FEDS 2018-006
Bank Market Power and the Risk Channel of Monetary Policy (PDF)

Elena Afanasyeva and Jochen Güntner

Abstract: This paper investigates the risk channel of monetary policy through banks' lending standards. We modify the classic costly state verification (CSV) problem by introducing a risk-neutral monopolistic bank, which maximizes profits subject to borrower participation. While the bank can diversify idiosyncratic default risk, it bears the aggregate risk. We show that, in partial equilibrium, the bank prefers a higher leverage ratio of borrowers, when the profitability of lending increases, e.g. after a monetary expansion. This risk channel persists when we embed our contract in a standard New Keynesian DSGE model. Using a factor-augmented vector autoregression (FAVAR) approach, we find that the model-implied impulse responses to a monetary policy shock replicate their empirical counterparts.

Keywords: Costly state verification, Credit supply, Lending standards, Monetary policy, Risk Channel

DOI: https://doi.org/10.17016/FEDS.2018.006

FEDS 2018-005
Using Payroll Processor Microdata to Measure Aggregate Labor Market Activity (PDF)

Tomaz Cajner, Leland Crane, Ryan Decker, Adrian Hamins-Puertolas, Christopher Kurz, and Tyler Radler

Abstract: We show that high-frequency private payroll microdata can help forecast labor market conditions. Payroll employment is perhaps the most reliable real-time indicator of the business cycle and is therefore closely followed by policymakers, academia, and financial markets. Government statistical agencies have long served as the primary suppliers of information on the labor market and will continue to do so for the foreseeable future. That said, sources of "big data" are becoming increasingly available through collaborations with private businesses engaged in commercial activities that record economic activity on a granular, frequent, and timely basis. One such data source is generated by the firm ADP, which processes payrolls for about one fifth of the U.S. private sector workforce. We evaluate the efficacy of these data to create new statistics that complement existing measures. In particular, we develop a set of weekly aggregate employment indexes from 2000 to 2017 , which allows us to measure employment at a higher frequency than is currently possible. The extensive coverage of the ADP data—similar in terms of private employment to the BLS CES sample—implies potentially high information value of these data, and our results confirm this conjecture. Indeed, the timeliness and frequency of the ADP payroll microdata substantially improves forecast accuracy for both current-month employment and revisions to the BLS CES data.

Keywords: Consumption, saving, production, employment, and investment, Labor supply and demand, forecasting

DOI: https://doi.org/10.17016/FEDS.2018.005

FEDS 2018-004
Quantitative Easing and the "New Normal" in Monetary Policy (PDF)

Abstract: Interest rates may remain low and fall to their effective lower bound (ELB) often. As a result, quantitative easing (QE), in which central banks expand their balance sheet to lower long-term interest rates, may complement policy approaches focused on adjustments in short-term interest rates. Simulation results using a large-scale model (FRB/US) suggest that QE does not improve economic performance if the steady-state interest rate is high, confirming that such policies were not advantageous from 1960 to 2007. However, QE can offset a significant portion of the adverse effects of the ELB when the equilibrium real interest rate is low. These improvements in economic performance exceed those associated with moderate increases in the inflation target. Active QE is primarily required when nominal interest rates are near the ELB, pointing to benefits within the model from QE as a secondary tool while relying on short-term interest rates as the primary tool.

Keywords: Interest rates, Macroeconomic models, Monetary policy

DOI: https://doi.org/10.17016/FEDS.2018.004

FEDS 2018-003
Entrepreneurship and State Taxation (PDF)

E. Mark Curtis and Ryan A. Decker

Abstract: Entrepreneurship plays a vital role in the economy, yet there exists little well-identified research into the effects of taxes on startup activity. Using recently developed county-level data on startups, we examine the effect of states' corporate, personal and sales tax rates on new firm activity and test for cross-border spillovers in response to these policies. We find that new firm employment is negatively--and disproportionately--affected by corporate tax rates. We find little evidence of an effect of personal and sales taxes on entrepreneurial outcomes. Our results are robust to changes in the tax base and other state-level policies.

Keywords: Labor supply and demand, Taxation, entrepreneurship, firm dynamics

DOI: https://doi.org/10.17016/FEDS.2018.003

FEDS 2018-002
Fiscal Implications of the Federal Reserve's Balance Sheet Normalization (PDF)

Michele Cavallo, Marco Del Negro, W. Scott Frame, Jamie Grasing, Benjamin A. Malin, and Carlo Rosa

Abstract: The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to pre-crisis levels has little effect on the likelihood of net losses.

Keywords: Central bank balance sheets, Monetary policy, Remittances

DOI: https://doi.org/10.17016/FEDS.2018.002

FEDS 2018-001
Inequality in 3-D: Income, Consumption, and Wealth (PDF)

Jonathan Fisher, David Johnson, Timothy Smeeding, and Jeffrey Thompson

Abstract: We do not need to and should not have to choose amongst income, consumption, or wealth as the superior measure of well-being. All three individually and jointly determine well-being. We are the first to study inequality in three conjoint dimensions for the same households, using income, consumption, and wealth from the 1989-2016 Surveys of Consumer Finances (SCF). The paper focuses on two questions. What does inequality in two and three dimensions look like? Has inequality in multiple dimensions increased by less, by more, or by about the same as inequality in any one dimension? We find an increase in inequality in two dimensions and in three dimensions, with a faster increase in multi-dimensional inequality than in one-dimensional inequality. Viewing inequality through one dimension greatly understates the level and the growth in inequality in two and three dimensions. The U.S. is becoming more economically unequal than is generally understood.

Keywords: Consumption, Inequality, Wealth

DOI: https://doi.org/10.17016/FEDS.2018.001

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Last Update: January 02, 2018