FEDS 2015-119
Un-Fortunate Sons: Effects of the Vietnam Draft Lottery on the Next Generation's Labor Market (PDF)

Sarena F. Goodman and Adam M. Isen

Abstract: Can shocks to one generation propagate to the next? To answer this question, we study how the Vietnam draft lottery affected the next generation's labor market. Using the universe of federal tax returns, we link fathers from draft cohorts to their sons' outcomes and find that sons of fathers randomly called by the draft 1) have lower earnings and labor force participation than their peers, and 2) are more likely to volunteer for military service. These findings highlight the strong role family plays in human capital development and occupational choice. More generally, our results provide sound evidence that malleable aspects of a parent's life course can influence children's labor market outcomes and that policies that only directly alter the circumstances of one generation can have important long-run effects on the next.

Keywords: Vietnam War draft lottery, household environment, intergenerational mobility, labor supply, military service, occupational transmission, parental inputs

DOI: http://dx.doi.org/10.17016/FEDS.2015.119r1

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Original paper: PDF | Accessible materials (.zip)

FEDS 2015-118
Do long-haul truckers undervalue future fuel savings? (PDF)

Jacob Adenbaum, Adam Copeland, and John J. Stevens

Abstract: The U.S. federal government enacted fuel efficiency standards for medium and heavy trucks for the first time in September 2011. Rationales for using this policy tool typically depend upon frictions existing in the marketplace or consumers being myopic, such that vehicle purchasers undervalue the future fuel savings from increased fuel efficiency. We measure by how much long-haul truck owners undervalue future fuel savings by employing recent advances to the classic hedonic approach to estimate the distribution of willingness-to-pay for fuel efficiency. We find significant heterogeneity in truck owners' willingness to pay for fuel efficiency, with the elasticity of fuel efficiency to price ranging from 0.51 at the 10th percentile to 1.33 at the 90th percentile, and an average of 0.91. Combining these results with estimates of future fuel savings from increases in fuel efficiency, we find that long-haul truck owners' willingness-to-pay for a 1 percent increase in fuel efficiency is, on average, just 29.5 percent of the expected future fuel savings. These results suggest that introducing fuel efficiency standards for heavy trucks might be an effective policy tool to raise medium and heavy trucks' fuel economy.

Keywords: fuel efficiency standards, durable goods, discrete-choice demand estimation

DOI: http://dx.doi.org/10.17016/FEDS.2015.118

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FEDS 2015-117
Taxing Capital? The Importance of How Human Capital is Accumulated (PDF)

Abstract: This paper considers the impact of how human capital is accumulated on optimal capital tax policy in a life cycle model. In particular, it compares the optimal capital tax when human capital is accumulated exogenously, endogenously through learning-by-doing, and endogenously through learning-or-doing. Previous work demonstrates that in a simple two generation life cycle model with exogenous human capital accumulation, if the utility function is separable and homothetic in each consumption and labor, then the government has no motive to condition taxes on age or tax capital. In contrast, this paper demonstrates analytically that adding either form of endogenous human capital accumulation creates a motive for the government to use age-dependent labor income taxes. Moreover, if the government cannot condition taxes on age, then a capital tax can be optimal in order to mimic such taxes. This paper quantitatively explores the strength of this channel and finds that, including human capital accumulation with learning-by-doing, as opposed to exogenously, causes the optimal capital tax to increase by between 7.3 and 14.5 percentage points. In contrast, introducing learning-or-doing causes a much smaller increase in the optimal capital tax of between 0.7 and 3.7 percentage points. Taken as a whole, this paper finds that the specific formulation by which human capital is accumulated can have notable implications on the optimal capital tax.

Keywords: Optimal Taxation, Capital Taxation, Human Capital.

DOI: http://dx.doi.org/10.17016/FEDS.2015.117

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FEDS 2015-116
Estimating (Markov-Switching) VAR Models without Gibbs Sampling: A Sequential Monte Carlo Approach (PDF)

Mark Bognanni and Edward P. Herbst

Abstract: Vector autoregressions with Markov-switching parameters (MS-VARs) fit the data better than do their constant-parameter predecessors. However, Bayesian inference for MS-VARs with existing algorithms remains challenging. For our first contribution, we show that Sequential Monte Carlo (SMC) estimators accurately estimate Bayesian MS-VAR posteriors. Relative to multi-step, model-specific MCMC routines, SMC has the advantages of generality, parallelizability, and freedom from reliance on particular analytical relationships between prior and likelihood. For our second contribution, we use SMC's flexibility to demonstrate that the choice of prior drives the key empirical finding of Sims, Waggoner, and Zha (2008) as much as does the data.

Keywords: Bayesian Analysis, Regime-Switching Models, Sequential Monte Carlo, Vector Autoregressions

DOI: http://dx.doi.org/10.17016/FEDS.2015.116

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FEDS 2015-115
Does Realized Volatility Help Bond Yield Density Prediction? (PDF)

Minchul Shin and Molin Zhong

Abstract: We suggest using "realized volatility" as a volatility proxy to aid in model-based multivariate bond yield density forecasting. To do so, we develop a general estimation approach to incorporate volatility proxy information into dynamic factor models with stochastic volatility. The resulting model parameter estimates are highly efficient, which one hopes would translate into superior predictive performance. We explore this conjecture in the context of density prediction of U.S. bond yields by incorporating realized volatility into a dynamic Nelson-Siegel (DNS) model with stochastic volatility. The results clearly indicate that using realized volatility improves density forecasts relative to popular specifications in the DNS literature that neglect realized volatility.

Keywords: Dynamic Nelson-Siegel Model, Dynamic factor model, Forecasting, Stochastic volatility, Term structure of interest rates

DOI: http://dx.doi.org/10.17016/FEDS.2015.115

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FEDS 2015-114
The Dynamics of Adjustable-Rate Subprime Mortgage Default: A Structural Estimation (PDF)

Hanming Fang, You Suk Kim, and Wenli Li

Abstract: We present a dynamic structural model of subprime adjustable-rate mortgage (ARM) borrowers making payment decisions taking into account possible consequences of different degrees of delinquency from their lenders. We empirically implement the model using unique data sets that contain information on borrowers' mortgage payment history, their broad balance sheets, and lender responses. Our investigation of the factors that drive borrowers' decisions reveals that subprime ARMs are not all alike. For loans originated in 2004 and 2005, the interest rate resets associated with ARMs, as well as the housing and labor market conditions were not as important in borrowers' delinquency decisions as in their decisions to pay off their loans. For loans originated in 2006, interest rate resets, housing price declines, and worsening labor market conditions all contributed importantly to their high delinquency rates. Counterfactual policy simulations reveal that even if the Libor rate could be lowered to zero by aggressive traditional monetary policies, it would have a limited effect on reducing the delinquency rates. We find that automatic modification mortgage designs under which the monthly payment or the principal balance of the loans are automatically reduced when housing prices decline can be effective in reducing both delinquency and foreclosure. Importantly, we find that automatic modification mortgages with a cushion, under which the monthly payment or principal balance reductions are triggered only when housing price declines exceed a certain percentage may result in a Pareto improvement in that borrowers and lenders are both made better off than under the baseline, with a lower delinquency and foreclosure rates. Our counterfactual analysis also suggests that limited commitment power on the part of the lenders to loan modification policies may be an important reason for the relatively small rate of modifications observed during the housing crisis.

Keywords: Adjustable-Rate Mortgage, Automatic Modification with a Cushion, Default, Loan Modification

DOI: http://dx.doi.org/10.17016/FEDS.2015.114

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FEDS 2015-113
Does Exporting Improve Matching? Evidence from French Employer-Employee Data (PDF)

Matilde Bombardini, Gianluca Orefice, and Maria D. Tito

Abstract: Does opening a market to international trade affect the pattern of matching between firms and workers? This paper answers this question both theoretically and empirically in three parts. We set up a model of matching between heterogeneous workers and firms in which variation in the worker type at the firm level exists in equilibrium only because of the presence of search costs. When firms gain access to the foreign market, their revenue potential increases. When stakes are high, matching with the right worker becomes particularly important because deviations from the ideal match quickly reduce the value of the relationship. Hence, exporting firms select sets of workers that are less dispersed relative to the average. We then document a novel fact about the hiring decisions of exporting firms versus non-exporting firms in a French matched employer-employee dataset. We construct the type of each worker using both a traditional wage regression and a model-based approach and construct measures of the average worker type and worker type dispersion at the firm level. We find that exporting firms feature a lower type dispersion in the pool of workers they hire. This effect is comparable and larger than the common finding in the literature that exporters pay higher wages because, among other factors, they employ better workers. The matching between exporting firms and workers is even tighter in sectors characterized by better exporting opportunities as measured by foreign demand or tariff shocks. Finally, we show that revenue loss is lower relative to the optimum allocation for exporting and more productive firms. This analysis is suggestive of the potenti al presence of additional gains from trade due to improved sorting.

Keywords: International Trade, Search frictions, Worker-Firm Matching

DOI: http://dx.doi.org/10.17016/FEDS.2015.113

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FEDS 2015-112
Credit Risk, Liquidity and Lies (PDF)

Thomas B. King and Kurt F. Lewis

Abstract: We reexamine the relative effects of credit risk and liquidity in the interbank market using bank-level panel data on Libor submissions and CDS spreads. Our model synthesizes previous work by combining the fundamental determinants of interbank spreads with the effects of strategic misreporting by Libor-submitting firms. We find that interbank spreads were very sensitive to credit risk at the peak of the crisis. However, liquidity premia constitute the bulk of those spreads on average, and Federal Reserve interventions coincide with improvements in liquidity at short maturities. Accounting for misreporting, which is large at times, is important for obtaining these results.

Keywords: Bank Funding, Credit Risk, LIBOR, Liquidity, Misreporting

DOI: http://dx.doi.org/10.17016/FEDS.2015.112

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FEDS 2015-111
Old-Fashioned Deposit Runs (PDF)

Abstract: This paper characterizes the deposit runs that occurred in the commercial banking system during 2008 and compares them with deposit runs during the 1930s. The importance of withdrawals by large depositors is a strong source of continuity across the two eras and reflects the longstanding concentration of deposit holdings. Runs occurred during 2008 despite the presence of national deposit insurance, which does not fully cover large accounts and therefore has limited impact on the incentives of those account holders. Large depositors continue to represent a source of both market discipline and financial instability.

Keywords: Bank runs, deposit insurance, large depositors

DOI: http://dx.doi.org/10.17016/FEDS.2015.111

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FEDS 2015-110
Risky Mortgages, Bank Leverage and Credit Policy (PDF)

Abstract: Two key channels that allowed the 2007-2009 mortgage crisis to severely impact the real economy were: a housing net worth channel, as defined by Mian and Sufi (2014), which affected the wealth of leveraged households; and a bank net worth channel, which reduced the ability of financial intermediaries to provide credit. To capture these features of the Great Recession, I develop a DSGE model with balance-sheet constrained banks financing both risky mortgages and productive capital. Mortgages are provided to agents facing idiosyncratic housing depreciation risk, implying an endogenous default decision and a link between their borrowing capacity and house prices. The interaction among the housing net worth channel, the bank net worth channel and endogenous foreclosures generates novel amplification mechanisms. I analyze the quantitative implications of these new channels by considering two different shocks linked to the supply of mortgage credit: an increase in the variance of housing risk and a deterioration in the collateral value of mortgages for bank funding. Both shocks are able to produce co-movements in house prices, business investment, consumption and output. Finally, I study two types of policy interventions that are able to reduce the severity of a mortgage crisis: debt relief for borrowing households and central bank credit intermediation.

Keywords: Financial frictions, Housing, Mortgages, Banking, Unconventional Monetary Policy

DOI: http://dx.doi.org/10.17016/FEDS.2015.110

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FEDS 2015-109
Welfare Evaluation in a Heterogeneous Agent Model: How Representative is the CES Representative Consumer? (PDF)

Abstract: The present paper investigates the impact of asymmetric price changes on welfare in a model with heterogeneous consumers. I consider consumer heterogeneity a la Anderson et al. (1992). The standard welfare equivalence between the CES representative consumer and the discrete choice model breaks down in presence of asymmetric price changes. In fact, asymmetric variation in prices produce differential gains among heterogeneous consumers. I show that there exists no feasible Kaldor-Hicks income transfer such that the gains are equally redistributed. Intuitively, in presence of decreasing marginal utility, aggregation creates an insurance mechanism: the CES representative consumer softens the impact of price changes reallocating consumption among the available varieties. Individual consumers, instead, purchase a single product and do not internalize the effects of changes in prices of other available varieties. This result suggests that only symmetric policy-induced price changes minimize the utility losses across heterogeneous consumers.

Keywords: Asymmetric Price Changes, CES representative consumer, Discrete Choice Model

DOI: http://dx.doi.org/10.17016/FEDS.2015.109

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FEDS 2015-108
Every Little Bit Counts: The Impact of High-speed Internet on the Transition to College (PDF)

Lisa J. Dettling, Sarena F. Goodman, and Jonathan Smith

Abstract: This paper investigates the effects of high-speed Internet on students' college application decisions. We link the diffusion of zip code-level residential broadband Internet to millions of PSAT and SAT takers' college testing and application outcomes and find that students with access to high-speed Internet in their junior year of high school perform better on the SAT and apply to a higher number and more expansive set of colleges. Effects appear to be concentrated among higher-SES students, indicating that while, on average, high-speed Internet improved students' postsecondary outcomes, it may have increased pre-existing inequities by primarily benefiting those with more resources.

Keywords: Broadband, College Choice, Undermatch

DOI: http://dx.doi.org/10.17016/FEDS.2015.108

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FEDS 2015-107
Financial Incentives, Hospital Care, and Health Outcomes: Evidence from Fair Pricing Laws (PDF)

Michael M. Batty and Benedic N. Ippolito

Abstract: It is often assumed that financial incentives of healthcare providers affect the care they deliver, but this issue is surprisingly difficult to study. The recent enactment of state laws that limit how much hospitals can charge uninsured patients provide a unique opportunity. Using an event study framework and panel data from the Nationwide Inpatient Sample, we examine whether these regulations lead to reductions in the amount and quality of care given to uninsured patients. We find that the introduction of a fair pricing law leads to a seven to nine percent reduction in the average length of hospital stay for uninsured patients, with no corresponding change for insured patients. These care reductions are not accompanied by worsening quality of inpatient care. Overall, our results provide strong evidence that hospitals actively alter their behavior in response to financial incentives, and are consistent with the laws promoting a shift towards more efficient care delivery. The findings also add to the growing evidence that hospitals can, and do, treat patients differently based upon insurance status.

Keywords: Health care, insurance, public economics

DOI: http://dx.doi.org/10.17016/FEDS.2015.107

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FEDS 2015-106
How Much Are Car Purchases Driven by Home Equity Withdrawal? (PDF)

Brett McCully, Karen M. Pence, and Daniel J. Vine

Abstract: Previous research indicates that changes in housing wealth affect consumer spending on cars. We find that home equity extraction plays only a small role in this relationship. Consumers rarely use funds from equity extraction to purchase a car directly, even during the mid-2000s housing boom; this finding holds across three nationally representative household surveys. We find in credit bureau data that equity extraction does lead to a statistically significant increase in auto loan originations, consistent with equity extraction easing borrowing constraints in the auto loan market. This channel, though, accounts for only a tiny share of overall car purchases.

Keywords: Auto loans, auto sales, cash-out refinancing, home equity, home equity lines of credit, mortgage refinancing, motor vehicles

DOI: https://doi.org/10.17016/FEDS.2015.106r1

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Original paper: PDF | Accessible materials (.zip)

FEDS 2015-105
Measuring Ambiguity Aversion (PDF)

A. Ronald Gallant, Mohammad Jahan-Parvar, and Hening Liu

Abstract: We confront the generalized recursive smooth ambiguity aversion preferences of Klibanoff, Marinacci, and Mukerji (2005, 2009) with data using Bayesian methods introduced by Gallant and McCulloch (2009) to close two existing gaps in the literature. First, we use macroeconomic and financial data to estimate the size of ambiguity aversion as well as other structural parameters in a representative-agent consumption-based asset pricing model. Second, we use estimated structural parameters to investigate asset pricing implications of ambiguity aversion. Our structural parameter estimates are comparable with those from existing calibration studies, demonstrate sensitivity to sampling frequencies, and suggest ample scope for ambiguity aversion.

Keywords: Ambiguity aversion, Bayesian estimation, Equity premium puzzle, Markov switching

DOI: http://dx.doi.org/10.17016/FEDS.2015.105

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FEDS 2015-104
Information Disclosures, Default Risk, and Bank Value (PDF)

Abstract: This paper investigates the causal effects of voluntary information disclosures on a bank's expected default probability, enterprise risk, and value. I measure disclosure via a self-constructed index for the largest 80 U.S. bank holding companies for the period 1998-2011. I provide evidence that a bank's management responds to a plausibly exogenous deterioration in the supply of public information by increasing its voluntary disclosure, which in turn improves investors' assessment of the bank risk and value. This evidence suggests that disclosure may alleviate informational frictions and lead to a more efficient allocation of risk and return.

Keywords: Disclosure, default probability, firm value, risk management, asymmetric information, corporate governance

DOI: http://dx.doi.org/10.17016/FEDS.2015.104

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FEDS 2015-103
Information, Contract Design, and Unsecured Credit Supply: Evidence from Credit Card Mailings (PDF)

Song Han, Benjamin Keys, and Geng Li

Abstract: How do lenders of unsecured credit use screening and contract design to mitigate the risks of information asymmetry and limited commitment in the absence of collateral? To address this question, we take advantage of a unique dataset of over 200,000 credit card mail solicitations to a representative sample of households over the recent credit cycle--a period that includes the implementation of the CARD Act. We find that while lenders use credit scores as a prominent screening device, they also take into account a wide array of other information on borrowers' credit histories and financial and demographic characteristics. For instance, the likelihood of receiving an offer is sensitive to the exact timing of a prior bankruptcy filing. We also find that credit market conditions affect the marginal information used in lenders' offer decisions, as lenders sharply reduced credit supplied to subprime borrowers during the crisis and in response to the CARD Act. Finally, we document that lenders extend multiple distinct offers to the same consumers over a relatively short period, likely designed such that consumers reveal private information in their choice of contract.

Keywords: Credit supply, information asymmetry, credit cards, mail solicitation, personal bankruptcy, CARD Act, household finance

DOI: http://dx.doi.org/10.17016/FEDS.2015.103

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FEDS 2015-102
Measurement Error in Macroeconomic Data and Economics Research: Data Revisions, Gross Domestic Product, and Gross Domestic Income (PDF)

Andrew C. Chang and Phillip Li

Abstract: We analyze the effect of measurement error in macroeconomic data on economics research using two features of the estimates of latent US output produced by the Bureau of Economic Analysis (BEA). First, we use the fact that the BEA publishes two theoretically identical estimates of latent US output that only differ due to measurement error: the more well-known gross domestic product (GDP), which the BEA constructs using expenditure data, and gross domestic income (GDI), which the BEA constructs using income data. Second, we use BEA revisions to previously published releases of GDP and GDI. Using a sample of 23 published economics papers from top economics journals that utilize GDP as a key component of an estimated model, we assess whether using either revised GDP or GDI instead of GDP in the published paper would change reported results. We find that estimating models using revised GDP generates the same qualitative result as the original paper in all 23 cases. Estimatin g models using GDI, both with the GDI data originally available to the authors and with revised GDI, instead of GDP generates larger differences in results than those obtained with revised GDP. For 3 of 23 papers (13%), the results we obtain with GDI are qualitatively different than the original published results.

Keywords: Data Revisions, Gross Domestic Income, Gross Domestic Product, Latent Output, Measurement Error, National Income and Product Accounts, Real-Time Data

DOI: http://dx.doi.org/10.17016/FEDS.2015.102

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FEDS 2015-101
Advertising and Risk Selection in Health Insurance Markets (PDF)

Naoki Aizawa and You Suk Kim

Abstract: We study impacts of advertising as a channel of risk selection in Medicare Advantage. We show evidence that both mass and direct mail advertising are targeted to achieve risk selection. We develop and estimate an equilibrium model of Medicare Advantage with advertising to understand its equilibrium impacts. We find that advertising attracts the healthy more than the unhealthy. Moreover, shutting down advertising increases premiums by up to 40% for insurers that advertised by worsening their risk pools, which further reduces the demand of the unhealthy. We argue that risk selection may make consumers better off by improving insurers' risk pools.

Keywords: Advertising, Health insurance, Medicare, Risk selection

DOI: http://dx.doi.org/10.17016/FEDS.2015.101

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FEDS 2015-100
Nowcasting Indonesia (PDF)

Matteo Luciani, Madhavi Pundit, Arief Ramayandi, and Giovanni Veronese

Abstract: We produce predictions of the current state of the Indonesian economy by estimating a dynamic factor model on a dataset of eleven indicators (also followed closely by market operators) over the time period 2002 to 2014. Besides the standard difficulties associated with constructing timely indicators of current economic conditions, Indonesia presents additional challenges typical to emerging market economies where data are often scant and unreliable. By means of a pseudo-real-time forecasting exercise we show that our model outperforms univariate benchmarks, and it does comparably with predictions of market operators. Finally, we show that when quality of data is low, a careful selection of indicators is crucial for better forecast performance.

Keywords: Dynamic Factor Models, Emerging Market Economies, Nowcasting

DOI: http://dx.doi.org/10.17016/FEDS.2015.100

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FEDS 2015-099
Monetary Policy, Incomplete Information, and the Zero Lower Bound (PDF)

Abstract: In the context of a stylized New Keynesian model, we explore the interaction between imperfect knowledge about the state of the economy and the zero lower bound. We show that optimal policy under discretion near the zero lower bound responds to signals about an increase in the equilibrium real interest rate by less than it would when far from the zero lower bound. In addition, we show that Taylor-type rules that either include a time-varying intercept that moves with perceived changes in the equilibrium real rate or that respond aggressively to deviations of inflation and output from their target levels perform similarly to optimal discretionary policy. Our analysis of first-difference rules highlights that rules with interest rate smoothing terms carry forward current and past misperceptions about the state of the economy and can lead to suboptimal performance.

Keywords: discretionary policy, imperfect information, monetary policy rules, zero lower bound

DOI: http://dx.doi.org/10.17016/FEDS.2015.099

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FEDS 2015-098
A Trillion Dollar Question: What Predicts Student Loan Delinquencies? (PDF)

Abstract: The recent significant increase in student loan delinquencies has generated interest in understanding the key factors predicting the non-performance of these loans. However, despite the large size of the student loan market, existing analyses have been limited by data. This paper studies predictors of student loan delinquencies using a nationally representative panel dataset that anonymously combines individual credit bureau records with Pell Grant and Federal student loan recipient information, records on college enrollment, graduation and major, and school characteristics. We show that borrower-level credit characteristics are important predictors of student loan delinquencies. In particular, credit scores of young borrowers are highly predictive of future student loan delinquencies, even when measured well before borrowers enter repayment. In marked contrast, our results point to only a limited power of student debt levels in predicting future student loan credit events. Our findings have potentially useful practical implications. For example, access to credit file information when borrowers exit school could help to more effectively target student loan borrowers who might benefit from enrolling in income-driven repayment or loan modification plans.

Keywords: Credit Scores, Delinquencies, Student Loans

DOI: http://dx.doi.org/10.17016/FEDS.2015.098

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FEDS 2015-097
Macroeconomic News Announcements, Systemic Risk, Financial Market Volatility and Jumps (PDF)

Abstract: This paper studies financial market volatility and jump responses to macroeconomic news announcements. Based on two decades of high-frequency data, we finds that there are significantly more jumps on news days than on no-news days, with the bond market being more responsive than the equity market, and nonfarm payroll employment being the most influential news. Both the first moment of news surprises and the second moments of disagreement and uncertainty affect financial market responses, with their impact significance changing over different market and response types. Market responses to news vary with economic situations, financial systemic risk and the zero-lower-bound policy.

Keywords: Macroeconomic news announcements, realized variance, jumps, disagreement and uncertainty, economic derivatives, financial systemic risk.

DOI: http://dx.doi.org/10.17016/FEDS.2015.097

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FEDS 2015-096
Demand Shock, Liquidity Management, and Firm Growth during the Financial Crisis (PDF)

Vojislav Maksimovic, Mandy Tham, and Youngsuk Yook

Abstract: We examine the transmission of liquidity across the supply chain during the 2007-09 financial crisis, a period of financial market illiquidity, for a sample of unrated public firms with differential demand shocks. We measure differential demand by comparing firms that primarily supply to government customers with those that primarily supply to corporate customers. A difference-in-difference analysis shows little evidence that relatively high demand firms provide more or less liquidity to their own suppliers. The main determinant of the usage of short-term financing is a product market shock. Firms with relatively high demand have higher raw-material inventory and use more trade credit. There is little evidence that the amount of credit usage per unit of raw-material inventory changes with firms' demand shocks. These outcomes are consistent with theories of trade credit that stress the use of trade credit in financing inputs rather than providing efficient monitoring of creditors by suppliers. The lack of liquidity provision to suppliers by high demand firms is likely due to the high opportunity costs they face: We show that such firms become more investment-constrained over the crisis and engage in more acquisition activities once the liquidity crunch dissipates.

Keywords: Financial crisis, demand shock, liquidity management, trade credit, inventory

DOI: http://dx.doi.org/10.17016/FEDS.2015.096

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FEDS 2015-095
Term Structure of Interest Rates with Short-run and Long-run Risks (PDF)

Olesya Grishchenko, Zhaogang Song, and Hao Zhou

Abstract: Bond returns are time-varying and predictable. What economic forces drive this variation? To answer this long-standing question, we propose a consumption-based model with recursive preferences, long-run risks, and inflation non-neutrality. Our model offers two important insights. First, our model matches well the post-1990 nominal upward-sloping U.S. Treasury yield curve. Second, consistent with our model's implication, variance risk premium based on the U.S. interest rate derivatives data emerges as a strong predictor for short-horizon Treasury excess returns, above and beyond the predictive power of other popular factors. In the model equilibrium, the variance risk premium is related to the short-run risks in the economy, while standard forward-rate-based factors are associated with long-run risks in the economy.

Keywords: Long-run risk, economic uncertainty, term structure of interest rates, bond risk premium, variance risk premium, predictability, interest rate derivatives

DOI: http://dx.doi.org/10.17016/FEDS.2015.095

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FEDS 2015-094
Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tohoku Earthquake (PDF)

Christoph E. Boehm, Aaron B. Flaaen, and Nitya Pandalai-Nayar

Abstract: Using novel firm-level microdata and leveraging a natural experiment, this paper provides causal evidence for the role of trade and multinational firms in the cross-country transmission of shocks. Foreign multinational affiliates in the U.S. exhibit substantial intermediate input linkages with their source country. The scope for these linkages to generate cross-country spillovers in the domestic market depends on the elasticity of substitution with respect to other inputs. Using the 2011 Tohoku earthquake as an exogenous shock, we estimate this elasticity for those firms most reliant on Japanese imported inputs: the U.S. affiliates of Japanese multinationals. These firms suffered large drops in U.S. output in the months following the shock, roughly one-for-one with the drop in imports and consistent with a Leontief relationship between imported and domestic inputs. Structural estimates of the production function for all firms with input linkages to Japan yield disaggreg ated production elasticities that are similarly low. Our results suggest that global supply chains are sufficiently rigid to play an important role in the cross-country transmission of shocks.

Keywords: Multinational firms, international business cycles, business fluctuations, elasticity of substitution

DOI: http://dx.doi.org/10.17016/FEDS.2015.094

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FEDS 2015-093
Regime-Switching Models for Estimating Inflation Uncertainty (PDF)

Abstract: This paper constructs regime-switching models for estimating the probability of inflation returning to its relatively high levels of variability and persistence in the 1970s and 1980s. Forecasts and probabilities of extreme events from the models are evaluated against comparable estimates from other statistical models, from surveys, and from financial markets. The paper then uses the models to construct prediction intervals around Federal Reserve Board staff forecasts of PCE price inflation, combining the recent non-parametric forecast error distribution with parametric information from the model. The outer tails of the prediction intervals depend importantly on the probability inflation is in its high-variance, high-persistence regime.

Keywords: Inflation, Markov-Switching, Uncertainty

DOI: http://dx.doi.org/10.17016/FEDS.2015.093

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FEDS 2015-092
A Historical Welfare Analysis of Social Security: Whom Did the Program Benefit? (PDF)

Abstract: A well-established result in the literature is that Social Security tends to reduce steady state welfare in a standard life cycle model. However, less is known about the historical effects of the program on agents who were alive when the program was adopted. In a computational life cycle model that simulates the Great Depression and the enactment of Social Security, this paper quantifies the welfare effects of the program's enactment on the cohorts of agents who experienced it. In contrast to the standard steady state results, we find that the adoption of the original Social Security tended to improve these cohorts' welfare. In particular, we estimate that the original program benefited households alive at the time of the program's adoption with a likelihood of over 80 percent, and increased these agents' welfare by the equivalent of 5.9% of their expected future lifetime consumption. The welfare benefit was particularly large for poorer agents and agents who were near retirement age when the program was enacted. Through a series of counterfactual experiments we demonstrate that the difference between the steady state and transitional welfare effects is primarily driven by a slower adoption of payroll taxes and a quicker adoption of benefit payments during the program's phase-in. Overall, the opposite welfare effects experienced by agents in the steady state versus agents who experienced the program's adoption might offer one explanation for why a program that potentially reduces welfare in the steady state was originally adopted.

Keywords: Social Security, Recessions, Great Depression, Overlapping Generations.

DOI: http://dx.doi.org/10.17016/FEDS.2015.092r1

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FEDS 2015-091
Financial Stress and Equilibrium Dynamics in Money Markets (PDF)

Abstract: Interest rate spreads are widely-used indicators of funding pressures and market functioning in money markets. Using weekly data from 2002 to 2015, we analyze money market dynamics in a long-run equilibrium framework where commonly-monitored spreads serve as error correction terms. We find strong evidence for nonlinearities with respect to levels of the spreads. We provide point and interval estimates for spread thresholds that quantify funding pressure points from a long-run perspective. Our results indicate significant asymmetry in the adjustment toward long-run equilibrium. We show that economically and statistically significant adjustments occur only following large shocks to risk premia. Additionally, we quantify shifts in interest rate volatilities in high spread regimes characterized by elevated funding stress as well as declining correlations between risky funding rates and relatively safe base rates in such environments.

Keywords: Money markets, Cointegration, Threshold models, GARCH, Constant conditional correlation model.

DOI: http://dx.doi.org/10.17016/FEDS.2015.091

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FEDS 2015-090
Interconnectedness in the Interbank Market (PDF)

Celso Brunetti, Jeffrey H. Harris, Shawn Mankad, and George Michailidis

Abstract: We study the behavior of the interbank market before, during and after the 2008 financial crisis. Leveraging recent advances in network analysis, we study two network structures, a correlation network based on publicly traded bank returns, and a physical network based on interbank lending transactions. While the two networks behave similarly pre-crisis, during the crisis the correlation network shows an increase in interconnectedness while the physical network highlights a marked decrease in interconnectedness. Moreover, these networks respond differently to monetary and macroeconomic shocks. Physical networks forecast liquidity problems while correlation networks forecast financial crises.

Keywords: Interconnectedness, correlation network, financial crisis, interbank market, physical network

DOI: http://dx.doi.org/10.17016/FEDS.2015.090

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FEDS 2015-089
Identification and Estimation of Risk Aversion in First Price Auctions With Unobserved Auction Heterogeneity (PDF)

Serafin J. Grundl and Yu Zhu

Abstract: We extent the point-identification result in Guerre, Perrigne, and Vuong (2009) to environments with one-dimensional unobserved auction heterogeneity. In addition, we also show a robustness result for the case where the exclusion restriction used for point identification is violated: We provide conditions to ensure that the primitives recovered under the violated exclusion restriction still bound the true primitives in this case. We propose a new Sieve Maximum Likelihood Estimator, show its consistency and illustrate its finite sample performance in a Monte Carlo experiment. We investigate the bias in risk aversion estimates if unobserved auction heterogeneity is ignored and explain why the sign of the bias depends on the correlation between the number of bidders and the unobserved auction heterogeneity. In an application to USFS timber auctions we find that the bidders are risk neutral, but we would reject risk neutrality without accounting for unobserved auction heterogeneity.

Keywords: Estimation, First Price Auction, Identification, Risk Aversion, Unobserved Heterogeneity

DOI: http://dx.doi.org/10.17016/FEDS.2015.089

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FEDS 2015-088
Fewer Vacants, Fewer Crimes? Impacts of Neighborhood Revitalization Policies on Crime (PDF)

Jonathan Spader, Jenny Schuetz, and Alvaro Cortes

Abstract: The relationship between neighborhood physical environment and social disorder, particularly crime, is of critical interest to urban economists and sociologists, as well as local governments. Over the past 50 years, various policy interventions to improve physical conditions in distressed neighborhoods have also been heralded for their potential to reduce crime. Urban renewal programs in the mid-20th century and public housing redevelopment in the 1990s both subscribed to the idea that signs of physical disorder invite social disorder. More recently, the federal Neighborhood Stabilization Program (NSP) provided funding for local policymakers to rehabilitate or demolish foreclosed and vacant properties, in order to mitigate negative spillovers--including crime--on surrounding neighborhoods. In this paper, we investigate the impact of NSP investments on localized crime patterns in Cleveland, Chicago and Denver. Results suggest that demolition activity in Cleveland decreased burglary and theft, but do not find measurable impacts of property rehabilitation investments--although the precision of these estimates are limited by the number of rehabilitation activities.

Keywords: Crime, broken windows, foreclosures, neighborhood revitalization

DOI: http://dx.doi.org/10.17016/FEDS.2015.088

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FEDS 2015-087
The Equity Premium, Long-Run Risk, & Optimal Monetary Policy (PDF)

Anthony M. Diercks

Abstract: In this study I examine the welfare implications of monetary policy by constructing a novel New Keynesian model that properly accounts for asset pricing facts. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same model calibrated to a counterfactually low equity premium implies an optimal inflation rate close to zero and inflation volatility less than 10 basis points, consistent with much of the existing literature. Relatively higher optimal inflation is due to the greater welfare costs of recessions associated with matching the equity premium. Additionally, the second order approximation allows monetary policy to have positive welfare effects on the labor share of income. I show that this channel is generally absent in standard macroeconomic models that do not take risk into account. Furthermore, the interest rate rule that comes closest to matching the dynamics of the optimal Ramsey policy puts a sizable weight on capital growth along with the price of capital, as it emphasizes stabilizing the medium to long term over the very short run.

Keywords: Asset Pricing, Long-run risk, Monetary policy

DOI: http://dx.doi.org/10.17016/FEDS.2015.087

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FEDS 2015-086
Comparing Micro and Macro Sources for Household Accounts in the United States: Evidence from the Survey of Consumer Finances (PDF)

Lisa J. Dettling, Sebastian J. Devlin-Foltz, Jacob Krimmel, Sarah J. Pack, and Jeffrey P. Thompson

Abstract: Household income, spending, and net worth are key inputs in macroeconomic forecasting and economic research. Macro-level data sources are often used to measure household accounts, but lack important information about heterogeneity across different types of households that can be found in micro-level data sources. This paper compares aggregates computed based on one micro-level data source--the Survey of Consumer Finances (SCF)--with macro-level sources of information on household accounts. We find that on most measures, aggregates computed from the SCF line up well with macro-level data sources once we construct comparable series. Our results imply that researchers and policy makers can be confident in making macroeconomic inferences from household-level surveys like the SCF.

Keywords: Income, Spending, Survey of Consumer Finances, Wealth

DOI: http://dx.doi.org/10.17016/FEDS.2015.086

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FEDS 2015-085
How Did Young Firms Fare During the Great Recession? Evidence from the Kauffman Firm Survey (PDF)

Rebecca E. Zarutskie and Tiantian Yang

Abstract: We examine the evolution of several key firm economic and financial variables in the years surrounding and during the Great Recession using the Kauffman Firm Survey, a large panel of young firms founded in 2004 and surveyed for eight consecutive years. We find that these young firms experienced slower growth in revenues, employment, and assets and faced tighter financing conditions during the recessionary years. While we find some evidence that firm growth picked up following the recession, it is not clear that it returned to the levels it would have been absent the recessionary shock. We find little evidence that financing conditions for young firms loosened following the recession and show that financing constraints, in addition to diminished demand, may have contributed to these firms' slower growth. We discuss the strengths and the limitations of the Kauffman Firm Survey in measuring the impact of the Great Recession on young firms and their founders and consider features of future data collection and measurement efforts that would be useful in studying entrepreneurial activity over the business cycle.

Keywords: Entrepreneurship, Financing constraints, Firm performance, Great Recession, Young firms

DOI: http://dx.doi.org/10.17016/FEDS.2015.085

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FEDS 2015-084
Large-Scale Buy-to-Rent Investors in the Single-Family Housing Market: The Emergence of a New Asset Class? (PDF)

Abstract: In 2012, several large firms began purchasing single-family homes with the stated intention of creating large portfolios of rental property. We present the first systematic evidence on how this new investor activity differs from that of other investors in the housing market. Many aspects of buy-to-rent investor behavior are consistent with holding property for rent rather than reselling quickly. Additionally, the large size of these investors imparts a few important advantages. In the short run, this investment activity appears to have supported house prices in the areas where it is concentrated. The longer-run impacts remain to be seen.

Keywords: Institutional investors, buy-to-rent, ownership structure, real estate investors, rental housing, securitization, single-family rental

DOI: http://dx.doi.org/10.17016/FEDS.2015.084

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FEDS 2015-083
Is Economics Research Replicable? Sixty Published Papers from Thirteen Journals Say "Usually Not" (PDF)

Andrew C. Chang and Phillip Li

Abstract: We attempt to replicate 67 papers published in 13 well-regarded economics journals using author-provided replication files that include both data and code. Some journals in our sample require data and code replication files, and other journals do not require such files. Aside from 6 papers that use confidential data, we obtain data and code replication files for 29 of 35 papers (83%) that are required to provide such files as a condition of publication, compared to 11 of 26 papers (42%) that are not required to provide data and code replication files. We successfully replicate the key qualitative result of 22 of 67 papers (33%) without contacting the authors. Excluding the 6 papers that use confidential data and the 2 papers that use software we do not possess, we replicate 29 of 59 papers (49%) with assistance from the authors. Because we are able to replicate less than half of the papers in our sample even with help from the authors, we assert that economics research is usually not replicable. We conclude with recommendations on improving replication of economics research.

Keywords: Data and Code Archives, Gross Domestic Product, GDP, Journals, Macroeconomics, National Income and Product Accounts, Publication, Research, Replication

DOI: http://dx.doi.org/10.17016/FEDS.2015.083

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FEDS 2015-082
An Empirical Test of Auction Efficiency: Evidence from MBS Auctions of the Federal Reserve (PDF)

Pietro Bonaldi, Ali Hortacsu, and Zhaogang Song

Abstract: Auction theory has ambiguous implications regarding the relative efficiency of three formats of multiunit auctions: uniform-price, discriminatory-price, and Vickrey auctions. We empirically evaluate the performance of these three auction formats using the bid-level data of the Federal Reserve's purchase auctions of agency mortgage-backed securities (MBS) from June 1, 2014 through November 17, 2014. We estimate marginal cost curves for all dealers, at each auction, based on structural models of the multiunit discriminatory-price auction. Our preliminary results suggest that neither uniform-price nor Vickrey auctions outperform discriminatory-price auctions in terms of the total expenditure. However, they do outperform in terms of efficiency, with efficiency gains around 0.74% of the surplus that dealers extract. We caution that our empirical estimation and analysis involve technical assumptions made about the specific auction mechanism the Federal Reserve uses and how auction participants perceive the auction mechanism, both of which may be distinct from practice and may alter the conclusions substantively.

Keywords: Agency MBS, Auction, Nonparametric

DOI: http://dx.doi.org/10.17016/FEDS.2015.082

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FEDS 2015-081
Credit Scores and Committed Relationships (PDF)

Jane Dokko, Geng Li, and Jessica Hayes

Abstract: This paper presents novel evidence on the role of credit scores in the dynamics of committed relationships. We document substantial positive assortative matching with respect to credit scores, even when controlling for other socioeconomic and demographic characteristics. As a result, individual-level differences in access to credit are largely preserved at the household level. Moreover, we find that the couples' average level of and the match quality in credit scores, measured at the time of relationship formation, are highly predictive of subsequent separations. This result arises, in part, because initial credit scores and match quality predict subsequent credit usage and financial distress, which in turn are correlated with relationship dissolution. Credit scores and match quality appear predictive of subsequent separations even beyond these credit channels, suggesting that credit scores reveal an individual's relationship skill and level of commitment. We present ancillary evidence supporting the interpretation of this skill as trustworthiness.

Keywords: Credit scores, Committed relationships, Assortative matching, Household finance, Trustworthiness

DOI: http://dx.doi.org/10.17016/FEDS.2015.081

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FEDS 2015-080
Venture Capital and the Performance of Incumbents (PDF)

Abstract: I study the effect of investment in young, private firms by venture capitalists (VC) on public firms in the same industry. I construct an instrument for VC investment that relies on individual VC's investment histories, holdings of equity stakes in IPO firms, and aggregate market returns immediately following those IPOs. I find that increased VC investment has a large effect on incumbent profitability. The effect arises due to higher costs and not depressed sales. The effect is short lived as firms respond by reallocating resources away from treated markets and by reducing their use of labor.

Keywords: Corporate finance, Financial markets, Venture Capital

DOI: http://dx.doi.org/10.17016/FEDS.2015.080

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FEDS 2015-079
The Role of Dispersed Information in Pricing Default: Evidence from the Great Recession (PDF)

Emanuele Brancati and Marco Macchiavelli

Abstract: The recent Global Games literature makes important predictions on how financial crises unfold. We test the empirical relevance of these theories by analyzing how dispersed information affects banks' default risk. We find evidence that precise information acts as a coordination device which reduces creditors' willingness to roll over debt to a bank, thus increasing both its default risk and its vulnerability to changes in expectations. We establish two new results. First, given an unfavorable median forecast, less dispersed beliefs greatly increase default risk; this is consistent with incomplete information models that rely on coordination risk while in contrast with a wide range of models that neglect this component. Second, less dispersion of beliefs amplifies the reaction of default risk to changes in market expectations; importantly, precise information raises banks' vulnerability by more than standard measures of banks' fragility. Taken together, our results suggest that enhanced transparency, by providing agents with more precise information, increases banks' vulnerability to changes in sentiment and raises the default risk of weaker banks. Finally, we address concerns of endogeneity of market expectations by introducing a novel set of instruments.

Keywords: CDS Spreads, Coordination Risk, Dispersed Information, Financial Crisis, Global Games

DOI: http://dx.doi.org/10.17016/FEDS.2015.079

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FEDS 2015-078
Optimal Monetary and Macroprudential Policies: Gains and Pitfalls in a Model of Financial Intermediation (PDF)

Abstract: We estimate a quantitative general equilibrium model with nominal rigidities and financial intermediation to examine the interaction of monetary and macroprudential stabilization policies. The estimation procedure uses credit spreads to help identify the role of financial shocks amenable to stabilization via monetary or macroprudential instruments. The estimated model implies that monetary policy should not respond strongly to the credit cycle and can only partially insulate the economy from the distortionary effects of financial frictions/shocks. A counter-cyclical macroprudential instrument can enhance welfare, but faces important implementation challenges. In particular, a Ramsey planner who adjusts a leverage tax in an optimal way can largely insulate the economy from shocks to intermediation, but a simple-rule approach must be cautious not to limit credit expansions associated with efficient investment opportunities. These results demonstrate the importance of considering both optimal Ramsey policies and simpler, but more practical, approaches in an empirically grounded model.

Keywords: Bayesian estimation, DSGE models, Macroprudential policy, Monetary policy

DOI: http://dx.doi.org/10.17016/FEDS.2015.078

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FEDS 2015-077
What Can the Data Tell Us About the Equilibrium Real Interest Rate? (PDF)

Abstract: The equilibrium real interest rate (r*) is the short-term real interest rate that, in the long run, is consistent with aggregate production at potential and stable inflation. Estimation of r* faces considerable econometric and empirical challenges. On the econometric front, classical inference confronts the "pile-up" problem. Empirically, the co-movement of output, inflation, unemployment, and real interest rates is too weak to yield precise estimates of r*. These challenges are addressed by applying Bayesian methods and examining the role of several "demand shifters", including asset prices, fiscal policy, and credit conditions. We find that the data provide relatively little information on the r* data-generating process, as the posterior distribution of this process lies very close to its prior. This result contrasts sharply with those for the trend growth or natural rate of unemployment processes. Second, credit spreads are very important for the estimated links between output and interest rates and hence for estimates of r*. Estimates of r* that account for this range of considerations are more stable than other estimates, with r* at the end of 2014 equal to approximately 1-1/4 percent.

Keywords: Bayesian Methods, Equilibrium real interest rate, Potential Output

DOI: http://dx.doi.org/10.17016/FEDS.2015.077

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FEDS 2015-076
Updating the Racial Wealth Gap (PDF)

Abstract: Using newly available data from the Survey of Consumer Finances, this paper updates and extends the literature exploring the racial wealth gap. We examine several hypotheses proposed by previous researchers, including the importance of inherited wealth and other family support and that of trends in local real estate markets, and also extend the literature by exploring the gap across the distribution of wealth and simultaneously considering white, African American and Hispanic households. The findings indicate that observable factors account for all of wealth gap between white and Hispanic households and most of the gap between white and black families – more than in most previous research – but a substantial unexplained portion remains. Wealth differences between black and white families are completely due to different asset holdings, while wealth differences between black and Hispanic families are mostly a result of different debt holdings. Home ownership and educatio nal attainment are the single largest observable factors that account for the racial wealth gaps, with income and financial assistance from family members playing important roles as well. The unexplained portion of the wealth gap between white and non-white families is greater at the top of the wealth distribution.

Keywords: Inequality, Racial Wealth Gap, Saving

DOI: https://doi.org/10.17016/FEDS.2015.076r1

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FEDS 2015-075
Does Salient Financial Information Affect Academic Performance and Borrowing Behavior among College Students? (PDF)

Maximilian Schmeiser, Christiana Stoddard, and Carly Urban

Abstract: The rising incidence and amount of student loan debt among young adults has significant implications for their economic well-being. However, students are generally provided little information on how to finance postsecondary education and how much to borrow. This paper studies how information can change student loan behavior among college students. We exploit a natural experiment across two large public colleges in which some students at one institution above a specific loan amount received "Know Your Debt" letters with information about their student loan debt, suggestions on how to manage their debt, and incentivized offers for one-on-one financial counseling, while the remainder did not. Using a difference-in-difference-in-difference strategy and a rich administrative dataset on individual-level academic records and financial aid packages, we find that students receiving the letters borrow an average of $1,360 less in the subsequent semester--a reduction of one-third. This reduction in borrowing does not adversely affect academic performance. In fact, those who receive the intervention take more credits and have higher GPAs in the subsequent semester.

Keywords: student loans, higher education, information, financial cues

DOI: http://dx.doi.org/10.17016/FEDS.2015.075

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FEDS 2015-074
Forecasting with Sufficient Dimension Reductions (PDF)

Alessandro Barbarino and Efstathia Bura

Abstract: Factor models have been successfully employed in summarizing large datasets with few underlying latent factors and in building time series forecasting models for economic variables. When the objective is to forecast a target variable y with a large set of predictors x, the construction of the summary of the xs should be driven by how informative on y it is. Most existing methods first reduce the predictors and then forecast y in independent phases of the modeling process. In this paper we present an alternative and potentially more attractive alternative: summarizing x as it relates to y, so that all the information in the conditional distribution of y|x is preserved. These y-targeted reductions of the predictors are obtained using Sufficient Dimension Reduction techniques. We show in simulations and real data analysis that forecasting models based on sufficient reductions have the potential of significantly improved performance.

Keywords: Diffusion Index, Dimension Reduction, Factor Models, Forecasting, Partial Least Squares, Principal Components

DOI: http://dx.doi.org/10.17016/FEDS.2015.074

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FEDS 2015-073
End of the Line: Behavior of HELOC Borrowers Facing Payment Changes (PDF)

Abstract: An important question in the household finance literature is whether a change in required debt payments affects borrower behavior. One challenge in this literature has been identifying whether higher default rates observed after an increase in debt payments stem from the inability of borrowers to pay the higher amount, or the attrition of better borrowers in advance of the payment change. A related question is whether the higher default rate is a result of specific features of the debt product, or the type of borrower who chooses the product. We address both of these questions as they relate to a scheduled increase in payments on home equity lines of credit (HELOCs). Many existing HELOCs are structured such that when they reach the end of the draw period, they convert from open-ended, non-amortizing lines of credit to closed-end, amortizing loans. We compare the performance of HELOCs reaching end of draw with those not reaching end of draw and find that HELOCs that reach end of draw have a significantly higher cumulative default rate in the following months. We also show that, at end of draw, borrowers who have a HELOC with a balloon feature are more likely to have lower credit scores and higher LTVs than borrowers who have HELOCs with longer amortization periods. However, even controlling for borrower and loan characteristics, HELOCs with a balloon payment are more likely to default. This result provides evidence that HELOC defaults can be influenced both by the features of the product and the characteristics of borrowers who choose those features.

Keywords: HELOC, consumer credit, end of draw, home equity, payment changes

DOI: http://dx.doi.org/10.17016/FEDS.2015.073

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FEDS 2015-072
Reconciling Full-Cost and Marginal-Cost Pricing (PDF)

Jacob P. Gramlich and Korok Ray

Abstract: Despite the clear prescription from economic theory that a firm should set price based only on variable costs, firms routinely factor fixed costs into pricing decisions. We show that full-cost pricing (FCP) can help firms uncover their optimal price from economic theory. FCP marks up variable cost with the contribution margin per unit, which in equilibrium includes the fixed cost. This requires some knowledge of the firm's equilibrium return, though this is arguably easier a lower informational burden than knowing one's demand curve, which is required for optimal economic pricing. We characterize when FCP can implement the optimal price in a static game, a dynamic game, with multiple products, and under a satisficing objective.

Keywords: Full Cost Pricing, Marginal Cost Pricing, Optimal Pricing, Pricing

DOI: http://dx.doi.org/10.17016/FEDS.2015.072

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FEDS 2015-071
The Effects of Asymmetric Volatility and Jumps on the Pricing of VIX Derivatives (PDF)

Abstract: This paper proposes a new collection of affine jump-diffusion models for the valuation of VIX derivatives. The models have two distinctive features. First, we allow for a positive correlation between changes in the VIX and in its stochastic volatility to accommodate asymmetric volatility. Second, upward and downward jumps in the VIX are separately modeled to accommodate the possibility that investors react differently to good and bad surprises. Using the VIX futures and options data from July 2006 through January 2013, we find conclusive evidence for the benefits of including both asymmetric volatility and upward jumps in models of VIX derivatives pricing. We do not, however, find evidence supporting downward jumps.

Keywords: VIX options, VIX futures, jump-diffusion, stochastic volatility, volatility smile

DOI: http://dx.doi.org/10.17016/FEDS.2015.071

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FEDS 2015-070
How House Price Dynamics and Credit Constraints affect the Equity Extraction of Senior Homeowners (PDF)

Stephanie Moulton, Samuel Dodini, Donald R. Haurin, and Maximilian D. Schmeiser

Abstract: Households can borrow against equity through different channels, including home equity lines of credit (HELOCs), second liens, cash-out refinancing, and--for senior homeowners--reverse mortgages. We use data from the New York Federal Reserve/Equifax Consumer Credit Panel, the U.S. Department of Housing and Urban Development, and other sources to jointly estimate the decision to extract equity through these different channels. Specifically, we identify the influence of credit constraints, house price dynamics and their interactions on the proportion of seniors in a ZIP code extracting through a given channel each year from 2004 to 2012: the boom and bust period in the U.S. housing market. Prior research finds credit constrained households were more responsive to house price gains than non-constrained households. Our results suggest that this response varies depending on the borrowing channel. As house prices increased, cash-out refinancing increased in credit-constrained areas, but HELOCs increased in less-credit-constrained areas. Further, when house prices fell, reverse mortgage originations increased--particularly in credit-constrained areas. We also observe differential responses to credit constraints and house price changes in minority versus non-minority neighborhoods.

Keywords: Home Equity Extraction, Mortgages and credit, Reverse Mortgages

DOI: http://dx.doi.org/10.17016/FEDS.2015.070

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FEDS 2015-069
Prices for Communications Equipment: Rewriting the Record (PDF)

David M. Byrne and Carol A. Corrado

Abstract: Communication equipment plays as large a role in high-tech investment as computers, yet prices for communication equipment have not been studied as extensively as prices for computers and electronic components. Prices for satellites, cell phones, and the ground stations for these systems--important components of a nation's communications infrastructure--are difficult to locate in official statistics. This paper develops new price measures for 16 types of communications equipment from 1963 to 2009. Indexes for some (e.g., cellular phone systems) experience declines of 15-20 percent per year, similar to the decline in quality-adjusted prices for computers, and suggest that advances in wireless communications technology have been very rapid. All told, our price index for domestic production falls 4.8 percent per year on average over the time period we study and 9.8 percent per year on average since 1985--nearly 10 percentage points faster than the official U.S. producer price index introduced in that year.

Keywords: ICT, communications equipment, price measurement, technical change, wireless technology, communications technology, communications equipment industry

DOI: http://dx.doi.org/10.17016/FEDS.2015.069

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FEDS 2015-068
Risk Taking and Low Longer-term Interest Rates: Evidence from the U.S. Syndicated Loan Market (PDF)

Abstract: We use supervisory data to investigate risk taking in the U.S. syndicated loan market at a time when longer-term interest rates are exceptionally low, and we study the ex-ante credit risk of loans acquired by different types of lenders, including banks and shadow banks. We find that insurance companies, pension funds, and, in particular, structured-finance vehicles take higher credit risk when investors expect interest rates to remain low. Banks originate riskier loans that they tend to divest shortly after origination, thus appearing to accommodate other lenders' investment choices. These results are consistent with a "search for yield" by certain types of shadow banks and, to the extent that Federal Reserve policies affected longer-term rates, the results are also consistent with the presence of a risk-taking channel of monetary policy. Finally, we find that longer-term interest rates have only a modest effect on loan spreads.

Keywords: Risk-taking channel of monetary policy, Search for yield, Shadow banking, Shared National Credit Program, Syndicated loans, Zero lower bound

DOI: http://dx.doi.org/10.17016/FEDS.2015.068

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FEDS 2015-067
Innovation, investor sentiment, and firm-level experimentation (PDF)

Abstract: Due to frictions like informational externalities, firms invest too little in learning the productivity of newly available technologies through small-scale experimentation. I study the effect of investor sentiment on the relation between technological innovation and future firm-level R&D expenses, which include the resources used for small-scale experimentation. I find that rapidly improving investor sentiment strengthens the effect of technological innovation on one-year-ahead R&D expenses, and that the effect is more pronounced for high-tech firms with tighter financing constraints. The results are not driven by sentiment proxying for technological innovation or by sentiment and R&D expenses being jointly determined. The evidence is consistent with the hypothesis that sentiment counteracts frictions in the process of technology diffusion.

Keywords: Investor sentiment, R&D, Technological innovation

DOI: http://dx.doi.org/10.17016/FEDS.2015.067

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FEDS 2015-066
Nowcasting Business Cycles: a Bayesian Approach to Dynamic Heterogeneous Factor Models (PDF)

Antonello D'Agostino, Domenico Giannone, Michele Lenza, and Michele Modugno

Abstract: We develop a framework for measuring and monitoring business cycles in real time. Following a long tradition in macroeconometrics, inference is based on a variety of indicators of economic activity, treated as imperfect measures of an underlying index of business cycle conditions. We extend existing approaches by permitting for heterogenous lead-lag patterns of the various indicators along the business cycles. The framework is well suited for high-frequency monitoring of current economic conditions in real time - nowcasting - since inference can be conducted in presence of mixed frequency data and irregular patterns of data availability. Our assessment of the underlying index of business cycle conditions is accurate and more timely than popular alternatives, including the Chicago Fed National Activity Index (CFNAI). A formal real-time forecasting evaluation shows that the framework produces well-calibrated probability nowcasts that resemble the consensus assessment of t he Survey of Professional Forecasters.

Keywords: Current Economic Conditions, Dynamic Factor Models, Dynamic Heterogeneity, Business Cycles, Real Time, Nowcasting.

DOI: http://dx.doi.org/10.17016/FEDS.2015.066

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FEDS 2015-065
Stock Market Investment: The Role of Human Capital (PDF)

Kartik Athreya, Felicia F. Ionescu, and Urvi Neelakantan

Abstract: Portfolio choice models counterfactually predict (or advise) almost universal equity market participation and a high share for equity in wealth early in life. Empirically consistent predictions have proved elusive without participation costs, informational frictions, or nonstandard preferences. We demonstrate that once human capital investment is allowed, standard theory predicts portfolio choices much closer to those empirically observed. Two intuitive mechanisms are at work: For participation, human capital returns exceed financial asset returns for most young households and, as households age, this is reversed. For shares, risks to human capital limit the household's desire to hold wealth in risky financial equity.

Keywords: Human capital investment, life-cycle, financial portfolios

DOI: http://dx.doi.org/10.17016/FEDS.2015.065

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FEDS 2015-064
Nominal Rigidities and the Term Structures of Equity and Bond Returns (PDF)

Abstract: A downward-sloping term structure of equity and upward-sloping term structures of interest rates arise endogenously in a general-equilibrium model with nominal rigidities and nonlinear habits in consumption. Countercyclical marginal costs exacerbate the procyclicality of dividends after a technology shock, and hence their riskiness, and generate countercyclical inflation. Marginal costs gradually fall after a negative technology shock as the price level increases sluggishly, so the payoffs of short-duration dividend claims (bonds) are more (less) procyclical than the payoffs of long-duration claims (bonds). The simultaneous presence of market and home consumption habits allows for uniting nonlinear habits and a production economy without compromising the ability of the model to fit macroeconomic variables.

Keywords: Equity and bond yields, habit formation, nominal rigidities, structural term structure modeling

DOI: http://dx.doi.org/10.17016/FEDS.2015.064

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FEDS 2015-063
Aggregate Consequences of Dynamic Credit Relationships (PDF)

Abstract: Which financial frictions matter in the aggregate? This paper presents a general equilibrium model in which entrepreneurs finance a firm with a long-term contract. The contract is constrained efficient because firm revenue is costly to monitor and entrepreneurs may default. The cost of monitoring firms and the entrepreneurs' outside options determine the significance of moral hazard relative to limited enforcement for financial contracting. Calibrating the model to the U.S. economy, I find that the relative welfare loss from financial frictions is about 5 percent in terms of aggregate consumption with moral hazard, while it is 1 percent with limited enforcement. Reforms designed to strengthen contract enforcement increase aggregate consumption in the short-run, but their long-run effects are modest when monitoring costs are high. Weak contract enforcement contributes to aggregate fluctuations by amplifying the effect of aggregate technological shocks, but moral hazard does not.

Keywords: Business cycles, financial contracting, financial development, firm dynamics, limited enforcement, private information

DOI: http://dx.doi.org/10.17016/FEDS.2015.063

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FEDS 2015-062
The Accuracy of Forecasts Prepared for the Federal Open Market Committee (PDF)

Andrew C. Chang and Tyler J. Hanson

Abstract: We analyze forecasts of consumption, nonresidential investment, residential investment, government spending, exports, imports, inventories, gross domestic product, inflation, and unemployment prepared by the staff of the Board of Governors of the Federal Reserve System for meetings of the Federal Open Market Committee from 1997 to 2008, called the Greenbooks. We compare the root mean squared error, mean absolute error, and the proportion of directional errors of Greenbook forecasts of these macroeconomic indicators to the errors from three forecasting benchmarks: a random walk, a first-order autoregressive model, and a Bayesian model averaged forecast from a suite of univariate time-series models commonly taught to first-year economics graduate students. We estimate our forecasting benchmarks both on end-of-sample vintage and real-time vintage data. We find find that Greenbook forecasts significantly outperform our benchmark forecasts for horizons less than one quarter ahead. However, by the one-year forecast horizon, typically at least one of our forecasting benchmarks performs as well as Greenbook forecasts. Greenbook forecasts of the personal consumption expenditures and unemployment tend to do relatively well, while Greenbook forecasts of inventory investment, government expenditures, and inflation tend to do poorly.

Keywords: Bayesian model averaging, Federal Open Market Committee, forecast accuracy, Greenbook, NIPA, national income and product accounts, real-time data

DOI: http://dx.doi.org/10.17016/FEDS.2015.062

Accessible materials (.zip)

FEDS 2015-061
Income and Earnings Mobility in U.S. Tax Data (PDF)

Jeff Larrimore, Jacob Mortenson, and David Splinter

Abstract: We use a large panel of federal income tax data to investigate intragenerational income mobility in the United States. We have two primary objectives. First, we explore the determinants of two-year changes in individual labor earnings and family incomes, such as job or industry changes, marriage, divorce, and geographic mobility. Second, we evaluate how federal income taxes stabilize or destabilize post-tax income changes relative to pre-tax changes. We find a relatively high degree of income mobility, with almost half of workers exhibiting earnings increases or decreases of at least 25 percent, and two-fifths of tax units experiencing income changes of this magnitude. Male and female labor income mobility patterns are remarkably similar, though marriage is associated with earnings gains among men, but is associated with modest earnings declines among women. We also observe that large income gains are most likely among families that add workers -- either through marria ge or through a second family member entering the workforce.

Keywords: Administrative data, income mobility, post-tax income

DOI: http://dx.doi.org/10.17016/FEDS.2015.061

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FEDS 2015-060
FOMC Responses to Calls for Transparency (PDF)

Miguel Acosta

Abstract: I apply latent semantic analysis to Federal Open Market Committee (FOMC) transcripts and minutes from 1976 to 2008 in order to analyze the Fed's responses to calls for transparency. Using a newly constructed measure of the transparency of deliberations, I study two events that define markedly different periods of transparency over this 32-year period. First, the 1978 Humphrey-Hawkins Act increased the degree to which the FOMC used meeting minutes to convey the content of its meetings. Historical evidence suggests that this increased transparency reflected a response to the Act's requirement that the Fed provide greater detail in reporting with respect to its goals and objectives. Second, the 1993 decision to publish nearly verbatim transcripts also increased transparency. However, the cost was an increasing degree of conformity at each meeting, as evidenced by lower variance in content disagreement at the member level.

Keywords: Federal Open Market Committee, transparency, latent semantic analysis, deliberation, natural language processing, conformity, central bank

DOI: http://dx.doi.org/10.17016/FEDS.2015.060

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FEDS 2015-059
Mapping Heat in the U.S. Financial System (PDF)

Abstract: We provide a framework for assessing the build-up of vulnerabilities in the U.S. financial system. We collect forty-four indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging the financial crisis. We also highlight several statistical properties of our approach: most importantly, our summary measures of system-wide vulnerabilities lead the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. Thus, our framework may provide useful information for setting macroprudential policy tools such as the countercyclical capital buffer.

Keywords: Early warning system, financial crisis, financial stability, financial vulnerabilities, heat maps, macroprudential policy, systemic risk, data visualization, countercyclical capital buffers

DOI: http://dx.doi.org/10.17016/FEDS.2015.059

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FEDS 2015-058
Changes in the Distribution of After-Tax Wealth: Has Income Tax Policy Increased Wealth Inequality? (PDF)

Adam Looney and Kevin B. Moore

Abstract: A substantial share of the wealth of Americans is held in tax-deferred form such as in retirement accounts or as unrealized capital gains. Most data and statistics on assets and wealth is reported on a pre-tax basis, but pre-tax values include an implicit tax liability and may not provide as accurate a measure of the financial position or material well-being of families. In this paper, we describe the distribution of tax-deferred assets in the SCF from 1989 to 2013, provide new estimates of the income tax liabilities implicit in those assets, and present new statistics on the level and distribution of after-tax net worth. The results of our analysis suggest that, relative to published statistics on pre-tax net worth, the distribution of after-tax wealth is slightly less concentrated at each point in time and the effectiveness of the income tax system in reducing wealth inequality has decreased during the last decade. We find the reduction in the long-term capital gains rate is the primary reason for the muted effectiveness of the income tax system in reducing wealth inequality.

Keywords: Inequality, taxation, wealth

DOI: http://dx.doi.org/10.17016/FEDS.2015.058

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FEDS 2015-057
Consumer Spending and Fiscal Consolidation: Evidence from a Housing Tax Experiment (PDF)

Paolo Surico and Riccardo Trezzi

Abstract: A sudden change of government in Italy at the end of 2011 prompted the legislation of a large fiscal consolidation plan. A major intervention of this plan was a temporary change (referred in the law as 'experiment') to the property tax system, generating significant variation in the amount of housing taxes paid across home-owners. Using new questions appositely added to the Survey on Household Income and Wealth (SHIW), we exploit this cross-sectional variation to provide an unprecedented analysis of the effects of a fiscal consolidation policy on consumer spending. A tax hike on the main dwelling leads to large expenditure cuts among mortgagors with low liquid wealth but generates only small revenues for the government. In contrast, higher tax rates on other residential properties reduce private savings and yield large tax revenues.

Keywords: Fiscal consolidation, housing taxes, marginal propensity to consume, mortgage debt, tax hike

Revised Paper DOI: http://dx.doi.org/10.17016/FEDS.2015.057r1

Revised Paper: Accessible materials (.zip)

Original Paper: Full paper (PDF)

Original Paper DOI: http://dx.doi.org/10.17016/FEDS.2015.057

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FEDS 2015-056
Identification of First-Price Auctions With Biased Beliefs (PDF)

Serafin J. Grundl and Yu Zhu

Abstract: This paper exploits variation in the number of bidders to separately identify the valuation distribution and the bidders' belief about the valuation distribution in first-price auctions with independent private values. Exploiting variation in auction volume the result is extended to environments with risk averse bidders. In an illustrative application we fail to reject the null hypothesis of correct beliefs.

Keywords: Biased beliefs, first-price auction, nonparametric identification, risk aversion

DOI: http://dx.doi.org/10.17016/FEDS.2015.056

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FEDS 2015-055
Un-Networking: The Evolution of Networks in the Federal Funds Market (PDF)

Daniel O. Beltran, Valentin Bolotnyy, and Elizabeth C. Klee

Abstract: Using a network approach to characterize the evolution of the federal funds market during the Great Recession and financial crisis of 2007-2008, we document that many small federal funds lenders began reducing their lending to larger institutions in the core of the network starting in mid-2007. But an abrupt change occurred in the fall of 2008, when small lenders left the federal funds market en masse and those that remained lent smaller amounts, less frequently. We then test whether changes in lending patterns within key components of the network were associated with increases in counterparty and liquidity risk of banks that make up the core of the network. Using both aggregate and bank-level network metrics, we find that increases in counterparty and liquidity risk are associated with reduced lending activity within the network. We also contribute some new ways of visualizing financial networks.

Keywords: Banks, credit unions, and other financial institutions, counterparty credit risk, data visualization, network models

DOI: http://dx.doi.org/10.17016/FEDS.2015.055

Paper without appendix (PDF)

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FEDS 2015-054
A margin call gone wrong: Credit, stock prices, and Germany's Black Friday 1927 (PDF)

Abstract: Leverage is often seen as villain in financial crises. Sudden deleveraging may lead to fire sales and price pressure when asset demand is downward-sloping. This paper looks at the effects of changes in leverage on asset prices. It provides a historical case study where a large, well-identified shock to margin credit disrupted the German stock market. In May 1927, the German central bank forced banks to cut margin lending to their clients. However, this shock affected banks differentially; the magnitude of credit change differed across banks. Using the strong connections between banks and firms in interwar Germany, I show in a difference-in-differences framework that stocks affiliated with affected banks decreased over 12 percent during 4 weeks. Volatility of these stocks doubled. Relating directly bank balance sheet information to asset prices, this paper finds that a one standard deviation decrease in lending to investors increased an affected stock's volatility by 0.2 2 standard deviations. These results are robust to the problem that banks' lending decisions may be influenced by asset prices. The Reichsbank threatened banks to cut their short-run funding. Using the differences in exposure towards this threat, an instrumental variable strategy provides further evidence that a sharp decrease in leverage may lead to stock price fluctuations.

Keywords: Asset pricing and bonds, banks, credit unions, and other financial institutions, economic history, equity

DOI: http://dx.doi.org/10.17016/FEDS.2015.054

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FEDS 2015-053
Asset Return Dynamics under Habits and Bad-Environment Good-Environment Fundamentals (PDF)

Geert Bekaert and Eric Engstrom

Abstract: We introduce a "bad environment-good environment" (BEGE) technology for consumption growth in a consumption-based asset pricing model with external habit formation. The model generates realistic non-Gaussian features of consumption growth and fits standard salient features of asset prices including the means and volatilities of equity returns and a low risk free rate. BEGE dynamics additionally allow the model to generate realistic properties of equity index options prices, and their comovements with the macroeconomic outlook. In particular, when option implied volatility is high, as measured for instance by the VIX index, the distribution of consumption growth is more negatively skewed.

Keywords: VIX, equity premium, habit, risk aversion, skewness

DOI: http://dx.doi.org/10.17016/FEDS.2015.053

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FEDS 2015-052
The Cyclicality of Sales, Regular and Effective Prices: Comment (PDF)

Etienne Gagnon, David Lopez-Salido, and Jason A. Sockin

Abstract: Coibion, Gorodnichenko, and Hong (2015) argue that the CPI underestimates the deceleration in consumer prices during economic downturns because the index fails to account for the reallocation of consumer spending from high- to low-price stores. We show that these authors' measures of inflation with and without store switching suffer from several methodological deficiencies, including an excessive truncation of price adjustments and the lack of a treatment for missing observations. When we address these deficiencies, the authors' key regression results no longer suggest that greater store switching during downturns is a statistically or economically significant phenomenon.

Keywords: Outlet substitution bias, effective prices, inflation measurement

DOI: http://dx.doi.org/10.17016/FEDS.2015.052

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FEDS 2015-051
Modelling Dependence in High Dimensions with Factor Copulas (PDF)

Dong Hwan Oh and Andrew J. Patton

Abstract: This paper presents flexible new models for the dependence structure, or copula, of economic variables based on a latent factor structure. The proposed models are particularly attractive for relatively high dimensional applications, involving fifty or more variables, and can be combined with semiparametric marginal distributions to obtain flexible multivariate distributions. Factor copulas generally lack a closed-form density, but we obtain analytical results for the implied tail dependence using extreme value theory, and we verify that simulation-based estimation using rank statistics is reliable even in high dimensions. We consider "scree" plots to aid the choice of the number of factors in the model. The model is applied to daily returns on all 100 constituents of the S&P 100 index, and we find significant evidence of tail dependence, heterogeneous dependence, and asymmetric dependence, with dependence being stronger in crashes than in booms. We also show that factor copula models provide superior estimates of some measures of systemic risk.

Keywords: Copulas, correlation, dependence, systemic risk, tail dependence

DOI: http://dx.doi.org/10.17016/FEDS.2015.051

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FEDS 2015-050
High-Dimensional Copula-Based Distributions with Mixed Frequency Data (PDF)

Dong Hwan Oh and Andrew J. Patton

Abstract: This paper proposes a new model for high-dimensional distributions of asset returns that utilizes mixed frequency data and copulas. The dependence between returns is decomposed into linear and nonlinear components, enabling the use of high frequency data to accurately forecast linear dependence, and a new class of copulas designed to capture nonlinear dependence among the resulting uncorrelated, low frequency, residuals. Estimation of the new class of copulas is conducted using composite likelihood, facilitating applications involving hundreds of variables. In- and out-of-sample tests confirm the superiority of the proposed models applied to daily returns on constituents of the S&P 100 index.

Keywords: Composite likelihood, forecasting, high frequency data, nonlinear dependence

DOI: http://dx.doi.org/10.17016/FEDS.2015.050

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FEDS 2015-049
Heterogeneity in Economic Shocks and Household Spending (PDF)

Sebastian J. Devlin-Foltz and John Sabelhaus

Abstract: Large swings in aggregate household-sector spending, especially for big ticket items such as cars and housing, have been a dominant feature of the macroeconomic landscape in the past two decades. Income and wealth inequality increased over the same period, leading some to suggest the two phenomena are interconnected. Indeed, there is supporting evidence for the idea that heterogeneity in economic shocks and spending are connected, most notably in studies using local-area geography as the unit of analysis. The Survey of Consumer Finances (SCF) provides a household-level perspective on changes in wealth, income, and spending across different types of families. The SCF confirms that inequality is indeed increasing in recent decades, and the data provide support for the proposition that shocks to income and wealth are indeed related to large swings in spending across and within birth cohorts. However, the economic shocks associated with the Great Recession and changes in spending and debt to income ratios are widespread, and inconsistent with a narrow focus on the experiences and changes in behavior of particular (especially low- and modest-income) households.

Keywords: Consumption, lifecycle, synthetic cohort

DOI: http://dx.doi.org/10.17016/FEDS.2015.049

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FEDS 2015-048
Monetary Policy, Hot Housing Markets and Leverage (PDF)

Christoph Ungerer

Abstract: Expansionary monetary policy can increase household leverage by stimulating housing liquidity. Low mortgage rates encourage buyers to enter the housing market, raising the speed at which properties can be sold. Because lenders can resell seized foreclosure inventory at lower cost in such a hot housing market, ex-ante they are comfortable financing a larger fraction of the house purchase. Consistent with this mechanism, this study documents empirically that both the housing sales rate and loan-to-value ratios increase after expansionary monetary policy. Calibrating a New Keynesian macroeconomic model to fit the response of housing liquidity to monetary policy, the interaction between credit frictions and housing market search frictions generates endogenous movements in the loan-to-value ratio which amplify the economy's response to monetary policy.

Keywords: Credit frictions, housing market, monetary policy, search frictions

DOI: http://dx.doi.org/10.17016/FEDS.2015.048

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FEDS 2015-047
Monetary Policy 101: A Primer on the Fed's Changing Approach to Policy Implementation (PDF)

Abstract: The Federal Reserve conducts monetary policy in order to achieve its statutory mandate of maximum employment, stable prices, and moderate long-term interest rates as prescribed by the Congress and laid out in the Federal Reserve Act. For many years prior to the financial crisis, the FOMC set a target for the federal funds rate and achieved that target through purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve's large scale asset purchase programs, this approach to implementing monetary policy will no longer work. This paper provides a primer on the Fed's implementation of monetary policy. We use the standard textbook model to illustrate why the approach used by the Federal Reserve before the financial crisis to keep the federal funds rate near the FOMC's target will not work in current circumst ances, and explain the approach that the Committee intends to use instead when it decides to begin raising short-term interest rates.

Keywords: FOMC, Federal Reserve, liftoff, monetary policy implementation, monetary policy normalization, monetary policy tools

DOI: http://dx.doi.org/10.17016/FEDS.2015.047

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FEDS 2015-046
Is the Intrinsic Value of Macroeconomic News Announcements Related to their Asset Price Impact? (PDF)

Thomas Gilbert, Chiara Scotti, Georg Strasser, and Clara Vega

Abstract: The literature documents a heterogeneous asset price response to macroeconomic news announcements: Some announcements have a strong impact on asset prices and others do not. In order to explain these differences, we estimate a novel measure of the intrinsic value of a macroeconomic announcement, which we define as the announcement's ability to nowcast GDP growth, inflation, and the Federal Funds Target Rate. Using the same nowcasting framework, we then decompose this intrinsic value into the announcement's characteristics: its relation to fundamentals, timing, and revision noise. We find that in the 1998-2013 period, a significant fraction of the variation in the announcements' price impact on the Treasury bond futures market can be explained by differences in intrinsic value. Furthermore, our novel measure of timing explains significantly more of this variation than the announcements' relation to fundamentals, reporting lag (which previous studies have used as a measure of timing), or revision noise.

Keywords: Macroeconomic announcements, central bank policy, coordination role of public information, learning, macroeconomic forecasting, price discovery

DOI: http://dx.doi.org/10.17016/FEDS.2015.046

Revision - Accessible materials (.zip)

Original Version: PDF | Accessible materials (.zip)

FEDS 2015-045
Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory (PDF)

Damjan Pfajfar and Blaž Žakelj

Abstract: Using laboratory experiments within a New Keynesian framework, we explore the interaction between the formation of inflation expectations and monetary policy design. The central question in this paper is how to design monetary policy when expectations formation is not perfectly rational. Instrumental rules that use actual rather than forecasted inflation produce lower inflation variability and reduce expectational cycles. A forward-looking Taylor rule where a reaction coefficient equals 4 produces lower inflation variability than rules with reaction coefficients of 1.5 and 1.35. Inflation variability produced with the latter two rules is not significantly different. Moreover, the forecasting rules chosen by subjects appear to vary systematically with the policy regime, with destabilizing mechanisms chosen more often when inflation control is weaker.

Keywords: Inflation expectations, laboratory experiments, monetary policy design, New Keynesian model

DOI: http://dx.doi.org/10.17016/FEDS.2015.045

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FEDS 2015-044
Macroeconomic Effects of Banking Sector Losses across Structural Models (PDF)

Abstract: The macro spillover effects of capital shortfalls in the financial intermediation sector are compared across five dynamic equilibrium models for policy analysis. Although all the models considered share antecedents and a methodological core, each model emphasizes different transmission channels. This approach delivers "model-based confidence intervals" for the real and financial effects of shocks originating in the financial sector. The range of outcomes predicted by the five models is only slightly narrower than confidence intervals produced by simple vector autoregressions.

Keywords: Bank losses, banks, capital requirements, DSGE models

DOI: http://dx.doi.org/10.17016/FEDS.2015.044

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FEDS 2015-043
Slow capital, fast prices: Shocks to funding liquidity and stock price reversals (PDF)

Abstract: A V-shaped price pattern is often observed in financial markets - in response to a negative shock, prices fall "too far" before reversing course. This paper looks at one particular channel of such patterns: the link between a liquidity provider's balance sheet and asset prices. I examine a well-identified historical case study where a large exogenous shock to a liquidity provider's balance sheet resulted in severe capital constraints. Using evidence from German universal banks, who acted as market makers for selected stocks in the interwar period, I show in a difference-in-differences framework that binding capital constraints made stocks 15-20 percent more likely to be illiquid if they were connected to the distressed liquidity provider. This resulted in V-shaped price patterns during times of illiquidity, where prices declined on average 2.5 percent and reversed over the next one to three days. Investing in these particular stocks would have yielded substantial gains. These findings can be rationalized by a model that incorporates imperfect competition and asymmetric information. Under this model, banks' market-making reduces price volatility (and uninformed traders' reactions to price movements) in normal times whereas in distressed times, the price impact of noise trading is high and leads to sharp price declines that are unrelated to fundamentals.

Keywords: Asset pricing and bonds, banks, credit unions, other financial institutions, economic history, equity, liquidity

DOI: http://dx.doi.org/10.17016/FEDS.2015.043

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FEDS 2015-042
The Passthrough of Labor Costs to Price Inflation (PDF)

Abstract: We use a time-varying parameter/stochastic volatility VAR framework to assess how the passthrough of labor costs to price inflation has evolved over time in U.S. data. We find little evidence that changes in labor costs have had a material effect on price inflation in recent years, even for compensation measures where some degree of passthrough to prices still appears to be present. Our results cast doubt on explanations of recent inflation behavior that appeal to such mechanisms as downward nominal wage rigidity or a differential contribution of long-term and short-term unemployed workers to wage and price pressures.

Keywords: Prices, business fluctuations, and cycles, wages, and compensation

DOI: http://dx.doi.org/10.17016/FEDS.2015.042

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FEDS 2015-041
The Income-Achievement Gap and Adult Outcome Inequality (PDF)

Abstract: This paper discusses various methods for assessing group differences in academic achievement using only the ordinal content of achievement test scores. Researchers and policymakers frequently draw conclusions about achievement differences between various populations using methods that rely on the cardinal comparability of test scores. This paper shows that such methods can lead to erroneous conclusions in an important application: measuring changes over time in the achievement gap between youth from high- and low-income households. Commonly-employed, cardinal methods suggest that this "income-achievement gap" did not change between the National Longitudinal Surveys of Youth (NLSY) 1979 and 1997 surveys. In contrast, ordinal methods show that this gap narrowed substantially for reading achievement and may have narrowed for math achievement as well. In fact, any weighting scheme that places more value on higher test scores must conclude that the reading income-achievement gap decreased between these two surveys. The situation for math achievement is more complex, but low-income students in the middle and high deciles of the low-income math achievement distribution unambiguously gained relative to their high-income peers. Furthermore, an anchoring exercise suggests that the narrowing of the income-achievement gap corresponds to an economically significant convergence in lifetime labor wealth and school completion rates for youth from high- and low-income backgrounds.

Keywords: Achievement inequality, anchoring, human capital, measurement of inequality, ordinal statistics

DOI: http://dx.doi.org/10.17016/FEDS.2015.041

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FEDS 2015-040
Achievement Gap Estimates and Deviations from Cardinal Comparability (PDF)

Abstract: This paper assesses the sensitivity of standard empirical methods for measuring group differences in achievement to violations in the cardinal comparability of achievement test scores. The paper defines a distance measure over possible weighting functions (scalings) of test scores. It then constructs worst-case bounds for the bias in the estimated achievement gap (or achievement gap change) that could result from using the observed rather than the true test scale, given that the true and observed scales are no more than a fixed distance from each other. The worst-case weighting functions have simple, closed-form expressions consisting of achievement thresholds, flat regions in which test scores are uninformative, and regions in which the observed test scores are actually cardinally comparable. The paper next estimates these worst-case weighting functions for black/white and high-/low-income achievement gaps and gap changes using data from several commonly employed surveys. The results of this empirical exercise suggest that cross-sectional achievement gap estimates tend to be quite robust to scale misspecification. In contrast, achievement gap change estimates seem to be quite sensitive to the choice of test scale. Standard empirical methods may not robustly identify the sign of the trend in achievement inequality between students from different racial groups and income classes. Furthermore, ordinal methods may be more powerful and will continue to have the correct size when the test scale has been misspecified.

Keywords: Achievement gaps; econometrics; health, education, and welfare; inequalty; measurement; robustness

DOI: http://dx.doi.org/10.17016/FEDS.2015.040

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FEDS 2015-039
Small Businesses and Small Business Finance during the Financial Crisis and the Great Recession: New Evidence From the Survey of Consumer Finances (PDF)

Arthur B. Kennickell, Myron L. Kwast, and Jonathan Pogach

Abstract: We use the Federal Reserve's 2007, 2009 re-interview of 2007 respondents, and 2010 Surveys of Consumer Finances (SCFs) to examine the experiences of small businesses owned and actively managed by households during these turbulent years. This is the first paper to use these SCFs to study small businesses even though the surveys contain extensive data on a broad cross-section of firms and their owners. We find that the vast majority of small businesses were severely affected by the financial crisis and the Great Recession, including facing tight credit constraints. We document numerous and often complex interdependencies between the finances of small businesses and their owner-manager households, including a more complicated role of housing assets than has been reported previously. We find that workers who lost their job responded in part by starting their own small business, and that factors correlated with the survival of a small business differed greatly depending upon whether the firm was established or new. Our results strongly reinforce the importance of relationship finance to small businesses, and the primary role of commercial banks in such relationships. We find that both cross-section and panel data are needed to understand the complex issues associated with the creation, survival and failure of small businesses.

Keywords: Great Recession, small business

DOI: http://dx.doi.org/10.17016/FEDS.2015.039

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FEDS 2015-038
Optimal Government Spending at the Zero Lower Bound: A Non-Ricardian Analysis (PDF)

Abstract: This paper analyzes the implications of distortionary taxation and debt financing for optimal government spending policy in a sticky-price economy where the nominal interest rate is subject to the zero lower bound constraint. Regardless of the type of tax available and the initial debt level, optimal government spending policy in a recession is characterized by an initial increase followed by a reduction below, and an eventual return to, the steady state. The magnitude of variations in the government spending as well as their welfare implications depend importantly on the available tax instrument and the initial debt level.

Keywords: Commitment, distortionary taxation, government spending, liquidity trap, nominal debt, optimal policy, zero lower bound

DOI: http://dx.doi.org/10.17016/FEDS.2015.038

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FEDS 2015-037
Balance-Sheet Households and Fiscal Stimulus: Lessons from the Payroll Tax Cut and Its Expiration (PDF)

Claudia R. Sahm, Matthew D. Shapiro, and Joel Slemrod

Abstract: Balance-sheet repair drove the response of a significant fraction of households to fiscal stimulus following the Great Recession. By combining survey, behavioral, and time-series evidence on the 2011 payroll tax cut and its expiration in 2013, this papers identifies and analyzes households who smooth debt repayment. These "balance-sheet households" are as prevalent as "permanent-income households," who smooth consumption in response to the temporary tax cut, and outnumber "constrained households," who temporarily boost spending. The asymmetric spending response of balance-sheet households poses challenges to standard models, but nonetheless appears important for understanding individual and aggregate responses to fiscal stimulus.

Keywords: Fiscal stimulus, balance sheets, marginal propensity to consume, payroll tax, survey responses

DOI: http://dx.doi.org/10.17016/FEDS.2015.037

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FEDS 2015-036
Dividend Taxes and Stock Volatility (PDF)

Abstract: How do dividend taxes affect stock volatility? In this paper, I use a decrease in dividend taxes as a natural experiment to identify their impact on firm's price volatility. If a risk-averse executive faces price risk through his incentive contract, changes in stock volatility due to dividend taxes may increase agency costs and therefore decrease overall welfare. Stock volatility decreased after the tax cut for firms where an executive has large holdings of shares and options relative to firms where an executive has small holdings of shares and options. Therefore, with a risk-averse executive and risk-neutral shareholders, dividend taxes may exacerbate agency costs. The increase in agency costs will decrease shareholder welfare, which can be partially offset by the use of options in the employment contract.

Keywords: Corporate finance and governance, taxation

DOI: http://dx.doi.org/10.17016/FEDS.2015.036

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FEDS 2015-035
Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News (PDF)

Lena Drager, Michael J. Lamla, and Damjan Pfajfar

Abstract: In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations is beneficial, as it improves the forecast accuracy. Furthermore, consistency is time varying. Exploring this time variation, we provide evidence that central bank communication as well as news on monetary policy can facilitate the understanding of those concepts and thereby improve the efficacy of monetary policy.

Keywords: Macroeconomic expectations, central bank communication, consumer forecast accuracy, macroeconomic literacy, monetary news, survey microdata

DOI: http://dx.doi.org/10.17016/FEDS.2015.035

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FEDS 2015-034
On Default and Uniqueness of Monetary Equilibria (PDF)

Li Lin, Dimitrios P. Tsomocos, and Alexandros P. Vardoulakis

Abstract: We examine the role that credit risk in the central bank's monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and long-term loans to agents. Short-term loans are riskless, but long-term loans are collateralized by a portfolio of real assets and are subject to credit risk. The private monetary wealth of individuals is zero, i.e., there is no outside money. When there is no default in equilibrium, there is indeterminacy. Positive default in every state of the world on some long-term loan endogenously creates positive liquid wealth that supports positive interest rates and resolves the aforementioned indeterminacy. Hence, a non-Ricardian policy across loan markets can determine the equilibrium allocations while it allows the central bank to earn profits from seigniorage in order to compensate for any losses.

Keywords: Collateral, Default, Determinacy, Liquid wealth, Monetary policy

DOI: http://dx.doi.org/10.17016/FEDS.2015.034

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FEDS 2015-033
Ambiguity in Securitization Markets (PDF)

Abstract: During the financial crisis of 2008, origination and trading in asset-backed securities markets dropped dramatically. I present a model with ambiguity averse investors to explain how such a market freeze could occur and to investigate how ambiguity affects origination and securitization decisions. The model captures many features of the crisis, including market freezes and fire sales, as well as the timing and duration of the freeze. The presence of ambiguity also reduces real economic activity. Lastly, I consider the differing implications of ambiguity and risk, as well as the role of policies that reduce ambiguity during market freezes.

Keywords: Structured finance, ambiguity aversion, market freezes

DOI: http://dx.doi.org/10.17016/FEDS.2015.033

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FEDS 2015-032
Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry (PDF)

Abstract: The interaction of worsening fundamentals and strategic complementarities among investors renders identification of self-fulfilling runs challenging. We propose a dynamic model to show how exogenous variation in firms' liability structures can be exploited to obtain variation in the strength of strategic complementarities. Applying this identification strategy to puttable securities offered by U.S. life insurers, we find that 40 percent of the $18 billion run on life insurers by institutional investors during the summer of 2007 was due to self-fulfilling expectations. Our findings suggest that other contemporaneous runs in shadow banking by institutional investors may have had a self-fulfilling component.

Keywords: Shadow banking, funding agreement-backed securities, life insurance companies, self-fulfilling runs

DOI: http://dx.doi.org/10.17016/FEDS.2015.032r1

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Original paper: PDF | Accessible materials (.zip)

Original DOI: http://dx.doi.org/10.17016/FEDS.2015.032

FEDS 2015-031
Secondary Market Liquidity and the Optimal Capital Structure (PDF)

Abstract: We present a model where endogenous liquidity generates a feedback loop between secondary market liquidity and firms' financing decisions in primary markets. The model features two key frictions: a costly state verification problem in primary markets, and search frictions in over-the-counter secondary markets. Our concept of liquidity depends endogenously on illiquid assets put up for sale relative to the resources available for buying those assets in the secondary market. Liquidity determines the liquidity premium, which affects issuance in the primary market, and this effect feeds back into secondary market liquidity by changing the composition of investors' portfolios. We show that the privately optimal allocations are inefficient because investors and firms fail to internalize how their behavior affects secondary market liquidity. These inefficiencies are established analytically through a set of wedge expressions for key efficiency margins. Our analysis provide s a rationale for the effect of quantitative easing on secondary and primary capital markets and the real economy.

Keywords: Capital structure, market liquidity, quantitiative easing, secondary markets

DOI: http://dx.doi.org/10.17016/FEDS.2015.031

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FEDS 2015-030
Measuring Income and Wealth at the Top Using Administrative and Survey Data (PDF)

Abstract: Administrative tax data indicate that U.S. top income and wealth shares are substantial and increasing rapidly (Piketty and Saez 2003, Saez and Zucman 2014). A key reason for using administrative data to measure top shares is to overcome the under-representation of families at the very top that plagues most household surveys. However, using tax records alone restricts the unit of analysis for measuring economic resources, limits the concepts of income and wealth being measured, and imposes a rigid correlation between income and wealth. The Survey of Consumer Finances (SCF) solves the under-representation problem by combining administrative and survey data (Bricker et al, 2014). Administrative records are used to select the SCF sample and verify that high-end families are appropriately represented, and the survey is designed to measure comprehensive concepts of income and wealth at the family level. The SCF shows high and rising top income and wealth shares, as in the ad ministrative tax data. However, unadjusted, the levels and growth based on administrative tax data alone appear to be substantially larger. By constraining the SCF to be conceptually comparable, we reconcile the differences, and show the extent to which restrictions and rigidities needed to estimate top income and wealth shares in the administrative data bias up levels and growth rates.

Keywords: Administrative data, survey data, top income shares, top wealth shares

DOI: http://dx.doi.org/10.17016/FEDS.2015.030

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FEDS 2015-029
Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record (PDF)

Andrew Jalil and Gisela Rua

Abstract: This paper uses the historical narrative record to determine whether inflation expectations shifted during the second quarter of 1933, precisely as the recovery from the Great Depression took hold. First, by examining the historical news record and the forecasts of contemporary business analysts, we show that inflation expectations increased dramatically. Second, using an event-studies approach, we identify the impact on financial markets of the key events that shifted inflation expectations. Third, we gather new evidence--both quantitative and narrative--that indicates that the shift in inflation expectations played a causal role in stimulating the recovery.

Keywords: Great Depression, inflation expectations, liquidity trap, narrative evidence, regime change

DOI: http://dx.doi.org/10.17016/FEDS.2015.029

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FEDS 2015-028
Credit-Market Sentiment and the Business Cycle (PDF)

David Lopez-Salido, Jeremy C. Stein, and Egon Zakrajsek

Abstract: Using U.S. data from 1929 to 2015, we show that elevated credit-market sentiment in year t-2 is associated with a decline in economic activity in years t and t+1. Underlying this result is the existence of predictable mean reversion in credit-market conditions. When credit risk is aggressively priced, spreads subsequently widen. The timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity. Exploring the mechanism, we find that buoyant credit-market sentiment in year t-2 also forecasts a change in the composition of external finance: Net debt issuance falls in year t, while net equity issuance increases, consistent with the reversal in credit-market conditions leading to an inward shift in credit supply. Unlike much of the current literature on the role of financial frictions in macroeconomics, this paper suggests that investor sentiment in credit markets can be an important driver of economic fluctuations.

Keywords: Business cycles, credit-market sentiment, financial stability

DOI: https://doi.org/10.17016/FEDS.2015.028r1

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FEDS 2015-027
An agency problem in the MBS market and the solicited refinancing channel of large-scale asset purchases (PDF)

Abstract: In this paper, we document that mortgage-backed securities (MBS) held by the Federal Reserve exhibit faster principal prepayment rates than MBS held by the rest of the market. Next, we show that this stylized fact persists even when controlling for factors that affect prepayment behavior, and thus determine the MBS that are delivered to the Federal Reserve. After ruling out several potential explanations for this result, we provide evidence that points to an agency problem in the secondary market for MBS, which has not previously been documented, as the most likely explanation for the abnormal prepayment behavior of Federal Reserve-held MBS. This agency problem--a key feature of the MBS market--arises when originators of mortgages that underlie the MBS no longer share in the prepayment risk of the securities, thereby increasing incentives to solicit refinancing activity. Therefore, Federal Reserve MBS holdings acquired from originators as a result of large-scale asset purchases can help stimulate economic activity through a so-called "solicited refinancing channel." Finally, we provide an estimate of the additional refinancing activity resulting from the solicited refinancing channel in the years after the Federal Reserve's first MBS purchase program, demonstrating that this channel conveyed savings on monthly mortgage payments to homeowners.

Keywords: Federal Reserve, LSAP, Monetary policy, QE, mortgage, mortgage-backed securities, prepayment rates

DOI: http://dx.doi.org/10.17016/FEDS.2015.027

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FEDS 2015-026
Derivatives Pricing under Bilateral Counterparty Risk (PDF)

Peter Carr and Samim Ghamami

Abstract: We consider risk-neutral valuation of a contingent claim under bilateral counterparty risk in a reduced-form setting similar to that of Duffie and Huang [1996] and Duffie and Singleton [1999]. The probabilistic valuation formulas derived under this framework cannot be usually used for practical pricing due to their recursive path-dependencies. Instead, finite-difference methods are used to solve the quasi-linear partial differential equations that equivalently represent the claim value function. By imposing restrictions on the dynamics of the risk-free rate and the stochastic intensities of the counterparties' default times, we develop path-independent probabilistic valuation formulas that have closed-form solution or can lead to computationally efficient pricing schemes. Our framework incorporates the so-called wrong way risk (WWR) as the two counterparty default intensities can depend on the derivatives values. Inspired by the work of Ghamami and Goldberg [2014] on th e impact of WWR on credit value adjustment (CVA), we derive calibration-implied formulas that enable us to mathematically compare the derivatives values in the presence and absence of WWR. We illustrate that derivatives values under unilateral WWR need not be less than the derivatives values in the absence of WWR. A sufficient condition under which this inequality holds is that the price process follows a semimartingale with independent increments.

Keywords: Basel III, Counterparty Risk, Credit Value Adjustment, Reduced-Form Modeling, Wrong Way Risk

DOI: http://dx.doi.org/10.17016/FEDS.2015.026

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FEDS 2015-025
Attendance Spillovers between Public and For-Profit Colleges: Evidence from Statewide Changes in Appropriations for Higher Education (PDF)

Abstract: Between 2000 and 2010, U.S. public postsecondary schools experienced widespread and uneven changes in funding from state and local appropriations. We estimate that statewide funding cuts lead to a decrease in public attendance that is offset by an increase in for-profit attendance, with no change in overall enrollment rates. We document a corresponding increase in borrowing, driven by both a shift in attendance toward a higher-borrowing sector and public institutions price adjusting to offset losses in revenue. Finally, we examine potential channels underlying these results and detect meaningful changes in public universities' tuition, faculty, and competitive admissions slots.

Keywords: enrollment, for-profit colleges, public colleges, state appropriations

DOI: http://dx.doi.org/10.17016/FEDS.2015.025r1

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FEDS 2015-024
Are the Borrowing Costs of Large Financial Firms Unusual? (PDF)

Javed I. Ahmed, Christopher Anderson, and Rebecca E. Zarutskie

Abstract: Estimates of investor expectations of government support of large financial firms are often based on large financial firms' lower borrowing costs relative to smaller financial firms. Using pricing data on credit default swaps (CDS) and corporate bonds over the period 2004 to 2013, however, we find that the CDS and bond spreads of financial firms are no more sensitive to borrower size than the spreads of non-financial firms. Outside of the financial crisis period, spreads are more sensitive to borrower size in several non-financial industries. We find that size-related differences in spreads are partially driven by higher liquidity and recovery rates of larger borrowers. Prior to the financial crisis, we also find that financial firms exhibited generally lower spreads that were less sensitive to size than spreads for several other industries. Our results suggest that estimates of implicit government guarantees to financial firms may overemphasize size-related borrowing cost differentials. However, our analysis also suggests that, prior to the financial crisis, investor expectations of government support, or generally reduced risk perceptions, may have reduced borrowing costs for the financial industry, as a whole.

Keywords: Borrowing costs, credit default swaps, financial industry, implicit government guarantee, size effect, Too-Big-to-Fail

DOI: http://dx.doi.org/10.17016/FEDS.2015.024

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FEDS 2015-023
Wage Dispersion with Heterogeneous Wage Contracts (PDF)

Abstract: I study a labor market in which identical workers search on- and off-the-job and heterogeneous firms employ using either posted wages or wage contracts contingent on outside options. Firm level costs for contingent contracts generate a separating equilibrium in which less productive firms post wages. The model with heterogeneous contracts can achieve wage dispersion, labor share, employment transitions, and flow value of unemployment that are simultaneously consistent with empirical observations even when most firms post wages. Using German employee-level administrative data, I estimate roughly 70 percent of firms post wages and employ nearly 50 percent of workers under such contracts.

Keywords: Labor supply and demand, Market structure and pricing, Wages and compensation

DOI: http://dx.doi.org/10.17016/FEDS.2015.023

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FEDS 2015-022
Liquidity Windfalls: The Consequences of Repo Rehypothecation (PDF)

Abstract: This paper presents a model of repo rehypothecation in which dealers intermediate funds and collateral between cash lenders (e.g., money market funds) and prime brokerage clients (e.g., hedge funds). Dealers take advantage of their position as intermediaries, setting different repo terms with each counterparty. In particular, the difference in haircuts represents a positive cash balance for the dealer that can be an important source of liquidity. The model shows that dealers with higher default risk are more exposed to runs by collateral providers than to runs by cash lenders, who are completely insulated from a dealer's default. In addition, collateral providers' repo terms are sensitive to changes in a dealer's default probability and its correlation with the collateral's outcome, whereas cash lenders' repo terms are unaffected by these changes. This paper rationalizes the difference in haircuts observed in bilateral and tri-party repo markets, reconciles the partial evidence of the run on repo during the recent financial crisis, and presents new empirical evidence to support the model's main prediction on haircut sensitivities.

Keywords: bankruptcy, haircuts, liquidity, prime brokerage, rehypothecation, repo

DOI: http://dx.doi.org/10.17016/FEDS.2015.022

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FEDS 2015-021
A Model of Endogenous Loan Quality and the Collapse of the Shadow Banking System (PDF)

Abstract: I develop a macroeconomic model with a financial sector, in which banks can finance risky projects (loans) and can affect their quality by exerting a costly screening effort. Informational frictions regarding the observability of loan characteristics limit the amount of external funds that banks can raise. In this framework I consider two possible types of financial intermediation, traditional banking (TB) and shadow banking (SB), differing in the level of diversification across projects. In particular, shadow banks, by pooling different loans, improve on the diversification of their idiosyncratic risk and increase the marketability of their assets. Due to their ability to pledge a larger share of the return on their projects, shadow banks will have a higher endogenous leverage compared to traditional banks, despite choosing a lower screening level. As a result, on the one hand, the introduction of SB will imply a higher amount of capital intermediated. On the other han d it will make the economy more fragile via three channels. First, by being highly leveraged and more exposed to risky projects, shadow banks will amplify exogenous negative shocks. Second, during a recession, the quality of projects intermediated by shadow banks will endogenously deteriorate even further, causing a slower recovery of the financial sector. A final source of instability is that the SB-system will be vulnerable to runs. When a run occurs, shadow banks will have to sell their assets to traditional banks, and this fire sale, because of the limited leverage capacity of the TB-system, will depress asset prices, making the run self-fulfilling and negatively affecting investment. In this framework I study how central bank credit intermediation helps reduce the impact of a crisis and the likelihood of a run.

Keywords: Bank Runs, Financial Frictions, Shadow Banking, Unconventional Monetary Policy

DOI: http://dx.doi.org/10.17016/FEDS.2015.021

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FEDS 2015-020
Downside Variance Risk Premium (PDF)

Bruno Feunou, Mohammad R. Jahan-Parvar, and Cedric Okou

Abstract: We propose a new decomposition of the variance risk premium in terms of upside and downside variance risk premia. The difference between upside and downside variance risk premia is a measure of skewness risk premium. We establish that the downside variance risk premium is the main component of the variance risk premium, and that the skewness risk premium is a priced factor with significant prediction power for aggregate excess returns. Our empirical investigation highlights the positive and significant link between the downside variance risk premium and the equity premium, as well as a positive and significant relation between the skewness risk premium and the equity premium. Finally, we document the fact that the skewness risk premium fills the time gap between one quarter ahead predictability, delivered by the variance risk premium as a short term predictor of excess returns and traditional long term predictors such as price-dividend or price-earning ratios. Our resul ts are supported by a simple equilibrium consumption-based asset pricing model.

Keywords: Downside variance risk premium, realized volatility, risk-neutral volatility, skewness risk premium, upside variance risk premium

DOI: http://dx.doi.org/10.17016/FEDS.2015.020

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FEDS 2015-019
Wealth, Pensions, Debt, and Savings: Considerations for a Panel Survey (PDF)

Brian K. Bucks and Karen M. Pence

Abstract: Several U.S. panel surveys measure household wealth. At the same time, many important questions about household wealth accumulation remain somewhat unresolved. We consider whether measurement error on the existing suite of longitudinal surveys hinders their usefulness for addressing these questions. We review the features of wealth data that make it difficult to collect and assess which assets and debts households are more likely to report accurately. We suggest several considerations in choosing between improving existing surveys and starting a new one.

Keywords: Measurement error, survey methods, wealth

DOI: http://dx.doi.org/10.17016/FEDS.2015.019

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FEDS 2015-018
Banking panics and deflation in dynamic general equilibrium (PDF)

Francesca Carapella

Abstract: This paper develops a framework to study the interaction between banking, price dynamics, and monetary policy. Deposit contracts are written in nominal terms: if prices unexpectedly fall, the real value of banks' existing obligations increases. Banks default, panics precipitate, economic activity declines. If banks default, aggregate demand for cash increases because financial intermediation provided by banks disappears. When money supply is unchanged, the price level drops, thereby providing incentives for banks to default. Active monetary policy prevents banks from failing and output from falling. Deposit insurance can achieve the same goal but amplifies business cycle fluctuations by inducing moral hazard.

Keywords: banking panics, deflation, deposit insurance

DOI: http://dx.doi.org/10.17016/FEDS.2015.018

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FEDS 2015-017
Crowding Out Effects of Refinancing on New Purchase Mortgages (PDF)

Abstract: We present evidence that binding mortgage processing capacity constraints reduce mortgage originations to borrowers of low to modest credit quality. Mortgage processing capacity constraints typically bind when the demand for mortgage refinancing shifts outward, usually because of lower mortgage rates. As a result, high capacity utilization leads mortgage lenders to ration mortgage credit, completing mortgages that require less underwriting resources, and are thus less costly, to produce. This is hypothesized to have a particularly adverse impact on the ability of low- to modest-credit-quality borrowers to obtain mortgages. What is more, we show that, by lowering capacity utilization, a rise in interest rates can, under certain circumstances, induce an increase in mortgage originations to borrowers of low to modest credit quality. In particular, we find fairly large effects for purchasing borrowers of modest credit quality, in which we find that a decrease in capacity utilization of 4 applications per mortgage employee (similar to that observed from 2012 to 2013) could result in increased purchase mortgage originations, as the relaxed capacity constraint at least partially offsets the higher cost of mortgage credit.

Keywords: Mortgages and credit, capacity constraint, refinancing

DOI: http://dx.doi.org/10.17016/FEDS.2015.017

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FEDS 2015-016
Have Distressed Neighborhoods Recovered? Evidence from the Neighborhood Stabilization Program (PDF)

Jenny Schuetz, Jonathan Spader, and Alvaro Cortes

Abstract: During the 2007-2009 housing crisis, concentrations of foreclosed and vacant properties created severe blight in many cities and neighborhoods. The federal Neighborhood Stabilization Program (NSP) was established to help mitigate distress in hard-hit areas by funding the rehabilitation or demolition of troubled properties. This paper analyzes housing market changes in areas that received investments during the second round of NSP funding, focusing on seven large urban counties. Grantees used NSP to invest in census tracts with high rates of distressed and vacancy properties, and tracts that had previously received other housing subsidies. The median NSP tract received quite sparse investment, relative to the overall housing stock and the initial levels of distress. Analysis of housing market outcomes indicates the recovery has been uneven across counties and neighborhoods. In a few counties, there is some evidence that NSP2 activity is correlated with improved housing outcomes.

Keywords: Foreclosures, Neighborhood revitalization, economic recovery, federal housing policy, housing markets

DOI: http://dx.doi.org/10.17016/FEDS.2015.016

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FEDS 2015-015
Consumers' Attitudes and Their Inflation Expectations (PDF)

Michael Ehrmann, Damjan Pfajfar, and Emiliano Santoro

Abstract: This paper studies consumers' inflation expectations using micro-level data from the Surveys of Consumers conducted by University of Michigan. It shows that beyond the well-established socio-economic factors such as income, age or gender, other characteristics such as the households' financial situation and their purchasing attitudes are important determinants of their forecast accuracy. Respondents with current or expected financial difficulties, pessimistic attitudes about major purchases, or expectations that income will go down in the future have a stronger upward bias in their expectations than other households. However, their bias shrinks by more than that of the average household in response to increasing media reporting about inflation. Equivalent results are found during recessions.

Keywords: Consumer Attitudes, Inflation Expectations, News on Inflation

DOI: http://dx.doi.org/10.17016/FEDS.2015.015

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FEDS 2015-014
Institutions and return predictability in oil-exporting countries (PDF)

Sirio Aramonte, Mohammad Jahan-Parvar, and Justin Shugarman

Abstract: We study whether stock market returns in oil-exporting countries can be predicted by oil price changes, and we investigate the link between predictability and the quality of each country's institutions. Returns are predictable for half the countries we consider, and predictability is stronger when institutional quality is lower. We argue that the relation between predictability and institutional quality reflects the preference of countries with weaker institutions to consume oil windfalls locally rather than smooth out the impact of windfalls by, for instance, investing the proceeds through a sovereign wealth fund.

Keywords: Country studies, Quality of institutions, Return predictability

DOI: http://dx.doi.org/10.17016/FEDS.2015.014

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FEDS 2015-013
A Global Trade Model for the Euro Area (PDF)

Antonello D'Agostino, Michele Modugno, and Chiara Osbat

Abstract: We propose a model for analyzing euro area trade based on the interaction between macroeconomic and trade variables. First, we show that macroeconomic variables are necessary to generate accurate short-term trade forecasts; this result can be explained by the high correlation between trade and macroeconomic variables, with the latter being released in a more timely manner. Second, the model tracks well the dynamics of trade variables conditional on the path of macroeconomic variables during the great recession; this result makes our model a reliable tool for scenario analysis. Third, we quantify the contribution of the most important euro area trading partners (regions) to the aggregate extra euro area developments: we evaluate the impact of an increase of the external demand from a specific region on the extra euro area trade.

Keywords: euro area trade, factor models, nowcast, conditional forecast, scenario analysis

DOI: http://dx.doi.org/10.17016/FEDS.2015.013

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FEDS 2015-012
Inflation Dynamics During the Financial Crisis (PDF)

Simon Gilchrist, Raphael Schoenle, Jae W. Sim, and Egon Zakrajsek

Abstract: Firms with limited internal liquidity significantly increased prices in 2008, while their liquidity unconstrained counterparts slashed prices. Differences in the firms' price-setting behavior were concentrated in sectors likely characterized by customer markets. We develop a model, in which firms face financial frictions, while setting prices in a customer-markets setting. Financial distortions create an incentive for firms to raise prices in response to adverse demand or financial shocks. These results reflect the firms' reaction to preserve internal liquidity and avoid accessing external finance, factors that strengthen the countercyclical behavior of markups and attenuate the response of inflation to fluctuations in output.

Keywords: Deflation, monetary policy, prices, business fluctuations, and cycles

DOI: http://dx.doi.org/10.17016/FEDS.2015.012

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FEDS 2015-011
Why Do We Need Both Liquidity Regulations and a Lender of Last Resort? A Perspective from Federal Reserve Lending during the 2007-09 U.S. Financial Crisis (PDF)

Mark Carlson, Burcu Duygan-Bump, and William Nelson

Abstract: During the 2007-09 financial crisis, there were severe reductions in the liquidity of financial markets, runs on the shadow banking system, and destabilizing defaults and near-defaults of major financial institutions. In response, the Federal Reserve, in its role as lender of last resort (LOLR), injected extraordinary amounts of liquidity. In the aftermath, lawmakers and regulators have taken steps to reduce the likelihood that such lending would be required in the future, including the introduction of liquidity regulations. These changes were motivated in part by the argument that central bank lending entails extremely high costs and should be made unnecessary by liquidity regulations. By contrast, some have argued that the loss of liquidity was the result of market failures, and that central banks can solve such failures by lending, making liquidity regulations unnecessary. In this paper, we argue that LOLR lending and liquidity regulations are complementary tools. Liquidity shortfalls can arise for two very different reasons: First, sound institutions can face runs or a deterioration in the liquidity of markets they depend on for funding. Second, solvency concerns can cause creditors to pull away from troubled institutions. Using examples from the recent crisis, we argue that central bank lending is the best response in the former situation, while orderly resolution (by the institution as it gets through the problem on its own or via a controlled failure) is the best response in the second situation. We also contend that liquidity regulations are a necessary tool in both situations: They help ensure that the authorities will have time to assess the nature of the shortfall and arrange the appropriate response, and they provide an incentive for banks to internalize the externalities associated with any liquidity risks.

Keywords: Lender of last resort, central banks, financial crises, liquidity regulation

DOI: http://dx.doi.org/10.17016/FEDS.2015.011

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FEDS 2015-010
Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations (PDF)

Josh Frost, Lorie Logan, Antoine Martin, Patrick McCabe, Fabio Natalucci, and Julie Remache

Abstract: We review recent changes in monetary policy that have led to development and testing of an overnight reverse repurchase agreement (ON RRP) facility, an innovative tool for implementing monetary policy during the normalization process. Making ON RRPs available to a broad set of investors, including nonbank institutions that are significant lenders in money markets, could complement the use of the interest on excess reserves (IOER) and help control short-term interest rates. We examine some potentially important secondary effects of an ON RRP facility, both positive and negative, including impacts on the structure of short-term funding markets and financial stability. We also investigate design features of an ON RRP facility that could mitigate secondary effects deemed undesirable. Finally, we discuss tradeoffs that policymakers may face in designing an ON RRP facility, as they seek to balance the objectives of setting an effective floor on money market rates during t he normalization process and limiting any adverse secondary effects.

Keywords: Federal Reserve Board and Federal Reserve System, monetary policy, interest on excess reserves, money market funds, overnight RRP, repo, reverse repo

DOI: http://dx.doi.org/10.17016/FEDS.2015.010

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FEDS 2015-009
The Evolution of Retirement Wealth (PDF)

Sebastian Devlin-Foltz, Alice M. Henriques, and John Sabelhaus

Abstract: Is the current mix of tax preferences for employer-sponsored pensions and individual retirement saving in the U.S. delivering the best possible retirement-preparedness across and within generations? Using data from the triennial Survey of Consumer Finances for 1989 through 2013, cohort-based analysis of life-cycle trajectories shows that (1) overall retirement plan participation was relatively stable or even rising through 2007, though participation fell noticeably in the wake of the Great Recession and has remained lower, (2) participation is strongly correlated with income, and the shift in the type of pension coverage occurred within--not just across--income groups, (3) relative to previous cohorts and a counterfactual lifecycle benchmark, the recent decline in retirement plan participation and defined contribution (DC) retirement account balance-to-income ratios is concentrated among younger families and lower-income families.

Keywords: Lifecycle, pension, retirement

DOI: http://dx.doi.org/10.17016/FEDS.2015.009

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FEDS 2015-008
Mode effects in mixed-mode economic surveys: Insights from a randomized experiment (PDF)

Joanne W. Hsu and Brooke H. McFall

Abstract: Web-based surveys have become increasingly common in economic, marketing, and other social science research. However, questions exist about the comparability of data gathered using a web interview and data gathered using more traditional survey modes, particularly for surveys on household economic behavior. Differences between data from different survey modes may arise through two different mechanisms: sample selectivity due to (lack of) web access and mode effects. This study leverages the randomized experimental design of the mixed-mode Cognitive Economics Study to examine mode effects separately from sample selectivity issues. In particular, we examine differences in survey response rates, item nonresponse, and data quality due to mode effects. Our results indicate that, in contrast to mail mode, web mode surveys (1) attain higher response rates among web users, (2) display lower item nonresponse, and (3) elicit more precise values for financial measures. We conclude that, for web-using populations, web mode surveys appear to result in more usable data than mail mode surveys, and these data appear to be of high quality. However, we also find no systematic mode differences in the categorical distributions of responses to items, providing no evidence that pooling data from the two modes is inadvisable.

Keywords: Data quality, household surveys, mode effects, response rates

DOI: http://dx.doi.org/10.17016/FEDS.2015.008

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FEDS 2015-007
The Real Effects of Credit Line Drawdowns (PDF)

Abstract: Do firms use credit line drawdowns to finance investment? Using a unique dataset of 467 COMPUSTAT firms with credit lines, we study the purpose of drawdowns during the 2007-2009 financial crisis. Our data show that credit line drawdowns had already increased in 2007, precisely when disruptions in bank funding markets began to squeeze aggregate liquidity. Consistent with theory, our results confirm that firms use drawdowns to sustain investment after an idiosyncratic liquidity shock. Using an instrumental variable approach based on institutional features of credit line contracts, we find that a one standard deviation increase in credit line drawdown is associated with an increase of 9 percent in average capital expenditures. Low aggregate liquidity amplifies this effect significantly. During the financial crisis, the effect of drawdowns on investment increased to 16 percent. The effect was even larger for smaller and financially constrained firms. We find only limited evidence, mostly for large and investment grade firms, that drawdowns were used to boost (precautionary) cash holdings during the crisis.

Keywords: Credit Lines, Financial Crisis, Investment, Liquidity Management

DOI: http://dx.doi.org/10.17016/FEDS.2015.007

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FEDS 2015-006
The Determinants of Subprime Mortgage Performance Following a Loan Modification (PDF)

Maximilian D. Schmeiser and Matthew B. Gross

Abstract: We examine the evolution of mortgage modification terms obtained by distressed subprime borrowers during the recent housing crisis, and the effect of the various types of modifications on the subsequent loan performance. Using the CoreLogic LoanPerformance dataset that contains detailed loan level information on mortgages, modification terms, second liens, and home values, we estimate a discrete time proportional hazard model with competing risks to examine the determinants of post-modification mortgage outcomes. We find that principal reductions are particularly effective at improving loan outcomes, as high loan-to-value ratios are the single greatest contributor to re-default and foreclosure. However, any modification that reduces total payment and interest (P&I) reduces the likelihood of subsequent re-default and foreclosure. Modifications that involve increasing the loan principal--primarily through capitalized interest and fees--are more likely to fail, even controlling for change in P&I.

Keywords: Mortgage Modification, Subprime, Mortgage Default, Foreclosure, HAMP

DOI: http://dx.doi.org/10.17016/FEDS.2015.006

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FEDS 2015-005
The Macroeconomic Effects of the Federal Reserve's Unconventional Monetary Policies (PDF)

Eric M. Engen, Thomas Laubach, and David Reifschneider

Abstract: After reaching the effective lower bound for the federal funds rate in late 2008, the Federal Reserve turned to two unconventional policy tools--quantitative easing and increasingly explicit and forward-leaning guidance for the future path of the federal funds rate--in order to provide additional monetary policy accommodation. We use survey data from the Blue Chip Economic Indicators to infer changes in private-sector perceptions of the implicit interest rate rule that the Federal Reserve would use following liftoff from the effective lower bound. Using our estimates of the changes over time in private expectations for the implicit policy rule, and estimates of the effects of the Federal Reserve's quantitative easing programs on term premiums derived from other studies, we simulate the FRB/US model to assess the actual economic stimulus provided by unconventional policy since early 2009. Our analysis suggests that the net stimulus to real activity and inflation was limited by the gradual nature of the changes in policy expectations and term premium effects, as well as by a persistent belief on the part of the public that the pace of recovery would be much faster than proved to be the case. Our analysis implies that the peak unemployment effect--subtracting 1-1/4 percentage points from the unemployment rate relative to what would have occurred in the absence of the unconventional policy actions--does not occur until early 2015, while the peak inflation effect--adding 1/2 percentage point to the inflation rate--is not anticipated until early 2016.

Keywords: Monetary policy reaction function, federal funds rate, forward guidance, large-scale asset purchases, zero lower bound

DOI: http://dx.doi.org/10.17016/FEDS.2015.005

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FEDS 2015-004
Which Way to Recovery? Housing Market Outcomes and the Neighborhood Stabilization Program (PDF)

Jenny Schuetz, Jonathan Spader, Jennifer Lewis Buell, Kimberly Burnett, Larry Buron, Alvaro Cortes, Michael DiDomenico, Anna Jefferson, Christian Redfearn, and Stephen Whitlow

Abstract: To help communities recover from the foreclosure crisis, Congress enacted a set of policies known as the Neighborhood Stabilization Program (NSP). NSP's objective was to mitigate the impact of foreclosures on neighboring properties, through reducing the stock of distressed properties and removing sources of visual blight. This paper presents evidence on production outcomes achieved through the second round of NSP funding (NSP2), and discusses the housing market context under which the program operated from 2010 to 2013. Two key findings emerge. First, local grantees undertook quite different approaches to NSP2. The type and scale of activity, expenditures per property and spatial concentration vary widely across grantees. Second, census tracts that received NSP2 investment had poor economic and housing market conditions prior to the program, but generally saw improved housing markets during the program's implementation period, as did non-NSP2 tracts in the same counties. Based on these findings, we outline topics and suggested approaches for additional research.

Keywords: Urban redevelopment, mortgages, housing markets, federal housing policy, fiscal federalism

DOI: http://dx.doi.org/10.17016/FEDS.2015.004

Accessible materials (.zip)

FEDS 2015-003
Tradability of Output, Business Cycles, and Asset Prices (PDF)

Abstract: I examine the effect of a firm's tradability, the proportion of output that is exported abroad, on its stock returns. There are three novel empirical findings: (1) firms with higher tradability have more cyclical asset returns; (2) firms with higher tradability have more cyclical earnings growth; (3) returns of a portfolio long on firms with the highest tradability and short on firms with the lowest tradability can predict the real exchange rate. The empirical patterns are consistent with the relative price adjustment of tradable and non-tradable goods to business cycles driven by endowment shocks.

Keywords: Asset returns, cyclicality, tradability

DOI: http://dx.doi.org/10.17016/FEDS.2015.003

Accessible materials (.zip)

FEDS 2015-002
Bayesian Estimation of Time-Changed Default Intensity Models (PDF)

Abstract: We estimate a reduced-form model of credit risk that incorporates stochastic volatility in default intensity via stochastic time-change. Our Bayesian MCMC estimation method overcomes nonlinearity in the measurement equation and state-dependent volatility in the state equation. We implement on firm-level time-series of CDS spreads, and find strong in-sample evidence of stochastic volatility in this market. Relative to the widely-used CIR model for the default intensity, we find that stochastic time-change offers modest benefit in fitting the cross-section of CDS spreads at each point in time, but very large improvements in fitting the time-series, i.e., in bringing agreement between the moments of the default intensity and the model-implied moments. Finally, we obtain model-implied out-of-sample density forecasts via auxiliary particle filter, and find that the time-changed model strongly outperforms the baseline CIR model.

Keywords: Bayesian estimation, CDS, CIR process, credit derivatives, MCMC, particle filter, stochastic time change

DOI: http://dx.doi.org/10.17016/FEDS.2015.002

Accessible materials (.zip)

FEDS 2015-001
Loan Sales and Bank Liquidity Risk Management: Evidence from a U.S. Credit Register (PDF)

Rustom M. Irani and Ralf R. Meisenzahl

Abstract: We examine the impact of banks' liquidity risk management on secondary loan sales. We track the dynamics of bank loan share ownership in the secondary market using data from the Shared National Credit Program, a credit register of syndicated bank loans administered by U.S. regulators. We analyze the 2007-2009 financial crisis as a market-wide liquidity shock and control for loan demand using a loan-year fixed effects approach. We find that banks with greater reliance on wholesale funding at the onset of the crisis were more likely to exit loan syndicates during the crisis. Our analysis identifies the importance of bank liquidity risk management as a motivation for loan sales, in addition to the credit risk transfer motive emphasized in prior literature.

Keywords: Bank risk management, financial crisis, loan sales, wholesale funding

DOI: http://dx.doi.org/10.17016/FEDS.2015.001

Accessible materials (.zip)

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Last Update: January 09, 2020