http://www.federalreserve.gov/pubs/workingpapers.htm Staff working papers in the Finance and Economics Discussion Series (FEDS) and International Finance Discussion Papers (IFDPS) 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 FEDS or IFDPS (other than acknowledgment) should be cleared with the author(s) to protect the tentative character of these papers. http://www.federalreserve.gov/pubs/feds/2012/201236/201236abs.html John Sabelhaus, David Johnson, Stephen Ash, Thesia Garner, John Greenlees, Steve Henderson, and David Swanson. Aggregate under-reporting of household spending in the Consumer Expenditure Survey (CE) can result from two fundamental types of measurement errors: higher-income households (who presumably spend more than average) are under-represented in the CE estimation sample, or there is systematic under-reporting of spending by at least some CE survey respondents. Using a new data set linking CE units to zip-code level average Adjusted Gross Income (AGI), we show that the very highest-income households are less likely to respond to the survey when they are sampled, but unit non-response rates are not associated with income over most of the income distribution. Although increasing representation at the high end of the income distribution could in principle significantly raise aggregate CE spending, the low reported average propensity to spend for higher-income respondent households could account for at least as much of the aggregate shortfall in total spending. 2012-05-23T17:02:44-04:00 en Is the Consumer Expenditure Survey Representative by Income? 2012-05-23T17:02:44-04:00 Consumer Expenditure Survey sampling 2012-36: Is the Consumer Expenditure Survey Representative by Income? http://www.federalreserve.gov/pubs/feds/2012/201236/201236pap.pdf PDF version Stephen Ash Stephen Ash U.S. Bureau of the Census Thesia Garner Thesia Garner U.S. Bureau of Labor Statistics John Greenlees John Greenlees U.S. Bureau of Labor Statistics Steve Henderson Steve Henderson U.S. Bureau of Labor Statistics David Johnson David Johnson U.S. Bureau of the Census John Sabelhaus John Sabelhaus Board of Governors of the Federal Reserve System David Swanson David Swanson U.S. Bureau of Labor Statistics John Sabelhaus, David Johnson, Stephen Ash, Thesia Garner, John Greenlees, Steve Henderson, and David Swanson 2012-05-23T17:02:44-04:00 2012-36 C81 C83 http://www.federalreserve.gov/pubs/feds/2012/201228/201228abs.html William B. Peterman. This paper considers the impact on optimal tax policy of including endogenously determined retirement in a life cycle model. Allowing individuals to determine when they retire causes the optimal tax on capital to increase by 75% because of two implicit changes in the aggregate labor supply elasticity. First, including endogenous retirement causes an increase in the overall aggregate labor supply elasticity since agents can change their labor supply on both the intensive and extensive margins. In response, the government limits the distortions from the tax policy by lowering the tax on labor and increases the tax on capital. Second, given that the choice to retire is more relevant for older individuals, endogenous retirement disproportionately increases older agent's elasticity compared to younger individuals. Ideally, the government would decrease the relative labor income tax on individuals when they are older and supply labor more elastically. However, in the absence of age-dependent taxes, the government mimics such a tax policy by further increasing the tax on capital. I find that the welfare lost from not accounting for endogenous retirement when solving for the optimal tax policy is equivalent to approximately one percent of lifetime consumption. 2012-05-23T14:05:26-04:00 en An Extensive Look at Taxes: How does endogenous retirement affect optimal taxation? 2012-05-23T14:05:26-04:00 Optimal taxation capital taxation endogenous retirement 2012-28: An Extensive Look at Taxes: How does endogenous retirement affect optimal taxation? http://www.federalreserve.gov/pubs/feds/2012/201228/201228pap.pdf PDF version William Peterman William Peterman Board of Governors of the Federal Reserve System William B. Peterman 2012-05-23T14:05:26-04:00 2012-28 E24 E62 H21 http://www.federalreserve.gov/pubs/ifdp/2012/1048/default.htm Mathias Trabandt and Harald Uhlig. We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt and Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income. We update the sample to 2010, thereby including recent increases in government spending and their fiscal consequences. We provide new tax rate data. We conduct an analysis for the pessimistic case that the recent fiscal shifts are permanent. We include a cross-country analysis on consumption taxes as well as a more detailed investigation of the inclusion of human capital considerations for labor taxation. 2012-05-23T10:34:09-04:00 en How Do Laffer Curves Differ Across Countries? 2012-05-23T10:01:37-04:00 FRB Laffer curve taxation corss country comparison debt sustainability fiscal limits quantitative endogenous growth human capital and labor taxation IFDP1048: How Do Laffer Curves Differ Across Countries? http://www.federalreserve.gov/pubs/ifdp/2012/1048/ifdp1048.pdf PDF version Mathias Trabandt and Harald Uhlig 2012-05-23T10:01:37-04:00 1048 E0 E13 E2 E3 E62 H0 H2 H3 H6 http://www.federalreserve.gov/pubs/ifdp/2012/1047/default.htm Nathan Foley-Fisher. I construct a database that maps the timing of sovereign default decisions into elected politicians' terms of office, that provides an empirical means of investigating political economy theories of sovereign default. I find no robust patterns in the timing of default decisions over terms of office. I also find no evidence in support of the political reputation theory of sovereign debt repayment. Finally, there is some tentative evidence that elected leaders who default are also those more likely to be re-elected. Motivated by anecdotal evidence, I use a stylised model of political leaders with career concerns to demonstrate how this can occur when politicians care about re-election. 2012-05-23T10:34:09-04:00 en The Timing of Sovereign Defaults Over Electoral Terms 2012-05-23T09:52:04-04:00 FRB Sovereign default electoral cycles career concerns IFDP1047: The Timing of Sovereign Defaults Over Electoral Terms http://www.federalreserve.gov/pubs/ifdp/2012/1047/ifdp1047.pdf PDF version Nathan Foley-Fisher 2012-05-23T09:52:04-04:00 1047 F34 H63 http://www.federalreserve.gov/pubs/feds/2012/201227/201227abs.html Jose M. Berrospide, Ralf R. Meisenzahl, and Briana D. Sullivan. What determined the corporate use of credit lines in the recent financial crisis? To address this question we hand-collect data on credit lines and interest rate hedging for a random sample of 600 COMPUSTAT firms. We document that drawdowns of credit lines had already increased in 2007, earlier than what previous work has found. The surge in drawdowns occurred precisely when disruptions in bank funding markets began. In addition, we distinguish unused and available portions of credit lines, which we then use to disentangle credit supply and credit demand effects. On the supply side, we find covenant-induced reduction of credit supply to be small, and almost no evidence of credit line cancellations. On the demand side, our results confirm that while smaller and lower-rated firms use their credit lines more intensively in general, larger and higher-rated firms were more likely to draw on their credit lines during the crisis. We find that firms that use interest rate swaps to hedge the interest rate risk associated with their credit lines draw down significantly more from those lines than non-hedged firms. 2012-05-22T10:23:04-04:00 en Credit Line Use and Availability in the Financial Crisis: The Importance of Hedging 2012-05-22T10:23:04-04:00 Credit lines financial crisis liquidity management hedging 2012-27: Credit Line Use and Availability in the Financial Crisis: The Importance of Hedging http://www.federalreserve.gov/pubs/feds/2012/201227/201227pap.pdf PDF version Jose Berrospide Jose Berrospide Board of Governors of the Federal Reserve System Ralf Meisenzahl Ralf Meisenzahl Board of Governors of the Federal Reserve System Briana Sullivan Briana Sullivan University of Florida, Gainesville Jose M. Berrospide, Ralf R. Meisenzahl, and Briana D. Sullivan 2012-05-22T10:23:04-04:00 2012-27 G31 G32 http://www.federalreserve.gov/pubs/feds/2012/201225/201225abs.html Valentin Bolotnyy. The U.S. mortgage crisis that began in 2007 generated questions about the role played by Fannie Mae and Freddie Mac, the Government-Sponsored Enterprises (GSEs), in its causes. Some have claimed that the Affordable Housing Goals (AHGs), introduced by Congress through the GSE Act of 1992, and the resulting purchases of single-family mortgages the GSEs made to meet those goals, drove lending to high-risk borrowers. Using regression discontinuity analysis, I measure the effect of one of the goals, the Underserved Areas Goal (UAG), on the number of whole single-family mortgages purchased by the GSEs in targeted census tracts from 1996 to 2002. Focusing additionally on tracts that became UAG-eligible in 2005-2006, when the Department of Housing and Urban Development (HUD) began to determine eligibility using the 2000 Census, I measure the effect of the UAG on the GSEs' whole single-family mortgage purchases during peak years for the subprime mortgage market. Under the first approach, I estimate that the GSEs purchased 0 to 3 percent more goal-eligible mortgages than they would have without the UAG in place. Under the second approach, I estimate this effect to be 2.5 to 5 percent. The results suggest a small UAG effect and challenge the view that the goals caused the GSEs to supply substantially more credit to high-risk borrowers than they otherwise would have supplied. Although the goals may have spurred the GSEs to purchase more multi-family mortgages and REMICs than they otherwise would have, my analyses suggest that the GSEs' purchases of whole single-family mortgages to satisfy the goals did not drive the subprime lending boom of 2002-2006. 2012-05-21T10:28:48-04:00 en The Government-Sponsored Enterprises and the Mortgage Crisis: The Role of the Affordable Housing Goals 2012-05-21T10:28:48-04:00 GSE government sponsored enterprises affordable housing goals subprime mortgages single family mortgages subprime crisis housing bubble 2012-25: The Government-Sponsored Enterprises and the Mortgage Crisis: The Role of the Affordable Housing Goals http://www.federalreserve.gov/pubs/feds/2012/201225/201225pap.pdf PDF version Valentin Bolotnyy Valentin Bolotnyy Board of Governors of the Federal Reserve System Valentin Bolotnyy 2012-05-21T10:28:48-04:00 2012-25 G21 G28 I38 L51 R38 http://www.federalreserve.gov/pubs/feds/2012/201235/201235abs.html Edward P. Herbst. In likelihood-based estimation of linearized Dynamic Stochastic General Equilibrium (DSGE) models, the evaluation of the Kalman Filter dominates the running time of the entire algorithm. In this paper, we revisit a set of simple recursions known as the ``Chandrasekhar Recursions" developed by Morf (1974) and Morf, Sidhu, and Kalaith (1974) for evaluating the likelihood of a Linear Gaussian State Space System. We show that DSGE models are ideally suited for the use of these recursions, which work best when the number of states is much greater than the number of observables. In several examples, we show that there are substantial benefits to using the recursions, with likelihood evaluation up to five times faster. This gain is especially pronounced in light of the trivial implementation costs--no model modification is required. Moreover, the algorithm is complementary with other approaches. 2012-05-18T16:02:41-04:00 en Using the "Chandrasekhar Recursions" for Likelihood Evaluation of DSGE Models 2012-05-18T16:02:41-04:00 Kalman filter likelihood estimation computational techniques 2012-35: Using the "Chandrasekhar Recursions" for Likelihood Evaluation of DSGE Models http://www.federalreserve.gov/pubs/feds/2012/201235/201235pap.pdf PDF version Edward Herbst Edward Herbst Board of Governors of the Federal Reserve System Edward P. Herbst 2012-05-18T16:02:41-04:00 2012-35 C18 C63 E20 http://www.federalreserve.gov/pubs/feds/2012/201234/201234abs.html Jonathan N. Millar, Stephen D. Oliner, and Daniel E. Sichel. We use a large project-level dataset to estimate the length of the planning period for commercial construction projects in the United States. We find that these time-to-plan lags are long, averaging about 17 months when we aggregate the projects without regard to size and more than 28 months when we weight the projects by their construction cost. The full distribution of time-to-plan lags is very wide, and we relate this variation to the characteristics of the project and its location. In addition, we show that time-to-plan lags lengthened by 3 to 4 months, on average, over our sample period (1999 to 2010). Regulatory factors help explain the variation in planning lags across locations, and we present anecdotal evidence that links at least some of the lengthening over time to heightened regulatory scrutiny. 2012-05-17T09:40:10-04:00 en Time-to-Plan Lags for Commercial Construction Projects 2012-05-17T09:40:10-04:00 Time to plan gestation lags construction investment commercial real estate 2012-34: Time-to-Plan Lags for Commercial Construction Projects http://www.federalreserve.gov/pubs/feds/2012/201234/201234pap.pdf PDF version Jonathan Millar Jonathan Millar Board of Governors of the Federal Reserve System Stephen Oliner Stephen Oliner UCLA Ziman Center for Real Estate and American Enterprise Institute Daniel Sichel Daniel Sichel Board of Governors of the Federal Reserve System Jonathan N. Millar, Stephen D. Oliner, and Daniel E. Sichel 2012-05-17T09:40:10-04:00 2012-34 E22 R33 L74 http://www.federalreserve.gov/pubs/feds/2012/201223/201223abs.html Alex Haberis and Anna Lipinska. In this paper, we consider how monetary policy in a large, foreign economy affects optimal monetary policy in a small open economy (`home') in response to a large global demand shock that pushes both economies to the zero lower bound (ZLB) on nominal interest rates. We show that the inability of foreign monetary policy to stabilise the foreign economy at the ZLB creates a spillover that affects how well the home policymaker is able to stabilise its own economy. We show that more stimulatory foreign policy worsens the home policymaker's trade-off between stabilising inflation and the output gap when home and foreign goods are close substitutes. This reflects the fact that looser foreign policy leads to a relatively more appreciated home real exchange rate, which induces large expenditure switching away from home goods when goods are highly substitutable--just at a time (at the ZLB) when home policy is trying to boost demand for home goods. When goods are not close substitutes the home policymaker's ability to stabilise the economy benefits from more stimulatory foreign policy. 2012-05-17T07:27:06-04:00 en International Policy Spillovers at the Zero Lower Bound 2012-05-17T07:27:06-04:00 Small open economy policy trade-offs trade structure 2012-23: International Policy Spillovers at the Zero Lower Bound http://www.federalreserve.gov/pubs/feds/2012/201223/201223pap.pdf PDF version Alex Haberis Alex Haberis Bank of England Anna Lipinska Anna Lipinska Board of Governors of the Federal Reserve System Alex Haberis and Anna Lipinska 2012-05-17T07:27:06-04:00 2012-23 E58 F41 F42 http://www.federalreserve.gov/pubs/feds/2012/201233/201233abs.html Alex Kaufman. This paper uses a novel instrumental variables approach to quantify the effect that GSE purchase eligibility had on equilibrium mortgage loan terms in the period from 2003 to 2007. The technique is designed to eliminate sources of bias that may have affected previous studies. GSE eligibility appears to have lowered interest rates by about 10 basis points, encouraged fixed-rate loans over ARMs, and discouraged low-documentation and brokered loans. There is no measurable effect on loan performance or on the prevalence of certain types of "exotic" mortgages. The overall picture suggests that GSE purchases had only a modest impact on loan terms during this period. 2012-05-11T11:31:22-04:00 en The Influence of Fannie and Freddie on Mortgage Loan Terms 2012-05-11T11:31:22-04:00 Government-sponsored enterprises mortgages 2012-33: The Influence of Fannie and Freddie on Mortgage Loan Terms http://www.federalreserve.gov/pubs/feds/2012/201233/201233pap.pdf PDF version Alex Kaufman Alex Kaufman Board of Governors of the Federal Reserve System Alex Kaufman 2012-05-11T11:31:22-04:00 2012-33 G21 G28 H81 N22 http://www.federalreserve.gov/pubs/feds/2012/201232/201232abs.html Marcelle Chauvet and Zeynep Senyuz. In this paper, we propose an econometric model of the joint dynamic relationship between the yield curve and the economy to predict business cycles. We examine the predictive value of the yield curve to forecast future economic growth as well as the beginning and end of economic recessions at the monthly frequency. The proposed nonlinear multivariate dynamic factor model takes into account not only the popular term spread but also information extracted from the level and curvature of the yield curve and from macroeconomic variables. The nonlinear model is used to investigate the interrelationship between the phases of the bond market and of the business cycle. The results indicate a strong interrelation between these two sectors. The proposed factor model of the yield curve exhibits substantial incremental predictive value compared to several alternative specifications. This result holds in-sample and out-of-sample, using revised or real time unrevised data. 2012-05-11T11:31:16-04:00 en A Dynamic Factor Model of the Yield Curve as a Predictor of the Economy 2012-05-11T11:31:16-04:00 Forecasting business cycles dynamic factor models Markov switching 2012-32: A Dynamic Factor Model of the Yield Curve as a Predictor of the Economy http://www.federalreserve.gov/pubs/feds/2012/201232/201232pap.pdf PDF version Marcelle Chauvet Marcelle Chauvet University of California, Riverside Zeynep Senyuz Zeynep Senyuz Board of Governors of the Federal Reserve System Marcelle Chauvet and Zeynep Senyuz 2012-05-11T11:31:16-04:00 2012-32 C32 E32 E44 http://www.federalreserve.gov/pubs/feds/2012/201231/201231abs.html Jonathan D. Rose. This paper studies how building and loan associations (B&Ls) slowly unwound their obligations following a set of financial shocks during the Great Depression, with a special focus on a group of particularly troubled B&Ls in Newark, NJ. Investors in B&Ls disagreed over whether to realize losses on foreclosed real estate holdings, and those investors favoring liquidation were unable to force action after legal developments nullified statutory withdrawal privileges. In the medium run, a market-based resolution mechanism developed in the form of a secondary market for B&L liabilities. Liability holders barred from withdrawal incurred large losses while liquidating their investments on this market. At the same time, B&Ls used the market to avoid realizing some losses by exchanging foreclosed real estate for their second-hand share liabilities. More formal resolution ultimately took place from 1938 to 1943, first consisting heavily of closures, and then of reorganizations. Reorganizations were spurred by a large scale federal intervention arranging for the creation of bad banks, liquidity injections, and liability insurance. 2012-05-11T10:26:13-04:00 en The Prolonged Resolution of Troubled Real Estate Lenders During the 1930s 2012-05-11T10:26:13-04:00 real estate lending building and loan associations financial institution resolution Great Depression 2012-31: The Prolonged Resolution of Troubled Real Estate Lenders During the 1930s http://www.federalreserve.gov/pubs/feds/2012/201231/201231pap.pdf PDF version Jonathan Rose Jonathan Rose Board of Governors of the Federal Reserve System Jonathan D. Rose 2012-05-11T10:26:13-04:00 2012-31 G21 N22 http://www.federalreserve.gov/pubs/feds/2012/201224/201224abs.html William F. Bassett, Mary Beth Chosak, John C. Driscoll, and Egon Zakrajsek. Identifying the macroeconomic effects of credit supply disruptions is difficult because many of the same factors that influence the supply of bank loans can also affect the demand for credit. Using bank-level responses to the Federal Reserve's Senior Loan Officer Opinion Survey, we decompose the reported changes in lending standards--a commonly-used indicator of changes in credit supply conditions--into a component that captures the change in banks' lending posture in response to bank-specific and macroeconomic factors that also affect loan demand and a residual component, which provides a cleaner measure of fluctuations in the effective supply of bank-intermediated credit. When included in a standard VAR framework, shocks to our measure of loan supply are associated with substantial declines in output and in the capacity of businesses and households to borrow from the banking sector, as well as with a sharp widening of credit spreads and a significant easing of monetary policy. We corroborate the interpretation of our series as movements in the supply of bank loans using a detailed loan-level data set: A regression of individual loan amounts on the corresponding interest rate spreads--where the latter is instrumented with our bank-level loan-supply shifter--yields the semi-elasticity of loan demand between −1.0 and −1.5. 2012-05-11T12:10:46-04:00 en Changes in Bank Lending Standards and the Macroeconomy 2012-05-11T12:10:46-04:00 Credit supply shocks bank credit policies financial accelerator 2012-24: Changes in Bank Lending Standards and the Macroeconomy http://www.federalreserve.gov/pubs/feds/2012/201224/201224pap.pdf PDF version William Bassett William Bassett Board of Governors of the Federal Reserve System Mary Beth Chosak Mary Beth Chosak Board of Governors of the Federal Reserve System John Driscoll John Driscoll Board of Governors of the Federal Reserve System Egon Zakrajsek Egon Zakrajsek Board of Governors of the Federal Reserve System William F. Bassett, Mary Beth Chosak, John C. Driscoll, and Egon Zakrajsek 2012-05-11T12:10:46-04:00 2012-24 E32 E44 http://www.federalreserve.gov/pubs/feds/2012/201230/201230abs.html Jeremy J. Nalewaik and Eugenio P. Pinto. This paper studies the behavior of producers of capital goods, examining how they set shipments in response to fluctuations in new orders. The paper establishes a stylized fact: the response of shipments to orders is more pronounced when the level of new orders is low relative to the level of shipments, usually after orders plunge in recessions. This cyclical change in firm behavior is quantitatively important, accounting for a large portion of the steep decline in equipment investment in the 2001 and 2007--9 recessions. We examine economic interpretations of this stylized fact using a model where firms smooth production with a target delivery lag for new orders. Heightened persistence in orders growth may explain part of the greater responsiveness of shipments to orders, as may increases in firms' target buffer stocks of unfilled orders relative to shipments. 2012-05-08T16:15:15-04:00 en The Response of Capital Goods Shipments to Demand over the Business Cycle 2012-05-08T16:15:15-04:00 Orders shipments business investment business cycles threshold cointegration models Markov switching models 2012-30: The Response of Capital Goods Shipments to Demand over the Business Cycle http://www.federalreserve.gov/pubs/feds/2012/201230/201230pap.pdf PDF version Jeremy Nalewaik Jeremy Nalewaik Board of Governors of the Federal Reserve System Eugenio Pinto Eugenio Pinto Board of Governors of the Federal Reserve System Jeremy J. Nalewaik and Eugenio P. Pinto 2012-05-08T16:15:15-04:00 2012-30 E22 E23 E32 http://www.federalreserve.gov/pubs/feds/2012/201229/201229abs.html Edward Nelson. Friedman and Schwartz (1982) and Goodhart (1982) report a zero correlation between money growth and output growth in U.K. historical data. This finding is puzzling, as there is wide agreement that changes in monetary policy are frequently nonneutral in the short run and that the U.K. experience, in particular, is replete with instances of real effects of monetary policy actions. This paper proposes a resolution to the puzzle. An analysis conducted on subperiods shows that a positive money growth/output growth correlation is indeed recoverable from U.K. historical data. Strike activity in the 1970s and shifts in the terms of trade during the interwar period are the two factors primarily responsible for obscuring the positive correlation between money and output in the United Kingdom. 2012-05-08T11:28:40-04:00 en The Correlation between Money and Output in the United Kingdom: Resolution of a Puzzle 2012-05-08T11:28:40-04:00 Money/output correlation monetary aggregates U.K. interwar depression 2012-29: The Correlation between Money and Output in the United Kingdom: Resolution of a Puzzle http://www.federalreserve.gov/pubs/feds/2012/201229/201229pap.pdf PDF version Edward Nelson Edward Nelson Federal Reserve Board Edward Nelson 2012-05-08T11:28:40-04:00 2012-29 E51 E52 E58