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Working Papers

Working Papers

  • WP 20-21 | Evaluating the Benefits of a Streamlined Refinance Program

    Kristopher Gerardi Lara Loewenstein Paul Willen


    Mortgage borrowers who have experienced employment disruptions as a result of the COVID-19 pandemic are unable to refinance their loans to take advantage of historically low market rates. In this article, we analyze the effects of a streamlined refinance (“refi”) program for government-insured loans that would allow borrowers to refinance without needing to document employment or income. In addition, we consider a cash-out component that would allow borrowers to extract some of the substantial housing equity that many have accumulated in recent years.   Read More

  • WP 20-22 | Will COVID-19-Induced Rental Nonpayment Drive Large Reductions in Shelter Inflation? Hints from the Great Recession

    Wesley Janson Randal J. Verbrugge


    The dramatic COVID-19-induced rise in unemployment has greatly increased uncertainty about the ability of renters to pay their rent. Ostensibly, a small increase in nonpayment incidence could sharply reduce shelter inflation. Will nonpayment during the current COVID collapse induce such a reduction? We estimate the nature of and change in nonpayment incidence over the Great Recession. Contrary to popular belief, most nonpayment does not translate into a $0 rent. Further, nonpayment incidence is acyclical and uncorrelated with neighborhood income. But some mismeasurement of nonpayment seems likely, threatening CPI accuracy; we offer suggestions to test and address mismeasurement, if present.   Read More

  • WP 20-20 | Output-Inflation Trade-offs and the Optimal Inflation Rate

    Takushi Kurozumi Willem Van Zandweghe


    In staggered price models, a non-CES aggregator of differentiated goods generates empirically plausible short- and long-run trade-offs between output and inflation: lower trend inflation flattens the Phillips curve and decreases steady-state output by increasing markups. We show that the aggregator reduces both the steady-state welfare cost of higher trend inflation and the inflation-related weight in a model-based welfare function for higher trend inflation. Consequently, optimal trend inflation is moderately positive even without considering the zero lower bound on nominal interest rates. Moreover, the welfare difference between 2 percent and 4 percent inflation targets is much smaller than in the CES aggregator case.   Read More

  • WP 20-19 | Estimating the Trend Unemployment Rate in the Fourth Federal Reserve District

    Bruce Fallick Murat Tasci


    We estimate trend unemployment rates for Ohio, Pennsylvania, Kentucky, and West Virginia, states that span parts of the Fourth District of the Federal Reserve System. Our estimated unemployment rate trend for the District as a whole stood at 5.7 percent in 2020:Q1 compared to a 4.7 percent observed unemployment rate within the District, implying a tight labor market by historical standards.   Read More

  • WP 20-13R | Nowcasting Tail Risks to Economic Activity with Many Indicators

    Andrea Carriero Todd E. Clark Massimiliano Marcellino

    Original Paper: WP 20-13


    This paper focuses on nowcasts of tail risk to GDP growth, with a potentially wide array of monthly and weekly information. We consider different models (Bayesian mixed frequency regressions with stochastic volatility, classical and Bayesian quantile regressions, quantile MIDAS regressions) and also different methods for data reduction (either forecasts from models that incorporate data reduction or the combination of forecasts from smaller models). Our results show that, within some limits, more information helps the accuracy of nowcasts of tail risk to GDP growth. Accuracy typically improves as time moves forward within a quarter, making additional data available, with monthly data more important to accuracy than weekly data. Accuracy also typically improves with the use of financial indicators in addition to a base set of macroeconomic indicators. The better-performing models or methods include the Bayesian regression model with stochastic volatility, Bayesian quantile regression, some approaches to data reduction that make use of factors, and forecast averaging. In contrast, simple quantile regression and quantile MIDAS regression perform relatively poorly.   Read More

  • WP 20-18 | On the Distributional Effects of International Tariffs

    Daniel R. Carroll Sewon Hur


    What are the distributional consequences of tariffs? We build a trade model with incomplete asset markets and households that are heterogeneous in their income, wealth, and labor skill. We increase tariffs by 5 percentage points and examine several budget-neutral fiscal policies for redistributing tariff revenue. Without redistribution, tariffs hurt all households, but higher tradables prices disproportionately harm the poor and the ensuing decline in the skill premium disproportionately harms the skilled. With redistribution, lowering the labor income tax leads to lower economic activity but higher average welfare relative to lowering the capital income tax; nevertheless, both policies reduce average welfare with retaliatory tariffs. Finally, when tariff revenue is rebated to households as lump-sum transfers, tariffs can be welfare improving even with full retaliation.   Read More

  • WP 19-03R | Firm Entry and Exit and Aggregate Growth

    Jose Asturias Sewon Hur Timothy Kehoe Kim Ruhl

    Original Paper: WP 19-03


    Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as they do in the data from Chile and Korea.   Read More

  • WP 20-16 | Raising the Inflation Target: How Much Extra Room Does It Really Give?

    Raphael Schoenle Jean-Paul L’Huillier


    Some, but less than intended. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We quantitatively investigate this channel across different models, based on a calibration using micro data. By raising the target from 2 percent to 4 percent, the monetary authority gets only between 0.51 and 1.60 percentage points of effective extra policy room for monetary policy (not 2 percentage points as intended). Getting 2 percentage points of effective extra room requires raising the target to more than 4 percent. Taking this channel into consideration raises the optimal inflation target by roughly 1 percentage points relative to earlier computations.   Read More

  • WP 20-17 | Asymmetric Responses of Consumer Spending to Energy Prices: A Threshold VAR Approach

    Edward S. Knotek II Saeed Zaman


    We document asymmetric responses of consumer spending to energy price shocks: Using a multiple-regime threshold vector autoregressive model estimated with Bayesian methods on US data, we find that positive energy price shocks have a larger negative effect on consumption compared with the increase in consumption in response to negative energy price shocks. For large shocks, the cumulative consumption responses are three to five times larger for positive than for negative shocks. Digging into disaggregated spending, we find that the estimated asymmetric responses are strongest for durable goods, but asymmetries are also present in the responses of nondurables and services.   Read More

  • WP 20-15 | Big G

    Lydia Cox Gernot Müller Ernesto Pasten Raphael Schoenle Michael Weber


    “Big G” typically refers to aggregate government spending on a homogeneous good. In this paper, we open up this construct by analyzing the entire universe of procurement contracts of the US government and establish five facts. First, government spending is granular; that is, it is concentrated in relatively few firms and sectors. Second, relative to private expenditures its composition is biased. Third, procurement contracts are short-lived. Fourth, idiosyncratic variation dominates the fluctuation in spending. Last, government spending is concentrated in sectors with relatively sticky prices. Accounting for these facts within a stylized New Keynesian model offers new insights into the fiscal transmission mechanism: fiscal shocks hardly impact inflation, little crowding out of private expenditure exists, and the multiplier tends to be larger compared to a one-sector benchmark, aligning the model with the empirical evidence.   Read More