Economic Review 2017
Economic Review: Special Issue 2017
Publication The Economic Review is a research publication with articles by Kansas City Fed staff on issues of relevance to the Federal Reserve. Read the special issue: Agricultural Consolidation: Causes and the Path Forward.
Financing a Changing Agricultural and Rural Landscape
Summary States in the Tenth Federal Reserve District are experiencing consolidation in production agriculture and agricultural lending at different rates.
Foreword
Summary In June 2017, the Federal Reserve Bank of Kansas City hosted a symposium titled “Agricultural Consolidation: Causes and the Path Forward.” Esther L. George, the Bank’s President and Chief Executive Officer, reviews the history of agricultural consolidation and the symposium’s contributions.
Drivers of Consolidation and Structural Change in Production Agriculture
Summary Production agriculture is in the midst of a major transformation marked by continued consolidation and changes in technology, production practices, and the value chain.
Consolidation, Concentration, and Competition in the Food System
Summary The food system is moving toward increased consolidation and concentration, with varying effects on competition and efficiency.
Concentration and Consolidation in the U.S. Food Supply Chain: The Latest Evidence and Implications for Consumers, Farmers, and Policymakers
Summary On balance, the consolidation of food marketing has benefited consumers through stable prices and increased choice.
Fiscal Sustainability: A Cross-Country Analysis
Publication Since the global financial crisis, public debt has risen rapidly in many advanced and emerging market economies. Every country faces a fiscal limit at which taxes and spending can no longer adjust to stabilize debt. But quantifying fiscal limits can be challenging. Different countries have different capacities to service their debt. Moreover, two countries with similar debt levels may face drastically different default risks. Huixin Bi introduces a new, country-specific framework of fiscal limits to quantify the maximum level of debt a government can sustain given its economic and policy environment. She finds that countries with relatively low government expenditures have significantly higher fiscal limits than countries with relatively high government expenditures. She also finds that sovereign default risks rise rapidly during an economic downturn, suggesting that debt levels viewed as safe in good times can quickly become unsustainable.
Do Adverse Oil Price Shocks Change Loan Contract Terms for Energy Firms?
Publication While low oil prices may stimulate the U.S. economy overall, they can be disruptive to the domestic oil industry. A decline in prices may reduce oil firm revenues in the short run and increase uncertainty around future prices and earnings. These effects, in turn, may lower oil firms’ creditworthiness, thereby reducing available financing for current operations and future investment. Rajdeep Sengupta, W. Blake Marsh, and David Rodziewicz examine whether the relationship between energy firms’ creditworthiness and loan prices changed after the 2014 oil price decline. They find that firms more closely involved in exploration and production were charged higher loan prices relative to other oil firms. In addition, they find that loan prices were even higher for exploration and production firms that did not have access to bond financing or that were refinancing existing loans. Overall, their results suggest credit conditions may not uniformly tighten across the oil industry after an adverse price shock.
Labor Market Improvement and the Use of Subsidized Housing Programs
Publication Improved employment outcomes and opportunities could assuage the need for subsidized housing programs by increasing household incomes. But at the national level, the relationship between labor market outcomes and subsidized housing use is unclear. State-level data may paint a more detailed picture. Local public housing agencies allocate resources and subsidies based on local priorities. Moreover, employment conditions and demographic factors are state-specific, causing the use of subsidized housing to vary across states in a manner that national indicators do not capture. Nicholas Sly and Elizabeth M. Johnson estimate how state-level changes in labor market conditions for particular sex, age, and race groups are associated with participation in a variety of subsidized housing programs. They find that the use of housing choice vouchers tends to fall as more women and prime-age workers obtain employment. Their results highlight the importance of local and demographic-specific labor market conditions, not national aggregates, in explaining subsidized housing use.
Economic Review: Volume 102, Number 2
Publication The Economic Review is a research publication with articles by Kansas City Fed staff on issues of relevance to the Federal Reserve. Read the third quarter 2017 issue.
Dissecting Wage Dispersion
Summary At any time, wages differ dramatically across U.S. workers. Some differences in the wages workers earn may be due to differences in characteristics such as age, race, or education level. But wages are substantially dispersed across individuals even after accounting for these differences, suggesting additional factors may play a role. San Cannon and José Mustre-del-Río investigate the sources of wage dispersion for different demographic groups as well as how these sources have changed over time. They find that “where you work”—also known as the match-specific component of residual wages—accounts for a substantial portion of residual wage differences across individuals. Moreover, they find that the sources of wage dispersion are similar across sexes and education levels.
Banking on Distributed Ledger Technology: Can It Help Banks Address Financial Inclusion?
Summary Banking services can help households make payments, obtain credit, and build wealth. But in 2015, 7 percent of U.S. households had no checking or savings account and were thus considered unbanked. Policymakers and consumer advocates have promoted distributed ledger technology (DLT) as one way to bring these households into the financial mainstream. But little research has connected DLT’s benefits to the specific obstacles unbanked consumers face. Jesse Leigh Maniff and W. Blake Marsh use data from the FDIC National Survey of Unbanked and Underbanked Households to analyze whether DLT addresses unbanked consumers’ primary concerns about having a checking or savings account. They find that although DLT addresses each concern in at least a limited capacity, it is unlikely to significantly reduce the share of unbanked consumers in the United States.
The Changing Cyclicality of Labor Force Participation
Summary The U.S. labor force participation rate—the percentage of the working-age population who are employed or looking for work—declined sharply after the 2007–09 recession. Typically, labor force participation is only mildly associated with the business cycle. Several studies of the recent recession, however, have concluded that the recession reduced labor force participation, suggesting a shift in its cyclical behavior. Willem Van Zandweghe examines whether the labor force participation rate has become more cyclical over time. He finds that cyclical fluctuations in the participation rate have become more pronounced, but the most notable shift occurred around 1984. In addition, he finds that cyclicality varies across segments of the labor force. Although the participation rate for workers age 25–54 has become more cyclical over time, the rate for older workers has turned countercyclical.
Economic Review: Volume 102, Number 2
Publication The Economic Review is a research publication with articles by Kansas City Fed staff on issues of relevance to the Federal Reserve. Read the second quarter 2017 issue.
How Do FOMC Projections Affect Policy Uncertainty?
Publication In January 2012, the Federal Open Market Committee (FOMC) began publicly releasing its participants’ projections for the future value of the federal funds rate in its quarterly Summary of Economic Projections. One of the goals of releasing these projections was to increase clarity in FOMC communications about the future path of policy. However, the individual—and possibly conflicting—nature of these projections may not necessarily lead to lower uncertainty about future policy. If participants notably disagree with each other about the appropriate path of policy, then the projections may actually lead to an increase in uncertainty about future interest rates. Brent Bundick and Trenton Herriford use options prices from financial markets to examine how uncertainty about future interest rates changed after the FOMC began releasing its participants’ projections for the appropriate federal funds rate. They find that overall uncertainty about future interest rates fell after the Committee began releasing its participants’ interest rate projections. However, they also find that uncertainty is significantly correlated with disagreement across participants’ projections.
Lifting the U.S. Crude Oil Export Ban: Prospects for Increasing Oil Market Efficiency
Publication Over the past decade, U.S. shale oil has substantially changed the nation’s energy landscape. The introduction of hydraulic fracturing and horizontal drilling accelerated shale oil production in the United States, encouraging domestic oil producers to look for export opportunities. Until recently, these producers faced export restrictions due to a longstanding federal ban on most crude oil exports. However, in December 2015, the 40-year-old-ban was lifted. Nida Çakır Melek and Elena Ojeda review oil market distortions while the export ban was in effect and examine whether the oil market became more efficient after the export ban was lifted. They find that together, the shale oil boom and export ban interacted to distort oil trade flows and prices. Repealing the export ban created opportunities for increased trade and efficiency in the oil market.
The Changing Input-Output Network Structure of the U.S. Economy
Publication The U.S. economy is a collection of varied industries linked by the goods and services they exchange with one another during production. In this way, industries form a network of input-output relationships with potentially important implications for economic activity. For example, supply disruptions to one industry might spill over to industries that receive inputs from the affected industry. The magnitude of these spillover effects depends crucially on both the affected industry's links to other industries as well as its importance within the network. Andrew Foerster and Jason Choi document the input-output network structure of the U.S. economy and examine how the connectivity and centrality of industries have changed over time. They find that the number of connections between industries has varied, with a decrease in industry interconnection more recently. In addition, they find that certain services-based industries have become more important in the network over time.
Economic Review: Volume 102, Number 1
Publication The Economic Review is a research publication with articles by Kansas City Fed staff on issues of relevance to the Federal Reserve. Read the second quarter 2016 issue.
Identifying State-Level Recessions
Summary Although the U.S. economy is in its eighth consecutive year of expansion since the Great Recession, some states are nevertheless in recession. The timing of states entering recession often differs from the nation as a whole. States with higher concentrations in specific sectors may enter downturns earlier than other states—and may remain in them longer. For example, energy-producing states in the Tenth Federal Reserve District entered a recession in 2015 and 2016 following a 70 percent decline in the price of oil. Most non-energy-producing states experienced steady growth over the same period. Jason P. Brown tests two approaches to determining whether the seven states of the Tenth District are in a recession: one approach is well suited for identifying state recession in retrospect, while the other is more helpful for identifying state recessions in real time. Both approaches suggest Oklahoma and Wyoming entered downturns in early to mid-2015, while only the second approach suggests Kansas and New Mexico entered recessions in late summer 2016. His results indicate that on average, recessions in energy-producing states occur more frequently but are typically shorter than recessions in non-energy-producing states.
Bond Premiums and the Natural Real Rate of Interest
Summary The natural real rate of interest—the level of the real federal funds rate most consistent with the Federal Reserve’s statutory mandates of maximum sustainable employment and stable prices—is a key guidepost for monetary policy decisions. But most approaches used to estimate the natural rate, also known as r*, have not kept pace with the Federal Open Market Committee’s rapidly expanding set of monetary policy tools. Craig S. Hakkio and A. Lee Smith introduce two approaches to estimating the natural real rate that account for the broad state of U.S. financial conditions as well as the additional accommodation that unconventional policies provide. Their results suggest bond premiums are an important determinant of the natural real rate of interest. Specifically, their estimates of r* from both approaches suggest a reduction in bond premiums increases the natural real rate.
Crowdedness, Centralized Employment, and Multifamily Home Construction
Summary After the 2007–08 financial crisis, both multifamily and single-family home construction collapsed. But multifamily construction, unlike single-family construction, has since rebounded strongly. This recent aggregate strength has varied considerably across metropolitan areas: multifamily construction boomed in metros such as Austin, TX, and Charlotte, NC, but remained weak in others such as Pittsburgh, PA, and Chicago, IL. Jordan Rappaport examines potential drivers behind the recent variation in multifamily construction and finds that factors related to population, population density, and centralized employment played important roles. More specifically, he finds multifamily construction was stronger in metropolitan areas with larger populations, lower average population density, and more concentrated employment in the city center. These relationships appear to largely capture differences in metros’ productivity, urban amenities, and availability of land for development.