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Working Papers

Working Papers

  • WP 19-02 | Can Landlords Be Paid to Stop Avoiding Voucher Tenants?

    Dionissi Aliprantis Hal Martin David Phillips


    Despite being eligible for use in any neighborhood, housing choice vouchers tend to be redeemed in low-opportunity neighborhoods. This paper investigates whether landlord behavior contributes to this outcome by studying the recent expansion of neighborhood-based voucher limits in Washington, DC. We conduct two waves of a correspondence experiment: one before and one after the expansion. Landlords heavily penalize tenants who indicate a desire to pay by voucher. The voucher penalty is larger in high-rent neighborhoods, pushing voucher tenants to low-rent neighborhoods. We find no evidence that indexing rents to small areas affects landlord acceptance of voucher tenants. The data can reject the claim that increasing rent limits by less than $3,000 per month can eliminate the voucher penalty. Neighborhood rent limits do shift lease-up locations toward high-rent neighborhoods in the year after the policy change, an effect that is large relative to the number of voucher households that move but small relative to all voucher tenants.   Read More

  • WP 19-01 | Causal Impact of Risk Oversight Functions on Bank Risk: Evidence from a Natural Experiment

    Lakshmi Balasubramanyan Naveen Daniel Joseph G. Haubrich Lalitha Naveen


    Our goal is to document the causal impact of having a board-level risk committee (RC) and a management-level executive designated as chief risk officer (CRO) on bank risk. The Dodd Frank Act requires bank holding companies with over $10 billion of assets to have an RC, while those with over $50 billion of assets are additionally required to have a CRO to oversee risk management. The innovation that allows us to document a causal impact is our research design. First, we use the passage of the Dodd Frank Act as a natural experiment that forced noncompliant firms to adopt an RC and appoint a CRO. We adopt the difference-in-difference approach to estimate the change in risk following RC and CRO adoption. Second, we use the regression discontinuity approach centered on the $10 billion and $50 billion thresholds whereby firms that were just below the threshold were not required by the law to install an RC and to recruit a CRO, while those just above the thresholds had to comply with the regulation. Our contribution is to document that neither the RC nor the CRO have a causal impact on risk near these thresholds. However, we do find strong evidence of risk reduction following the passage of the law.   Read More

  • WP 18-16 | Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985-2015

    Christopher Foote Lara Loewenstein Paul Willen


    The application of information technology to finance, or “fintech,” is expected to revolutionize many aspects of borrowing and lending in the future, but technology has been reshaping consumer and mortgage lending for many years. During the 1990s computerization allowed mortgage lenders to reduce loan-processing times and largely replace human-based assessment of credit risk with default predictions generated by sophisticated empirical models. Debt-to-income ratios at origination add little to the predictive power of these models, so the new automated underwriting systems allowed higher debt-to-income ratios than previous underwriting guidelines would have typically accepted. In this way, technology brought about an exogenous change in lending standards, which helped raise the homeownership rate and encourage the conversion of rental properties to owner-occupied ones, but did not have large effects on housing prices. Technological innovation in mortgage underwriting may have allowed the 2000s housing boom to grow, however, because it enhanced the ability of both borrowers and lenders to act on optimistic beliefs about future house-price growth.   Read More

  • WP 17-21R | Costly Information Intermediation as a Natural Monopoly

    Daniel Monte Roberto Pinheiro

    Original Paper: WP 17-21


    Many markets rely on information intermediation to sustain cooperation between large communities. We identify a key trade-off in costly information intermediation: intermediaries can create trust by incentivizing information exchange, but with too much information acquisition, intermediation becomes expensive, with a resulting high equilibrium default rate and a low fraction of agents buying this information. The particular pricing scheme and the competitive environment affect the direct and indirect costs of information transmission, represented by fees paid by consumers and the expected loss due to imperfect information, respectively. Moreover, we show that information trade has characteristics similar to a natural monopoly, where competition may be detrimental to efficiency either because of the duplication of direct costs or the slowing down of information spillovers. Finally, a social-welfare-maximizing policymaker optimally chooses a low information sampling frequency in order to maximize the number of partially informed agents. In other words, maximizing information spillovers, even at the cost of slow information accumulation, enhances welfare.   Read More

  • WP 18-15 | Understanding the Aspects of Federal Reserve Forward Guidance

    Kurt G. Lunsford


    This paper studies the effects of Federal Open Market Committee (FOMC) forward guidance language. I estimate two policy surprises at FOMC meetings: a change in the current federal funds rate and an orthogonal change in the expected path of the federal funds rate. From February 2000 to June 2003, the FOMC only gave forward guidance about risks to the economic outlook, and a surprise increase in the expected federal funds rate path had expansionary effects. This is consistent with models of central bank information effects, where a positive economic outlook causes private agents to revise up their expectations for the economy. From August 2003 to May 2006, the FOMC also gave forward guidance about policy inclinations, and a surprise increase in the federal funds rate path had contractionary effects. These results are consistent with standard macroeconomic models of forward guidance. Overall, the effects of forward guidance depend on the FOMC’s choice to use one or both of the economic-outlook and policy-inclination aspects of forward guidance.   Read More

  • WP 18-14 | All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy

    Richard Ashley Kwok Ping Tsang Randal J. Verbrugge


    The historical analysis of FOMC behavior using estimated simple policy rules requires the specification of either an estimated natural rate of unemployment or an output gap. But in the 1970s, neither output gap nor natural rate estimates appear to guide FOMC deliberations. This paper uses the data to identify the particular implicit unemployment rate gap (if any) that is consistent with FOMC behavior. While its ability appears to have improved over time, our results indicate that, both before the Volcker period and through the Bernanke period, the FOMC distinguished persistent movements in the unemployment rate from other movements; implicitly such movements were treated as an intermediate target, one that departs substantially from conventional estimates of the natural rate. We further investigate historical FOMC responses to inflation fluctuations. In this regard, FOMC behavior changed in the Volcker-Greenspan-Bernanke period: its response to the inflation rate became much stronger, and it focused more intensely on very persistent movements in this variable. Our results shed light on the “Great Inflation” experience of the 1970s, and are consistent with the view that political pressures effectively limited the FOMC response to the buildup of inflation. They also suggest new directions for DSGE modeling.   Read More

  • WP 18-12 | Inflation, Debt, and Default

    Sewon Hur Illenin Kondo Fabrizio Perri


    We study how the co-movement of inflation and economic activity affects real interest rates and the likelihood of debt crises. First, we show that for advanced economies, periods with procyclical inflation are associated with lower real interest rates. Procyclical inflation implies that nominal bonds pay out more in bad times, making them a good hedge against aggregate risk. However, such procyclicality also increases sovereign default risk when the economy deteriorates, since the government needs to make larger (real) payments. In order to evaluate both effects, we develop a model of sovereign default on domestic nominal debt with exogenous inflation risk and domestic risk-averse lenders. Countercyclical inflation is a substitute with default, while procyclical inflation is a complement with it, by increasing default incentives. In good times, when default is unlikely, procyclical inflation yields lower real rates. In bad times, as default becomes more material, procyclical inflation can magnify default risk and trigger an increase in real rates.   Read More

  • WP 18-13 | A Closer Look at the Behavior of Uncertainty and Disagreement: Micro Evidence from the Euro Area

    Robert Rich Joseph Tracy


    This paper examines point and density forecasts of real GDP growth, inflation and unemployment from the European Central Bank’s Survey of Professional Forecasters. We present individual uncertainty measures and introduce individual point- and density-based measures of disagreement. The data indicate substantial heterogeneity and persistence in respondents’ uncertainty and disagreement, with uncertainty associated with prominent respondent effects and disagreement associated with prominent time effects. We also examine the co-movement between uncertainty and disagreement and find an economically insignificant relationship that is robust to changes in the volatility of the forecasting environment. This provides further evidence that disagreement is not a reliable proxy for uncertainty.   Read More

  • WP 18-11 | A Class of Time-Varying Parameter Structural VARs for Inference under Exact or Set Identification

    Mark Bognanni


    This paper develops a new class of structural vector autoregressions (SVARs) with time-varying parameters, which I call a drifting SVAR (DSVAR). The DSVAR is the first structural time-varying parameter model to allow for internally consistent probabilistic inference under exact—or set—identification, nesting the widely used SVAR framework as a special case. I prove that the DSVAR implies a reduced-form representation, from which structural inference can proceed similarly to the widely used two-step approach for SVARs: beginning with estimation of a reduced form and then choosing among observationally equivalent candidate structural parameters via the imposition of identifying restrictions. In a special case, the implied reduced form is a tractable known model for which I provide the first algorithm for Bayesian estimation of all free parameters. I demonstrate the framework in the context of Baumeister and Peersman’s (2013b) work on time variation in the elasticity of oil demand.   Read More

  • WP 16-35R | Goods-Market Frictions and International Trade

    Pawel Krolikowski Andrew McCallum

    Original Paper: WP 16-35


    We add goods-market frictions to a general equilibrium dynamic model with heterogeneous exporting producers and identical importing retailers. Our tractable framework leads to endogenously unmatched producers, which attenuate welfare responses to foreign shocks but increase the trade elasticity relative to a model without search costs. Search frictions are quantitatively important in our calibration, attenuating welfare responses to tariffs by 40 percent and increasing the trade elasticity by 50 percent. Eliminating search costs raises welfare by 1 percent and increasing them by only a few dollars has the same effects on welfare and trade flows as a 10 percent tariff.   Read More