about the role played by Fannie Mae and Freddie Mac, the Government-Sponsored Enterprises (GSEs), in its causes. Some have claimed that the Affordable Housing Goals (AHGs), introduced by Congress through the GSE Act of 1992, and the resulting purchases of single-family mortgages the GSEs made to meet those goals, drove lending to high-risk borrowers. Using regression discontinuity analysis, I measure the effect of one of the goals, the Underserved Areas Goal (UAG), on the number of whole single-family mortgages purchased by the GSEs in targeted census tracts from 1996 to 2002. Focusing additionally on tracts that became UAG-eligible in 2005-2006, when the Department of Housing and Urban Development (HUD) began to determine eligibility using the 2000 Census, I measure the effect of the UAG on the GSEs' whole single-family mortgage purchases during peak years for the subprime mortgage market. Under the first approach, I estimate that the GSEs purchased 0 to 3 percent more goal-eligible mortgages than they would have without the UAG in place. Under the second approach, I estimate this effect to be 2.5 to 5 percent. The results suggest a small UAG effect and challenge the view that the goals caused the GSEs to supply substantially more credit to high-risk borrowers than they otherwise would have supplied. Although the goals may have spurred the GSEs to purchase more multi-family mortgages and REMICs than they otherwise would have, my analyses suggest that the GSEs' purchases of whole single-family mortgages to satisfy the goals did not drive the subprime lending boom of 2002-2006.
The Correlation between Money and Output in the United Kingdom: Resolution of a Puzzle
Authors: Nelson Edward
Published: August 2019

Friedman and Schwartz (1982) and Goodhart (1982) report a zero correlation between money growth and output growth in U.K. historical data. This finding is puzzling, as there is wide agreement that changes in monetary policy are frequently nonneutral in the short run and that the U.K. experience, in particular, is replete with instances of real effects of monetary policy actions. This paper proposes a resolution to the puzzle. An analysis conducted on subperiods shows that a positive money growth/output growth correlation is indeed recoverable from U.K. historical data. Strike activity in the 1970s and shifts in the terms of trade during the interwar period are the two factors primarily responsible for obscuring the positive correlation between money and output in the United Kingdom.
What Should Core Inflation Exclude?
Authors: Detmeister Alan K.
Published: August 2019

Consumer price inflation excluding food and energy often performs worse than other measures of underlying inflation in out-of-sample tests of predicting future inflation or tracking an ex-post measure of underlying trend inflation. Nonetheless, inflation excluding food and energy remains popular for its simplicity and transparency. Would excluding different items improve performance while maintaining the simplicity and transparency? Unfortunately, probably not. Averaging across a series of tests suggests that knowing what items to exclude before seeing the data is problematic and excluding food and energy is not a bad ex-ante guess. However, ex-post it is not difficult to construct an index which performs considerably better than excluding food and energy.
Spending within Limits: Evidence from Municipal Fiscal Restraints
Authors: Brooks Leah , Halberstam Yosh , Phillips Justin
Published: August 2019

This paper studies the role of a constitutional rule new to the literature: a limit placed by a city on its own ability to tax or spend. We find that such a limit exists in at least 1 in 8 cities, and that limits are not adopted in response to high levels of or variability in taxation. After limit adoption, municipal revenue growth declines by 16 to 22 percent. Our results suggest that institutional constraints may be effective when representative government falls short of the median voter ideal.
Constituencies and Legislation: The Fight Over the McFadden Act of 1927
Authors: Ramcharan Rodney , Rajan Raghuram
Published: August 2019

The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was still felt over half a century later. The Act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks, it also had the potential to expand the number of states that allowed branching. Congressional votes for the Act therefore could reflect the strength of various interests in the district for expanded banking competition. We find congressmen in districts in which landholdings were concentrated (suggesting a landed elite), and where the cost of bank credit was high and its availability limited (suggesting limited banking competition and high potential rents), were significantly more likely to oppose the Act. The evidence suggests that while the law and the overall regulatory structure can shape the financial system far into the future, they t
Profitability and the Lifecycle of Firms
Authors: Warusawitharana Missaka
Published: August 2019

Using data on listed and unlisted firms in the U.K., this study documents that average profitability changes systematically with age. In their early years, firms realize substantial profitability increases, while mature firms face slow declines in profitability. A model of endogenous profitability changes arising from product development captures this pattern. Investment in product development generates profitability increases for young firms while competitive pressures from new entrants lead to profitability declines for mature firms. In addition, the model predicts that young firms realize profitability jumps more frequently and that the effect of age on firms' policies would be stronger for young firms. Empirical tests support these predictions. Taken together, these findings show that changes in profitability influences the lifecycle of firms.
Reconciling Micro and Macro Estimates of the Frisch Labor Supply Elasticity
Authors: Peterman William B.
Published: August 2019

There are large differences between the microeconometric estimates of the Frisch labor supply elasticity (0-0.5) and the values used by macroeconomists to calibrate general equilibrium models (2-4). The microeconometric estimates of the Frisch are typically estimated by regressing changes in hours on changes in wages conditional on the individual being a married male head of household, working some minimum number of hours and being of prime working age. In contrast macroeconomic calibration values are typically set such that fluctuations in a general equilibrium model match the observed changes in the aggregate hours and wages from the whole population over time. This paper aims to explain the gap by estimating an aggregate Frisch elasticity which is consistent with the concept of macro calibration values using the microeconometric techniques. In order to estimate the Frisch consistent with the macro concept, this paper alters the typical microeconometric approach in order to incorporate fluctuations on the extensive margin and also broadens the scope of the sample to include single males, females, secondary earners, young individuals, and old individuals. This paper finds that estimates of the aggregate macro Frisch elasticity are in the middle of the range of macroeconomic calibration values (around 3.0). Furthermore, it finds that the key to explaining the difference are the fluctuations on the extensive margin of single males, females, secondary earners, older individuals, and younger individuals.
CEO Successions and Firm Performance in the US Financial Industry
Authors: Falato Antonio , Kadyrzhanova Dalida
Published: August 2019

This paper examines the labor market for CEOs in the financial sector from 1988 to 2007, using a new hand-collected sample of 1,655 CEO successions. We document that there is a significant role of outside successions, as about one out of two successions involves an outside hire. In addition, using difference-in-differences estimates, we study the link between the labor market for finance CEOs and firm performance. We document that (1) there is a large performance gap between inside and outside successions, as outside successions are followed by significantly larger improvements in firm performance (2) the performance gap between outside and inside successions is larger for firms with an insider dominated board of directors (3) the performance gap widened after an important deregulation event (the 1999 Gramm-Leach-Bliley Act). These results are robust to using a battery of firm performance measures (short-run and long-run stock market returns, and several long-run operating performance measures) and a matched sample approach to address selection issues. Overall, our findings suggest that managerial human capital is very valuable in the financial industry, and weak internal governance hurts firm performance by limiting the scope of labor market competition.
The Integrated Macroeconomic Accounts of the United States
Authors: Cagetti Marco , Holmquist Elizabeth Ball , Lynn Lisa , McIntosh Susan Hume , Wasshausen David
Published: August 2019

The integrated macroeconomic accounts (IMAs), produced jointly by the Bureau of Economic Analysis (BEA) and the Federal Reserve Board (FRB), present a sequence of accounts that relate income, saving, investment in real and financial assets, and asset revaluations to changes in net worth. In this paper we first provide some background information on the IMAs and on their construction. Next, we discuss the usefulness of the IMAs, focusing for instance on the evolution of household net worth and its components, a set of series that has appeared frequently in discussions of the causes and effects of the recent financial crisis. We also discuss some of the challenges associated with integrating nonfinancial and financial data sources, that is, the current and capital accounts statistics from BEA's national income and product accounts (NIPAs) and the financial account statistics from FRB's flow of funds accounts (FFAs). In the final section, we discuss future plans for improving the IMAs, including a proposed framework and methodology for breaking out the financial business sector into three subsectors: 1) Central bank, 2) Insurance and pension funds, and 3) Other financial business.
Real-Time Properties of the Federal Reserve's Output Gap
Authors: Edge Rochelle M. , Rudd Jeremy Bay
Published: August 2019

This note considers the reliability of Federal Reserve Board staff estimates of the output gap after the mid-1990s, and examines the usefulness of these estimates for inflation forecasting. Over this period, we find that the Federal Reserve's output gap is more reliably estimated in real time than previous studies have documented for earlier periods and alternative estimation techniques. In contrast to previous work, we also find no deterioration in forecast performance when inflation projections are conditioned on real-time estimates of the output gap.
Lessons from the Historical Use of Reserve Requirements in the United States to Promote Bank Liquidity
Authors: Carlson Mark A.
Published: August 2019

Efforts in the United States to promote bank liquidity through reserve requirements, a minimum ratio of liquid assets relative to liabilities, extend at least as far back as the aftermath of the Panic of 1837. These requirements were quite important during the National Banking Era. Nevertheless, suspensions of deposit convertibility and liquidity shortfalls continued to occur during banking panics. Eventually, efforts to ensure that banks remained liquid resulted in a shift away from reserve requirements in favor of a central bank able to add liquidity to the financial system. This paper reviews the issues raised in the historical debates about reserve requirements along with some empirical evidence on banks&#x27; holdings of reserves, to provide some insights and lessons that are relevant today. A key lesson is that individual bank liquidity during stress periods is inherently and intricately tied to the liquidity policies of the central bank.
Welfare Costs of Shifting Trend Inflation
Authors: Nakata Taisuke
Published: August 2019

This paper studies the welfare consequences of exogenous variations in trend inflation in a New Keynesian economy. Consumption and leisure respond asymmetrically to a rise and a decline in trend inflation. As a result, an increase in the variance of shocks to the trend inflation process decreases welfare not only by increasing the volatilities of consumption and leisure, but also by decreasing their average levels. I find that the welfare cost of drifting trend inflation is modest and that it comes mainly from reduced average levels of consumption and leisure, not from their increased volatilities.