skip to main navigation skip to secondary navigation skip to content
Board of Governors of the Federal Reserve System
skip to content

Finance and Economics Discussion Series

Other Years Available:
 feds  2017-019
February 2017

Declining Dynamism, Allocative Efficiency, and the Productivity Slowdown (PDF)

Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda

Abstract: A large literature documents declining measures of business dynamism including high-growth young firm activity and job reallocation. A distinct literature describes a slowdown in the pace of aggregate labor productivity growth. We relate these patterns by studying changes in productivity growth from the late 1990s to the mid 2000s using firm-level data. We find that diminished allocative efficiency gains can account for the productivity slowdown in a manner that interacts with the within-firm productivity growth distribution. The evidence suggests that the decline in dynamism is reason for concern and sheds light on debates about the causes of slowing productivity growth.

Keywords: Job reallocation, Labor supply and demand, Productivity


 feds  2017-018
February 2017

Macroeconomic Forecasting in Times of Crises (PDF)

Pablo Guerrón-Quintana and Molin Zhong

Abstract: We propose a parsimonious semiparametric method for macroeconomic forecasting during episodes of sudden changes. Based on the notion of clustering and similarity, we partition the time series into blocks, search for the closest blocks to the most recent block of observations, and with the matched blocks we proceed to forecast. One possibility is to compare local means across blocks, which captures the idea of matching directional movements of a series. We show that our approach does particularly well during the Great Recession and for variables such as inflation, unemployment, and real personal income. When supplemented with information from housing prices, our method consistently outperforms parametric linear, nonlinear, univariate, and multivariate alternatives for the period 1990 - 2015.

Keywords: Forecasting, Great Recession, Nearest neighbor, Semiparametric methods


 feds  2017-017
February 2017

Lining Up: Survey and Administrative Data Estimates of Wealth Concentration (PDF)

Arthur B. Kennickell

Abstract: The Survey of Consumer Finances (SCF) has a dual-frame sample design that supplements a standard area-probability frame with a sample of observations drawn from statistical records derived from tax returns. The tax-based frame is stratified on the basis of a "wealth index" constructed largely from observed income flows, with the intent of heavily oversampling wealthy households. Although the SCF is not specifically designed to estimate wealth concentration, the design arguably provides sufficient support to enable such analysis with a reasonable level of credibility. Similar estimates may also be made by using tax-based data directly, as in [1], by using a construct very close to a key part of the SCF wealth index. Such an approach has appeal as a way of tapping a much larger set of information to improve SCF estimates. Not surprisingly, there are differences in the two approaches, largely as a result of conceptual differences or complications in the survey imp leme ntation. This paper focuses on the top 1 percent of the wealth distribution, the group most intensively covered by the SCF list sample and it explores the stability of the relationship between the patterns of concentration in the survey data and parallel patterns in tax-based estimates and considers how those patterns differ across survey participants, the full sample and the entire survey frame. In addition, the paper makes as series of recommendation for further research on the technical support of the survey.

Keywords: Nonresponse, Oversampling, Sampling, Skewed distributions, Wealth measurement


 feds  2017-016
February 2017

ICT Asset Prices: Marshaling Evidence into New Measures (PDF)

David Byrne and Carol Corrado

Abstract: This paper is a companion to our recent paper, "ICT Prices and ICT Services: What do they tell us about Productivity and Technology?" It provides the sources and methods used to construct national accounts-style price deflators for the major components of ICT investment--communications equipment, computer equipment, and software--that were presented and analyzed in that paper. The ICT equipment measures described herein were also used in Byrne, Fernald, and Reinsdorf (2016).

Keywords: ICT asset prices, Information and communication technology (ICT), Prices


Abstract: This paper reassesses the link between ICT prices, technology, and productivity. To understand how the ICT sector could come to the rescue of a whole economy, we introduce a simple model that sets out the steady-state contribution of the sector to the growth in U.S. labor productivity. The model extends Oulton (2012) to include ICT services (e.g., cloud computing) which has implications for the relationship between prices for ICT services and prices for the capital stocks (i.e., ICT assets) used to supply them. ICT asset prices are then put under a microscope, and offcial prices are found to substantially understate ICT price declines. And because ICT use continues to diffuse through the economy increasingly via cloud and related services which are not fully accounted for in the standard narrative on ICT's contribution to economic growth the contribution of ICT to growth in output per hour going forward is calibrated to be substantially larger than thought in the past.

Keywords: Productivity, computer software and internet services, high-performance computing, information and communications technology (ICT), prices, technology


Abstract: This paper proposes a novel link between the propagation of shocks within production networks and asset prices. It develops a dynamic network model in which the propagation of firm cash-flow shocks via inter-firm relationships affects the economy’s equilibrium asset prices. When calibrated to match key features of customer–supplier networks in the United States, the model generates long-run risks, high and volatile risk premia, and a low and stable risk-free rate. Consistent with data from firms in manufacturing and service industries, the model predicts that central firms in the network command lower risk premiums than peripheral firms, and that firm-level return volatilities exhibit a high degree of co-movement.

Keywords: Equilibrium asset prices, Inter-firm relationships, Networks, Shock propagation


Abstract: Exploiting the heterogeneity in legal constraints on local bank employees’ mobility, I show that access to local information influences banks’ modes of expansion. Banks entering a new market typically establish new branches directly when interbank labor mobility is less restrictive but acquire incumbent branches otherwise. The treatment effect is strengthened when information asymmetries between local and entrants are severe. Furthermore, I find a surge in the total amount of local small business and mortgage loans granted, a higher mortgage approval rate, and a reduction of mortgage rates by surrounding incumbent branches, precisely around the period of entrants establishing new branches, which indicate intensified competition among banks.

Keywords: Credit market development, Labor mobility, Local information


Abstract: This paper studies whether knowledge protection affects shareholder value and firms’ investment in knowledge assets using the staggered adoptions and rejections of the inevitable disclosure doctrine (IDD) by U.S. state courts as exogenous changes in the level of knowledge protection. We find positive (negative) abnormal stock returns around the IDD adoption (rejection) day for firms headquartered in the state and uncover a positive IDD treatment effect on firms’ investment in knowledge assets. Moreover, the effects on stock returns and knowledge assets investment are stronger in more knowledge-oriented industries and firms. Finally, enhancing knowledge protection does not discourage local entrepreneurial activity.

Keywords: Inevitable Disclosure Doctrine, Investment in Knowledge Assets, Knowledge Protection, Shareholder Value


 feds  2017-011
February 2017

The (Unintended?) Consequences of the Largest Liquidity Injection Ever (PDF)

Matteo Crosignani, Miguel Faria-e-Castro, and Luís Fonseca

Abstract: We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank's three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening.

Keywords: Lender of Last Resort, Sovereign Debt, Unconventional Monetary Policy


Abstract: Proponents of minimum wage legislation point to its potential to raise earnings and lift families out of poverty, while opponents argue that disemployment effects lead to net welfare losses. But these arguments typically ignore the possibility that minimum wage policy has spillover effects on other aspects of households’ financial circumstances. This paper examines how state-level minimum wage changes affect the decisions of lenders and low-income borrowers. Using data derived from direct mailings of credit offers, debt recorded in credit reports, and survey-reported usage of alternative credit products, we broadly find that when minimum wages rise, access to credit expands for lower-income households, who in turn, use more traditional credit and less high-cost alternatives. Specifically, for each $1 increase in the minimum wage, lower-income households receive 7 percent more credit card offers, with higher limits and improved terms. Further, there is a drop in usage o f high-cost borrowing: payday borrowing falls 40 percent. Finally, we find that borrowers are also better able to manage their debt: delinquency rates fall by 5 percent. Overall, our results suggest that minimum wage policy has positive spillover effects by relaxing borrowing constraints among lower income households.

Keywords: consumer debt, credit constraints, credit supply, delinquency, minimum wages, payday loans


 feds  2017-009
February 2017

Capital Misallocation and Secular Stagnation (PDF)

Andrea Caggese and Ander Perez-Orive

Abstract: The widespread emergence of intangible technologies in recent decades may have significantly hurt output growth--even when these technologies replaced considerably less productive tangible technologies--because of structurally low interest rates caused by demographic forces. This insight is obtained in a model in which intangible capital cannot attract external finance, firms are credit constrained, and there is substantial dispersion in productivity. In a tangibles-intense economy with highly leveraged firms, low rates enable more borrowing and faster debt repayment, reduce misallocation, and increase aggregate output. An increase in the share of intangible capital in production reduces the borrowing capacity and increases the cash holdings of the corporate sector, which switches from being a net borrower to a net saver. In this intangibles-intense economy, the ability of firms to purchase intangible capital using retained earnings is impaired by low interest rates, be cause low rates increase the price of capital and slow down the accumulation of corporate savings.

Keywords: Borrowing Constraints, Capital Reallocation, Intangible Capital, Secular Stagnation


Abstract: While a rapidly growing body of research underscores the influence of social capital on financial decisions and economic developments, objective data-based measurements of social capital are lacking. We introduce average credit scores as an indicator of a community's social capital and present evidence that this measure is consistent with, but richer and more robust than, those used in the existing literature, such as electoral participation, blood donations, and survey-based measures. Merging unique proprietary credit score data with two nationwide representative household surveys, we show that households residing in communities with higher social capital are more likely to invest in stocks, even after controlling for a rich set of socioeconomic, preferential, neighborhood, and demographic characteristics. Notably, such a relationship is robustly observed only when social capital is measured using community average credit scores. Consistent with the notion that social capital and trust promote stock investment, we find the following: first, the association between average credit score and stock ownership is more pronounced among the lower educated; second, social capital levels of the county where one grew up appear to have a lasting influence on future stock investment; and third, investors who did not own stocks before have a greater chance of entering the stock market a few years after they relocate to higher-score communities.

Keywords: Credit scores, Social Capital, Stock market participation, Trust


Abstract: How should regulators design effective emergency lending facilities to mitigate stigma during a financial crisis? I explore this question using data from an unexpected disclosure of partial lists of banks that secretly borrowed from the lender of last resort during the Great Depression. I find evidence of stigma in that depositors withdrew more deposits from banks included on the lists in comparison with banks left off the lists. However, stigma dissipated for banks that were revealed earlier after subsequent banks were revealed. Overall, the results suggest that an emergency lending facility that never reveals bank identities would mitigate stigma.

Keywords: Great Depression, central bank, financial crisis, stigma


 feds  2017-006
January 2017

Heaping at Round Numbers on Financial Questions: The Role of Satisficing (PDF)

Michael Gideon, Brooke Helppie-McFall, and Joanne W. Hsu

Abstract: Survey responses to quantitative financial questions frequently display strong patterns of heaping at round numbers. This paper uses two studies to examine variation in rounding across questions and by individual characteristics. Rounding was more common for respondents low in ability, for respondents low in motivation, and for more difficult questions, all consistent with theories of satisficing. Questions that require more difficult information retrieval and integration of information exhibit more heaping. The use of records, which lowers task difficulty, reduces rounding as well. Higher episodic memory is associated with less rounding, and standard measures of motivation are negatively associated with rounding. These relationships, along with the fact that longer response latencies are associated with less rounding, all support the idea that rounding is a manifestation of satisficing on open-ended financial questions. Rounding patterns also appear remarkably similar across the two studies, despite being fielded in different modes and employing different question order and wording.

Keywords: Consumer surveys, Data collection and estimation, Satisficing


 feds  2017-005
January 2017

How Fast are Semiconductor Prices Falling? (PDF)

David M. Byrne, Stephen D. Oliner, and Daniel E. Sichel

Abstract: The Producer Price Index (PPI) for the United States suggests that semiconductor prices have barely been falling in recent years, a dramatic contrast to the rapid declines reported from the mid-1980s to the early 2000s. This slowdown in the rate of decline is puzzling in light of evidence that the performance of microprocessor units (MPUs) has continued to improve at a rapid pace. Over the course of the 2000s, the MPU prices posted by Intel, the dominant producer of MPUs, became much stickier over the chips’ life cycle. As a result of this change, we argue that the matched-model methodology used in the PPI for MPUs likely started to be biased after the early 2000s and that hedonic indexes can provide a more accurate measure of price change since then. MPU prices fell rapidly through 2004 on every price measure we present, with the PPI declining at an even quicker pace than the hedonic indexes. However, from 2004 to 2009, our preferred hedonic index fell faster than the PPI, and from 2009 to 2013 the gap widened further, with our preferred index falling at an average annual rate of 42 percent, while the PPI declined at only a 6 percent rate. Given that MPUs currently represent about half of U.S. shipments of semiconductors, this difference has important implications for gauging the rate of innovation in the semiconductor sector.

Keywords: measurement, hedonic price index, quality adjustment, technological change, microprocessor


Abstract: Factor models are widely used in summarizing large datasets with few underlying latent factors and in building time series forecasting models for economic variables. In these models, the reduction of the predictors and the modeling and forecasting of the response y are carried out in two separate and independent phases. We introduce a potentially more attractive alternative, Sufficient Dimension Reduction (SDR), that summarizes x as it relates to y, so that all the information in the conditional distribution of y|x is preserved. We study the relationship between SDR and popular estimation methods, such as ordinary least squares (OLS), dynamic factor models (DFM), partial least squares (PLS) and RIDGE regression, and establish the connection and fundamental differences between the DFM and SDR frameworks. We show that SDR significantly reduces the dimension of widely used macroeconomic series data with one or two sufficient reductions delivering similar forecasting performance to that of competing methods in macro-forecasting.

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


Abstract: This paper models the important role that repurchase agreements (repos) play in bond market intermediation. Not only do repos allow dealers to finance their activities, but they also increase dealers' ability to satisfy levered client demands without having to adjust their holdings of risky assets. In effect, the ability to borrow specific assets for delivery allows dealers to source large quantity of assets without taking ownership of them. Larger levered client orders imply larger asset borrowing demands, thus increasing the borrowing cost for the asset (i.e., repo specialness). Dealers pass on the higher intermediation cost to their clients in the form of higher bid-ask spreads. Although this method of intermediation is optimal, the use of repos significantly increases dealers' balance sheets. Limiting one dealer's balance sheet leverage, leaving all else equal, reduces the affected dealer's market making abilities and increases his bid-ask spreads. The equilibrium effect of limiting all dealers' balance sheet leverage on bid-ask spreads is unclear, and depends on the intensity of clients' demand and securities lenders' sensitivity to repo specialness.

Keywords: Market liquidity, Financial services and intermediation, Repo, Specialness, U.S. Treasury market


Abstract: Tax return data are increasingly the standard for tracking income statistics in the United States. However, these data have traditionally been limited by their inability to capture non-filers and to identify members of separate tax units living in the same household. We overcome these obstacles and create household records directly in the tax data using mailing address information included on tax forms. We then present the first set of tax-based household income and inequality measures for the entire income distribution. When comparing household income inequality results in the tax data to those using the March CPS, we confirm previous findings that the March CPS understates the inequality of household income. However, we also find that the previous approach of using tax units in the IRS data to proxy for households leads to an overstatement of household income inequality. Finally, using households in the IRS tax records, we illustrate how focusing on tax units rather than households alters the observed distribution of tax programs such as the Earned Income Tax Credit.

Keywords: EITC, Household Income, IRS Data, Income Inequality, Tax Unit Income


Abstract: We investigate how the use of a currency transmits monetary policy shocks in the global banking system. We use newly available unique data on the bilateral cross-border lending flows of 27 BIS-reporting lending banking systems to over 50 borrowing countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, this currency dimension of the bank lending channel works similarly across the three currencies suggesting that the cross-border bank lending channel of liquidity shock transmission may not be unique to lending in USD.

Keywords: Bank lending channel, Cross-border bank lending, Currency denomination, Monetary transmission



FEDS Ordering Information

Search Working Papers

Skip stay connected section
Last update: February 21, 2017