http://www.federalreserve.gov/pubs/feds/feeds.xml Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgment) should be cleared with the author(s) to protect the tentative character of these papers. 2009-10-19T18:15:08-05:00 en Board of Governors of the Federal Reserve System http://www.federalreserve.gov/pubs/feds/2010/201007/201007abs.html Morten L. Bech and Elizabeth Klee. To combat the financial crisis that intensified in the fall of 2008, the Federal Reserve injected a substantial amount of liquidity into the banking system. The resulting increase in reserve balances exerted downward price pressure in the federal funds market, and the effective federal funds rate began to deviate from the target rate set by the Federal Open Market Committee. In response, the Federal Reserve revised its operational framework for implementing monetary policy and began to pay interest on reserve balances in an attempt to provide a floor for the federal funds rate. Nevertheless, following the policy change, the effective federal funds rate remained below not only the target but also the rate paid on reserve balances. We develop a model to explain this phenomenon and use data from the federal funds market to evaluate it empirically. In turn, we show how successful the Federal Reserve may be in raising the federal funds rate even in an environment with substantial reserve balances. 2010-02-02T17:05:44-05:00 en The Mechanics of a Graceful Exit: Interest on Reserves and Segmentation in the Federal Funds Market 2010-02-02T17:05:44-05:00 Federal funds segmentation interest on reserves corridor system exit strategy 2010-07: The Mechanics of a Graceful Exit: Interest on Reserves and Segmentation in the Federal Funds Market http://www.federalreserve.gov/pubs/feds/2010/201007/201007.pdf PDF version Morten Bech Morten Bech Federal Reserve Bank of New York Elizabeth Klee Elizabeth Klee Board of Governors of the Federal Reserve System Morten L. Bech and Elizabeth Klee 2010-02-02T17:05:44-05:00 2010-07 E4 E58 G21 G28 http://www.federalreserve.gov/pubs/feds/2010/201006/201006abs.html Kevin B. Moore and Michael G. Palumbo. The downturn in economic activity in the U.S. that began in December 2007 (as determined by researchers with the National Bureau of Economic Research) has been noticeably deeper and has already lasted considerably longer than the prior two recessions--those beginning in July 1990 and in March 2001. In addition, a key difference between the current and the past two recessions is the extent to which consumer spending and residential investment have dropped since late 2007--that is, the extent to which the household sector appears to have "led" the drop in aggregate economic activity in this recession. This paper uses household-level data from the Federal Reserve Board's series of Surveys of Consumer Finances to document three factors that appear to have contributed to greater financial stress in the household sector in the current downturn compared with the prior two: 1) substantial and widespread reductions in home values that resulted in sizable erosions of home equity and net worth for many homeowners; 2) markedly expanded holdings of corporate equity among middle-income households which lost significant market value, on net, as stock prices sunk; and, 3) greater debt on household balance sheets and overall financial vulnerability around the onset of the 2008-09 recession, particularly for those in the middle of the income distribution. 2010-02-02T16:57:20-05:00 en The Finances of American Households in the Past Three Recessions: Evidence from the Survey of Consumer Finances 2010-02-02T16:57:20-05:00 Household net worth consumer finances business cycle recession 2010-06: The Finances of American Households in the Past Three Recessions: Evidence from the Survey of Consumer Finances http://www.federalreserve.gov/pubs/feds/2010/201006/201006.pdf PDF version Kevin Moore Kevin Moore Board of Governors of the Federal Reserve System Michael Palumbo Michael Palumbo Board of Governors of the Federal Reserve System Kevin B. Moore and Michael G. Palumbo 2010-02-02T16:57:20-05:00 2010-06 E21 E32 D32 http://www.federalreserve.gov/pubs/feds/2010/201005/201005abs.html Michael B. Gordy and Søren Willemann. In its complexity and its vulnerability to market volatility, the CPDO might be viewed as the poster child for the excesses of financial engineering in the credit market. This paper examines the CPDO as a case study in model risk in the rating of complex structured products. We demonstrate that the models used by S&P and Moody's would have assigned very low probability to the spread levels realized in the investment grade corporate credit default swap market in late 2007, even though these spread levels were comparable to those of 2002. The spread levels realized in the first quarter of 2008 would have been assigned negligibly small probabilities. Had the models put non-negligible likelihood on attaining these high spread levels, the CPDO notes could never have achieved investment grade status. We conclude with larger lessons for the rating of complex products and for modeling credit risk in general. 2010-01-27T14:23:06-05:00 en Constant Proportion Debt Obligations: A Post-Mortem Analysis of Rating Models 2010-01-27T14:23:06-05:00 Credit risk securitization structured credit rating agencies 2010-05: Constant Proportion Debt Obligations: A Post-Mortem Analysis of Rating Models http://www.federalreserve.gov/pubs/feds/2010/201005/201005.pdf PDF version Michael Gordy Michael Gordy Board of Governors of the Federal Reserve System Søren Willemann Søren Willemann Barclays Capital Michael B. Gordy and Søren Willemann 2010-01-27T14:23:06-05:00 2010-05 G24 G17 http://www.federalreserve.gov/pubs/feds/2010/201004/201004abs.html Hui Shan and David Powell. The link between taxes and occupational choices is central for understanding the welfare impacts of income taxes. Just as taxes distort the labor-leisure decision, they also distort the wage-amenity decision. Yet, there are no estimates of the full response on this margin. When tax rates increase, workers favor jobs with lower wages and more non-taxable amenities. We introduce a two-step methodology which uses compensating differentials to characterize the tax elasticity of occupational choice. We estimate a significant compensated elasticity of 0.05, implying that a 10% increase in the net-of-tax rate causes workers to change to a 0.5% higher wage job. 2010-01-22T09:07:30-05:00 en Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage-Amenity Decision 2010-01-22T09:07:30-05:00 Income taxes occupational choice compensating differentials 2010-04: Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage-Amenity Decision http://www.federalreserve.gov/pubs/feds/2010/201004/201004.pdf PDF version David Powell David Powell RAND Corporation Hui Shan Hui Shan Board of Governors of the Federal Reserve System Hui Shan and David Powell 2010-01-22T09:07:30-05:00 2010-04 H24 H31 J24 http://www.federalreserve.gov/pubs/feds/2010/201003/201003abs.html Christopher L. Smith. The employment-to-population rate of high-school aged youth has fallen by about 20 percentage points since the late 1980s. The human capital implications of this decline depend on the reasons behind it. In this paper, I demonstrate that growth in the number of less-educated immigrants may have considerably reduced youth employment rates. This finding stands in contrast to previous research that generally identifies, at most, a modest negative relationship across states or cities between immigration levels and adult labor market outcomes. At least two factors are at work: there is greater overlap between the jobs that youth and less-educated adult immigrants traditionally do, and youth labor supply is more responsive to immigration-induced changes in their wage. Despite a slight increase in schooling rates in response to immigration, I find little evidence that reduced employment rates are associated with higher earnings ten years later in life. This raises the possibility that an immigration-induced reduction in youth employment, on net, hinders youths' human capital accumulation. 2010-01-11T16:23:51-05:00 en The Impact of Low-Skilled Immigration on the Youth Labor Market 2010-01-11T16:23:51-05:00 Youth employment immigration 2010-03: The Impact of Low-Skilled Immigration on the Youth Labor Market http://www.federalreserve.gov/pubs/feds/2010/201003/201003.pdf PDF version Christopher Smith Christopher Smith Board of Governors of the Federal Reserve System Christopher L. Smith 2010-01-11T16:23:51-05:00 2010-03 J13 J23 J24 J61 http://www.federalreserve.gov/pubs/feds/2010/201002/201002abs.html Antonella Tutino. This paper argues that constraining people to choose consumption and labor under finite Shannon capacity produces results in line with U.S. business cycle data. My model has a simple partial equilibrium setting in which risk averse consumers keep high labor supply and low consumption profile at early stage of life to hedge against wealth fluctuations. They rationally choose to keep consumption and labor unchanged until they collect enough information. I find that at high frequency consumption appears to be more sluggish than labor supply. However, when people decide to change consumption they do so by a large amount. This combination leads to higher variance of consumption with respect to labor supply. My model also finds high persistence and strong comovement of consumption and employment and delayed response of consumption and labor with respect to wealth. Furthermore, my framework generates endogenously a wedge between marginal rate of substituition and marginal rate of transformation or wages. Such wedge is bigger and more volatile the lower information flow. These findings suggest that rational inattention offers a promising avenue to bridge the gap between theory and U.S. business cycle data. 2010-01-11T16:23:46-05:00 en The Rigidity of Labor: Processing Savings and Work Decisions Through Shannon's Channels 2010-01-11T16:23:46-05:00 Rational inattention savings labor decisionmaking 2010-02: The Rigidity of Labor: Processing Savings and Work Decisions Through Shannon's Channels http://www.federalreserve.gov/pubs/feds/2010/201002/201002.pdf PDF version Antonella Tutino Antonella Tutino Board of Governors of the Federal Reserve System Antonella Tutino 2010-01-11T16:23:46-05:00 2010-02 D81 D91 E21 C63 http://www.federalreserve.gov/pubs/feds/2010/201001/201001abs.html Athanasios Orphanides and Min Wei. We explore the role of evolving beliefs regarding the structure of the macroeconomy in improving our understanding of the term structure of interest rates within the context of a simple macro-finance model. Using quarterly vintages of real-time data and survey forecasts for the United States over the past 40 years, we show that a recursively estimated VAR on real GDP growth, inflation and the nominal short-term interest generates predictions that are more consistent with survey forecasts than a benchmark fixed-coefficient counterpart. We then estimate a simple term structure model under the assumption that the investors' risk attitude is driven by near-term expectations of the three state variables. When we allow for evolving beliefs about the macroeconomy, the resulting term structure model provides a better fit to the cross section of yields than the benchmark model, especially at longer maturities, and exhibits better performance in out-of-sample predictions of future yield movements. 2010-01-11T16:23:37-05:00 en Evolving Macroeconomic Perceptions and the Term Structure of Interest Rates 2010-01-11T16:23:37-05:00 Macro term structure model recursive VAR survey forecasts anticipated utility 2010-01: Evolving Macroeconomic Perceptions and the Term Structure of Interest Rates http://www.federalreserve.gov/pubs/feds/2010/201001/201001.pdf PDF version Athanasios Orphanides Athanasios Orphanides Central Bank of Cyprus Min Wei Min Wei Board of Governors of the Federal Reserve System Athanasios Orphanides and Min Wei 2010-01-11T16:23:37-05:00 2010-01 E43 E44 E47 G12 http://www.federalreserve.gov/pubs/feds/2009/200949/200949abs.html Jane Dokko, Brian Doyle, Michael T. Kiley, Jinill Kim, Shane Sherlund, Jae Sim, and Skander Van den Heuvel. We examine the role of monetary policy in the housing bubble. Our review examines the setting of monetary policy in the middle of this decade, the impetus from monetary policy to the housing market, and other factors that may have contributed to the run-up, and subsequent collapse, in house prices. 2009-12-28T13:55:55-05:00 en Monetary Policy and the Housing Bubble 2009-12-28T13:55:55-05:00 Bubbles monetary policy house prices 2009-49: Monetary Policy and the Housing Bubble http://www.federalreserve.gov/pubs/feds/2009/200949/200949.pdf PDF version Jane Dokko Jane Dokko Board of Governors of the Federal Reserve System Brian Doyle Brian Doyle Board of Governors of the Federal Reserve System Michael Kiley Michael Kiley Board of Governors of the Federal Reserve System Jinill Kim Jinill Kim Board of Governors of the Federal Reserve System Shane Sherlund Shane Sherlund Board of Governors of the Federal Reserve System Jae Sim Jae Sim Board of Governors of the Federal Reserve System Skander Van den Heuvel Skander Van den Heuvel Board of Governors of the Federal Reserve System Jane Dokko, Brian Doyle, Michael T. Kiley, Jinill Kim, Shane Sherlund, Jae Sim, and Skander Van den Heuvel 2009-12-28T13:55:55-05:00 2009-49 E5 R21 http://www.federalreserve.gov/pubs/feds/2009/200948/200948abs.html Jessica C. Stahl. This paper estimates a dynamic oligopoly model in order to separately identify the demand-side and cost-side advantages of consolidation in the broadcast television industry. I exploit an exogenous change in regulation that led to significant industry consolidation. Using revenue and ownership data for broadcast stations over the past ten years, I estimate the effect of ownership changes on revenue. I recover costs by examining patterns in ownership changes that are left unexplained by revenue estimation. I model firms' purchasing decisions as a dynamic game, and estimate the game using a two-step estimation method recently developed by Bajari, Benkard & Levin (2007). This is the first paper to estimate a model of merger activity in a dynamic, strategic setting. I find that there are both revenue and cost advantages to consolidation, but they operate through different mechanisms. Access to a wider audience enables firms to increase per-station advertising revenue, while simply owning more stations enables firms to reduce per-station operating costs. A firm's ability to realize these benefits is affected by its stations' network affiliations, locations and viewers. 2009-12-15T09:32:08-05:00 en A Dynamic Analysis of Consolidation in the Broadcast Television Industry 2009-12-15T09:32:08-05:00 Dynamic oligopoly structural estimation market structure 2009-48: A Dynamic Analysis of Consolidation in the Broadcast Television Industry http://www.federalreserve.gov/pubs/feds/2009/200948/200948.pdf PDF version Jessica Stahl Jessica Stahl Board of Governors of the Federal Reserve System Jessica C. Stahl 2009-12-15T09:32:08-05:00 2009-48 L13 L22 L40 L82 http://www.federalreserve.gov/pubs/feds/2009/200947/200947abs.html Geng Li. Using the Panel Study of Income Dynamics, we document that, controlling for observable characteristics, household investors' likelihood of entering the stock market within the next five years is about 30 percent higher if their parents or children had entered the stock market during the previous five years. Because even family members who live far away from each other tend to communicate frequently, despite the fact that interactions among people living close geographically have declined with the rise of alternative social channels, we argue that these findings highlight the significance of information sharing regarding household financial decisions. In addition, focusing on the sequential patterns of stock market entry, we explicitly take into account the time needed for information to be shared and disseminated among family members. Our finding that one member's entry positively influences future entries of other family members at distinct stages of the life cycle allows us to largely rule out the hypothesis that the observed correlations in stock market entries are primarily caused by common preferences shared by family members. Furthermore, because we do not find similar sequential patterns in stock market exits, our results do not support the hypothesis of herding behavior. 2009-11-18T16:10:52-05:00 en Information Sharing and Stock Market Participation: Evidence from Extended Families 2009-11-18T16:10:52-05:00 Information sharing stock market participation extended families 2009-47: Information Sharing and Stock Market Participation: Evidence from Extended Families http://www.federalreserve.gov/pubs/feds/2009/200947/200947.pdf PDF version Geng Li Geng Li Board of Governors of the Federal Reserve System Geng Li 2009-11-18T16:10:52-05:00 2009-47 D14 D83 G11 http://www.federalreserve.gov/pubs/feds/2009/200946/200946abs.html Ricardo Correa and Gustavo A. Suarez. This paper exploits the staggered timing of state-level banking deregulation in the United States during the 1980s to study the causal effect of banking integration on the volatility of non-financial corporations. We find that firm-level employment, production, sales, and cash flows are less volatile after interstate banking deregulation, particularly for firms that have limited access to external finance. This finding suggests that bank-dependent firms exploit wider access to finance after deregulation to smooth out idiosyncratic shocks. In fact, short-term credit becomes less pro-cyclical after out-of-state bank entry is permitted. Finally, lower volatility in real-side variables after deregulation translates into lower idiosyncratic risk in stock returns. 2009-11-18T16:10:44-05:00 en Firm Volatility and Banks: Evidence from U.S. Banking Deregulation 2009-11-18T16:10:44-05:00 Bank deregulation firm volatility external finance idiosyncratic volatility 2009-46: Firm Volatility and Banks: Evidence from U.S. Banking Deregulation http://www.federalreserve.gov/pubs/feds/2009/200946/200946.pdf PDF version Ricardo Correa Ricardo Correa Board of Governors of the Federal Reserve System Gustavo Suarez Gustavo Suarez Board of Governors of the Federal Reserve System Ricardo Correa and Gustavo A. Suarez 2009-11-18T16:10:44-05:00 2009-46 G21 G32 http://www.federalreserve.gov/pubs/feds/2009/200945/200945abs.html Claudia R. Sahm, Matthew D. Shapiro, and Joel Slemrod. Only about one-fifth of respondents in the Reuters/University of Michigan survey report that the 2008 tax rebates led them to mostly increase spending, while over half said it would lead them to mostly pay off debt. Of those in the mostly-spend category, the response was swift, with over 80 percent reporting increasing their spending within three months of receiving their rebate. Older households, households with higher wealth and higher income, and those expecting future income growth were generally more likely to spend the rebates. A review of other surveys confirms the general pattern of results and suggests that small changes in survey design do not have a major effect on the distribution of responses. The distribution of survey answers corresponds to an aggregate MPC after one year of about one-third. The paper combines this survey-based estimate of the MPC and the survey-based estimate of the timing of spending to show that the rebates help explain the aggregate movements in saving, spending, and debt in 2008. Because the rebate was large and distributed over a short period, we estimate that it had a non-trivial effect on total spending in the second and third quarters of 2008. Nonetheless, the results imply that the rebates provided only a modest stimulus to spending per dollar of rebate. 2009-11-12T14:35:18-05:00 en Household Response to the 2008 Tax Rebates: Survey Evidence and Aggregate Implications 2009-11-12T14:35:18-05:00 Tax rebates marginal propensity to consume survey responses 2009-45: Household Response to the 2008 Tax Rebates: Survey Evidence and Aggregate Implications http://www.federalreserve.gov/pubs/feds/2009/200945/200945.pdf PDF version Claudia Sahm Claudia Sahm Board of Governors of the Federal Reserve System Matthew Shapiro Matthew Shapiro University of Michigan and NBER Joel Slemrod Joel Slemrod University of Michigan and NBER Claudia R. Sahm, Matthew D. Shapiro, and Joel Slemrod 2009-11-12T14:35:18-05:00 2009-45 C83 E21 H31 http://www.federalreserve.gov/pubs/feds/2009/200944/200944abs.html Xin Huang, Hao Zhou, and Haibin Zhu. This paper extends the approach of measuring and stress-testing the systemic risk of a banking sector in Huang, Zhou, and Zhu (2009) to identifying various sources of financial instability and to allocating systemic risk to individual financial institutions. The systemic risk measure, defined as the insurance cost to protect against distressed losses in a banking system, is a risk-neutral concept of capital based on publicly available information that can be appropriately aggregated across different subsets. An application of our methodology to a portfolio of twenty-two major banks in Asia and the Pacific illustrates the dynamics of the spillover effects of the global financial crisis to the region. The increase in the perceived systemic risk, particularly after the failure of Lehman Brothers, was mainly driven by the heightened risk aversion and the squeezed liquidity. The analysis on the marginal contribution of individual banks to the systemic risk suggests that ``too-big-to-fail" is a valid concern from a macroprudential perspective of bank regulation. 2009-11-02T10:05:47-05:00 en Assessing the Systemic Risk of a Heterogeneous Portfolio of Banks During the Recent Financial Crisis 2009-11-02T10:05:47-05:00 Systemic risk macroprudential regulation portfolio distress loss credit default swap dynamic conditional correlation 2009-44: Assessing the Systemic Risk of a Heterogeneous Portfolio of Banks During the Recent Financial Crisis http://www.federalreserve.gov/pubs/feds/2009/200944/200944.pdf PDF version Xin Huang Xin Huang Department of Economics, University of Oklahoma Hao Zhou Hao Zhou Risk Analysis Section, Federal Reserve Board Haibin Zhu Haibin Zhu Bank for International Settlements, Asia-Pacific Office Xin Huang, Hao Zhou, and Haibin Zhu 2009-11-02T10:05:47-05:00 2009-44 G21 G28 G13 http://www.federalreserve.gov/pubs/feds/2009/200943/200943abs.html Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf. Delinquencies on residential mortgages and home foreclosures have risen dramatically in the past couple of years. The mortgage losses triggered a broad-based financial crisis and severe recession, which, in turn, exacerbated the initial financial distress faced by homeowners. Although servicers increased their loss mitigation efforts as defaults began to mount, foreclosures continued to occur in cases where both the borrower and investor would be better off if such an outcome were avoided. The U.S. government has engaged in a number of initiatives to reduce such foreclosures. This paper examines the economic underpinnings of the Administration's loan modification program, the Home Affordable Modification Program (HAMP). We argue that HAMP should help many borrowers avoid foreclosure, as its key features--a standardized protocol, incentive fees for servicers, and a requirement that the first lien mortgage payment be reduced to 31 percent of gross income--alleviate some of the previous obstacles to successful modifications. That said, HAMP is not well-suited to address payment problems associated with job loss because the required modification in such cases would often be too costly to qualify for the program. In addition, the focus of the program on reducing the payments associated with the mortgage rather than the principal of the mortgage may limit its effectiveness when the homeowner's equity is sufficiently negative. In this case, recent government efforts to establish a protocol for short sales should be a useful tool in avoiding costly foreclosure. 2009-10-27T18:15:57-05:00 en Designing Loan Modifications to Address the Mortgage Crisis and the Making Home Affordable Program 2009-10-27T18:15:57-05:00 Mortgage mortgage-servicers mortgage-modification foreclosures HAMP GSEs 2009-43: Designing Loan Modifications to Address the Mortgage Crisis and the Making Home Affordable Program http://www.federalreserve.gov/pubs/feds/2009/200943/200943.pdf PDF version Larry Cordell Larry Cordell Federal Reserve Bank of Philadelphia Karen Dynan Karen Dynan Brookings Institute Andreas Lehnert Andreas Lehnert Board of Governors of the Federal Reserve System Nellie Liang Nellie Liang Board of Governors of the Federal Reserve System Eileen Mauskopf Eileen Mauskopf Board of Governors of the Federal Reserve System Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf 2009-10-27T18:15:57-05:00 2009-43 G01 G21 G28 H40 H20 H00 H81 http://www.federalreserve.gov/pubs/feds/2009/200942/200942abs.html Hui Shan. Reverse mortgages allow elderly homeowners to tap into their housing wealth without having to sell or move out of their homes. However, very few eligible homeowners have used reverse mortgages to achieve consumption smoothing until recently when the reverse mortgage market in the United States witnessed substantial growth. This paper examines 1989-2007 loan-level reverse mortgage data and presents a number of findings. First, I show that recent reverse mortgage borrowers are significantly different from earlier borrowers in many respects. Second, I find that borrowers who take the line-of-credit payment plan, single male borrowers, and borrowers with higher house values exit their homes sooner than other reverse mortgage borrowers. Third, I combine the reverse mortgage data with county-level house price data to show that elderly homeowners are more likely to purchase reverse mortgages when the local housing market is at its peak. This finding suggests that the 2000-05 housing market boom may be partially responsible for the rapid growth of reverse mortgage markets. Lastly, I show that the Federal Housing Administration (FHA) mortgage limits, which cap the amount of housing wealth that an eligible homeowner can borrow against, have no effect on the demand for reverse mortgages. The findings have important implications to both policy-making and the economics of housing and aging. 2009-10-19T18:15:08-05:00 en Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market 2009-10-19T18:15:08-05:00 Reverse mortgages housing aging 2009-42: Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market http://www.federalreserve.gov/pubs/feds/2009/200942/200942.pdf PDF version Hui Shan Hui Shan Board of Governors of the Federal Reserve System Hui Shan 2009-10-19T18:15:08-05:00 2009-42 E21 J14 R21