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2014 Working Papers

  • WP 14-42 | Majority Voting: A Quantitative Investigation

    Daniel R. Carroll Jim Dolmas Eric Young

    Revisions: WP 14-42R


    We study the tax systems that arise in a once-and-for-all majority voting equilibrium embedded within a macroeconomic model of inequality. We find that majority voting delivers (i) a small set of outcomes, (ii) zero labor income taxation, and (iii) nearly zero transfers. We find that majority voting, contrary to the literature developed in models without idiosyncratic risk, is quite powerful at restricting outcomes; however, it also delivers predictions inconsistent with observed tax systems. Read More

  • WP 14-41 | Can Reputation Ensure Efficiency in the Structured Finance Market?

    Mahmoud Elamin


    This paper investigates whether the fear of losing its reputation can discipline a credit rating agency (CRA) in the structured finance market, where products are opaque and ratings are unverifiable. Read More

  • WP 14-40 | Big Data versus a Survey

    Stephan D. Whitaker


    Economists are shifting attention and resources from work on survey data to work on “big data.” This analysis is an empirical exploration of the trade-offs this transition requires. Parallel models are estimated using the Federal Reserve Bank of New York Consumer Credit Panel/Equifax and the Survey of Consumer Finances. After adjustments to account for different variable definitions and sampled populations, it is possible to arrive at similar models of total household debt. However, the estimates are sensitive to the adjustments. Little similarity is observed in parallel models of nonmortgage debt. While surveys intentionally collect theoretically related variables, it may be necessary to merge external data into commercial big data. In this example, some education and income measures are successfully integrated with the big data, but other external aggregates fail to adequately substitute for survey responses. Big data offers sample sizes, frequencies, and details that surveys cannot match. However, this example illustrates why caution is appropriate when attempting to substitute big data for a carefully executed survey. Read More

  • WP 14-39 | Using Entropic Tilting to Combine BVAR Forecasts with External Nowcasts

    Fabian Krueger Todd E. Clark Francesco Ravazzolo


    This paper shows entropic tilting to be a flexible and powerful tool for combining medium-term forecasts from BVARs with short-term forecasts from other sources (nowcasts from either surveys or other models). Tilting systematically improves the accuracy of both point and density forecasts, and tilting the BVAR forecasts based on nowcast means and variances yields slightly greater gains in density accuracy than does just tilting based on the nowcast means. Hence entropic tilting can offer—more so for persistent variables than not-persistent variables—some benefits for accurately estimating the uncertainty of multi-step forecasts that incorporate nowcast information. Read More

  • WP 14-33 | Can Leverage Constraints Help Investors?

    Rawley Z. Heimer


    This paper provides causal evidence that leverage constraints can reduce the underperformance of individual investors. Read More

  • WP 14-38 | Assessing the Change in Labor Market Conditions

    Hess Chung Bruce Fallick Christopher Nekarda David Ratner


    This paper describes a dynamic factor model of 19 U.S. labor market indicators, covering the broad categories of unemployment and underemployment, employment, workweeks, wages, vacancies, hiring, layoffs, quits, and surveys of consumers’ and businesses’ perceptions. The resulting labor market conditions index (LMCI) is a useful tool for gauging the change in labor market conditions. In addition, the model provides a way to organize discussions of the signal value of different labor market indicators in situations when they might be sending diverse signals. The model takes the greatest signal from private payroll employment and the unemployment rate. Other influential indicators include the insured unemployment rate, consumers’ perceptions of job availability, and help-wanted advertising. Through the lens of the LMCI, labor market conditions have improved at a moderate pace over the past several years, albeit with some notable variation along the way. In addition, from the perspective of the model, the unemployment rate declined a bit faster over the past two years than was consistent with the other indicators. Read More

  • WP 14-37 | The Effect of Safe Assets on Financial Fragility in a Bank-Run Model

    Toni Ahnert Mahmoud Elamin


    We revisit Goldstein and Pauzner (2005) and show that, in the optimal demand-deposit contract subject to sequential service, banks hold safe assets to insure investors against investment risk. Consequently, fewer investors withdraw prematurely, which reduces the probability of a bank run. Safe asset holdings increase investor welfare and may increase the bank's provision of liquidity. Read More

  • WP 14-36 | What Kind of Teachers Are Schools Looking For? Evidence from a Randomized Field Experiment

    Peter L. Hinrichs


    Teacher quality is a pressing public policy concern, yet there is little evidence on what types of teachers schools actually prefer to hire. This paper reports the results of an experiment that involved sending schools fictitious resumes with randomly-chosen characteristics in an attempt to determine what characteristics schools value when hiring new teachers. The results of the study suggest that an applicant’s academic background has little impact on the likelihood of success at private and charter schools, although public schools respond more favorably to candidates from more selective colleges. Additionally, private schools demonstrate a slight preference for female candidates, and all three sectors demonstrate a preference for in-state candidates Read More

  • WP 14-35 | An Empirical Analysis of Racial Segregation in Higher Education

    Peter L. Hinrichs


    This descriptive paper documents how segregation between blacks and whites across colleges in the United States has evolved since the 1960s. It also explores potential channels through which changes are occurring, and it uses recent data to study the issue of segregation within colleges. The main findings are as follows: (1) White exposure to blacks has been rising since the 1960s, whereas black exposure to whites increased sharply in the late 1960s and early 1970s and has fluctuated since then. Meanwhile, black-white dissimilarity and the Theil index fell sharply in the late 1960s and early 1970s and have fallen more gradually since. (2) There has been regional convergence, although colleges in the South remain more segregated than those in any other region when measured by dissimilarity, by the Theil index, or by black exposure to whites. (3) A major channel for the decline in segregation is the declining share of blacks attending historically black colleges and universities. (4) Although there is segregation within universities, most segregation across major × university cells occurs across universities. Read More

  • WP 14-34 | Legal Institutions, Credit Markets, and Economic Activity

    James Brown J. Anthony Cookson Rawley Z. Heimer


    This paper provides novel evidence on the causal connections between legal institutions, credit markets, and real economic activity. Read More

  • WP 14-32 | The Piketty Transition

    Daniel R. Carroll Eric Young

    Revisions: WP 14-32R | WP 14-32R2


    We study the effects on inequality of a "Piketty transition" to zero growth. In a model with a worker-capitalist dichotomy, we show that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth can raise or lower inequality, depending on parameters. In particular, the elasticity of substitution between capital and labor in production needs to be considerably greater than 1 in order for income inequality be higher with zero growth; furthermore, the inequality effects operate through labor supply when the elasticity is high, rather than through r - g. Extending our model to include idiosyncratic wage risk we show that growth has quantitatively negligible effects on inequality, and furthermore the effect is negative rather than positive. Modifications designed to mitigate the decline in returns (such as financial development or capital-biased technical change) along the transition either strengthen or do not affect our conclusions. Read More

  • WP 14-31 | Household Debt and Local Public Finances

    Ron Cheung Chris Cunningham Stephan D. Whitaker


    In the wake of the Great Recession, steep declines in state and local government expenditures and employment were a large and persistent source of economic weakness. The business cycle was also characterized by large increases and decreases in household debt. We estimate the extent to which variation in local government revenues and expenditures can be explained by variation in the expansion of household debt from 2002 to 2007, and the contraction thereafter. Read More

  • WP 14-30 | Frequency Dependence in a Real-Time Monetary Policy Rule

    Richard Ashley Kwok Ping Tsang Randal J. Verbrugge


    We estimate a monetary policy rule for the US allowing for possible frequency dependence--i.e., allowing the central bank to respond differently to more persistent innovations than to more transitory innovations, in both the unemployment rate and the inflation rate. Read More

  • WP 14-29 | Do Tenant- and Place-Based Rental Housing Programs Complement Each Other? Evidence from Ohio

    Brett Barkley Amy Higgins Francisca Richter

    Revisions: WP 14-29R2 | WP14-29R


    We characterize Housing Choice Voucher (HCV) use in Low-Income Housing Tax Credit (LIHTC) units with the intent to explore whether the subsidy overlap responds to needs unmet by the HCV program alone. Lacking the data to contrast HCV use in and out of LIHTC units, we turn to a comparison of HCV users in LIHTC units relative to the overall HCV population. Our analysis of 2011 tenantlevel LIHTC data from Ohio and HCV data from HUD suggests placed-based vouchers, which must be redeemed in an LIHTC unit, are more likely allocated to extremely low-income or special-needs households. On the other hand, HCV users who freely choose to redeem their voucher in an LIHTC unit are similar to the overall HCV population in terms of incomes and ethnicity, although they tend to be older. There is little evidence that using both programs in concert enables access to better neighborhoods for HCV users: households across both programs live in neighborhoods that tend to have poverty rates above 20 percent, with HCV-LIHTC users actually living in higher-poverty neighborhoods in most urban Ohio counties when compared to the HCV population as a whole. Read More

  • WP 14-28 | Rebuilding after Disaster Strikes: How Local Lenders Aid in the Recovery

    Kristle Cortés


    Using detailed employment data on firm age and size, I show that the presence of local finance improves job retention and creation at young and small firms. Read More

  • WP 14-27 | Estimating (Markov-Switching) VAR Models without Gibbs Sampling: A Sequential Monte Carlo Approach

    Mark Bognanni Edward Herbst


    Vector autoregressions with Markov-switching parameters (MS-VARs) offer dramatically better data fit than their constant-parameter predecessors. We document the effectiveness of Sequential Monte Carlo (SMC) algorithms at estimating MSVAR posteriors, and we exploit SMC's flexibility to demonstrate that the use of priors with superior data fit alters inference about the presence of time variation in macroeconomic dynamics. Using the same data as Sims, Waggoner, and Zha (2008), we provide evidence of recurrent episodes characterized by a flat Phillips curve. Read More

  • WP 14-26 | Drifting Inflation Targets and Monetary Stagflation

    Shujaat Khan Edward S. Knotek II


    This paper revisits the phenomenon of stagflation. Using a standard New Keynesian dynamic, stochastic general equilibrium model, we show that stagflation from monetary policy alone is a very common occurrence when the economy is subject to both deviations from the policy rule and a drifting inflation target. Read More

  • WP 14-25 | Debt-Overhang Banking Crises

    Filippo Occhino


    This paper studies how a worsening of the debt overhang distortion on bank lending can explain banking solvency crises that are accompanied by a plunge of bank asset values and by a severe contraction of lending and economic activity. Read More

  • WP 14-24 | What Is the Equity-Efficiency Tradeoff when Maintaining Wells in Rural Haiti?

    Dionissi Aliprantis


    This paper quantitatively compares water infrastructure interventions that prioritize equity with those that prioritize efficiency. Read More

  • WP 14-22 | Unemployment Flows, Participation, and the Natural Rate for Turkey

    Gonul Sengul Murat Tasci


    This paper measures flow rates into and out of unemployment for Turkey and uses them to estimate the unemployment rate trend, that is, the unemployment rate to which the economy converges in the long run. Read More

  • WP 14-21 | The Role of Interbank Relationships and Liquidity Needs

    Ben R. Craig Falko Fecht Günseli Tümer-Alkan


    In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. Read More

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

    Lakshmi Balasubramanyan Saeed Zaman James Thomson

    Original Paper: WP 13-13


    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 14-20 | Optimal Contracts, Aggregate Risk, and the Financial Accelerator

    Charles T. Carlstrom Timothy S. Fuerst Matthius Paustian


    This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (1999). Read More

  • WP 14-19 | Targeting Long Rates in a Model with Segmented Markets

    Charles T. Carlstrom Timothy S. Fuerst Matthius Paustian


    This paper develops a model of segmented financial markets in which the net worth of financial institutions limits the degree of arbitrage across the term structure. Read More

  • WP 14-18 | Interbank Lending and Distress: Observables, Unobservables, and Network Structure

    Ben R. Craig Michael Koetter Ulrich Krüger


    We provide empirical evidence on the relevance of systemic risk through the interbank lending channel. Read More

  • WP 14-17 | Volatile Lending and Bank Wholesale Funding

    Ben R. Craig Valeriya Dinger


    The paper presents the first empirical study of the relation between bank loan volume volatility and bank retail and wholesale liabilities. Read More

  • WP 14-16 | Filling in the Blanks: Network Structure and Interbank Contagion

    Kartik Anand Ben R. Craig Goetz von Peter


    This paper proposes an efficient method for estimating counterparty exposures in banking and financial markets. It combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, yielding networks with minimum density. When used in a stress-testing context, the minimum-density solution overestimates contagion, whereas maximum entropy underestimates it. Using the two benchmarks side by side defines a useful range that bounds the cost of contagion in the true interbank network when counterparty exposures are unknown. Read More

  • WP 14-23 | The Impact of Missed Payments and Foreclosures on Credit Scores

    Yuliya Demyanyk


    This paper debunks the common perception that "foreclosure will ruin your credit score." Read More

  • WP 14-15 | Differential Capital Requirements: Leverage Ratio versus Risk-Based Capital Ratio from a Monitoring Perspective

    Lakshmi Balasubramanyan


    In this paper, I attempt to amalgamate the study of leverage-ratio performance with the monitoring decisions of a profit-maximizing bank. Read More

  • WP 12-40R | Can Local Housing Ordinances Prevent Neighborhood Destabilization?

    Thomas J. Fitzpatrick IV Lisa Nelson Francisca Richter Stephan D. Whitaker

    Original Paper: WP 12-40


    This paper assesses the ability of local housing ordinances to prevent neighborhood destabilization. We evaluate the degree to which vacancy registrations and point-of-sale inspection requirements influenced housing market outcomes following the housing crisis. With comprehensive real property data from Cuyahoga County, Ohio, we measure outcomes that characterize housing market distress including foreclosures, sales below the tax-assessed value, bulk sales, flipping, and property tax delinquency. We compare outcomes across properties in regulated and unregulated municipalities using matching procedures on linked data containing property, loan, and transaction characteristics. We find evidence that vacancy registrations substantially reduce foreclosures. Registrations are also negatively associated with tax delinquency and sales below a property's tax-assessed value in some specifications. In contrast, we find little evidence that point-of-sale inspections reduce undesirable transactions. Rather, properties in cities with inspection requirements displayed higher levels of foreclosure and tax delinquency relative to the control group during the study period. Read More

  • WP 14-14 | The Evolution of the Federal Reserve Swap Lines since 1962

    Michael Bordo Owen F. Humpage Anna Schwartz


    In this paper, we describe the evolution of the Federal Reserve's swap lines from their inception in 1962. Read More

  • WP 14-13 | Evaluating Conditional Forecasts from Vector Autoregressions

    Todd E. Clark Michael McCracken

    Revisions: WP 14-13R


    Many forecasts are conditional in nature. For example, a number of central banks routinely report forecasts conditional on particular paths of policy instruments. Even though conditional forecasting is common, there has been little work on methods for evaluating conditional forecasts. This paper provides analytical, Monte Carlo, and empirical evidence on tests of predictive ability for conditional forecasts from estimated models. In the empirical analysis, we consider forecasts of growth, unemployment, and inflation from a VAR, based on conditions on the short-term interest rate. Throughout the analysis, we focus on tests of bias, efficiency, and equal accuracy applied to conditional forecasts from VAR models. Read More

  • WP 14-12 | Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters

    Kristle Cortés Phillip Strahan

    Revisions: WP 14-12R


    Multi-market banks reallocate capital when local credit demand increases after natural disasters. Read More

  • WP 14-11 | Have Standard VARs Remained Stable since the Crisis?

    Knut Are Aastveit Andrea Carriero Todd E. Clark Massimiliano Marcellino

    Revisions: WP 14-11R


    Small or medium-scale VARs are commonly used in applied macroeconomics for forecasting and evaluating the shock transmission mechanism. This requires the VAR parameters to be stable over the evaluation and forecast sample, or to explicitly consider parameter time variation. The earlier literature focused on whether there were sizable parameter changes in the early 1980s, in either the conditional mean or variance parameters, and in the subsequent period till the beginning of the new century. In this paper we conduct a similar analysis but focus on the effects of the recent crisis. Using a range of techniques, we provide substantial evidence against parameter stability. The evolution of the unemployment rate seems particularly different relative to its past behavior. We then discuss and evaluate alternative methods to handle parameter instability in a forecasting context. While none of the methods clearly emerges as best, some techniques turn out to be useful to improve the forecasting performance. Read More

  • WP 14-10 | Labor Force Participation: Recent Developments and Future Prospects

    Stephanie Aaronson Tomaz Cajner Bruce Fallick Felix Galbis-Reig Christopher Smith William Wascher


    Since 2007, the labor force participation rate has fallen from about 66 percent to about 63 percent. We use a variety of approaches to assess reasons for the decline in participation. Read More

  • WP 14-09 | The Transmission of the Financial Crisis in 1907: An Empirical Investigation

    Jon Moen Ellis W. Tallman


    Using an extensive high-frequency data set, we investigate the transmission of financial crisis specifically focusing on the Panic of 1907, the final severe panic of the National Banking Era (1863-1913). Read More

  • WP 10-11R | The Effect of Foreclosures on Nearby Housing Prices: Supply or Disamenity

    Daniel Hartley

    Original Paper: WP 10-11


    A number of studies have measured negative price effects of foreclosed residential properties on nearby property sales. However, only one other study addresses which mechanism is responsible for these effects. I measure separate effects for different types of foreclosed properties and use these estimates to decompose the effects of foreclosures on nearby home prices into a component that is due to additional available housing supply and a component that is due to disamenity stemming from deferred maintenance or vacancy. I estimate that each extra unit of supply decreases prices within 0.05 miles by about 1.2 percent while the disamenity stemming from a foreclosed property is near zero. Read More

  • WP 12-33R | Assessing the Evidence on Neighborhood Effects from Moving to Opportunity

    Dionissi Aliprantis

    Original Paper: WP 11-01


    This paper shows that treatment effects of the Moving to Opportunity (MTO) housing mobility program should not be interpreted as evidence on neighborhood effects. In a standard joint model of potential outcomes and selection into treatment, defining treatment as moving with an MTO voucher generates a model of program effects, while defining treatment as moving to a high-quality neighborhood generates a model of neighborhood effects. I state the assumptions necessary for using the random assignment of vouchers in a housing mobility program as an instrument to identify neighborhood effects. I then show that the literature using program effects to learn about neighborhood effects implicitly imposes dubious versions of these assumptions. Read More

  • WP 12-30R | Land Bank 2.0: An Empirical Evaluation

    Thomas J. Fitzpatrick IV Stephan D. Whitaker

    Original Paper: WP 12-30


    In 2009, Cuyahoga County, Ohio, which contains Cleveland and 58 other municipalities, created the Cuyahoga County Land Reutilization Corporation. This land bank was established to acquire low-value properties, mitigate blighted housing, help stabilize neighborhoods, and slow the decline of property values. As of September 2013, the land bank had acquired 3,405 properties and demolished 1,853 structures. This empirical study evaluates the effectiveness of the land bank by estimating spatially corrected hedonic price models using sales near the land bank homes. In the six months before they are purchased by the land bank, the distressed properties are estimated to lower the sale price of nearby homes (within 500 feet) by 5.2 percent. The negative externality from the distressed properties decreases to 4.4 percent once the land bank takes possession. Read More

  • WP 14-08 | Outside Lending in the NYC Call Loan Market

    Jon Moen Ellis W. Tallman


    Before the Panic of 1907 the large New York City banks were able to maintain the call loan market’s liquidity during panics, but the rise in outside lending by trust companies and interior banks in the decade leading up the panic weakened the influence of the large banks. Creating a reliable source of liquidity and reserves external to the financial market like a central bank became obvious after the panic. The lack of a lender of last resort for investment banks engaged in bank-like activities during the crisis of 2007-09 revealed a similar need for an external liquidity source. Read More

  • WP 14-07 | Federal Reserve Policy and Bretton Woods

    Michael Bordo Owen F. Humpage


    During the Bretton Woods era, balance-of-payments developments, gold losses, and exchange-rate concerns had little influence on Federal Reserve monetary policy, even after 1958 when such issues became critical. Read More

  • WP 12-08R2 | Evidence of Neighborhood Effects from MTO: LATEs of Neighborhood Quality

    Dionissi Aliprantis Francisca Richter

    Original Paper: WP 12-08 | Revisions: WP 12-08R1


    This paper finds evidence of positive neighborhood effects on adult labor market outcomes using the Moving to Opportunity (MTO) housing mobility experiment. Our results stand in such sharp contrast to the current literature because our analysis focuses on outcomes of the subpopulation induced by the program to move to a higher quality neighborhood, while previous analyses have focused on outcomes of either the entire population or the subpopulation induced by the program to move to any neighborhood. We propose and implement a new strategy for identifying heterogeneous transition-specific effects that exploits the identification of the idiosyncratic component of an ordered choice model. We estimate Local Average Treatment Effects (LATEs) of the change in quality most commonly induced by MTO vouchers, between the first and second deciles of the national distribution of neighborhood quality. Although MTO vouchers induced much larger changes in neighborhood quality than standard Section 8 vouchers, these LATEs only pertain to a subpopulation representing under 10 percent of program participants. Read More

  • WP 14-06 | Household Finance after a Natural Disaster: The Case of Hurricane Katrina

    Justin Gallagher Daniel Hartley

    Revisions: WP 14-06R


    Little is known about how affected residents are able to cope with the financial shock of a natural disaster. We investigate the impact that flooding from a major US hurricane had on household finance. Spikes in credit card borrowing and overall delinquency rates for the most flooded residents are modest in size and short-lived. Greater flooding results in larger reductions in total debt. Lower debt levels appear to be driven by homeowners using flood insurance to repay their mortgages rather than to rebuild. Debt reductions are larger in census tracts where mortgages were likely to be originated by nonlocal lenders. Read More

  • WP 14-05 | Why Do Earnings Fall with Job Displacement?

    William Carrington Bruce Fallick


    The earnings of workers are reduced for many years after being displaced from their jobs, and those workers and their families face increased risk of other problems as well. Read More

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

    Dionissi Aliprantis

    Original Paper: WP 13-02


    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 14-04 | Financial Innovations and Issuer Sophistication in Municipal Securities Markets

    Stephan D. Whitaker


    When local governments default or file for bankruptcy, it is often because public officials misunderstood the risks associated with innovative financial products. If unsophisticated municipal bond issuers were to widely adopt a high risk financial product, this could harm taxpayers and investors, as well as destabilize the financial system. This analysis uses municipal bond issuers’ total debt outstanding as a proxy for their sophistication and investigates the relationship between sophistication and adoption of financial innovations. Using comprehensive data on securities issued between 1992 and 2012, 25 innovations are identified. Read More

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

    Jean Burson John Carlson O. Emre Ergungor Patricia Waiwood

    Original Paper: WP 13-01


    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 14-03 | Nowcasting U.S. Headline and Core Inflation

    Edward S. Knotek II Saeed Zaman

    Revisions: WP 14-03R


    We propose a new and parsimonious model for nowcasting headline and core inflation in the U.S. price index for personal consumption expenditures (PCE) and the consumer price index (CPI). Read More

  • WP 12-20R3 | Mortgage Companies and Regulatory Arbitrage

    Yuliya Demyanyk Elena Loutskina

    Original Paper: WP 12-20 | Revisions: WP 12-20R1 | WP 12-20R2 | 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 14-02 | Independent within—not of—Government: The Emergence of the Federal Reserve as a Modern Central Bank

    Owen F. Humpage


    Independence is the hallmark of modern central banks, but independence is a mutable and fragile concept, because the governments to whom central banks are ultimately responsible can have objectives that take precedence over price stability. This paper traces the Federal Reserve's emergence as a modern central bank beginning with its abandonment of monetary policy for debt-management operations during the Second World War and through the controversies that led to the Treasury-Federal Reserve accord in 1951. The accord, however, did not end the Federal Reserve's search for independence. After the accord, the Federal Reserve's view of responsibilities "within" government led it to policies--even keel and foreign exchange operations--that complicated the System's ability to conduct monetary policy. Read More

  • WP 14-01 | Consumer Debt Dynamics: Follow the Increasers

    John Carter Braxton Edward S. Knotek II


    Consumer debt played a central role in creating the U.S. housing bubble, the ensuing housing downturn, and the Great Recession, and it has been blamed as a factor in the weak subsequent recovery as well. Read More

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

    Ellis W. Tallman Margaret Jacobson

    Original Paper: WP 13-04


    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 12-17R | Trimmed-Mean Inflation Statistics: Just Hit the One in the Middle

    Brent Meyer Guhan Venkatu

    Original Paper: WP 12-17


    This paper reinvestigates the performance of trimmed-mean inflation measures some 20 years since their inception, asking whether there is a particular trimmed-mean measure that dominates the median CPI. Unlike previous research, we evaluate the performance of symmetric and asymmetric trimmed-means using a well-known equality of prediction test. We find that there is a large swath of trimmed-means that have statistically indistinguishable performance. Also, while the swath of statistically similar trims changes slightly over different sample periods, it always includes the median CPI--an extreme trim that holds conceptual and computational advantages. We conclude with a simple forecasting exercise that highlights the advantage of the median CPI (and trimmed-mean estimators in general) relative to other standard measures in forecasting headline inflation. Read More

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

    Yuliya Demyanyk Dmytro Hryshko María José Luengo-Prado Bent Sørensen

    Original Paper: WP 13-05


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

    Dionissi Aliprantis

    Original Paper: WP 13-10


    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. Read More