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2015 Working Papers

  • WP 15-34 | Premium Municipal Bonds and Issuer Fiscal Distress

    Stephan D. Whitaker O. Emre Ergungor


    Economic theory suggests that bond issuers of lower credit quality or higher opacity should be more likely to issue bonds with premium coupons (higher coupon rates relative to yields at issuance). Using a comprehensive data set of municipal bonds issued between 1992 and 2012 by more than 21,000 issuers, we show that this has not been the case until the early 2000s. We examine what changed in this market to bring it into greater alignment with economic principles. We argue that the Government Accounting Standards Board’s Statement 34 that required the use of accrual accounting rules in government financial reports deserves the credit. Read More

  • WP 15-33 | Industrial Composition and Intergenerational Mobility

    Stephan D. Whitaker

    Revisions: WP 15-33R


    For five decades, the share of adults employed in college-degree-intensive industries, such as health care and education, has been rising. Industries that provided employment for workers without degrees, especially manufacturing, have been reducing their payrolls. This economic transition could impact the probability of children obtaining higher levels of education than their parents achieved. In this analysis, measures of the local industrial composition from the Current Population Survey are merged with the National Longitudinal Surveys of Youth using the confidential geo-coded records. Living in a labor market with a higher share of adults employed in degree-intensive industries is positively associated with obtaining a college degree among youth whose parents do not have a degree. An additional standard deviation difference in the share of employment in degreeintensive industries corresponds to a 0.02 increase in the probability of ascending to being a college graduate, from a mean of 0.23. For cohorts born in the 1960s, living in a manufacturing-intensive region was negatively correlated with college attainment, but the relationship becomes positive among more recent cohorts. Alternate specifi cations introduce measures of several factors that could relate the industrial composition to educational attainment, including returns to education (wage premiums), opportunity costs (youth employment), parental inputs (family structure, income), community resources (per capita income), information (regional education levels, post-secondary student populations), and networks (parent’s employment). Read More

  • WP 15-32 | Even Keel and the Great Inflation

    Owen F. Humpage Sanchita Mukherjee


    This working paper has been removed at the request of the authors. A new version is WP 20-33. Read More

  • WP 15-31 | Macro Credit Policy and the Financial Accelerator

    Charles T. Carlstrom Timothy Fuerst


    This paper studies macro credit policies within the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The focus is on borrower-based restrictions on lending such as loan-to-value (LTV) ratios. We find that the efficacy of cyclical taxes on LTV ratios depends upon the nature of the underlying loan contract. If the loan contract contains equity-like features such as indexation to aggregate conditions, then there is little role for cyclical taxation. But if the loan contract is not indexed to aggregate conditions, then there are substantial gains to procyclical taxes on LTV ratios. Read More

  • WP 15-30 | Persistence Dependence in Empirical Relations: The Velocity of Money

    Richard Ashley Randal J. Verbrugge


    Standard theory predicts persistence dependence in numerous economic relationships. (For example, persistence dependence is precisely the kind of nonlinear relationship posited in the Permanent Income Hypothesis; persistence dependence is the inverse of "frequency dependence" in a relationship.) Until recently, however, it was challenging to achieve credible inference about persistence dependence in an economic relationship using available methods. However, recently developed econometric tools (Ashley and Verbrugge, 2009a) allow one to elegantly quantify the variation in a time-series relationship across persistence levels, even when the data must be first-differenced because they are I(1), or nearly so. We apply these tools to study the velocity of money. Standard theory predicts that velocity should be positively correlated with the nominal interest rate: A high nominal interest rate raises the opportunity cost of holding wealth in liquid form, prompting agents to economize on money holdings. But as Cochrane (2012) pointed out, the velocity-interest rate linkage appears to be weak upon first-differencing. We argue that the root cause of this phenomenon is a particularly intuitive form of nonlinear dependence in the relationship: The strength of the relationship depends on the persistence level of a particular interest rate fluctuation. In particular, this relationship is substantially (and statistically significantly) stronger at low frequencies-- i.e., at high interest rate fluctuation persistence levels. Because we allow for persistence dependence in the estimated relationship, this strong association is apparent despite the first-difference transformation applied to these data. Read More

  • WP 15-03R | Are America’s Inner Cities Competitive? Evidence from the 2000s

    Daniel Hartley Nikhil Kaza William Lester

    Original Paper: WP 15-03


    In the years since Michael Porter's paper about the potential competitiveness of inner cities there has been growing evidence of a residential resurgence in urban neighborhoods. Yet, there is less evidence on the competitiveness of inner cities for employment. We document the trends in net employment growth and find that inner cities gained over 1.8 million jobs between 2002 and 2011 at a rate comparable to suburban areas. We also find a significant number of inner cities are competitive over this period--increasing their share of metropolitan employment in 144 out of 281 MSAs. We also describe the pattern of job growth within the inner city, finding that tracts that grew faster tended to be closer to downtown, with access to transit, and adjacent to areas with higher population growth. However, tracts with higher poverty rates experienced less job growth, indicating that barriers still exist in the inner city. Read More

  • WP 15-29 | From Organization to Activity in the US Collateralized Interbank Market

    Mikhail V. Oet Stephen Ong


    We quantify the role of contractionary monetary shocks and nominal wage rigidities in the U.S. Great Contraction. In contrast to conventional wisdom, we find that the average economy-wide real wage varied little over 1929–33, although real wages rose significantly in some industries. Using a two-sector model with intermediates and nominal wage rigidities in one sector, we find that contractionary monetary shocks can account for only a quarter of the fall in GDP, and as little as a fifth at the trough. Intermediate linkages play a key role, as the output decline in our benchmark is roughly half as large as in a two-sector model without intermediates. Read More

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

    Justin Gallagher Daniel Hartley

    Original Paper: WP 14-06


    Little is known about how affected residents are able to cope with the financial shock of a natural disaster. This paper investigates the impact of flooding 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 are driven by homeowners using flood insurance to repay their mortgages rather than to rebuild. Mortgage reductions are larger in areas where reconstruction costs exceeded pre-Katrina home values and where mortgages were likely to be originated by nonlocal lenders. Read More

  • WP 15-28 | Identifying Structural VARs with a Proxy Variable and a Test for a Weak Proxy

    Kurt G. Lunsford


    This paper develops a simple estimator to identify structural shocks in vector autoregressions (VARs) by using a proxy variable that is correlated with the structural shock of interest but uncorrelated with other structural shocks. When the proxy variable is weak, modeled as local to zero, the estimator is inconsistent and converges to a distribution. This limiting distribution is characterized, and the estimator is shown to be asymptotically biased when the proxy variable is weak. The F statistic from the projection of the proxy variable onto the VAR errors can be used to test for a weak proxy variable, and the critical values for different VAR dimensions, levels of asymptotic bias, and levels of statistical significance are provided. An important feature of this F statistic is that its asymptotic distribution does not depend on parameters that need to be estimated. Read More

  • WP 12-36R2 | The Cyclical Behavior of Equilibrium Unemployment and Vacancies across OECD Countries

    Pedro Amaral Murat Tasci

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


    We show that the inability of a standardly calibrated labor search-and-matching model to account for observed levels of labor market volatility extends beyond the U.S. to a set of OECD countries. That is, the volatility puzzle is ubiquitous. We argue that 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) is rather fragile and fails for some countries in our sample. It delivers counterfactually low volatility for economies where the elasticity of wages with respect to productivity is sufficiently high and where productivity persistence and/or vacancy-filling rates are sufficiently low. Read More

  • WP 15-27 | Tracking Trend Inflation: Nonseasonally Adjusted Variants of the Median and Trimmed-Mean CPI

    Amy Higgins Randal J. Verbrugge


    We make five contributions. We demonstrate that extant trimmed-mean and median CPI construction procedures depart from Bureau of Labor Statistics index construction procedures, and that the departures don’t make much of a difference. We produce nonseasonally adjusted variants of the trimmed-mean CPI and median CPI, and demonstrate that these are useful real-time estimates of trend inflation; the NSA median CPI outperforms the median CPI, but both SA and NSA variants of the median and the trimmed-mean CPI easily dominate the so-called “core” CPI. We introduce superior ex post measures of trend inflation. We demonstrate that a small amount of time-series averaging reaps large rewards. Finally, we discuss using model-averaging as a new direction for simple and robust trend inflation indicators. Read More

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

    Edward S. Knotek II Saeed Zaman

    Original Paper: WP 14-03


    Forecasting future inflation and nowcasting contemporaneous inflation are difficult. We propose a new and parsimonious model for nowcasting headline and core inflation in the U.S. consumer price index (CPI) and price index for personal consumption expenditures (PCE) that relies on relatively few variables. The model's nowcasting accuracy improves as information accumulates over a month or quarter, outperforming statistical benchmarks. In real-time comparisons, the model's headline inflation nowcasts substantially outperform those from the Blue Chip consensus and the Survey of Professional Forecasters. Across all four inflation measures, the model's nowcasting accuracy is comparable to the Federal Reserve Board's Greenbook. Read More

  • WP 15-26 | Give ’em Enough Rope? Leveraged Trading when Investors are Overconfident

    Rawley Z. Heimer


    Can leverage constraints mitigate overconfident financial decision-making? I examine CFTC regulation capping the maximum permissible leverage available to U.S. households that trade foreign exchange on the same brokerages as similar but unregulated European traders. The constraint reduces trading volume and alleviates up to three-quarters of per-trade losses. According to a model of portfolio choice with distorted beliefs, investor overconfidence can explain both leverage demand and underperformance. Several tests support the predictions of the model. Using common proxies to classify traders as overconfident, I find that these traders are most affected by the regulation. Consistent with overconfident, belief-based trading, traders ignore CFTC warnings of leveraged trading risks. Read More

  • WP 15-25 | Neighborhood Dynamics and the Distribution of Opportunity

    Dionissi Aliprantis Daniel R. Carroll


    Wilson (1987) argued that policies ending racial discrimination would not equalize opportunity without addressing residential sorting and neighborhood externalities. This paper studies related counterfactual policies using an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation. 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 determined by the human capital in their neighborhood. We calibrate the model with two neighborhoods and neighborhood-specific production technologies to data from Chicago when mobility was restricted by race. We then conduct three numerical experiments by eliminating the restriction on neighborhood choice, equalizing production technologies, or both. We find that allowing residential mobility generates persistent income inequality, even when technologies are equalized across neighborhoods. Equalizing technologies only equalizes opportunity for residents in the originally segregated neighborhood when high-income households reside there. Our findings suggest that policies aimed at improving outcomes in impoverished areas should feature incentives for high-income households to stay or migrate into the neighborhood. Read More

  • WP 15-20 | A New Model of Inflation, Trend Inflation, and Long-Run Inflation Expectations

    Joshua C.C. Chan Todd E. Clark Gary Koop


    A knowledge of the level of trend inflation is key to many current policy decisions, and several methods of estimating trend inflation exist. This paper adds to the growing literature which uses survey-based long-run forecasts of inflation to estimate trend inflation. We develop a bivariate model of inflation and long-run forecasts of inflation which allows for the estimation of the link between trend inflation and the long-run forecast. Thus, our model allows for the possibilities that long-run forecasts taken from surveys can be equated with trend inflation, that the two are completely unrelated, or anything in between. By including stochastic volatility and time-variation in coefficients, it extends existing methods in empirically important ways. We use our model with a variety of inflation measures and survey-based forecasts. We find that long-run forecasts can provide substantial help in refining estimates of trend inflation over popular alternatives. But simply equating trend inflation with the long-run forecasts is not appropriate. Read More

  • WP 15-23 | A State-Level Analysis of Okun’s Law

    Amy Guisinger Rubén Hernández-Murillo Michael Owyang Tara Sinclair


    Okun's law is an empirical relationship that measures the correlation between the deviation of the unemployment rate from its natural rate and the deviation of output growth from its potential. In this paper, we estimate Okun's coefficients for each U.S. state and examine the potential factors that explain the heterogeneity of the estimated Okun relationships. We find that indicators of more flexible labor markets (higher levels of education achievement in the population, lower rate of unionization, and a higher share of nonmanufacturing employment) are important determinants of the differences in Okun's coefficient across states. Finally, we show that Okun's relationship is not stable across specifications, which can lead to inaccurate estimates of the potential determinants of Okun's coefficient. Read More

  • WP 15-22 | Facebook Finance: How Social Interaction Propagates Active Investing

    Rawley Z. Heimer David Simon


    This paper shows how active investing strategies propagate through social connections in a network of retail traders, using a new database of social activity linked to individual-level trading records. A trader's good short-term performance causes them to contact others. A trader's activity increases when peers perform well and increase communication. We use the staggered entry of brokerages into partnerships with the social networking platform, which is a necessary precursor for traders to access the network, to argue these effects are causal. This pattern of communication supports active trading, even though the network reveals the low success rate of retail traders. Read More

  • WP 15-24 | Clustered Housing Cycles

    Rubén Hernández-Murillo Michael Owyang Margarita Rubio


    Using a panel of U.S. city-level building permits data, we estimate a Markov-switching model of housing cycles that allows for idiosyncratic departures from a national housing cycle. These departures occur for clusters of cities that experience simultaneous housing contractions. We find that cities do not form housing regions in the traditional geographic sense. Instead, similarities in factors affecting the demand for housing (such as average winter temperature and the unemployment rate) appear to be more important determinants of cyclical comovements than similarities in factors affecting the supply for housing (such as housing density and the availability of developable land). Read More

  • WP 15-21 | YOLO: Mortality Beliefs and Household Finance Puzzles

    Rawley Z. Heimer Kristian Ove R. Myrseth Raphael Schoenle


    Subjective mortality beliefs affect pre- and post-retirement consumption and savings decisions, as well as portfolio allocation. New survey evidence shows that individuals overestimate their mortality at short horizons and survival rate at long horizons. For example, a 28-year-old male with a 99.4% chance of surviving beyond 5 years believes he will do so with 92.8% probability. A 68 year old with a 71.4% probability of living to 78 believes he has an 82.4% chance of living that long. The formation of these beliefs across age cohorts can be attributed to overweighting salient causes-of-death. This bias matters empirically: Survival expectations correlate with heterogeneity in financial education and investment behavior. Embedded in a run-of-the-mill life-cycle model, these beliefs cause the young to under-save and retirees to not fully draw down their assets. In addition, for reasonable levels of risk-tolerance, the required excess rate of return on equity is in line with historical averages once subjective beliefs are accounted for. Read More

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

    Kristle Cortés Philip Strahan

    Original Paper: WP 14-12


    Multimarket banks reallocate capital when local credit demand increases after natural disasters. Using property damage as an instrument for lending growth, we find credit in unaffected but connected markets declines by a little less than 50 cents per dollar of additional lending in shocked areas. However, banks shield their core markets because most of the decline comes from loans in areas where banks do not own branches. Moreover, banks increase sales of more-liquid loans and they bid up the prices of deposits in the connected markets. These actions help lessen the impact of the demand shock on credit supply. Read More

  • WP 15-19 | Forecasting Inflation: Phillips Curve Effects on Services Price Measures

    Ellis W. Tallman Saeed Zaman

    Revisions: WP 15-19R


    We estimate an empirical model of inflation that exploits a Phillips curve relationship between a measure of unemployment and a subaggregate measure of inflation (services). We generate an aggregate inflation forecast from forecasts of the goods subcomponent separate from the services subcomponent, and compare the aggregated forecast to the leading time-series univariate and standard Phillips curve forecasting models. Our results indicate notable improvements in forecasting accuracy statistics for models that exploit relationships between services inflation and the unemployment rate. In addition, models of services inflation using the short-term unemployment rate (less than 27 weeks) as the real economic indicator display additional modest forecast accuracy improvements. Read More

  • WP 15-18 | Intermediation in Networks

    Jan-Peter Siedlarek


    I study intermediation in networked markets using a stochastic model of multilateral bargaining in which players compete on different routes through the network. I characterize stationary equilibrium payoffs as the fixed point of a set of intuitive value function equations and study efficiency and the impact of network structure on payoffs. There is never too little trade but there may be an inefficiency through too much trade in states where delay would be efficient. With homogeneous trade surplus the payoffs for players that are not essential to a trade opportunity go to zero as trade frictions vanish. Read More

  • WP 12-20R4 | Mortgage Companies and Regulatory Arbitrage

    Yuliya Demyanyk Elena Loutskina

    Original Paper: WP 12-20 | Revisions: WP 12-20R1 | WP 12-20R2 | WP 12-20R3


    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 15-17 | Community Leaders and the Preservation of Cultural Traits

    Anja Prummer Jan-Peter Siedlarek


    We explain persistent differences in cultural traits of immigrant groups with the presence of community leaders. Leaders influence the cultural traits of their community, which have an impact on the group's earnings. They determine whether a community will be more assimilated and wealthier or less assimilated and poorer. With a leader, cultural integration remains incomplete. The leader chooses more distinctive cultural traits in high-productivity environments and if the community is more connected. Lump-sum transfers to immigrants can hinder cultural integration. These findings are in line with integration patterns of various ethnic and religious groups. Read More

  • WP 15-16 | Metropolitan Area Home Prices and the Mortgage Interest Deduction: Estimates and Simulations from Policy Change

    Hal Martin Andrew Hanson


    We simulate changes to metropolitan area home prices from reforming the Mortgage Interest Deduction (MID). Price simulations are based on an extended user cost model that incorporates two dimensions of behavioral change in home buyers: sensitivity of borrowing and the propensity to use tax deductions. We simulate prices with both inelastic and elastic supply. Our results show a wide range of price effects across metropolitan areas and prospective policies. Considering behavioral change and no supply elasticity, eliminating the MID results in average home price declines as steep as 13.5 percent in Washington, D.C., and as small as 3.5 percent in Miami-Fort Lauderdale, Florida. Converting the MID to a 15 percent refundable credit reduces prices by as much as 1.4 percent in San Jose, California, San Francisco, California, and Washington, D.C., and increases average prices in other metropolitan areas by as much as 12.1 percent (Miami-Fort Lauderdale). Accounting for market elasticities produces price estimates that are on average thirty-six percent as large as standard estimates. Read More

  • WP 15-15 | Credit Market Information Feedback

    Lakshmi Balasubramanyan Ben R. Craig James Thomson Saeed Zaman


    We examine how a combination of credit market and asset quality information can jointly be used in assessing bank franchise value. We find that expectations of future credit demand and future asset quality explain contemporaneous bank franchise value, indicative of the feedback in credit market information and its consequent impact on bank franchise value. Read More

  • WP 15-14 | Job Ladders and Earnings of Displaced Workers

    Pawel Krolikowski


    Workers who suffer job displacement experience surprisingly large and persistent earnings losses. This paper proposes an explanation for this robust empirical puzzle in a model of search over match-quality with a significant job ladder. In addition to capturing the depth and persistence of displaced-worker-earnings losses, the model is able to match a) separation rates by tenure; b) the empirical decomposition of earnings losses into reduced wages and employment; c) observed wage dispersion; d) the pattern of employer-to-employer transitions after layoff, and e) the degree of serial correlation in separations. Read More

  • WP 15-13 | Evaluating the Information Value for Measures of Systemic Conditions

    Mikhail V. Oet John Dooley Dieter Gramlich Peter Sarlin Stephen Ong


    Timely identification of coincident systemic conditions and forward-looking capacity to anticipate adverse developments are critical for macroprudential policy. Despite clear recognition of these factors in literature, an evaluation methodology and empirical tests for the information value of coincident measures are lacking. This paper provides a twofold contribution to the literature: (i) a general-purpose evaluation framework for assessing information value for measures of systemic conditions, and (ii) an empirical assessment of the information value for several alternative measures of US systemic conditions. We find substantial differences among the measures, of which the Cleveland Financial Stress Index shows best-in-class identification performance. In terms of forecasting performance, Kamakura's Troubled Company Index, Cleveland Financial Stress Index, and Goldman Sachs Financial Conditions Index show moderately stable usefulness metrics over time. Read More

  • WP 15-12 | Forecasts from Reduced-form Models under the Zero-Lower-Bound Constraint

    Mehmet Pasaogullari


    In this paper, I consider forecasting from a reduced-form VAR under the zero lower bound (ZLB) for the short-term nominal interest rate. The ZLB constraint expands the number of states exponentially, making the exact computation of forecast moments infeasible. I develop a method that a) computes the exact moments for the first n + 1 periods when n previous periods are tracked and b) approximates moments for the periods beyond n + 1 period using techniques for truncated normal distributions and approximations a la Kim (1994). In its simplest form, the algorithm tracks only the previous forecast period. The approximations become more accurate as additional previous periods are tracked at the cost of longer computational time, although when the method is tracking two or three previous periods, it is competitive with Monte Carlo simulation in terms computational time. I show that the algorithm produces satisfactory results for VAR systems with moderate to high persistence even when only one previous period is tracked. For very persistent VAR systems, however, tracking more periods is needed in order to obtain reliable approximations. I also show that the method is suitable for affine term-structure modeling, where the underlying state vector includes the short-term interest rate as in Taylor rules with inertia. Read More

  • WP 15-11 | Determinants of Differential Rent Changes: Mean Reversion versus the Usual Suspects

    Randal J. Verbrugge Alan Dorfman William Johnson Fred Marsh III Robert Poole Owen Shoemaker


    We study 2001-2004 and 2004-2007 rent growth of 18,000 rental units, ending our study prior to the Great Recession. Which variables correlate with rent growth: Location? Age? Rent level? Occupancy duration? Structure type? The answers deepen understanding of the rental market, help statistical agencies make decisions about sample stratification and substitution, and expose coverage problems. We document significant rent stickiness. Initial relative rent level is the best predictor, though mainly due to mean reversion. "Location" comes in second, though often not statistically significantly: the relative value of location is persistent. Age and occupancy duration are also notable. Our findings are reassuring to statistical agencies. Read More

  • WP 15-10 | The Federal Reserve System and World War I: Designing Policies without Precedent

    Ellis W. Tallman Margaret Jacobson


    The Federal Reserve System failed to prevent the collapse of intermediation during the Great Depression (1929-1933) and took action as if it was unaware of policies that should have been taken in the event of widespread bank runs. The National Banking Era panics and techniques to alleviate them should have been useful references for how to alleviate a financial crisis. We suggest that the overwhelming effort to finance World War I combined with a perspective held by contemporary Federal Reserve officials that the central bank legislation was sufficient to overcome financial crises are key reasons why the historical experiences were overlooked. Read More

  • WP 10-22R | Blowing It Up and Knocking It Down: The Local and Citywide Effects of Demolishing High-Concentration Public Housing on Crime

    Dionissi Aliprantis Daniel Hartley

    Original Paper: WP 10-22


    Despite popular accounts that link public housing demolitions to spatial redistribution of crime and possible increases in crime, little systematic research has analyzed the neighborhood or citywide impact of demolitions on crime. In Chicago, which has conducted the largest public housing demolition program in the United States, I find that public housing demolitions are associated with a 10 percent to 20 percent reduction in murder, assault, and robbery in neighborhoods where the demolitions occurred. Furthermore, violent crime rates fell by about the same amount in neighborhoods that received the most displaced public-housing households relative to neighborhoods that received fewer displaced public-housing households, during the period when these developments were being demolished. This suggests violent crime was not simply displaced from the neighborhoods where demolitions occurred to neighborhoods that received the former public-housing residents. Read More

  • WP 15-09 | The 2012 Eurozone Crisis and the ECB's OMT Program: A Debt-Overhang Banking and Sovereign Crisis Interpretation

    Filippo Occhino


    This paper develops a model to interpret the 2012 eurozone crisis and the ECB’s policy response. In the model, bank lending is distorted by debt overhang, banks hold sovereign bonds, and the government guarantees the bailout of bank creditors. A self-fulfilling pessimistic view of the economy can trigger a banking and sovereign crisis: with pessimistic economic expectations, the value of sovereign bonds declines, the bank risk of default rises, and the debt overhang distortion worsens; this leads to a contraction in bank lending and to a decline in economic activity, which confirms the initial pessimistic expectations. A commitment by the central bank to purchase the sovereign bonds at pre-crisis market spreads manages to eliminate the crisis equilibrium. Read More

  • WP 15-08 | Determinants of Expected Returns at Public Defined-Benefit Pension Plans

    Raj Aggarwal John Goodell


    Estimated expected returns are important for pension plans, as they influence many plan characteristics including required asset levels, annual contributions, and the extent of plan under- or overfunding. Yet, there seems to be little prior literature on the factors influencing these estimated future returns. In an attempt to fill this gap, this paper presents the results of a panel analysis of data on the determinants of such returns used by US public defined-benefit (DB) pension plans for the period 2001–2011. As expected, we find that real return estimates by DB public pension funds are positively related to fund size, fund age, international asset diversification, state income, and corruption levels. However, more interestingly and importantly, we document that real return estimates by public US DB pension funds are positively related to cultural measures of individualism and masculinity, and negatively related to uncertainty avoidance. These results should be of much interest not only to scholars and pension beneficiaries, but also to fund managers, other capital market participants, and policymakers. Read More

  • WP 15-07 | The Rise and Fall of Consumption in the ’00s

    Yuliya Demyanyk María José Luengo-Prado Dmytro Hryshko Bent Sørensen


    U.S. consumption has gone through steep ups and downs since the turn of the millennium, but the causes of these fluctuations are still imperfectly identified. We quantify the relative impact on consumption growth of income, unemployment, house prices, credit scores, debt, expectations, foreclosures, inequality, and refinancings for four subperiods: the "dot-com recession" (2001-2003), the "subprime boom" (2004-2006), the Great Recession (2007-2009), and the "tepid recovery" (2010-2012). We document that the explanatory power of different factors varies by subperiods, implying that a successful modeling of this decade needs to allow for multiple causal determinants of consumption. Read More

  • WP14-29R | Do Tenant- and Place-Based Rental Housing Programs Complement Each Other? Evidence from Ohio

    Brett Barkley Amy Higgins Francisca Richter

    Original Paper: WP 14-29 | Revisions: WP 14-29R2


    We characterize Housing Choice Voucher (HCV) use in Low-Income Housing Tax Credit (LIHTC) units and explore whether the subsidy overlap responds to needs unmet by the HCV program alone. We present a subsidy allocation model allowing for complementarity of tenant-based and place-based subsidies to guide our analysis. Findings for Ohio in 2011 suggest vouchers tied to LIHTC units are more likely allocated to very poor households with special needs. We also find that HCV users who freely choose to redeem their voucher in a LIHTC unit make up a somewhat larger share of LIHTC households in tighter or less affordable markets. There is little evidence that using both programs in concert enables access to better neighborhoods: households across both programs live in neighborhoods that tend to have above 20% poverty rates, with HCVLIHTC users actually living in higher poverty neighborhoods in the most urban Ohio counties when compared to the HCV population as a whole. Read More

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

    Knut Are Aastveit Andrea Carriero Todd E. Clark Massimiliano Marcellino

    Original Paper: WP 14-11


    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 14-32R | The Piketty Transition

    Daniel R. Carroll Eric Young

    Original Paper: WP 14-32 | Revisions: 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 14-13R | Evaluating Conditional Forecasts from Vector Autoregressions

    Todd E. Clark Michael McCracken

    Original Paper: WP 14-13


    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 GDP and investment growth as well as 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 15-06 | Assessing the Evidence on Neighborhood Effects from Moving to Opportunity

    Dionissi Aliprantis


    The Moving to Opportunity (MTO) experiment randomly assigned housing vouchers that could be used in low-poverty neighborhoods. Consistent with the literature, I find that receiving an MTO voucher had no effect on outcomes like earnings, employment, and test scores. However, after studying the assumptions identifying neighborhood effects with MTO data, this paper reaches a very different interpretation of these results than found in the literature. I first specify a model in which the absence of effects from the MTO program implies an absence of neighborhood effects. I present theory and evidence against two key assumptions of this model: That poverty is the only determinant of neighborhood quality, and that outcomes only change across one threshold of neighborhood quality. I then show that in a more realistic model of neighborhood effects that relaxes these assumptions, the absence of effects from the MTO program is perfectly compatible with the presence of neighborhood effects. This analysis illustrates why the implicit identification strategies used in the literature on MTO can be misleading. Read More

  • WP 15-05 | A Distinction between Causal Effects in Structural and Rubin Causal Models

    Dionissi Aliprantis


    Structural Causal Models define causal effects in terms of a single Data Generating Process (DGP), and the Rubin Causal Model defines causal effects in terms of a model that can represent counterfactuals from many DGPs. Under these different definitions, notationally similar causal effects make distinct claims about the results of interventions to the system under investigation: Structural equations imply conditional independencies in the data that potential outcomes do not. One implication is that the DAG of a Rubin Causal Model is different from the DAG of a Structural Causal Model. Another is that Pearl's do-calculus does not apply to potential outcomes and the Rubin Causal Model. Read More

  • WP 15-04 | How Cyclical Is Bank Capital?

    Joseph G. Haubrich

    Revisions: WP 15-04R


    The alleged pro-cyclicality of bank capital (high in good times, low in bad) has received some blame for the recent financial crisis. Others blame the countercyclicality of capital regulations: too low in high times and too high in bad. To address this problem, Basel III has introduced countercyclical capital buffers for large banks. But just how cyclical is bank capital? We look at the question from several vantage points, using both detailed recent data on risk-weighted assets and several sources of annual data going back to 1834. To help understand the historical data, we provide a short summary of capital concepts and regulation from early America to the present. Read More

  • WP 15-03 | Are America's Inner Cities Competitive? Evidence from the 2000s

    Daniel Hartley Nikhil Kaza William Lester

    Revisions: WP 15-03R


    In the years since Michael Porter’s paper about the potential competitiveness of inner cities there has been growing evidence of a residential resurgence in urban neighborhoods. Yet, there is less evidence on the competitiveness of inner cities for employment. We document the trends in net employment growth and find that inner cities gained over 1.8 million jobs between 2002 and 2011 at a rate comparable to suburban areas. We also find a significant number of inner cities are competitive over this period—increasing their share of metropolitan employment in 120 out of 281 MSAs. We also describe the pattern of job growth within the inner city, finding that tracts that grew faster tended to be closer to downtown, with access to transit, and adjacent to areas with higher population growth. However, tracts with higher poverty rates experienced less job growth, indicating that barriers still exist in the inner city. Read More

  • WP 15-02 | Lessons for Forecasting Unemployment in the U.S.: Use Flow Rates, Mind the Trend

    Brent Meyer Murat Tasci


    This paper evaluates the ability of autoregressive models, professional forecasters, and models that leverage unemployment flows to forecast the unemployment rate. We pay particular attention to flows-based approaches—the more reduced form approach of Barnichon and Nekarda (2012) and the more structural method in Tasci (2012)—to generalize whether data on unemployment flows is useful in forecasting the unemployment rate. We find that any approach that leverages unemployment inflow and outflow rates performs well in the near term. Over longer forecast horizons, Tasci (2012) appears to be a useful framework, even though it was designed to be mainly a tool to uncover long-run labor market dynamics such as the “natural” rate. Its usefulness is amplified at specific points in the business cycle when unemployment rate is away from the longer-run natural rate. Judgmental forecasts from professional economists tend to be the single best predictor of future unemployment rates. However, combining those guesses with flows-based approaches yields significant gains in forecasting accuracy. Read More

  • WP 15-01 | Centrality-based Capital Allocations

    Adrian Alter Ben R. Craig Peter Raupach


    This paper looks at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. Keeping total capital in the system constant, the reallocation rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of systemwide losses. Using the detailed German Credit Register for estimation, we find that capital rules based on eigenvectors dominate any other centrality measure, saving about 15 percent in expected bankruptcy costs. Read More