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Working Papers

Working Papers

  • WP 20-01R2 | Making Friends Meet: Network Formation with Introductions


    Jan-Peter Siedlarek

    Original Paper: WP 20-01 | Revisions: WP 20-01R

    Abstract

    In the US, income and expenditure-side estimates of GDP (GDPI and GDPE) measure "true" GDP with error and are available at a quarterly frequency. Methods exist for using these proxies to produce reconciled quarterly estimates of true GDP. In this paper, we extend these methods to provide reconciled historical true GDP estimates at a monthly frequency. We do this using a Bayesian mixed frequency vector autoregression (MF-VAR) involving GDPE, GDPI, unobserved true GDP, and monthly indicators of short-term economic activity. Our MF-VAR imposes restrictions that reflect a measurement-error perspective (that is, the two GDP proxies are assumed to equal true GDP plus measurement error). Without further restrictions, our model is unidentified. We consider a range of restrictions that allow for point and set identification of true GDP and show that they lead to informative monthly GDP estimates. We illustrate how these new monthly data contribute to our historical understanding of business cycles and we provide a real-time application nowcasting monthly GDP over the pandemic recession.   Read More

  • WP 22-21 | Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation


    Ina Hajdini Edward S. Knotek II John Leer Mathieu Pedemonte Robert Rich Raphael Schoenle

    Abstract

    Using a novel experimental setup, we study the direction of causality between consumers’ inflation expectations and their income growth expectations. In a large, nationally representative survey of US consumers, we find that the rate of passthrough from expected inflation to expected income growth is incomplete, on the order of 20 percent. There is no statistically significant effect going in the other direction. Passthrough varies systematically with demographic and socioeconomic factors, with greater passthrough for higher-income individuals than lower-income individuals, although it is still incomplete. Higher inflation expectations also cause consumers to report a higher probability that they will search for a new job that pays more. Using our survey findings to calibrate a search-and-matching model, we find that dampened responses of real wages to demand and supply shocks translate into greater fluctuations in output. Taken together, the survey results and model exercises provide a labor market channel to explain why people dislike inflation.   Read More

  • WP 22-20 | Greater Than the Sum of the Parts: Aggregate vs. Aggregated Inflation Expectations


    Alexander Dietrich Edward S. Knotek II Kristian Ove R. Myrseth Robert Rich Raphael Schoenle Michael Weber

    Abstract

    Using novel survey evidence on consumer inflation expectations disaggregated by personal consumption expenditure (PCE) categories, we document the paradox that consumers' aggregate inflation expectations usually exceed any individual category expectation. We explore procedures for aggregating category inflation expectations, and find that the inconsistency between aggregate and aggregated inflation expectations rises with subjective uncertainty and is systematically related to socioeconomic characteristics. Overall, our results are inconsistent with the notion that consumers' aggregate inflation expectations comprise an expenditure-weighted sum of category beliefs. Moreover, aggregated inflation expectations explain a greater share of planned consumer spending than aggregate inflation expectations.   Read More

  • WP 22-19 | The Lightning Network: Turning Bitcoin into Money


    Anantha Divakaruni Peter Zimmerman

    Abstract

    The Lightning Network (LN) is a means of netting Bitcoin payments outside the blockchain. We find a significant association between LN adoption and reduced blockchain congestion, suggesting that the LN has helped improve the efficiency of Bitcoin as a means of payment. This improvement cannot be explained by other factors, such as changes in demand or the adoption of SegWit. We find mixed evidence on whether increased centralization in the Lightning Network has improved its efficiency. Our findings have implications for the future of cryptocurrencies as a means of payment and their environmental footprint.   Read More

  • WP 22-18 | Credit Availability for Minority Business Owners in an Evolving Credit Environment: Before and During the COVID-19 Pandemic


    Brett Barkley Mark E. Schweitzer

    Abstract

    We apply data from the Federal Reserve’s Small Business Credit Survey from 2016 to 2020 to estimate disparities in access to small business financing through loan denials and discouragement. We find that substantial credit disparities continue to exist despite the growth of fintech lenders, which prior research shows have expanded the set of small businesses receiving credit. Because the pandemic period brought many direct changes to the business and lending environment, we separately analyze the change to lending in 2020. PPP loans represented an unprecedented support for small businesses, support that was not dependent on the creditworthiness of businesses, but minority-owned businesses are estimated to have received a smaller fraction of the funds they applied for from the program.   Read More

  • WP 22-17 | Labor Supply Shocks, Labor Force Entry, and Monetary Policy


    Takushi Kurozumi Willem Van Zandweghe

    Abstract

    Should monetary policy offset the effects of labor supply shocks on inflation and the output gap? Canonical New Keynesian models answer yes. Motivated by weak labor force participation during the pandemic, we reexamine the question by introducing labor force entry and exit in an otherwise canonical model with sticky prices and wages. The entry decision generates an employment channel of monetary policy, and a labor supply shock to the value of nonparticipation in the labor market induces a policy trade-off between stabilization of the employment gap and wage growth. For an adverse labor supply shock, optimal policy dampens the decline in employment to rein in wage growth, which entails a period of higher inflation and a positive output gap. A welfare analysis of policy rules shows that monetary policy should not lean against the employment gap.   Read More

  • WP 22-16 | The Value of Unemployment Insurance: Liquidity vs. Insurance Value


    Victor Hernandez Martinez Kaixin Liu

    Abstract

    This paper argues that the value of unemployment insurance (UI) can be decomposed into a liquidity component and an insurance component. While the liquidity component captures the value of relieving the cost to access liquidity during unemployment, the insurance component captures the value of protecting the worker against a potential permanent future income loss. We develop a novel sufficient statistics method to identify each component that requires only the labor supply responses to changes in the potential duration of UI and severance payment and implement it using Spanish administrative data. We find that the liquidity component represents half of the value of UI, while the insurance component captures the remaining half. However, the relevance of each component is highly heterogeneous across different groups of workers. Poorer and wealthier workers are both similarly liquidity-constrained, but poorer workers place a higher value on UI because the insurance component is significantly more important for them. On the other hand, wealthier workers and workers with more cash-on-hand value additional UI equally, but the wealthier value its liquidity, while those with more liquidity care about its insurance value. Finally, from a welfare perspective, we show that extending the potential duration of Spain’s UI would increase welfare. However, in our counterfactual case where UI is complemented with the provision of liquidity, the optimal potential duration of Spain's UI should be lower than its current level.   Read More

  • WP 21-04R | Applications of Markov Chain Approximation Methods to Optimal Control Problems in Economics


    Tom Phelan Keyvan Eslami

    Original Paper: WP 21-04

    Abstract

    In this paper we explore some benefits of using the finite-state Markov chain approximation (MCA) method of Kushner and Dupuis (2001) to solve continuous-time optimal control problems in economics. We first show that the implicit finite-difference scheme of Achdou et al. (2022) amounts to a limiting form of the MCA method for a certain choice of approximating chains and policy function iteration for the resulting system of equations. We then illustrate that, relative to the implicit finite-difference approach, using variations of modified policy function iteration to solve income fluctuation problems both with and without discrete choices can lead to an increase in the speed of convergence of more than an order of magnitude. Finally, we provide several consistent chain constructions for stationary portfolio problems with correlated state variables, and illustrate the flexibility of the MCA approach by using it to construct and compare two simple solution methods for a general equilibrium model with financial frictions.   Read More

  • WP 22-15 | The Geographic Effects of Monetary Policy


    Mathieu Pedemonte Juan Herreño

    Abstract

    We propose a novel approximation of the risky steady state and construct first-order perturbations around it for a general class of dynamic equilibrium models with time-varying and non-Gaussian risk. We offer analytical formulas and conditions for their local existence and uniqueness. We apply this approximation technique to models featuring Campbell-Cochrane habits, recursive preferences, and time-varying disaster risk, and show how the proposed approximation represents the implications of the model similarly to global solution methods. We show that our approximation of the risky steady state cannot be generically replicated by higher-order perturbations around the deterministic steady state, which cannot account well for the effects of risk in our applications even up to third order. Finally, we argue that our perturbation can be viewed as a generalized version of the heuristic loglinear-lognormal approximations commonly used in the macro-finance literature.   Read More

  • WP 22-14 | Accounting for Risk in a Linearized Solution: How to Approximate the Risky Steady State and Around It


    Pierlauro Lopez David Lopez-Salido Francisco Vazquez-Grande

    Abstract

    We propose a novel approximation of the risky steady state and construct first-order perturbations around it for a general class of dynamic equilibrium models with time-varying and non-Gaussian risk. We offer analytical formulas and conditions for their local existence and uniqueness. We apply this approximation technique to models featuring Campbell-Cochrane habits, recursive preferences, and time-varying disaster risk, and show how the proposed approximation represents the implications of the model similarly to global solution methods. We show that our approximation of the risky steady state cannot be generically replicated by higher-order perturbations around the deterministic steady state, which cannot account well for the effects of risk in our applications even up to third order. Finally, we argue that our perturbation can be viewed as a generalized version of the heuristic loglinear-lognormal approximations commonly used in the macro-finance literature.   Read More