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2013 Working Papers

  • WP 13-17 | Lending to Women in Microfinance: Influence of Social Trust and National Culture

    Raj Aggarwal John Goodell Lauren Selleck


    The preference of microfinance institutions for women borrowers is generally attributed to two reasons: women borrowers are more trustworthy and have greater social impact. However, the role of social trust with regard to this gender preference has not been adequately investigated. Controlling for the social outreach goals of MFIs, we document that MFIs favor women more in low trust countries, suggesting that women are targeted to offset low social trust. We also examine how the nature of trust formation affects this relationship between gender targeting and trust. Our results should be of considerable interest to policymakers and scholars. Read More

  • WP 13-16 | What Do We Know about Regional Banks? An Exploratory Analysis

    Lakshmi Balasubramanyan Joseph G. Haubrich


    This study tries to get a sense of the topography of the regional banking landscape. We focus on bank holding companies and banks with $10 billion to $50 billion in assets and look for factors that potentially explain regional bank health from 2008 to 2013. Our dataset is a combination of bank Call Report data and confidential supervisory data. Our analysis shows that regional banks are not a monolithic group, and different factors explain bank safety and soundness for different types of banks. Read More

  • WP 12-36R | The Cyclical Behavior of Equilibrium Unemployment and Vacancies across OECD Countries

    Pedro Amaral Murat Tasci

    Original Paper: WP 12-36 | Revisions: WP 12-36R2


    We show that the inability of a standardly calibrated labor search-and-matching model to account for labor market volatility extends beyond the U.S. to a set of OECD countries. That is, the volatility puzzle is ubiquitous. We argue cross-country data is helpful in scrutinizing between potential solutions to this puzzle. To illustrate this, we show that the solution proposed in Hagedorn and Manovskii (2008) continues to deliver counterfactually low volatility in countries where labor-productivity persistence and/or steady-state job-finding rates are sufficiently low. Moreover, the model's ability to generate high enough volatility depends on vacancy-filling-rate levels that seem counterfactual outside the U.S. Read More

  • WP 13-15 | Even Keel and the Great Inflation

    Owen F. Humpage Sanchita Mukherjee


    Using IV-GMM techniques and real-time data, we estimate a forward looking, Taylor-type reaction function incorporating dummy variables for even-keel operations and a variable for foreign official pressures on the U.S. gold stock during the Great Inflation. We show that when the Federal Reserve undertook even-keel operations to assist U.S. Treasury security sales, the FOMC tended to delay monetary-policy adjustments and to inject small amounts of reserves into the banking system. The operations, however, did not contribute significantly to the Great Inflation, because they occurred during periods of both monetary ease and monetary tightness, at least in the FOMC’s view. Consequently, the average federal funds rate during months containing even-keel events was no different than the average federal funds rate in other months, suggesting that even keel had no effect on the thrust of monetary policy. We also show that prospective gold losses had no effect on the FOMC’s monetary-policy decisions in the 1960s and early 1970s Read More

  • WP 13-14 | Friends Do Let Friends Buy Stocks Actively

    Rawley Z. Heimer


    This research is the first to provide empirical evidence that social interaction is more prevalent amongst active rather than passive investors. While previous empirical work, spearheaded by Hong, Kubik, and Stein (2004), shows that proxies for sociability are related to participation in asset markets, the literature is unable to distinguish between the types of participants because of data limitations. I address this shortcoming by using data from the Consumer Expenditure Quarterly Interview Survey on individual holdings, and buying and selling of financial assets as well as expenditure variables which imply variation in the level of social activity. My findings support a new explanation for the active investing puzzle in which informal communication tends to promote active rather than passive strategies (Han and Hirshleifer 2012). Read More

  • WP 12-39R | Privately Optimal Contracts and Suboptimal Outcomes in a Model of Agency Costs

    Charles T. Carlstrom Timothy Fuerst Matthius Paustian

    Original Paper: WP 12-04


    This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. Although privately optimal, this contract is not welfare maximizing as it leads to a sub-optimally high price of capital. The welfare cost of the privately optimal contract (when compared to the planner outcome) is significant. A menu of time-varying taxes and subsidies can decentralize the planner's allocations. Read More

  • WP 12-16R | Estimating Contract Indexation in a Financial Accelerator Model

    Charles T. Carlstrom Timothy Fuerst Alberto Ortiz Matthius Paustian

    Original Paper: WP 12-16


    This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model with indexation over the frictionless model, they have remarkably similar business cycle properties for non-financial exogenous shocks. Read More

  • WP 13-13 | Are Banks Forward-Looking in Their Loan Loss Provisioning? Evidence from the Senior Loan Officer Opinion Survey (SLOOS)

    Lakshmi Balasubramanyan Saeed Zaman James Thomson

    Revisions: WP 13-13R


    This paper makes a fundamental contribution by studying loan-loss provisioning over the credit cycle as three distinct phases. Looking at the three distinct phases of the financial crisis?the precrisis period, crisis period, and postcrisis period?is important as loan-loss provisioning is driven by different factors in each, in part due to extensive shifts in (or in the application of) regulatory rule. We show evidence of forward-looking loan-loss provisioning by utilizing Senior Loan Officer Opinion Surveys (SLOOS), which provide useful controls for credit cycle information. Though the SLOOS dataset is a restricted sample and generalizability to a broader sample could potentially be a stretch, we control for credit cycle factors as part of an identification strategy to sort out changes in the credit market equilibrium. We contribute to the growing literature on forward-looking loan-loss provisioning and early-in-the-cycle loss recognition by incorporating a broader range of available credit information. Read More

  • WP 13-12 | Cryptography and the Economics of Supervisory Information: Balancing Transparency and Confidentiality

    Mark Flood Jonathan Katz Stephen Ong Adam Smith


    We elucidate the tradeoffs between transparency and confidentiality in the context of financial regulation. The structure of information in financial contexts creates incentives with a pervasive effect on financial institutions and their relationships. This includes supervisory institutions, which must balance the opposing forces of confidentiality and transparency that arise from their examination and disclosure duties. Prudential supervision can expose confidential information to examiners who have a duty to protect it. Disclosure policies work to reduce information asymmetries, empowering investors and fostering market discipline. The resulting confidentiality/transparency dichotomy tends to push supervisory information policies to one extreme or the other. Read More

  • WP 13-11 | Low-Income-Rental-Housing Programs in the Fourth District

    Francisca Richter Mark Sniderman Matt Klesta Frank Manzo


    In the aftermath of the Great Recession, many policy analysts are rethinking national housing policies, including affordable housing programs. We review the literature to compare the largest tenant-based (housing choice voucher or HCV) and place-based (low-income-housing tax credit or LIHTC) programs with respect to cost efficiency and access to better quality neighborhoods. We also provide an overview of low-income-rental-housing policy trends and perform a rough comparison of neighborhood quality across programs and counties, focusing on four main urban counties in the Fourth Federal Reserve District (Cuyahoga, Hamilton, and Franklin in Ohio, and Allegheny in Pennsylvania). We find that in spite of relatively stable real rents, affordability in the Ohio counties declined between 2005 and 2009 due to a drop in real incomes. We find that in Allegheny County during 2006-2009, neighborhood quality was comparable for rental units available through each of the two housing programs. We also find evidence that neighborhoods with LIHTC investments placed in service by 2000 in Allegheny County improved their quality by 2006-2009 relative to comparable neighborhoods, but we do not find similar evidence for the Ohio counties. Lacking tenant-level data on LIHTC renters, it is hard to explain these regional differences. Finally, we note that richer data reporting on various aspects of HCV and LIHTC would improve the ability of program administrators and policymakers to design, coordinate, and evaluate programs based on efficiency and effectiveness. Read More

  • WP 13-10 | Covariates and Causal Effects: The Problem of Context

    Dionissi Aliprantis

    Revisions: WP 13-10R


    The literature contrasting structural and experimental econometrics highlights that stronger assumptions are required to identify direct effects than total effects. This paper examines the additional assumptions required to predict future experience using either type of causal effect identified in past data. I show there is a tradeoff between identification and prediction driven by a fact I call the problem of context: Treatment always influences the outcome variable in combination with covariates. The response of covariates to variation in treatment impedes identification of direct effects, while changes over time to the process generating covariates impedes prediction using total effects. I show that total effects can be used for prediction only under restrictive assumptions about the evolution of the DGP: All features of the DGP must remain the same. Direct effects allow for prediction when only some features of the DGP remain the same. To highlight implications for applied work, I discuss the strong assumptions about the behavior of covariates required for prediction when using the total effects of educational attainment successfully identified in past data. While the assumptions required to both identify and predict using standard methodology may be daunting, an explicit statement of these assumptions is a first step towards developing methodology capable of weakening them. Read More

  • WP 12-21R | Business Cycles and Financial Crises: The Roles of Credit Supply and Demand Shocks

    James Nason Ellis W. Tallman

    Original Paper: WP 12-21


    This paper explores the hypothesis that the sources of economic and financial crises differ from those of noncrisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and non-crisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations. (Published in Macroeconomic Dynamics, 2014.) Read More

  • WP 10-08R3 | Endogenous Gentrification and Housing-Price Dynamics

    Veronica Guerrieri Daniel Hartley Erik Hurst

    Original Paper: WP 10-08 | Revisions: WP 10-08R1 | WP 10-08R2


    In this paper, we begin by documenting substantial variation in house-price growth across neighborhoods within a city during citywide housing price booms. We then present a model which links house-price movements across neighborhoods within a city and the gentrification of those neighborhoods in response to a citywide housing-demand shock. A key ingredient in our model is a positive neighborhood externality: individuals like to live next to richer neighbors. This generates an equilibrium where households segregate based upon their income. In response to a citywide demand shock, higher-income residents will choose to expand their housing by migrating into the poorer neighborhoods that directly abut the initial richer neighborhoods. The in-migration of the richer residents into these border neighborhoods will bid up prices in those neighborhoods, causing the original poorer residents to migrate out. We refer to this process as “endogenous gentrification.” Using a variety of data sets and using Bartik variation across cities to identify city-level housing demand shocks, we find strong empirical support for the model’s predictions. Read More

  • WP 13-09 | Policy in Adaptive Financial Markets—The Use of Systemic Risk Early Warning Tools

    Mikhail V. Oet Stephen Ong Dieter Gramlich


    How can a systemic risk early warning system (EWS) facilitate the financial stability work of policymakers? In the context of evolving financial market dynamics and limitations of microprudential policy, this study examines new directions for financial macroprudential policy. A flexible macroprudential approach is anchored in strategic capacities of systemic risk EWSs. Tactically, macroprudential applications are founded on information about the level, structure, and institutional drivers of systemic financial stress and aim to manage the financial system risk and imbalances in two dimensions: across time and institutions. Time-related EWS policy applications are analyzed in pursuit of prevention and mitigation. EWS applications across institutions are considered via common exposures and interconnectedness. Care must be taken in the calibration of macroprudential applications, given their reliance on quality of the underlying systemic risk-modeling framework. Read More

  • WP 13-08 | Close but not a Central Bank: The New York Clearing House and Issues of Clearing House Loan Certificates

    Jon Moen Ellis W. Tallman


    The paper examines the New York Clearing House (NYCH) as a lender of last resort by looking at clearing-house-loan-certificate borrowing during five banking panics of the National Banking Era (1863-1913). In that system, adequate aggregate liquidity provision was passive and dependent upon member bank borrowing. We document bank borrowing behavior using bank-level data for clearing-house loan certificates issued to NYCH member banks. The historical record reveals that the large New York City banks behaved in ways that resembled those of a central bank in 1884 and in 1890, but less so in the more severe crises. Read More

  • WP 13-07 | The Long-Term Employment Impacts of Gentrification in the 1990s

    Daniel Hartley T. William Lester


    This paper explores the degree to which gentrification impacts local labor markets. It begins by describing the nature of employment change in one archetypical gentrifying neighborhood—Chicago’s Wicker Park—to motivate the central hypothesis that gentrification is associated with industrial restructuring. Next, a detailed analysis is presented on the long-term employment changes in neighborhoods that have experienced gentrification during the 1990s across a sample of 20 large central cities. This analysis shows that employment grew slightly faster in gentrifying neighborhoods than other portions of the central city. However, jobs in restaurants and retail services tended to replace those lost in goods-producing industries. This process of industrial restructuring occurred at a faster rate in gentrifying areas. Thus gentrification can be considered a contributory and catalytic factor in accelerating the shift away from manufacturing with urban labor markets. Read More

  • WP 12-20R2 | Mortgage Companies and Regulatory Arbitrage

    Yuliya Demyanyk Elena Loutskina

    Original Paper: WP 12-20 | Revisions: WP 12-20R1 | WP 12-20R3 | WP 12-20R4


    Mortgage companies (MCs) do not fall under the strict regulatory regime of depository institutions. We empirically show that this gap resulted in regulatory arbitrage and allowed bank holding companies (BHCs) to circumvent consumer compliance regulations, mitigate capital requirements, and reduce exposure to loan-related losses. Compared to bank subsidiaries, MC subsidiaries of BHCs originated riskier mortgages to borrowers with lower credit scores, lower incomes, higher loan-to-income ratios, and higher default rates. Our results imply that precrisis regulations had the capacity to mitigate the deterioration of lending standards if consistently applied and enforced for all types of intermediaries. Revised April 2014. Read More

  • WP 13-06 | On the Non-Optimality of a Diamond-Dybvig Contract in the Goldstein-Pauzner Environment

    Mahmoud Elamin


    I show, under intuitive conditions on the risk-averse utility function, the nonoptimality of the Diamond and Dybvig (1983) contract in the Goldstein and Pauzner (2005) environment. If marginal utility at zero is low enough, then Goldstein and Pauzner (2005)'s claim about the optimality of the Diamond and Dybvig (1983) contract is true. When it is not, the optimal contract insures the patient depositor against a project default. The contract may exhibit risk-sharing with the impatient depositor. Unlike when Goldstein and Pauzner (2005)'s claim is correct, relative risk aversion greater than 1 does not necessarily make the optimal bank contract run-prone. I present a condition under which it is Read More

  • WP 13-05 | Moving to a Job: The Role of Home Equity, Debt, and Access to Credit

    Yuliya Demyanyk María José Luengo-Prado Bent Sørensen

    Revisions: WP 13-05R


    Using individual-level credit reports merged with loan-level data on mortgages, we estimate how mobility relates to home equity and labor market conditions. We control for constant individual-specific traits with fixed effects and find that homeowners with negative home equity move to other metropolitan areas more than other homeowners. We use a dynamic quantitative model of consumption, housing, employment, and mobility to interpret our findings. The utility gain from accepting a higher-paid job in another area is negatively correlated with home equity. The relationship between home equity and mobility in the data is well replicated by the model. Read More

  • WP 13-04 | Liquidity Provision during the Crisis of 1914: Private and Public Sources

    Margaret Jacobson Ellis W. Tallman

    Revisions: WP 13-04R


    Caught between the end of the National Banking Era and the beginning of the Federal Reserve System, the crisis of 1914 provides an example of a banking panic avoided. We investigate how this outcome was achieved by examining data on the issues of Aldrich-Vreeland emergency currency and clearing house loan certificates to New York City institutions that identify the borrower and the quantity requested for each type of temporary liquidity measure. The extensive provision of temporary credit to a wide array of financial intermediaries was, in our opinion, essential to the successful alleviation of financial distress in 1914. Empirical results indicate an important role for clearing house loan certificates that is distinct from the influence of Aldrich-Vreeland emergency currency issues. Read More

  • WP 13-03 | It’s Not Just for Inflation: The Usefulness of the Median CPI in BVAR Forecasting

    Brent Meyer Saeed Zaman

    Revisions: WP 13-03R


    In this paper we investigate the forecasting performance of the median CPI in a variety of Bayesian VARs (BVARs) that are often used for monetary policy. Until now, the use of trimmed-mean price statistics in forecasting inflation has often been relegated to simple univariate or "Philips-curve" approaches, thus limiting their usefulness in applications that require consistent forecasts of multiple macro variables. We find that inclusion of an extreme trimmed-mean measure—the median CPI—significantly improves the forecasts of both headline and core CPI across our wide-ranging set of BVARs. While the inflation forecasting improvements are perhaps not surprising given the current literature on core inflation statistics, we also find that inclusion of the median CPI improves the forecasting accuracy of the central bank's primary instrument for monetary policy—the federal funds rate. We conclude with a few illustrative exercises that highlight the usefulness of using the median CPI. Read More

  • WP 13-02 | Human Capital in the Inner City

    Dionissi Aliprantis

    Revisions: WP 13-02R


    This paper quantitatively characterizes the "code of the street" from the sociology literature, using the nationally-representative National Longitudinal Survey of Youth 1997 data set to investigate how black young males alter their behavior when living in violent neighborhoods. An astounding 26 percent of black males in the United States report seeing someone shot before turning 12. Conditional on reported exposure to violence, black and white young males are equally likely to engage in violent behavior. Black males' education and labor market outcomes are much worse when reporting exposure to violence; these gaps persist in estimated models controlling for many patterns of selection. Read More

  • WP 13-01 | Do Public Pension Obligations Affect State Funding Costs?

    Jean Burson John Carlson O. Emre Ergungor Patricia Waiwood

    Revisions: WP 13-01R


    States’ unfunded pension obligations to their current and retired employees have exploded in recent years to levels that are estimated to be between $750 billion and $4.4 trillion. In theory, this massive debt should have implications for states’ ability to meet their financial obligations and a measurable impact on funding costs. Yet we find limited evidence that municipal bond markets are pricing the risks to states’ fiscal health arising from these large obligations. Read More

  • WP 12-12R2 | Neighborhood Dynamics and the Distribution of Opportunity

    Dionissi Aliprantis Daniel R. Carroll

    Original Paper: WP 12-12 | Revisions: WP 12-12R1


    This paper uses an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation to investigate the effects of neighborhood externalities. In the model, households choose where to live and how much to invest toward the production of their child's human capital. The return on parents' investment is determined in part by the child's ability and in part by an externality from the average human capital in their neighborhood. We use the model to test a prominent hypothesis about the concentration of poverty within racially-segregated neighborhoods (Wilson 1987). Read More