Skip to main content

Working Papers

Working Papers

  • WP 16-14R2 | The Impact of Stricter Merger Control on Bank Mergers and Acquisitions. Too-Big-To-Fail and Competition


    Elena Carletti Steven Ongena Jan-Peter Siedlarek Giancarlo Spagnolo

    Original Paper: WP 16-14R

    Abstract

    The effect of regulations on the banking sector is a key question for financial intermediation. This paper provides evidence that merger control regulation, although not directly targeted at the banking sector, has substantial economic effects on bank mergers. Based on an extensive sample of European countries, we show that target announcement premia increased by up to 16 percentage points for mergers involving control shifts after changes in merger legislation, consistent with a market expectation of increased profitability. These effects go hand-in-hand with a reduction in the propensity for mergers to create banks that are too-big-to-fail in their country.   Read More

  • WP 19-14 | Monetary Policy and Macroeconomic Stability Revisited


    Yasuo Hirose Willem Van Zandweghe Takushi Kurozumi

    Abstract

    A large literature has established that the Fed’s change from a passive to an active policy response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature’s view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The model empirically outperforms canonical New Keynesian models that confirm the literature’s view. Our estimated model shows an active policy response to inflation even during the Great Inflation. More importantly, a more active policy response to inflation alone does not suffice for explaining the U.S. macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. This extends the literature by emphasizing the importance of the changes in other aspects of monetary policy in addition to its response to inflation.   Read More

  • WP 1804R | Internal Migration in the United States: A Comprehensive Comparative Assessment of the Consumer Credit Panel


    Jack DeWaard Janna E. Johnson Stephan D. Whitaker

    Original Paper: WP 18-04

    Abstract

    We introduce and provide the first comprehensive comparative assessment of the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP) as a valuable and underutilized data set for studying internal migration within the United States. Relative to other data sources on US internal migration, the CCP permits highly detailed cross-sectional and longitudinal analyses of migration, both temporally and geographically. We compare cross-sectional and longitudinal estimates of migration from the CCP to similar estimates derived from the American Community Survey, the Current Population Survey, Internal Revenue Service data, the National Longitudinal Survey of Youth, the Panel Study of Income Dynamics, and the Survey of Income and Program Participation. Our results establish the comparative utility and illustrate some of the unique advantages of the CCP relative to other data sources on US internal migration. We conclude by identifying some profitable directions for future research on US internal migration using the CCP, as well as reminding readers of the strengths and limitations of these data. More broadly, this paper contributes to discussions and debates on improving the availability, quality, and comparability of migration data.   Read More

  • WP 19-13 | Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy


    Michael Bordo Edward S. Prescott

    Abstract

    The decentralized structure of the Federal Reserve System is evaluated as a mechanism for generating and processing new ideas on monetary and financial policy. The role of the Reserve Banks starting in the 1960s is emphasized. The introduction of monetarism in the 1960s, rational expectations in the 1970s, credibility in the 1980s, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System is documented. Contributions by Reserve Banks to policy on bank structure, bank regulation, and lender of last resort are also discussed. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s. Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure, a structure set up in 1913 for a highly decentralized Federal Reserve System, but which survived the centralization of the System in the Banking Act of 1935. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve’s decentralized structure and contributes to better policy by allowing for more competition in ideas and reducing groupthink.   Read More

  • WP 19-12 | The Effect of Possible EU Diversification Requirements on the Risk of Banks’ Sovereign Bond Portfolios


    Ben R. Craig Margherita Giuzio Sandra Paterlini

    Abstract

    Recent policy discussion includes the introduction of diversification requirements for sovereign bond portfolios of European banks. In this paper, we evaluate the possible effects of these constraints on risk and diversification in the sovereign bond portfolios of the major European banks. First, we capture the dependence structure of European countries’ sovereign risks and identify the common factors driving European sovereign CDS spreads by means of an independent component analysis. We then analyze the risk and diversification in the sovereign bond portfolios of the largest European banks and discuss the role of “home bias,” i.e., the tendency of banks to concentrate their sovereign bond holdings in their domicile country. Finally, we evaluate the effect of diversification requirements on the tail risk of sovereign bond portfolios and quantify the system-wide losses in the presence of fire-sales. Under our assumptions about how banks respond to the new requirements, demanding that banks modify their holdings to increase their portfolio diversification may mitigate fire-sale externalities, but it may be ineffective in reducing portfolio risk, including tail risk.   Read More

  • WP 19-11 | Macroprudential Policy: Results from a Tabletop Exercise


    Denise Duffy Joseph G. Haubrich Anna Kovner Alex Musatov Edward S. Prescott Richard J. Rosen Thomas D. Tallarini Jr. Alexandros P. Vardoulakis Emily Yang Andrei Zlate

    Abstract

    This paper presents a tabletop exercise designed to analyze macroprudential policy. Several senior Federal Reserve officials were presented with a hypothetical economy as of 2020:Q2 in which commercial real estate and nonfinancial debt valuations were very high. After analyzing the economy and discussing the use of monetary and macroprudential policy tools, participants were then presented with a hypothetical negative shock to commercial real estate valuations that occurred in the second half of 2020. Participants then discussed the use of the tools during an incipient downturn. Some of the findings of the exercise were that during an asset boom, there were limits to the effectiveness of US macroprudential tools in controlling narrow risks and that changes to the fed funds rate may not always simultaneously meet macroeconomic and financial stability goals. Some other findings were that during a downturn, it would be desirable to use high-frequency indicators for deciding when to release the countercyclical capital buffer (CCyB) and that tensions exist between microprudential and macroprudential goals when using the CCyB and the stress test.   Read More

  • WP 19-08 | Asymptotically Valid Bootstrap Inference for Proxy SVARs


    Carsten Jentsch Kurt G. Lunsford

    Abstract

    Proxy structural vector autoregressions identify structural shocks in vector autoregressions with external variables that are correlated with the structural shocks of interest but uncorrelated with all other structural shocks. We provide asymptotic theory for this identification approach under mild α-mixing conditions that cover a large class of uncorrelated, but possibly dependent innovation processes, including conditional heteroskedasticity. We prove consistency of a residual-based moving block bootstrap for inference on statistics such as impulse response functions and forecast error variance decompositions. Wild bootstraps are proven to be generally invalid for these statistics and their coverage rates can be badly and persistently mis-sized.   Read More

  • WP 19-10 | Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation


    Kristina Bluwstein Michał Brzoza-Brzezina Paolo Gelain Marcin Kolasa

    Abstract

    We study the implications of multiperiod mortgage loans for monetary policy, considering several realistic modifications—fixed interest rate contracts, a lower bound constraint on newly granted loans, and the possibility of the collateral constraint to become slack—to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective and may lead to asymmetric responses to positive and negative monetary shocks.   Read More

  • WP 19-09 | Variation in the Phillips Curve Relation across Three Phases of the Business Cycle


    Richard Ashley Randal J. Verbrugge

    Abstract

    We use recently developed econometric tools to demonstrate that the Phillips curve unemployment rate–inflation rate relationship varies in an economically meaningful way across three phases of the business cycle. The first (“bust phase”) relationship is the one highlighted by Stock and Watson (2010): A sharp reduction in inflation occurs as the unemployment rate is rising rapidly. The second (“recovery phase”) relationship occurs as the unemployment rate subsequently begins to fall; during this phase, inflation is unrelated to any conventional unemployment gap. The final (“overheating phase”) relationship begins once the unemployment rate drops below its natural rate. We validate our findings in a forecasting exercise and find statistically significant episodic forecast improvement. Our analysis allows us to provide a unified explanation of many prominent findings in the literature.   Read More

  • WP 17-06R | Firms, Skills, and Wage Inequality


    Roberto Pinheiro Murat Tasci

    Original Paper: WP 17-06

    Abstract

    We present a model with search frictions and heterogeneous agents that allows us to decompose the overall increase in US wage inequality in the last 30 years into its within- and between-firm and skill components. We calibrate the model to evaluate how much of the overall rise in wage inequality and its components is explained by different channels. Output distribution per firm-skill pair more than accounts for the observed increase over this period. Parametric identification implies that the worker-specific component is responsible for 85 percent of this, compared to 15 percent that is attributable to firm-level productivity shifts.   Read More