bluuebunny/crossref_metadata_2025 huggingface dataset:
Polarization, Immigration, Education: What's Behind the Dramatic Decline in Youth Employment?
Authors: Smith Christopher L.
Published: August 2019

Since the beginning of the recent recession, the employment-population ratio for high-school age youth (16-17 years old) has fallen by nearly a third, to its lowest level ever. However, this recession has exacerbated a longer-run downward trend that actually began in the 1990s and accelerated in the early 2000s. There is little research regarding why teen employment has fallen. Some earlier work emphasized labor supply explanations related to schooling and education, such as an increased emphasis on college preparation (Aaronson, Park, and Sullivan 2006), while others have argued that adult immigrants have crowded out teens, at least in part because adult immigrants and native teens tend to be employed in similar occupations (Sum, Garrington, and Khatiwada 2006, Camarota and Jensenius 2010, Smith 2012). This paper presents updated trends in teen employment and participation across multiple demographic characteristics, and argues that, in addition to immigration, occupational polarization in the U.S. adult labor market has resulted in increased competition for jobs that teens traditionally hold. Testing various supply and demand explanations for the decline since the mid-1980s, I find that demand factors can explain at least half of the decline unexplained by the business cycle, and that supply factors can explain much of the remaining decline.
Tossed and Turned: Wealth Dynamics of U.S. Households 2007-2009
Authors: Kennickell Arthur B.
Published: August 2019

For many years, the cross-sectional Survey of Consumer Finances (SCF) has shown relatively weak or inconsistent changes in the shape of the distribution of net worth, despite many shifts in income and other economic factors. In 2009, households that had taken part in the 2007 SCF were re-interviewed to obtain information on the changes in their financial condition over the period of the intervening financial crisis. Looked at as a second cross section, the 2009 data show a pattern of wealth distribution very similar in shape to what had been seen in the earlier cross sections. Between the two years, however, there was considerable variation in the relative positions of households within the wealth distribution. This paper presents data on the changed situation of households and it decomposes the observed wealth changes in terms of underlying portfolio shifts. It is generally recognized that changes in the value of residential real estate, corporate equities and private businesses were important sources of wealth losses. Although the data presented here confirm that picture, they also show a great deal of heterogeneity below the aggregate level. The observed stability of the pseudo-cross-sectional wealth shares in the panel despite the underlying turmoil is largely a consequence of changes in values of businesses and equities among comparatively wealthy households offsetting changes in the value of housing assets among other households.
The Effect of Endogenous Human Capital Accumulation on Optimal Taxation
Authors: Peterman William B.
Published: August 2019

This paper considers the impact of learning-by-doing on optimal tax policy in a general equilibrium heterogenous agent life-cycle model. Analytically, it identifies two main channels by which learning-bydoing alters the optimal tax policy. First, learning-by-doing creates a motive for the government to use age-dependent labor income taxes. If the government cannot condition taxes on age, then a capital tax or progressive/regressive labor income tax can be used in order to mimic age-dependent taxes. Second, a progressive/regressive labor income tax is potentially more distortionary in a model with learning-bydoing since the distortion is propagated through the additional intertemporal link between current labor and future human capital. Quantitatively, I find that both of these channels are important for the optimal tax policy. Adding learning-by-doing leads to a notably flatter optimal labor income tax due to the second channel. Moreover, including learning-by-doing causes an increase in the optimal capital tax due to the first channel. I find that when solving for the optimal tax policy in the learning-by-doing model, the welfare consequences of not accounting for endogenous human capital accumulation are equivalent to around one percent of expected lifetime consumption, a majority of which are due to adopting too progressive of a tax policy.
Supply Constraints and Housing Market Dynamics
Authors: Paciorek Andrew D.
Published: August 2019

Although the volatility of house prices is often ascribed to demand-side factors, constraints on housing supply have important and little-studied implications for housing dynamics. I illustrate the strong relationship in city-level data between the volatility of house prices and the regulation of new housing supply. I then employ a dynamic structural model of housing investment to estimate the effect of supply constraints on both the level of new construction and the responsiveness of investment to house prices. I find that supply constraints increase volatility through two channels: First, regulation lowers the elasticity of new housing supply by increasing lags in the permit process and adding to the cost of supplying new houses on the margin. Second, geographic limitations on the area available for building houses, such as steep slopes and water bodies, lead to less investment on average relative to the size of the existing housing stock, leaving less scope for the supply response to attenuate the effects of a demand shock. My estimates and simulations confirm that regulation and geographic constraints play critical and complementary roles in decreasing the responsiveness of investment to demand shocks, which in turn amplifies house price volatility.
Using Policy Intervention to Identify Financial Stress
Authors: Carlson Mark A. , Lewis Kurt F. , Nelson William R.
Published: August 2019

This paper describes the construction of a financial stress index. This stress index differs from other indexes in that it incorporates the co-movement and volatility of financial series as well as the levels of the series. Our index also uses past experience more than others to guide the assessment about which characteristics of the data suggest financial stress exists. In addition to describing the construction of our financial stress index, we spend some time discussing issues relevant to the general construction of stress indexes.
Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing
Authors: Dubin Eduard , Grishchenko Olesya V. , Kartashov Vasily
Published: August 2019

We explicitly solve for the aggregate asset pricing quantities of a general equilibrium Lucas endowment economy inhabited by two agents with habit formation preferences. Preferences are modeled either as internal or external habits. We allow for agents' heterogeneity in relative risk aversion and habit strength. Equilibrium quantities, such as equity premium, equity volatility, Sharpe ratio, interest rate volatility, and asset holdings are computed using a recently developed algorithm of Dumas and Lyasoff (2011). The algorithm is refined to capture time-nonseparability induced by habit. We obtain that internal habits provide for a considerable improvement in obtaining aggregate asset pricing quantities consistent with historically observed magnitudes as opposed to 'catching up with Joneses' preferences.
What Does Financial Volatility Tell Us About Macroeconomic Fluctuations?
Authors: Senyuz Zeynep , Chauvet Marcelle , Yoldas Emre
Published: August 2019

This paper provides an extensive analysis of the predictive ability of financial volatility measures for economic activity. We construct monthly measures of aggregated and industry-level stock volatility, and bond market volatility from daily returns. We model log financial volatility as composed of a long-run component that is common across all series, and a short-run component. If volatility has components, volatility proxies are characterized by large measurement error, which veils analysis of their fundamental information and relationship with the economy. We find that there are substantial gains from using the long term component of the volatility measures for linearly projecting future economic activity, as well as for forecasting business cycle turning points. When we allow for asymmetry in the long-run volatility component, we find that it provides early signals of upcoming recessions. In a real-time out-of-sample analysis of the last recession, we find that these signals are concomitant with the first signs of distress in the financial markets due to problems in the housing sector around mid-2007 and the implied chronology is consistent with the crisis timeline.
Evaluating DSGE Model Forecasts of Comovements
Authors: Herbst Edward P. , Schorfheide Frank
Published: August 2019

This paper develops and applies tools to assess multivariate aspects of Bayesian Dynamic Stochastic General Equilibrium (DSGE) model forecasts and their ability to predict comovements among key macroeconomic variables. We construct posterior predictive checks to evaluate conditional and unconditional density forecasts, in addition to checks for root-mean-squared errors and event probabilities associated with these forecasts. The checks are implemented on a three-equation DSGE model as well as the Smets and Wouters (2007) model using real-time data. We find that the additional features incorporated into the Smets-Wouters model do not lead to a uniform improvement in the quality of density forecasts and prediction of comovements of output, inflation, and interest rates.
Interest Rate Risk and Bank Equity Valuations
Authors: English William B. , Van den Heuvel Skander J. , Zakrajšek Egon
Published: August 2019

Because they engage in maturity transformation, a steepening of the yield curve should, all else equal, boost bank profitability. We re-examine this conventional wisdom by estimating the reaction of bank intraday stock returns to exogenous fluctuations in interest rates induced by monetary policy announcements. We construct a new measure of the mismatch between the repricing time or maturity of bank assets and liabilities and analyze how the reaction of stock returns varies with the size of this mismatch and other bank characteristics, including the usage of interest rate derivatives. Our results indicate that bank stock prices decline substantially following an unanticipated increase in the level of interest rates or a steepening of the yield curve. A large maturity gap, however, significantly attenuates the negative reaction of returns to a slope surprise, a result consistent with the role of banks as maturity transformers. Share prices of banks that rely heavily on core deposits decline more in response to policy-induced interest rate surprises, a reaction that primarily reflects ensuing deposit disintermediation. Results using income and balance sheet data highlight the importance of adjustments in quantities--as well as interest margins--for understanding the reaction of bank equity values to interest rate surprises.
An Extensive Look at Taxes: How does Endogenous Retirement Affect Optimal Taxation?
Authors: Peterman William B.
Published: August 2019

This paper considers the impact on optimal tax policy of including endogenously determined retirement in a life cycle model. Allowing individuals to determine when they retire causes the optimal tax on capital to increase by 75% because of two implicit changes in the aggregate labor supply elasticity. First, including endogenous retirement causes an increase in the overall aggregate labor supply elasticity since agents can change their labor supply on both the intensive and extensive margins. In response, the government limits the distortions from the tax policy by lowering the tax on labor and increases the tax on capital. Second, given that the choice to retire is more relevant for older individuals, endogenous retirement disproportionately increases older agent&#x27;s elasticity compared to younger individuals. Ideally, the government would decrease the relative labor income tax on individuals when they are older and supply labor more elastically. However, in the absence of age-dependent taxes, the government mimics such a tax policy by further increasing the tax on capital. I find that the welfare lost from not accounting for endogenous retirement when solving for the optimal tax policy is equivalent to approximately one percent of lifetime consumption.
Signal Extraction for Nonstationary Multivariate Time Series with Illustrations for Trend Inflation
Authors: McElroy Tucker , Trimbur Thomas M.
Published: August 2019

This paper advances the theory and methodology of signal extraction by introducing asymptotic and finite sample formulas for optimal estimators of signals in nonstationary multivariate time series. Previous literature has considered only univariate or stationary models. However, in current practice and research, econometricians, macroeconomists, and policy-makers often combine related series -- that may have stochastic trends -- to attain more informed assessments of basic signals like underlying inflation and business cycle components. Here, we use a very general model structure, of widespread relevance for time series econometrics, including flexible kinds of nonstationarity and correlation patterns and specific relationships like cointegration and other common factor forms. First, we develop and prove the generalization of the well-known Wiener-Kolmogorov formula that maps signal-noise dynamics into optimal estimators for bi-infinite series. Second, this paper gives the first explicit treatment of finite-length multivariate time series, providing a new method for computing signal vectors at any time point, unrelated to Kalman filter techniques this opens the door to systematic study of near end-point estimators/filters, by revealing how they jointly depend on a function of signal location and parameters. As an illustration we present econometric measures of the trend in total inflation that make optimal use of the signal content in core inflation.
Consolidation and Merger Activity in the United States Banking Industry from 2000 through 2010
Authors: Adams Robert M.
Published: August 2019

This study investigates trends in consolidation and merger activity in the United States banking industry from 2000 through 2010. Over this period, the U.S. banking industry has consistently experienced over 150 mergers annually, with the largest banking organizations holding an increasing share of banking assets. While the industry has undergone considerable consolidation at the national level, local banking markets have not experienced significant increases in concentration. The dynamics of consolidation raise concerns about competition, output, efficiency, and financial stability. This study uses a comprehensive proprietary data set to examine mergers and acquisitions involving banks and thrifts. The methodology in this paper expands the definition of mergers to include more types of transactions than previous studies on bank mergers.
The Effect of Self-Reported Transitory Income Shocks on Household Spending
Authors: Ackerman Samuel , Sabelhaus John Edward
Published: August 2019

We use repeated cross-sections of the Survey of Consumer Finances (SCF) to study the effect of self-reported transitory income shocks on household food spending. The self-reported shocks in the SCF are derived from survey questions about the gap between actual and 'normal' income. This approach stands in contrast to existing income shock measures in the literature, which are generally derived from the residuals of estimated earnings or income equations. Although the self-reported transitory shocks could potentially give very different answers, the overall variance and asymmetry of shocks over the business cycle are similar to those of existing residual-based estimates. Engel curve analysis shows a significant relationship between self-reported income shocks and household food spending, though the estimated spending responses are only a small part of the substantial slowdown in the growth rate of food consumption observed during the recent economic downturn.
Practical Tools for Policy Analysis in DSGE Models with Missing Channels
Authors: Caldara Dario , Harrison Richard , Lipinska Anna
Published: August 2019

In this paper we analyze the propagation of shocks originating in sectors that are not present in a baseline dynamic stochastic general equilibrium (DSGE) model. Specifically, we proxy the missing sector through a small set of factors, that feed into the structural shocks of the DSGE model to create correlated disturbances. We estimate the factor structure by matching impulse responses of the augmented DSGE model to those generated by an auxiliary model. We apply this methodology to track the effects of oil shocks and housing demand shocks in models without energy and housing sectors.
Job-to-Job Flows and the Consequences of Job Separations
Authors: Fallick Bruce , Haltiwanger John , McEntarfer Erika
Published: August 2019

This paper extends the literature on the earnings losses of displaced workers to provide a more comprehensive picture of the earnings and employment outcomes for workers who separate. First, we compare workers who separate from distressed employers (presumably displaced workers) and those who separate from stable or growing employers. Second, we distinguish between workers who do and do not experience a spell of joblessness. Third, we examine the full distribution of earnings outcomes from separations - not the impact on only the average worker. We find that earnings outcomes depend much less on whether a job separation is associated with a distressed employer than on whether the separator experienced a jobless spell after the separation. Moreover, we find that workers separating from distressed firms are faster to find jobs at new employers than are other separators.
Optimal CEO Incentives and Industry Dynamics
Authors: Falato Antonio , Kadyrzhanova Dalida
Published: August 2019

This paper develops a competitive equilibrium model of CEO compensation and industry dynamics. CEOs make product pricing and product improvement decisions subject to shareholders' compensation choices and idiosyncratic shocks to product quality. The choice of high-powered incentives optimally trades off the benefits from expected product improvements and the associated agency costs. In market equilibrium, the interaction between CEO pay and product market decisions affects the stationary distribution of firms. We characterize a dynamic feedback effect of industry structure on CEO incentives. As a result of this effect, we predict that the performance-based component of CEO pay should be higher, (i) across industries, when the degree of heterogeneity of industry structure is lower (ii) within industries, when firms are laggards with respect to their industry peers. We empirically estimate pay-performance sensitivity for a large sample of U.S. CEOs and other top executives over the 1993 to 2004 period and find strong support for our theory. Our results offer a novel product market rationale for the increased reliance of CEO pay on bonuses and stock options over the 1990s.
Financial Stress and Economic Dynamics: The Transmission of Crises
Authors: Tetlow Robert , Hubrich Kirstin
Published: August 2019

The recent financial crisis and the associated decline in economic activity have raised some important questions about economic activity and its links to the financial sector. This paper introduces an index of financial stress--an index that was used in real time by the staff of the Federal Reserve Board to monitor the crisis--and shows how stress interacts with real activity, inflation and monetary policy. We define what we call a stress event--a period affected by stress in both shock variances and model coefficients--and describe how financial stress affects macroeconomic dynamics. We also examine what constitutes a useful and credible measure of stress and the role of monetary policy. We address these questions using a richly parameterized Markov-switching VAR model, estimated using Bayesian methods. Our results show that allowing for time variation is important: the constant-parameter, constant-shock-variance model is a poor characterization of the data. We find that periods of high stress coefficients in general, and stress events in particular, line up well with financial events in recent U.S. history. We find that a shift to a stress event is highly detrimental to the outlook for the real economy, and that conventional monetary policy is relatively weak during such periods. Finally, we argue that our findings have implications for DSGE modeling of financial events insofar as researchers wish to capture phenomena more consequential than garden-variety business cycle fluctuations, pointing away from linearized DSGE models toward either MS-DSGE models or fully nonlinear models solved with global methods.
The Empirical Implications of the Interest-Rate Lower Bound
Authors: Gust Christopher J. , López-Salido J. David , Smith Matthew E. , Herbst Edward P.
Published: August 2019

Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the U.S. economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. We find that the interest-rate lower bound was a significant constraint on monetary policy that exacerbated the recession and inhibited the recovery, as our mean estimates imply that the zero lower bound (ZLB) accounted for about 30 percent of the sharp contraction in U.S. GDP that occurred in 2009 and an even larger fraction of the slow recovery that followed.
Government Debt and Macroeconomic Activity: A Predictive Analysis for Advanced Economies
Authors: Baglan Deniz , Yoldas Emre
Published: August 2019

This paper explores the empirical relationship between government debt and future macroeconomic activity using data on twenty advanced economies throughout the post-war era. We use robust inference techniques to deal with the bias arising from the persistent nature of debt to GDP ratio as an endogenous predictor of GDP growth. Our results show that statistical significance of the coefficient on the debt ratio in predictive regressions changes considerably with the use of robust inference techniques. For countries with relatively low average debt ratios we find a negative threshold effect as their debt ratios increase toward moderate levels. For countries with chronically high debt ratios, GDP growth slows as relative government debt increases, but we find no significant threshold effect.
Discovering the Universe: Measuring the Role of Finance Companies in the U.S. Economy
Authors: Chen Lisa , Johnson Kathleen W. , Kennickell Arthur B.
Published: August 2019

Credit to consumers and business is critical to the efficient functioning of the U.S. economy, and finance companies are a key source of such credit. Every five years, the Federal Reserve conducts a two-part survey: the Census of Finance Companies (CFC) to identify the universe of such firms and the Survey of Finance Companies (SFC) to obtain balance-sheet data from firms identified in the CFC. In 2010, this survey underwent a major revision that addressed both the absence of a comprehensive list frame and low response rates. A follow-up study of nonrespondents to the CFC was conducted to obtain information on the operating status of the unobserved firms, and their status as a finance company under the definitions of the CFC. An important complication was the presence of complicated tangles of firms within a corporate hierarchy, whereas the CFC intended to include the consolidated assets of the highest-level parent finance company in such a hierarchy the follow-up was designed to provide information to estimate the extent of such relationships in the initial sample data. This paper describes the way the CFC and the follow-up were used to construct an estimate of the universe of finance companies.
Exchange Rates, Monetary Policy Statements, and Uncovered Interest Parity: Before and After the Zero Lower Bound
Authors: Kiley Michael T.
Published: August 2019

While uncovered interest parity (UIP) fails unconditionally, UIP conditional on monetary policy actions remains a cornerstone of macroeconomic models used for monetary policy analysis. We posit that monetary policy actions are partially revealed by FOMC statements and propose a new identification strategy to uncover the degree to which such policy actions induce comovement in exchange rates and long-term interest rates consistent with uncovered interest parity. We reach three conclusions. First, there is evidence in favor of UIP at long horizons, conditional on monetary policy actions, for Dollar/Euro and Dollar/Yen exchange rates. Second, short-run movements in exchange rates following monetary policy surprises are consistent with the overshooting prediction of Dornbusch (1976), although our approach cannot test UIP at short horizons. Finally, we examine the degree to which monetary policy statements since the onset of the zero-lower bound (ZLB) on the short-term interest rate in the United States have engendered different comovement between long-term interest rates and exchange rates and find little evidence for a change in relationships.
Uncertainty, Risk, and Incentives: Theory and Evidence
Authors: He Zhiguo , Li Si , Wei Bin , Yu Jianfeng
Published: August 2019

Uncertainty has qualitatively different implications than risk in studying executive incentives. We study the interplay between profitability uncertainty and moral hazard, where profitability is multiplicative with managerial effort. Investors who face greater uncertainty desire faster learning, and consequently offer higher managerial incentives to induce higher effort from the manager. In contrast to the standard negative risk-incentive trade-off, this 'learning-by-doing' effect generates a positive relation between profitability uncertainty and incentives. We document empirical support for this prediction.
The Ins and Outs of Forecasting Unemployment: Using Labor Force Flows to Forecast the Labor Market
Authors: Barnichon Régis , Nekarda Christopher J.
Published: August 2019

This paper presents a forecasting model of unemployment based on labor force flows data that, in real time, dramatically outperforms the Survey of Professional Forecasters, historical forecasts from the Federal Reserve Board's Greenbook, and basic time-series models. Our model's forecast has a root-mean-squared error about 30 percent below that of the next-best forecast in the near term and performs especially well surrounding large recessions and cyclical turning points. Further, because our model uses information on labor force flows that is likely not incorporated by other forecasts, a combined forecast including our model's forecast and the SPF forecast yields an improvement over the latter alone of about 35 percent for current-quarter forecasts, and 15 percent for next-quarter forecasts, as well as improvements at longer horizons.
Declining Migration Within the US: The Role of the Labor Market
Authors: Molloy Raven Saks , Smith Christopher L. , Wozniak Abigail
Published: August 2019

We examine explanations for the secular decline in interstate migration since the 1980s. After showing that demographic and socioeconomic factors can account for little of this decrease, we present evidence suggesting that it is related to a downward trend in labor market transitions--i.e. a decline in the fraction of workers moving from job to job, changing industry, and changing occupation--that occurred over the same period. We explore a number of reasons why these flows have diminished over time, including changes in the distribution of job opportunities across space, polarization in the labor market, concerns of dual-career households, and a strengthening of internal labor markets. We find little empirical support for all but the last of these hypotheses. Specifically, using data from three cohorts of the National Longitudinal Surveys spanning the 1970s to the 2000s, we find that wage gains associated with employer transitions have fallen, possibly signaling a growing role for internal labor markets in determining wages.
Duration Risk versus Local Supply Channel in Treasury Yields: Evidence from the Federal Reserve's Asset Purchase Announcements
Authors: Li Canlin , Cahill Michael E. , D'Amico Stefania , Sears John S.
Published: August 2019

The FOMC&#x27;s announcements of Treasury purchase programs and the subsequent or contemporaneous statements by the New York Fed about the programs&#x27; operational details provide a sequence of natural experiments with the potential to shed light on the relative importance of the duration risk channel versus the local supply channel for the transmission of supply effects to the term structure of interest rates. Using intraday security-level data on Treasury securities, we conduct five event studies to document the presence of local supply effects and duration risk effects. Further, using our new measures of local supply surprise and duration risk surprise we quantify the average impact of these two supply channels on nominal Treasury yields for each of the five events. Finally, we also try to determine how the importance of these factors has changed over time and relative to the first Large Scale Asset Purchase program in 2008-09. We find that: first, once the pre-announcement market expectations are carefully controlled for, the duration risk and local supply channels together are responsible for a decline in yields averaging about 9 basis points per $100 billion over the course of these announcements second, these two channels are almost equally important for the transmission mechanism of purchases, as on average each of these channels accounts for about half of the yields decline third, the efficacy of these two channels does not seem to have declined over time and fourth, the purchase and sale price reactions to the announcements are quite similar, a result potentially relevant for the unwinding of these programs.
Credit-Crunch Dynamics with Uninsured Investment Risk
Authors: Goldberg Jonathan E.
Published: August 2019

I study the effects of credit tightening in an economy with uninsured idiosyncratic investment risk. In the model, entrepreneurs require an equity premium because collateral constraints limit insurance. After collateral constraints tighten, the equity premium and the riskiness of consumption rise and the risk-free interest rate falls. I show that, both immediately after the shock and in the long run, the equity premium and the riskiness of consumption increase more than they would if the risk-free rate were constant. Indeed, the long-run increase in the riskiness of consumption growth is purely a general-equilibrium effect: if the risk-free rate were constant (as in a small open economy), an endogenous decrease in risk-taking by entrepreneurs would, in the long run, completely offset the decrease in their ability to diversify. I also show that the credit shock leads to a decrease in aggregate capital if the elasticity of intertemporal substitution is sufficiently high. Finally, I show that, due to a general-equilibrium effect, there is no &#x27;overshooting&#x27; in the equity premium: in response to a permanent decrease in firms&#x27; ability to pledge their future income, the equity premium immediately jumps to its new steady-state level and remains constant thereafter, even as aggregate capital adjusts over time. However, if idiosyncratic uncertainty is sufficiently low, credit tightening has no short- or long-run effects on aggregate capital, the equity premium, or the riskiness of consumption. Thus my paper highlights how investment risk affects the economy&#x27;s response to a credit crunch.
Are Leveraged and Inverse ETFs the New Portfolio Insurers?
Authors: Tuzun Tugkan
Published: August 2019

This paper studies Leveraged and Inverse Exchange Traded Funds (LETFs) from a financial stability perspective. Mechanical positive-feedback rebalancing of LETFs resembles the portfolio insurance strategies, which contributed to the stock market crash of October 19, 1987 (Brady Report, 1988). I show that a 1% increase in broad stock-market indexes induces LETFs to originate rebalancing flows equivalent to $1.04 billion worth of stock. Price-insensitive and concentrated trading of LETFs results in price reaction and extra volatility in underlying stocks. Implied price impact calculations and empirical results suggest that they contributed to the stock market volatility in the 2008-2009 financial crisis and in the second half of 2011 when the European sovereign debt crisis came to the forefront. Although LETFs are not as large as portfolio insurers of the 1980s and have not been proven to disrupt stock market activity, their large and concentrated trading could be destabilizing during periods of high volatility.
Inequality and Poverty in the United States: The Aftermath of the Great Recession
Authors: Thompson Jeffrey P. , Smeeding Timothy M.
Published: August 2019

This paper explores trends in inequality and poverty using both market and after-tax and transfer income in the period during and after the Great Recession (through 2011). Using market income (or wages), inequality and poverty rose sharply between 2008 and 2010. The primary exception is measures for the top of the distribution annual wage and income shares of the top one percent dipped in 2008 and 2009. Including taxes and transfers, broad-based inequality measures also fell, and the poverty increase was muted. Tax and transfer policies lowered inequality and poverty, but those policies were not equal across the population. Poverty declined among the elderly, changed little among children, and rose sharply among the working-age. Inequality fell across the total population, but was unchanged among working-age households. Since 2009, as the economy has grown slowly, inequality has risen for all groups, and poverty remains high for the working-age.
Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital
Authors: Yook Youngsuk , Julio Brandon
Published: August 2019

We examine the effects of government policy uncertainty on cross-border capital flows. FDI flows from US companies to foreign affiliates drop significantly during the period just before an election. The election effect for FDI is larger than election cycles in domestic investment. The electoral patterns in FDI flows are more pronounced in countries with higher propensities for policy reversals and when election outcomes are more uncertain. Our identification strategy compares variation in different types of capital flows into the same country around the timing of national elections. The electoral cycles are present in relatively irreversible FDI flows but not in foreign portfolio investment flows, suggesting a likely causal link from political uncertainty to and capital flows.
Sectoral Allocation, Risk Efficiency and the Great Moderation
Authors: Tase Manjola
Published: August 2019

This paper argues that the decline in U.S. real GDP growth volatility after the mid 1980s was an outcome of more risk efficient and more diversified sectoral allocations. Using a portfolio approach, I distinguish between the two determinants of GDP growth volatility: sectoral covariances and sectoral allocations. I use the sectoral growth and covariances to compute the growth-volatility frontier of the economy. I define the efficiency of the actual sectoral allocation as the distance of the economy from the frontier, measured in the (volatility, growth) space. There are three main findings. 1) The frontier has shifted due to a lower sectoral growth rate and a higher sectoral variance. 2) The distance of the economy from the frontier has decreased. The efficiency over the period increased by 1.4 percentage points. This increase occurred along the volatility dimension and it is interpreted as the decline in the growth volatility in the economy, if there were no changes in the sectoral covariances. This efficiency improvement is comparable to the 1.5 percentage points decline in GDP growth volatility in the data after the mid 1980s. 3) The U.S. economy became more diversified across sectors after the early 1980s, shifting away from manufacturing and agriculture towards services. The increase in the share of Finance and Insurance coupled with the doubling of the growth volatility in this sector, might have contributed to the recent increase in GDP growth volatility.
Who Works for Startups? The Relation Between Firm Age, Employee Age, and Growth
Authors: Zarutskie Rebecca , Ouimet Paige P.
Published: August 2019

Young firms disproportionately employ young workers, controlling for firm size, industry, geography and time. The same positive correlation between young firms and young employees holds when we look just at new hires. On average, young employees in young firms earn higher wages than young employees in older firms. Further, young employees disproportionately join young firms with greater innovation potential and that exhibit higher growth, conditional on survival. These facts are consistent with the argument that the skills, risk tolerance, and career dynamics of young workers are contributing factors to their disproportionate share of employment in young firms. Finally, we show that an increase in the regional supply of young workers is positively related to the rate of new firm creation, especially in high tech industries, suggesting a causal link between the supply of young workers and new firm creation.
Repo Collateral Fire Sales: The Effects of Exemption from Automatic Stay
Authors: Infante Sebastian
Published: August 2019

What are the consequences of a potential fire sale stemming from the exemption of repurchase agreements (repos) from automatic stay? This paper shows that repo's exemption from stay alters firms' financing and investment decisions ex ante. Specifically, a stay exemption changes firms' investment opportunity set, enabling them to purchase assets of defaulted firms at fire sale prices. Fire sales arise endogenously because of limited capital available to purchase collateral posted by insolvent firms, i.e., cash-in-the-market pricing. A fire sale effectively creates a premium for holding on to dry powder and concentrates asset ownership with firms that have preferences to hold highly leveraged positions and risk default. The premium reduces the initial asset price, potentially inducing more firms to take on risky positions, increasing the fraction of defaulting firms in the economy. In contrast, when repo is subject to automatic stay secured lenders do not receive their collateral immediately, reducing the severity of a fire sale and ex ante price distortions.
Are Banks' Internal Risk Parameters Consistent? Evidence from Syndicated Loans
Authors: Firestone Simon , Rezende Marcelo
Published: August 2019

This paper examines consistency in the estimates of probability of default (PD) and loss given default (LGD) that nine large U.S. banks assign to syndicated loans for regulatory capital purposes. Using internal bank data on loans that had PDs and LGDs assigned by more than one bank, we find substantial dispersion in these parameters. Banks differ substantially in PDs, but only a few set PDs systematically higher or lower than the median bank. However, many banks differ from the median bank systematically in LGDs, and these differences affect their Basel II minimum regulatory capital significantly. The differences in LGDs imply that, for an identical loan portfolio, the bank that sets the highest LGDs would have Basel II minimum regulatory capital twice as large as the bank that sets the lowest LGDs. We argue that these differences in risk parameters across banks can be at least partially explained by bank behavior that complies with the Basel rules. We also find a negative relation between banks&#x27; LGDs and their shares in loan syndicates, suggesting that differences in risk parameters have implications beyond bank capital.
Small Price Responses to Large Demand Shocks
Authors: Gagnon Etienne , López-Salido J. David
Published: August 2019

We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population relocation, and shopping sprees around major snowstorms and hurricanes. Our focus on demand shocks is novel in the empirical literature that uses large datasets of individual data to bridge micro price behavior and aggregate price dynamics. We find that large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and even though stores adjust prices frequently. We also uncover evidence of tit-for-tat behavior by which retailers with radically different demand shocks nonetheless seek to match their local competitors&#x27; pricing movements and recourse to sales and promotions.
Assessing Targeted Macroprudential Financial Regulation: The Case of the 2006 Commercial Real Estate Guidance for Banks
Authors: Bassett William F. , Marsh W. Blake
Published: August 2019

In the mid-2000s, federal bank regulatory agencies became alarmed by steadily increasing concentrations of commercial real estate (CRE) loans at many banks, particularly loans used to finance construction and land development (CLD). In January 2006, they issued guidance that required banks with specific high concentrations in those asset classes to tighten managerial controls. This paper shows that banks with concentrations in excess of the thresholds set in the guidance subsequently experienced slower growth in their CRE and CLD portfolios than can be explained by changes in the health of their balance sheets and economic conditions. Moreover, banks that were above the CRE thresholds also tended to have slower growth in C&amp;I loans but faster growth in loans to households after the guidance was issued. The results highlight the potential for this type of macroprudential regulation to have a significant and broad influence on bank behavior.
The Transformation of Banking: Tying Loan Interest Rates to Borrowers' CDS Spreads
Authors: Ivanov Ivan T. , Santos Joao A. C. , Vo Thu
Published: August 2019

We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected borrowing costs. We find that CDS-based loans are associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.
Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability
Authors: Cairó Isabel , Cajner Tomaz
Published: August 2019

Why do more educated workers experience lower unemployment rates and lower employment volatility? A closer look at the data reveals that these workers have similar job finding rates, but much lower and less volatile separation rates than their less educated peers. We argue that on-the-job training, being complementary to formal education, is the reason for this pattern. Using a search and matching model with endogenous separations, we show that investments in match-specific human capital reduce the outside option of workers, implying less incentives to separate. The model generates unemployment dynamics that are quantitatively consistent with the cross-sectional empirical patterns.
The Impact of the Small Business Lending Fund on Community Bank Lending to Small Businesses
Authors: Amel Dean F. , Mach Traci L.
Published: August 2019

Following the financial crisis, total outstanding loans to businesses by commercial banks dropped off substantially. Large loans outstanding began to rebound by the third quarter of 2010 and essentially returned to their previous growth trajectory while small loans outstanding continued to decline. Furthermore, much of the drop in small business loans outstanding was evident at community banks. To address this perceived lack of supply of credit to small businesses, the Small Business Lending Fund (SBLF) was created as part of the 2010 Small Business Jobs Act. The fund was intended to provide community banks with low-cost funding that they could then lend to their small business customers. As of December 31, 2013, the U.S. Department of the Treasury reports that SBLF participants had increased their small business lending by $12.5 billion over their baseline numbers. The current paper uses Call Report data from community banks an d thrift institutions to look at the impact of receiving funds from SBLF on their small business lending. The analysis controls for economic and demographic conditions, market structure and competition. Simple regression estimates indicate that participants in the SBLF program increased their small business lending by about 10 percent more than their non-participating counterparts, in line with numbers reported by Treasury. However, estimates that control for the ongoing growth path in small business lending indicate no statistically significant impact of SBLF participation on small business lending.
The Effects of Bank Charter Switching on Supervisory Ratings
Authors: Rezende Marcelo
Published: August 2019

I study whether commercial banks can improve their supervisory ratings by switching charters. I use the fees charged by chartering authorities to establish a causal effect from switching on ratings. Banks receive more favorable ratings after they change charters, an effect that is large for both national and state charters. In addition, controlling for bank ratings, banks that switch charters fail more often than others. These results suggest that banks can arbitrage ratings by switching charters and are consistent with regulators competing for banks by rating incoming banks better than similar banks that they already supervise.
A Tale of Two Option Markets: Pricing Kernels and Volatility Risk
Authors: Song Zhaogang , Xiu Dacheng
Published: August 2019

Using prices of both S&P 500 options and recently introduced VIX options, we study asset pricing implications of volatility risk. While pointing out the joint pricing kernel is not identified nonparametrically, we propose model-free estimates of marginal pricing kernels of the market return and volatility conditional on the VIX. We find that the pricing kernel of market return exhibits a decreasing pattern given either a high or low VIX level, whereas the unconditional estimates present a U-shape. Hence, stochastic volatility is the key state variable responsible for the U-shape puzzle documented in the literature. Finally, our estimates of the volatility pricing kernel feature a U-shape, implying that investors have high marginal utility in both high and low volatility states.