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2008 Working Papers

  • WP 08-12 | Cross-Sectoral Variation in Firm-Level Idiosyncratic Risk

    Rui Castro Luca Clementi Gian Yoonsoo Lee


    In this paper we use data from the U.S. Census Bureau’s Longitudinal Research Database in order to assess the extent of the cross-sectoral variation in firm-level idiosyncratic risk and shed light on its determinants. We find that firms producing investment goods exhibit greater volatility in sales and TFP growth than firms producing consumption goods. Our data suggests that this may be the case because winner–takes–all competition is more common for the former than for the latter. Read More

  • WP 08-13 | Diagnosing Labor Market Search Models: A Multiple-Shock Approach

    Kenneth Beauchemin Murat Tasci


    We construct a multiple-shock version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to underpredict the volatility of key labor market variables. Data on U.S. job-finding and job separation probabilities are used to help estimate the parameters of a three-dimensional shock process comprising labor productivity, job separation, and matching or “allocative” effciency. Although our multiple-shock model generates some more volatility, it has counterfactual implications for the cyclicality of unemployment and vacancies. Our second exercise forces the model to be the data-generating process to uncover the necessary realizations of all three shocks. Read More

  • WP 08-11 | An Analysis of Foreclosure Rate Differentials in Soft Markets

    Francisca Richter


    A quantile regression model is used to identify the main neighborhood characteristics associated with high foreclosure rates in weak market neighborhoods, specifically for two counties in Ohio and one in Pennsylvania. A decomposition technique by Machado and Mata (2005) allows separating foreclosure filing rate differentials across counties into two components: the first due to differences in the levels of neighborhood characteristics and the second due to differences in the model parameters. At higher than median rates, foreclosure rate differentials between counties in Ohio are mainly explained by the levels of these characteristics. However, foreclosure rate differences between counties across states are mainly explained by the parameter component, suggesting that state level effects might have contributed to shape foreclosure rate outcomes. Read More

  • WP 08-10 | Estimating Real and Nominal Term Structures using Treasury Yields Inflation Inflation Forecasts and Inflation Swap Rates

    Joseph G. Haubrich George Pennacchi Peter Ritchken


    This paper develops and estimates an equilibrium model of the term structures of nominal and real interest rates. The term structures are driven by state variables that include the short term real interest rate, expected inflation, a factor that models the changing level to which inflation is expected to revert, as well as four volatility factors that follow GARCH processes. We derive analytical solutions for the prices of nominal bonds, inflation-indexed bonds that have an indexation lag, the term structure of expected inflation, and inflation swap rates. The model parameters are estimated using data on nominal Treasury yields, survey forecasts of inflation, and inflation swap rates. Read More

  • WP 08-09 | On the Threat of Counterfeiting

    Yiting Li Guillaume Rocheteau


    We study counterfeiting of currency in a search–theoretic model of monetary exchange. In contrast to Nosal and Wallace (2007), we establish that counterfeiting does not pose a threat to the existence of a monetary equilibrium; i.e., a monetary equilibrium exists irrespective of the cost of producing counterfeits, or the ease with which genuine money can be authenticated. However, the possibility to counterfeit ?at money can affect its value, velocity, output and welfare, even if no counterfeiting occurs in equilibrium. We provide two extensions of the model under which the threat of counterfeiting can materialize: counterfeits can circulate across periods, and sellers set terms of trades in some matches. Policies that make the currency more costly to counterfeit or easier to recognize raise the value of money and society’s welfare, but the latter policy does not always decrease counterfeiting. Read More

  • WP 08-08 | Reconsidering the Application of the Holder in Due Course Rule to Home Mortgage Notes

    Mark Greenlee Thomas J. Fitzpatrick IV


    In this paper we investigate the history of negotiable instruments and the holder in due course rule and contrast their function and consequences in the 1700s with their function and consequences today. We explain how the holder in due course rule works and identify ways in which the rule’s application is limited in some consumer transactions. In particular, we focus on laws limiting application of the rule to some home mortgage loans. We investigate Lord Mansfield’s original justification for the rule as a money substitute, the lack of explicit justification of the rule by the drafters of the Uniform Commercial Code in the 1950s, the contemporary justification of the rule as a means of increasing the availability and decreasing the cost of credit, and the concerns of legislators and regulators about lack of consumer knowledge, bargaining power, and financial resources which caused them to limit the application of the holder in due course rule to some consumer transactions. Read More

  • WP 08-07 | Historical Review of Umbrella Supervision by the Board of Governors of the Federal Reserve System

    Mark Greenlee


    The article reviews legislative history and supervisory practices related to bank holding companies with a view toward understanding what Congress meant by referring to the Board of Governors of the Federal Reserve System as the “umbrella supervisor” in the Gramm-Leach-Bliley Act. The first part of the article looks at the historical development of bank holding company law and regulation, which laid the foundation for the current practice of umbrella supervision. The second part of the article provides answers to questions related to the Board’s current role as umbrella supervisor: What does “umbrella supervision” mean, and is it different from “consolidated supervision”? How does the GLB Act limit the Board’s authority and practice and when did the Board obtain all of the legal authority to allow it to practice umbrella supervision? Read More

  • WP 08-06 | Bank Mergers and the Dynamics of Deposit Interest Rates

    Ben R. Craig Valeriya Dinger

    Revisions: WP 08-06R


    Despite extensive research interest in the last decade, the banking literature has not reached a consensus on the impact of bank mergers on deposit rates. In particular, results on the dynamics of deposit rates surrounding bank mergers vary substantially across studies. In this paper, we aim for a comprehensive empirical analysis of a bank merger’s impact on deposit rate dynamics. We base the analysis on a unique dataset comprising deposit rates of 624 US banks with a monthly frequency for the time period 1997-2006. These data are matched with individual bank and local market characteristics and the complete list of bank mergers in the US. The data allow us to track the dynamics of bank mergers while controlling for the rigidity of the deposit rates and for a range of merger, bank, and local market features. An innovation of our work is the introduction of an econometric approach for estimating the change of the deposit rates given their rigidity. Read More

  • WP 08-05 | Investment Spikes and Uncertainty in the Petroleum Refining Industry

    Timothy Dunne Xiaoyu Mu


    This paper investigates the effect of uncertainty on the investment decisions of petroleum refineries in the US. We construct uncertainty measures from commodity futures market and use data on actual capacity changes to measure investment episodes. Capacity changes in US refineries occur infrequently and a small number of investment spikes account for a large fraction of the change in industry capacity. Given the lumpy nature of investment adjustment in this industry, we empirically model the investment process using hazard models. An increase in uncertainty decreases the probability a refinery adjusts its capacity. The results are robust to various investment thresholds. Our findings lend support to theories that emphasize the role of irreversibility in investment decisions. Read More

  • WP 08-04 | Liquidity in Asset Markets with Search Frictions

    Ricardo Lagos Guillaume Rocheteau


    We develop a search-theoretic model of financial intermediation and use it to study how trading frictions affect the distribution of asset holdings, asset prices, efficiency, and standard measures of liquidity. A distinctive feature of our theory is that it allows for unrestricted asset holdings, so market participants can accommodate trading frictions by adjusting their asset positions. We show that these individual responses of asset demands constitute a fundamental feature of illiquid markets: they are a key determinant of bid-ask spreads, trade volume, and trading delays—all the dimensions of market liquidity that search-based theories seek to explain. Read More

  • WP 08-03 | Do Financial Education Programs Work?

    Ian Hathaway Sameer Khatiwada


    In this paper we provide a comprehensive critical analysis of research that has investigated the impact of financial education programs on consumer financial behavior. In light of the evidence, we recommend that future programs be highly targeted toward a specific audience and area of financial activity (e.g. homeownership or credit card counseling, etc.), and that this training occurs just before the corresponding financial event (e.g. purchase of a home or use of a credit card, etc.). Similarly, in light of a lack of evidence, we also recommend that program evaluation be taken as an essential element of any program, and that it be included in the design of the programs before they are introduced. Read More

  • WP 08-02 | Money and Competing Assets under Private Information

    Guillaume Rocheteau


    I study random-matching economies where at money coexists with real assets, and no restrictions are imposed on payment arrangements. I emphasize informational asymmetries about asset fundamentals to explain the partial illiquidity of real assets and the usefulness of at money. The liquidity of the real asset, as measured by its transaction velocity, is shown to depend on the discrepancy of its dividend across states as well as policy. I analyze how monetary policy affects payment arrangements, asset prices, and welfare. Read More

  • WP 08-01 | Positive and Normative Effects of a Minimum Wage

    Guillaume Rocheteau Murat Tasci


    We review the positive and normative effects of a minimum wage in various versions of a search-theoretic model of the labor market. Read More

  • WP 07-18R | Entry, Exit, and Plant-Level Dynamics over the Business Cycle

    Yoonsoo Lee Toshihiko Mukoyama


    This paper analyzes the implications of plant-level dynamics over the business cycle. We first document basic patterns of entry and exit of U.S. manufacturing plants, in terms of employment and productivity, between 1972 and 1997. We show how entry and exit patterns vary during the business cycle, and that the cyclical pattern of entry is very different from the cyclical pattern of exit. Second, we build a general equilibrium model of plant entry, exit, and employment and compare its predictions to the data. In our model, plants enter and exit endogenously, and the size and productivity of entering and exiting plants are also determined endogenously. Finally, we explore the policy implications of the model. Imposing a firing tax that is constant over time can destabilize the economy by causing fluctuations in the entry rate. Entry subsidies are found to be effective in stabilizing the entry rate and output. Read More