http://www.federalreserve.gov/pubs/feds/feeds.xml Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgment) should be cleared with the author(s) to protect the tentative character of these papers. 2012-05-04T11:45:53-04:00 en Board of Governors of the Federal Reserve System http://www.federalreserve.gov/pubs/feds/2012/201233/201233abs.html Alex Kaufman. This paper uses a novel instrumental variables approach to quantify the effect that GSE purchase eligibility had on equilibrium mortgage loan terms in the period from 2003 to 2007. The technique is designed to eliminate sources of bias that may have affected previous studies. GSE eligibility appears to have lowered interest rates by about 10 basis points, encouraged fixed-rate loans over ARMs, and discouraged low-documentation and brokered loans. There is no measurable effect on loan performance or on the prevalence of certain types of "exotic" mortgages. The overall picture suggests that GSE purchases had only a modest impact on loan terms during this period. 2012-05-11T07:43:28-04:00 en The Influence of Fannie and Freddie on Mortgage Loan Terms 2012-05-11T07:43:28-04:00 Government-sponsored enterprises mortgages 2012-33: The Influence of Fannie and Freddie on Mortgage Loan Terms http://www.federalreserve.gov/pubs/feds/2012/201233/201233pap.pdf PDF version Alex Kaufman Alex Kaufman Board of Governors of the Federal Reserve System Alex Kaufman 2012-05-11T07:43:28-04:00 2012-33 G21 G28 H81 N22 http://www.federalreserve.gov/pubs/feds/2012/201232/201232abs.html Marcelle Chauvet and Zeynep Senyuz. In this paper, we propose an econometric model of the joint dynamic relationship between the yield curve and the economy to predict business cycles. We examine the predictive value of the yield curve to forecast future economic growth as well as the beginning and end of economic recessions at the monthly frequency. The proposed nonlinear multivariate dynamic factor model takes into account not only the popular term spread but also information extracted from the level and curvature of the yield curve and from macroeconomic variables. The nonlinear model is used to investigate the interrelationship between the phases of the bond market and of the business cycle. The results indicate a strong interrelation between these two sectors. The proposed factor model of the yield curve exhibits substantial incremental predictive value compared to several alternative specifications. This result holds in-sample and out-of-sample, using revised or real time unrevised data. 2012-05-10T15:50:13-04:00 en A Dynamic Factor Model of the Yield Curve as a Predictor of the Economy 2012-05-10T15:50:13-04:00 Forecasting business cycles dynamic factor models Markov switching 2012-32: A Dynamic Factor Model of the Yield Curve as a Predictor of the Economy http://www.federalreserve.gov/pubs/feds/2012/201232/201232pap.pdf PDF version Marcelle Chauvet Marcelle Chauvet University of California, Riverside Zeynep Senyuz Zeynep Senyuz Board of Governors of the Federal Reserve System Marcelle Chauvet and Zeynep Senyuz 2012-05-10T15:50:13-04:00 2012-32 C32 E32 E44 http://www.federalreserve.gov/pubs/feds/2012/201231/201231abs.html Jonathan D. Rose. This paper studies how building and loan associations (B&Ls) slowly unwound their obligations following a set of financial shocks during the Great Depression, with a special focus on a group of particularly troubled B&Ls in Newark, NJ. Investors in B&Ls disagreed over whether to realize losses on foreclosed real estate holdings, and those investors favoring liquidation were unable to force action after legal developments nullified statutory withdrawal privileges. In the medium run, a market-based resolution mechanism developed in the form of a secondary market for B&L liabilities. Liability holders barred from withdrawal incurred large losses while liquidating their investments on this market. At the same time, B&Ls used the market to avoid realizing some losses by exchanging foreclosed real estate for their second-hand share liabilities. More formal resolution ultimately took place from 1938 to 1943, first consisting heavily of closures, and then of reorganizations. Reorganizations were spurred by a large scale federal intervention arranging for the creation of bad banks, liquidity injections, and liability insurance. 2012-05-10T12:40:58-04:00 en The Prolonged Resolution of Troubled Real Estate Lenders During the 1930s 2012-05-10T12:40:58-04:00 real estate lending building and loan associations financial institution resolution Great Depression 2012-31: The Prolonged Resolution of Troubled Real Estate Lenders During the 1930s http://www.federalreserve.gov/pubs/feds/2012/201231/201231pap.pdf PDF version Jonathan Rose Jonathan Rose Board of Governors of the Federal Reserve System Jonathan D. Rose 2012-05-10T12:40:58-04:00 2012-31 G21 N22 http://www.federalreserve.gov/pubs/feds/2012/201230/201230abs.html Jeremy J. Nalewaik and Eugenio P. Pinto. This paper studies the behavior of producers of capital goods, examining how they set shipments in response to fluctuations in new orders. The paper establishes a stylized fact: the response of shipments to orders is more pronounced when the level of new orders is low relative to the level of shipments, usually after orders plunge in recessions. This cyclical change in firm behavior is quantitatively important, accounting for a large portion of the steep decline in equipment investment in the 2001 and 2007--9 recessions. We examine economic interpretations of this stylized fact using a model where firms smooth production with a target delivery lag for new orders. Heightened persistence in orders growth may explain part of the greater responsiveness of shipments to orders, as may increases in firms' target buffer stocks of unfilled orders relative to shipments. 2012-05-08T16:15:15-04:00 en The Response of Capital Goods Shipments to Demand over the Business Cycle 2012-05-08T16:15:15-04:00 Orders shipments business investment business cycles threshold cointegration models Markov switching models 2012-30: The Response of Capital Goods Shipments to Demand over the Business Cycle http://www.federalreserve.gov/pubs/feds/2012/201230/201230pap.pdf PDF version Jeremy Nalewaik Jeremy Nalewaik Board of Governors of the Federal Reserve System Eugenio Pinto Eugenio Pinto Board of Governors of the Federal Reserve System Jeremy J. Nalewaik and Eugenio P. Pinto 2012-05-08T16:15:15-04:00 2012-30 E22 E23 E32 http://www.federalreserve.gov/pubs/feds/2012/201229/201229abs.html Edward Nelson. Friedman and Schwartz (1982) and Goodhart (1982) report a zero correlation between money growth and output growth in U.K. historical data. This finding is puzzling, as there is wide agreement that changes in monetary policy are frequently nonneutral in the short run and that the U.K. experience, in particular, is replete with instances of real effects of monetary policy actions. This paper proposes a resolution to the puzzle. An analysis conducted on subperiods shows that a positive money growth/output growth correlation is indeed recoverable from U.K. historical data. Strike activity in the 1970s and shifts in the terms of trade during the interwar period are the two factors primarily responsible for obscuring the positive correlation between money and output in the United Kingdom. 2012-05-08T11:28:40-04:00 en The Correlation between Money and Output in the United Kingdom: Resolution of a Puzzle 2012-05-08T11:28:40-04:00 Money/output correlation monetary aggregates U.K. interwar depression 2012-29: The Correlation between Money and Output in the United Kingdom: Resolution of a Puzzle http://www.federalreserve.gov/pubs/feds/2012/201229/201229pap.pdf PDF version Edward Nelson Edward Nelson Federal Reserve Board Edward Nelson 2012-05-08T11:28:40-04:00 2012-29 E51 E52 E58 http://www.federalreserve.gov/pubs/feds/2012/201228/201228abs.html William B. Peterman. This paper considers the impact on optimal tax policy of including endogenously determined retirement in a life cycle model. Allowing individuals to determine when they retire causes the optimal tax on capital to increase by 75% because of two implicit changes in the aggregate labor supply elasticity. First, including endogenous retirement causes an increase in the overall aggregate labor supply elasticity since agents can change their labor supply on both the intensive and extensive margins. In response, the government limits the distortions from the tax policy by lowering the tax on labor and increases the tax on capital. Second, given that the choice to retire is more relevant for older individuals, endogenous retirement disproportionately increases older agent's elasticity compared to younger individuals. Ideally, the government would decrease the relative labor income tax on individuals when they are older and supply labor more elastically. However, in the absence of age-dependent taxes, the government mimics such a tax policy by further increasing the tax on capital. I find that the welfare lost from not accounting for endogenous retirement when solving for the optimal tax policy is equivalent to approximately one percent of lifetime consumption. 2012-05-08T11:28:35-04:00 en An Extensive Look at Taxes: How does endogenous retirement affect optimal taxation? 2012-05-08T11:28:35-04:00 Optimal taxation capital taxation endogenous retirement 2012-28: An Extensive Look at Taxes: How does endogenous retirement affect optimal taxation? http://www.federalreserve.gov/pubs/feds/2012/201228/201228pap.pdf PDF version William Peterman William Peterman Board of Governors of the Federal Reserve System William B. Peterman 2012-05-08T11:28:35-04:00 2012-28 E24 E62 H21 http://www.federalreserve.gov/pubs/feds/2012/201227/201227abs.html Jose M. Berrospide, Ralf R. Meisenzahl, and Briana D. Sullivan. What determined the corporate use of credit lines in the recent financial crisis? To address this question we hand-collect data on credit lines and interest rate hedging for a random sample of 600 COMPUSTAT firms. We document that drawdowns of credit lines had already increased in 2007, earlier than what previous work has found. The surge in drawdowns occurred precisely when disruptions in bank funding markets began. In addition, we distinguish unused and available portions of credit lines, which we then use to disentangle credit supply and credit demand effects. On the supply side, we find covenant-induced reduction of credit supply to be small, and almost no evidence of credit line cancellations. On the demand side, our results confirm that while smaller and lower-rated firms use their credit lines more intensively in general, larger and higher-rated firms were more likely to draw on their credit lines during the crisis. We find that firms that use interest rate swaps to hedge the interest rate risk associated with their credit lines draw down significantly more from those lines than non-hedged firms. 2012-05-08T11:28:27-04:00 en Credit Line Use and Availability in the Financial Crisis: The Importance of Hedging 2012-05-08T11:28:27-04:00 Credit lines financial crisis liquidity management hedging 2012-27: Credit Line Use and Availability in the Financial Crisis: The Importance of Hedging http://www.federalreserve.gov/pubs/feds/2012/201227/201227pap.pdf PDF version Jose Berrospide Jose Berrospide Board of Governors of the Federal Reserve System Ralf Meisenzahl Ralf Meisenzahl Board of Governors of the Federal Reserve System Briana Sullivan Briana Sullivan University of Florida, Gainesville Jose M. Berrospide, Ralf R. Meisenzahl, and Briana D. Sullivan 2012-05-08T11:28:27-04:00 2012-27 G31 G32 http://www.federalreserve.gov/pubs/feds/2012/201226/201226abs.html William B. English, Skander J. Van den Heuvel, and Egon Zakrajsek. Because they engage in maturity transformation, a steepening of the yield curve should, all else equal, boost bank profitability. We re-examine this conventional wisdom by estimating the reaction of bank intraday stock returns to exogenous fluctuations in interest rates induced by monetary policy announcements. We construct a new measure of the mismatch between the repricing time or maturity of bank assets and liabilities and analyze how the reaction of stock returns varies with the size of this mismatch and other bank characteristics, including the usage of interest rate derivatives. Our results indicate that bank stock prices decline substantially following an unanticipated increase in the level of interest rates or a steepening of the yield curve. A large maturity gap, however, significantly attenuates the negative reaction of returns to a slope surprise, a result consistent with the role of banks as maturity transformers. Share prices of banks that rely heavily on core deposits decline more in response to policy-induced interest rate surprises, a reaction that primarily reflects ensuing deposit disintermediation. Results using income and balance sheet data highlight the importance of adjustments in quantities--as well as interest margins--for understanding the reaction of bank equity values to interest rate surprises. 2012-05-08T11:28:10-04:00 en Interest Rate Risk and Bank Equity Valuations 2012-05-08T11:28:10-04:00 FOMC announcements interest rate surprises maturity transformation bank profitability 2012-26: Interest Rate Risk and Bank Equity Valuations http://www.federalreserve.gov/pubs/feds/2012/201226/201226pap.pdf PDF version William English William English Board of Governors of the Federal Reserve System Skander Van den Heuvel Skander Van den Heuvel Board of Governors of the Federal Reserve System Egon Zakrajsek Egon Zakrajsek Board of Governors of the Federal Reserve System William B. English, Skander J. Van den Heuvel, and Egon Zakrajsek 2012-05-08T11:28:10-04:00 2012-26 G21 G32 http://www.federalreserve.gov/pubs/feds/2012/201225/201225abs.html Valentin Bolotnyy. The U.S. mortgage crisis that began in 2007 generated questions about the role played by Fannie Mae and Freddie Mac, the Government-Sponsored Enterprises (GSEs), in its causes. Some have claimed that the Affordable Housing Goals (AHGs), introduced by Congress through the GSE Act of 1992, and the resulting purchases of single-family mortgages the GSEs made to meet those goals, drove lending to high-risk borrowers. Using regression discontinuity analysis, I measure the effect of one of the goals, the Underserved Areas Goal (UAG), on the number of whole single-family mortgages purchased by the GSEs in targeted census tracts from 1996 to 2002. Focusing additionally on tracts that became UAG-eligible in 2005-2006, when the Department of Housing and Urban Development (HUD) began to determine eligibility using the 2000 Census, I measure the effect of the UAG on the GSEs' whole single-family mortgage purchases during peak years for the subprime mortgage market. Under the first approach, I estimate that the GSEs purchased 0 to 3 percent more goal-eligible mortgages than they would have without the UAG in place. Under the second approach, I estimate this effect to be 2.5 to 5 percent. The results suggest a small UAG effect and challenge the view that the goals caused the GSEs to supply substantially more credit to high-risk borrowers than they otherwise would have supplied. Although the goals may have spurred the GSEs to purchase more multi-family mortgages and REMICs than they otherwise would have, my analyses suggest that the GSEs' purchases of whole single-family mortgages to satisfy the goals did not drive the subprime lending boom of 2002-2006. 2012-05-08T11:28:01-04:00 en The Government-Sponsored Enterprises and the Mortgage Crisis: The Role of the Affordable Housing Goals 2012-05-08T11:28:01-04:00 GSE government sponsored enterprises affordable housing goals subprime mortgages single family mortgages subprime crisis housing bubble 2012-25: The Government-Sponsored Enterprises and the Mortgage Crisis: The Role of the Affordable Housing Goals http://www.federalreserve.gov/pubs/feds/2012/201225/201225pap.pdf PDF version Valentin Bolotnyy Valentin Bolotnyy Board of Governors of the Federal Reserve System Valentin Bolotnyy 2012-05-08T11:28:01-04:00 2012-25 G21 G28 I38 L51 R38 http://www.federalreserve.gov/pubs/feds/2012/201224/201224abs.html William F. Bassett, Mary Beth Chosak, John C. Driscoll, and Egon Zakrajsek. Identifying the macroeconomic effects of credit supply disruptions is difficult because many of the same factors that influence the supply of bank loans can also affect the demand for credit. Using bank-level responses to the Federal Reserve's Senior Loan Officer Opinion Survey, we decompose the reported changes in lending standards--a commonly-used indicator of changes in credit supply conditions--into a component that captures the change in banks' lending posture in response to bank-specific and macroeconomic factors that also affect loan demand and a residual component, which provides a cleaner measure of fluctuations in the effective supply of bank-intermediated credit. When included in a standard VAR framework, shocks to our measure of loan supply are associated with substantial declines in output and in the capacity of businesses and households to borrow from the banking sector, as well as with a sharp widening of credit spreads and a significant easing of monetary policy. We corroborate the interpretation of our series as movements in the supply of bank loans using a detailed loan-level data set: A regression of individual loan amounts on the corresponding interest rate spreads--where the latter is instrumented with our bank-level loan-supply shifter--yields the semi-elasticity of loan demand between −1.0 and −1.5. 2012-05-07T13:31:44-04:00 en Changes in Bank Lending Standards and the Macroeconomy 2012-05-07T13:31:44-04:00 Credit supply shocks bank credit policies financial accelerator 2012-24: Changes in Bank Lending Standards and the Macroeconomy http://www.federalreserve.gov/pubs/feds/2012/201224/201224pap.pdf PDF version William Bassett William Bassett Board of Governors of the Federal Reserve System Mary Beth Chosak Mary Beth Chosak Board of Governors of the Federal Reserve System John Driscoll John Driscoll Board of Governors of the Federal Reserve System Egon Zakrajsek Egon Zakrajsek Board of Governors of the Federal Reserve System William F. Bassett, Mary Beth Chosak, John C. Driscoll, and Egon Zakrajsek 2012-05-07T13:31:44-04:00 2012-24 E32 E44 http://www.federalreserve.gov/pubs/feds/2012/201223/201223abs.html Alex Haberis and Anna Lipinska. In this paper, we consider how monetary policy in a large, foreign economy affects optimal monetary policy in a small open economy (`home') in response to a large global demand shock that pushes both economies to the zero lower bound (ZLB) on nominal interest rates. We show that the inability of foreign monetary policy to stabilise the foreign economy at the ZLB creates a spillover that affects how well the home policymaker is able to stabilise its own economy. We show that more stimulatory foreign policy worsens the home policymaker's trade-off between stabilising inflation and the output gap when home and foreign goods are close substitutes. This reflects the fact that looser foreign policy leads to a relatively more appreciated home real exchange rate, which induces large expenditure switching away from home goods when goods are highly substitutable--just at a time (at the ZLB) when home policy is trying to boost demand for home goods. When goods are not close substitutes the home policymaker's ability to stabilise the economy benefits from more stimulatory foreign policy. 2012-05-08T13:55:51-04:00 en International Policy Spillovers at the Zero Lower Bound 2012-05-08T13:55:51-04:00 Small open economy policy trade-offs trade structure 2012-23: International Policy Spillovers at the Zero Lower Bound http://www.federalreserve.gov/pubs/feds/2012/201223/201223pap.pdf PDF version Alex Haberis Alex Haberis Bank of England Anna Lipinska Anna Lipinska Board of Governors of the Federal Reserve System Alex Haberis and Anna Lipinska 2012-05-08T13:55:51-04:00 2012-23 E58 F41 F42 http://www.federalreserve.gov/pubs/feds/2012/201222/201222abs.html Diana Hancock and Wayne Passmore. We provide an empirical analysis of the effects of the Federal Reserve's asset holdings on MBS yields and mortgage rates. We argue that understanding the particulars of the U.S. mortgage markets, particularly the linkages between the secondary and primary mortgage markets, is important. We find evidence that the Federal Reserve's portfolio holdings influence mortgage markets, through both a "portfolio balancing channel" and an "excess reserves" channel. These two channels can work in opposite directions and their magnitudes are difficult to estimate, but on net, larger Federal Reserve's portfolio holdings seem to have placed a significant downward influence on MBS yields and mortgage rates. 2012-05-07T10:58:53-04:00 en The Federal Reserve's Portfolio and its Effects on Mortgage Markets 2012-05-07T10:58:53-04:00 QE1 QE2 Federal Reserve MBS mortgage interest rates mortgage rate 2012-22: The Federal Reserve's Portfolio and its Effects on Mortgage Markets http://www.federalreserve.gov/pubs/feds/2012/201222/201222pap.pdf PDF version Diana Hancock Diana Hancock Board of Governors of the Federal Reserve System Wayne Passmore Wayne Passmore Board of Governors of the Federal Reserve System Diana Hancock and Wayne Passmore 2012-05-07T10:58:53-04:00 2012-22 E52 E58 G01 G21 http://www.federalreserve.gov/pubs/feds/2012/201221/201221abs.html Morten L. Bech, Elizabeth Klee, and Viktors Stebunovs. This paper examines the link between the federal funds and repo markets, before, during, and emerging from the financial crisis that began in August 2007. In particular, the paper investigates the initial transmission of monetary policy to closely related money markets, pricing of risk, and liquidity effects, and then shows how these could interact if the Federal Reserve removes the substantial amount of liquidity currently in the federal funds market. The results suggest that pass-through from the federal funds rate to the repo deteriorated somewhat during the zero lower bound period, likely due to limits to arbitrage and idiosyncratic market factors. In addition, during the early part of the crisis, the pricing of federal funds, which are unsecured loans, indicated a marked jump in perceived credit risk. Moreover, the liquidity effect for the federal funds rate, or the change in the federal funds rate associated with an exogenous change in reserve balances, weakened greatly with the increase in supply of these balances over the crisis, implying a non-linear demand for federal funds. Using these analyses, the paper then shows simulations of the dynamic effects and balance sheet mechanics of liquidity draining on the federal funds and repo rates--a tool that might be used in an exit strategy to tighten monetary policy. 2012-05-07T10:59:40-04:00 en Arbitrage, liquidity and exit: The repo and federal funds markets before, during, and emerging from the financial crisis 2012-05-07T10:59:40-04:00 Repurchase agreement federal funds financial crisis monetary policy implementation exit strategy 2012-21: Arbitrage, liquidity and exit: The repo and federal funds markets before, during, and emerging from the financial crisis http://www.federalreserve.gov/pubs/feds/2012/201221/201221pap.pdf PDF version Morten Bech Morten Bech Bank for International Settlements Elizabeth Klee Elizabeth Klee Board of Governors of the Federal Reserve System Viktors Stebunovs Viktors Stebunovs Board of Governors of the Federal Reserve System Morten L. Bech, Elizabeth Klee, and Viktors Stebunovs 2012-05-07T10:59:40-04:00 2012-21 E52 E58 G01 http://www.federalreserve.gov/pubs/feds/2012/201220/201220abs.html Dario Caldara and Christophe Kamps. Does fiscal policy stimulate output? SVARs have been used to address this question but no stylized facts have emerged. We derive analytical relationships between the output elasticities of fiscal variables and fiscal multipliers. We show that standard identification schemes imply different priors on elasticities, generating a large dispersion in multiplier estimates. We then use extra-model information to narrow the set of empirically plausible elasticities, allowing for sharper inference on multipliers. Our results for the U.S. for the period 1947-2006 suggest that the probability of the tax multiplier being larger than the spending multiplier is below 0.5 at all horizons. 2012-05-02T09:47:08-04:00 en The Analytics of SVARs: A Unified Framework to Measure Fiscal Multipliers 2012-05-02T09:47:08-04:00 Fiscal policy identification vector autoregressions 2012-20: The Analytics of SVARs: A Unified Framework to Measure Fiscal Multipliers http://www.federalreserve.gov/pubs/feds/2012/201220/201220pap.pdf PDF version Dario Caldara Dario Caldara Board of Governors of the Federal Reserve System Christophe Kamps Christophe Kamps European Central Bank Dario Caldara and Christophe Kamps 2012-05-02T09:47:08-04:00 2012-20 E62 C52 http://www.federalreserve.gov/pubs/feds/2012/201219/201219abs.html Alice M. Henriques. A majority of women receive most of their Social Security benefits based upon their husbands' earnings history, but previous research has shown that husbands' benefit claiming is inconsistent with maximizing lifetime benefits for the couple. However, that research assumes husbands choose their claim age based on all Social Security incentives facing the household. I show that husbands' claiming behavior responds to the actuarial incentives built into their own retired worker benefit formula, but not to the incentives built into the spouse and survivor formulas that determine their wives' benefits. This failure to incorporate his spouses' incentives reduces wives' lifetime benefits. Variation in incentives comes from rule changes to the Social Security benefit calculation in addition to the age difference between spouses and the relative strength of the wife's labor force history. A variety of robustness checks looking at segments of the population predicted to be more responsive to incentives provide similar results to the main specification. 2012-05-04T11:45:53-04:00 en How Does Social Security Claiming Respond to Incentives? Considering Husbands' and Wives' Benefits Separately 2012-05-04T11:45:53-04:00 Social Security incentives retirement behavior married couples 2012-19: How Does Social Security Claiming Respond to Incentives? Considering Husbands' and Wives' Benefits Separately http://www.federalreserve.gov/pubs/feds/2012/201219/201219pap.pdf PDF version Alice Henriques Alice Henriques Federal Reserve Board of Governors Alice M. Henriques 2012-05-04T11:45:53-04:00 2012-19 H55 D1