Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation: Comment Based on System Estimation
By Willem Van Zandweghe, Yasuo Hirose and Takushi Kurozumi
RWP 15-17, December 2015

This paper re-examines the role of trend inflation in the U.S. economy's shift from the Great Inflation era to the Great Moderation era.

Elastic Attention, Risk Sharing, and International Comovements
By Jun Nie, Wei Li and Yulei Luo
RWP 15-16, December 2015

How does rational inattention reduce cross-country consumption correlations?

Driver of Choice? The Cost of Financial Products for Unbanked Consumers
By Fumiko Hayashi, Josh Hanson and Jesse Leigh Maniff
RWP 15-15, November 2015

Prepaid cards are significantly less costly than checking accounts for unbanked consumers who make overdrafts or need short-term loans, but prepaid cards are more costly for the other unbanked consumers.

Ambiguity, Low Risk-Free Rates, and Consumption Inequality
By Jun Nie, Yulei Luo and Eric R. Young
RWP 15-14, October 2015; updated January 2019

How do concerns about possible model misspecifications influence the equilibrium real interest rate?

PDFDid Saving Wall Street Really Save Main Street? The Real Effects of TARP on Local Economic Conditions
By Raluca A. Roman and Allen N. Berger
RWP 15-13, October 2015

We investigate whether saving Wall Street through the Troubled Assets Relief Program (TARP) really saved Main Street during the recent financial crisis. Our difference-in-difference analysis suggests that TARP statistically and economically significantly increased net job creation and net hiring establishments and decreased business and personal bankruptcies. The results are robust, including accounting for endogeneity. The main mechanisms driving the results appear to be increases in commercial real estate lending and off-balance sheet real estate guarantees. These results suggest that saving Wall Street via TARP may have helped save Main Street, complementing the TARP literature and contributing to the cost-benefit debate.

PDFCash Flow and Risk Premium Dynamics in an Equilibrium Asset-Pricing Model with Recursive Preferences
By Taeyoung Doh and Shu Wu
RWP 15-12, October 2015

Under linear approximations for asset prices and the assumption of independence between expected consumption growth and time-varying volatility, long-run risks models imply constant market prices of risks and often generate counterfactual results about asset return and cash flow predictability. We develop and estimate a nonlinear equilibrium asset pricing model with recursive preferences and a flexible econometric specification of cash flow processes. While in many long-run risks models time-varying volatility influences only risk premium but not expected cash flows, in our model a common set of risk factors drive both expected cash flow and risk premium dynamics. This feature helps the model to overcome two main criticisms against long-run risk models following Bansal and Yaron (2004): the over-predictability of cash flows by asset prices and the tight relation between time-varying risk premia and growth volatility. Our model extends the approach in Le and Singleton (2010) to a setting with multiple cash flows. We estimate the model using the long-run historical data in the U.S. and find that the model with generalized market prices of risks produces cash flow and return predictability that are more consistent with the data.

Did Bank Borrowers Benefit from the TARP Program? The Effects of TARP on Loan Contract Terms
By Raluca A. Roman, Allen N. Berger and Tanakorn Makaew
RWP 15-11, September 2015

We study the effects of the Troubled Asset Relief Program (TARP) on loan contract terms to businesses borrowing from recipient banks.  Using a difference-in-difference analysis, we find that TARP led to more favorable terms to these borrowers in all five contract terms studied – loan amounts, spreads, maturities, collateral, and covenants. This suggests recipient banks' borrowers benefited from TARP. These findings are statistically and economically significant, and are robust to dealing with potential endogeneity issues and other checks.  The contract term improvements are concentrated primarily among safer borrowers, consistent with a decrease in the exploitation of moral hazard incentives. Benefits extended to both relationship and non-relationship borrowers, and to term loan, revolver, and other loan borrowers. Results contribute to the TARP benefits-costs debate, by adding to the list of benefits of the program.

PDFHealth-Care Reform or Labor Market Reform? A Quantitative Analysis of the Affordable Care Act
By Makoto Nakajima and Didem Tuzemen
RWP 15-10, September 2015; updated March 2017

An equilibrium model with firm and worker heterogeneity is constructed to analyze labor market implications of the Affordable Care Act (ACA). Our model indicates that the ACA lowers the uninsured rate from 22.6 to 5.4 percent, with a moderate welfare gain due to increased redistribution through health insurance subsidies and Medicaid expansion. Because of the weakened link between full-time employment and access to insurance, 2.1 million more part-time jobs are created at the expense of 1.6 million full-time jobs. The predicted negative effect on total hours (0.36 percent) is smaller than other estimates, partly due to the general equilibrium effect.

PDFShareholder Activism in Banking
By Raluca A. Roman
RWP 15-09, August 2015

This paper conducts the first assessment of shareholder activism in banking and its effects on risk and performance. The focus is on the conflicts among bank shareholders, managers, and creditors (e.g., regulators, deposit insurer, taxpayers, depositors). This paper finds activism may generally be a destabilizing force, increasing bank risk-taking, but creating market value for shareholders, and leaving operating returns unchanged, consistent with the empirical dominance of the Shareholder-Creditor Conflict. However, during financial crises, the increase in risk disappears, suggesting activism risk incentives may be muted. From a public perspective, creditors (including the government) may lose during normal times, but not during financial crises.

PDFInternationalization and Bank Risk
By Raluca A. Roman, Allen N. Berger, Sadok El Ghoul and Omrane Guedhami
RWP 15-08, June 2015

This paper documents a positive relation between internationalization and bank risk. This is consistent with the empirical dominance of the market risk hypothesis – whereby internationalization increases banks' risk due to market-specific factors in foreign markets – over the diversification hypothesis – whereby internationalization allows banks to reduce risk through diversification of their operations. The results continue to hold following a variety of robustness tests, including endogeneity and sample selection bias. We also find that the magnitude of this effect is more pronounced during financial crises. The results appear to be at least partially explained by agency problems related to poor corporate governance.

PDFGlobal Tax Policy and the Synchronization of Business Cycles
By Nicholas Sly and Caroline Weber
RWP 15-07, August 2015

Using a 30-year panel of quarterly GDP fluctuations from of a broad set of countries, we demonstrate that the signing of a bilateral tax treaty increases the comovement of treaty partners' business cycles by 1/2 a standard deviation. This effect of fiscal policy is as large as the effect of trade linkages on comovement, and stronger than the effects of several other common financial and investment linkages. We also show that bilateral tax treaties increase comovement in shocks to nations’ GDP trends, demonstrating the permanent effects of coordination on fiscal policy rules. We estimate trend and business cycle components of nations' output series using an unobserved-components model in order to measure comovement between countries, and then estimate the impact of tax treaties using generalized estimating equations.

PDFWhen Does the Cost Channel Pose a Challenge to Inflation Targeting Central Banks?
By A. Lee Smith
RWP 15-06, June 2015; updated September 2016

In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank's inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. This paper shows that real wage rigidities decrease this upper bound, but coefficients in the range of those on the Taylor rule place the economy well within the determinacy region. However, when there is time-variation in the share of firms who finance their inputs (i.e. Markov-Switching) then inflation targeting interest rate rules frequently result in indeterminacy, even if the central bank also targets output. Adding a nominal growth target to the policy rule can often alleviate this indeterminacy and therefore anchor inflation expectations.

PDFIs Optimal Monetary Policy Always Optimal?
By Refet S. Gurkaynak
RWP 15-05, July 2015

No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.

PDFCapturing Rents from Natural Resource Abundance: Private Royalties from U.S. Onshore Oil & Gas Production
By Jason P. Brown, Timothy Fitzgerald and Jeremy G. Weber
RWP 15-04, June 2015; updated July 2016

We study how much private mineral owners capture geologically-driven advantages in well productivity through a higher royalty rate. Using proprietary data from nearly 1.8 million leases, we estimate that the six major shale plays generated $39 billion in private royalties in 2014. There is limited pass-through of resource abundance into royalty rates. A doubling of the ultimate recovery of the average well in a county increases the average royalty rate by 1 to 2 percentage points (a 6 to 11 percent increase). Thus, mineral owners benefit from resource abundance primarily through a quantity effect, not through negotiating better lease terms from extraction firms. The low pass-through likely reflects a combination of firms exercising market power in private leasing markets and uncertainty over the value of resource endowments.

Faster Payments in the United States: How Can Private Sector Systems Achieve Public Policy Goals?
By Fumiko Hayashi
RWP 15-03, June 2015

To help private-sector faster payments systems achieve public policy goals of ubiquity, safety, and efficiency, the Federal Reserve could influence governance of the private-sector systems through its leadership role.

PDFCredit Scoring and Loan Default
By Rajdeep Sengupta and Geetesh Bhardwaj
RWP 15-02, February 2015

A metric of credit score performance is developed to study the usage and performance of credit scoring in the loan origination process. We examine the performance of origination FICO scores as measures of ex ante borrower creditworthiness using loan-level data on ex post performance of subprime mortgages. Parametric and nonparametric estimates of credit score performance reveal different trends, especially on originations with low credit scores. The data suggest a trend of increased emphasis on higher credit scores accompanying a trend of increased riskiness in other origination attributes. Over time, this increased emphasis on credit scoring coincided with deterioration in FICO performance largely due to the fact that higher credit score originations of later cohorts were more likely to have riskier attributes. However, controlling for other attributes on originations and changes in economic conditions, we find that, as measures of borrower ranking, FICO performance on subprime loans over the years remains fairly stable.

Endogenous Volatility at the Zero Lower Bound: Implications for Stabilization Policy
By Brent Bundick and Susanto Basu
RWP 15-01, January 2015

At the zero lower bound, the central bank’s inability to offset shocks generates higher expected volatility. The proper design of monetary policy is crucial to avoiding bad outcomes.