http://www.federalreserve.gov/pubs/workingpapers.htm Staff working papers in the Finance and Economics Discussion Series (FEDS) and International Finance Discussion Papers (IFDPS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the FEDS or IFDPS (other than acknowledgment) should be cleared with the author(s) to protect the tentative character of these papers. http://www.federalreserve.gov/pubs/feds/2013/201329/201329abs.html Douglas J. Elliott, Greg Feldberg, and Andreas Lehnert. Since the financial crisis of 2007-2009, policymakers have debated the need for a new toolkit of cyclical "macroprudential" policies to constrain the build-up of risks in financial markets, for example, by dampening credit-fueled asset bubbles. These discussions tend to ignore America's long and varied history with many of the instruments under consideration to smooth the credit cycle, presumably because of their sparse usage in the last three decades. We provide the first comprehensive survey and historic narrative of these efforts. The tools whose background and use we describe include underwriting standards, reserve requirements, deposit rate ceilings, credit growth limits, supervisory pressure, and other financial regulatory policy actions. The contemporary debates over these tools highlighted a variety of concerns, including "speculation," undesirable rates of inflation, and high levels of consumer spending, among others. Ongoing statistical work suggests that macroprudential tightening lowers consumer debt but macroprudential easing does not increase it. 2013-05-14T16:26:38-04:00 en The History of Cyclical Macroprudential Policy in the United States 2013-05-14T16:26:38-04:00 Macroprudential policy financial stability credit cycles regulation Federal Reserve history credit controls 2013-29: The History of Cyclical Macroprudential Policy in the United States http://www.federalreserve.gov/pubs/feds/2013/201329/201329pap.pdf PDF version Douglas Elliott Douglas Elliott Brookings Institution Greg Feldberg Greg Feldberg Office of Financial Research Andreas Lehnert Andreas Lehnert Board of Governors of the Federal Reserve System Douglas J. Elliott, Greg Feldberg, and Andreas Lehnert 2013-05-14T16:26:38-04:00 2013-29 E32 E44 E63 E65 http://www.federalreserve.gov/pubs/feds/2013/201328/201328abs.html Robert B. Avery, Daniel Grodzicki, and Kevin B. Moore. Debate over the U.S. federal estate tax has intensified recently as a result of the sunset provisions in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 and changes in law passed in conjunction with the "fiscal cliff" at the end of 2012. Despite recent changes in the law, there remains an open debate regarding the extent to which prospective estates comprise assets that have been taxed previously. Using wealth data on U.S. households, we forecast changes in household wealth in the coming decade and calculate the importance of untaxed wealth in bequeathed estates. Connecting further to the debate, we investigate the impact of various policies on U.S. households. In particular, we compare policies in which the entire estate is taxed at death (estate tax) to those in which only the unrealized capital gains portion is subject to tax (capital gains tax). We estimate that the average unrealized capital gains in estates monotonically increases with the size of the estate, ranging from 13% for estates under $2 million to 55% for estates over $100 million. We also find that policies aimed at taxing the entire estate raise more revenue than those aimed at taxing unrealized gains. However, policies that tax only gains concentrate a larger portion of the tax burden on high wealth households. 2013-05-13T08:46:14-04:00 en Estate vs. Capital Gains Taxation: An Evaluation of Prospective Policies for Taxing Wealth at the Time of Death 2013-05-13T08:46:14-04:00 Estate tax capital gains tax policy household wealth 2013-28: Estate vs. Capital Gains Taxation: An Evaluation of Prospective Policies for Taxing Wealth at the Time of Death http://www.federalreserve.gov/pubs/feds/2013/201328/201328pap.pdf PDF version Robert Avery Robert Avery Federal Housing Finance Agency Daniel Grodzicki Daniel Grodzicki Stanford University Kevin Moore Kevin Moore Board of Governors of the Federal Reserve System Robert B. Avery, Daniel Grodzicki, and Kevin B. Moore 2013-05-13T08:46:14-04:00 2013-28 H22 H24 K34 http://www.federalreserve.gov/pubs/feds/2013/201327/201327abs.html Raven Molloy, Christopher L. Smith, and Abigail Wozniak. We examine explanations for the secular decline in interstate migration since the 1980s. After showing that demographic and socioeconomic factors can account for little of this decrease, we present evidence suggesting that it is related to a downward trend in labor market transitions--i.e. a decline in the fraction of workers moving from job to job, changing industry, and changing occupation--that occurred over the same period. We explore a number of reasons why these flows have diminished over time, including changes in the distribution of job opportunities across space, polarization in the labor market, concerns of dual-career households, and a strengthening of internal labor markets. We find little empirical support for all but the last of these hypotheses. Specifically, using data from three cohorts of the National Longitudinal Surveys spanning the 1970s to the 2000s, we find that wage gains associated with employer transitions have fallen, possibly signaling a growing role for internal labor markets in determining wages. 2013-05-13T08:45:55-04:00 en Declining Migration Within the US: The Role of the Labor Market 2013-05-13T08:45:55-04:00 U.S. migration trends in migration internal labor markets job mobility 2013-27: Declining Migration Within the US: The Role of the Labor Market http://www.federalreserve.gov/pubs/feds/2013/201327/201327pap.pdf PDF version Raven Molloy Raven Molloy Board of Governors of the Federal Reserve System Christopher Smith Christopher Smith Board of Governors of the Federal Reserve System Abigail Wozniak Abigail Wozniak University of Notre Dame, NBER and IZA Raven Molloy, Christopher L. Smith, and Abigail Wozniak 2013-05-13T08:45:55-04:00 2013-27 J61 J62 J10 J24 http://www.federalreserve.gov/pubs/feds/2013/201326/201326abs.html Andrew D. Paciorek. One of the drivers of housing demand is the rate of new household formation, which has been well below trend in recent years, leading to persistent weakness in the housing market. This paper studies the determinants of household formation in the United States, including demographic and behavioral changes, and how they evolve over the long and short runs. There are three main findings: First, because older adults tend to live in smaller households, the aging of the U.S. population over the past 30 years has reduced the average household size, or equivalently, pushed up the headship rate and household formation. Second, after stripping out the effects of the aging population, the residual behavioral component of the headship rate has declined over time, thanks largely to rising housing costs. This shift has reduced household formation, all else equal. Finally, the short-run dynamics of headship and household formation reflect the effects of the business cycle. In particular, I find that poor labor market outcomes have played an important role in depressing the headship rate in recent years. Consequently, household formation could increase substantially as the labor market recovers and the headship rate returns to trend. 2013-05-13T08:45:45-04:00 en The Long and the Short of Household Formation 2013-05-13T08:45:45-04:00 Household formation headship rate housing demand 2013-26: The Long and the Short of Household Formation http://www.federalreserve.gov/pubs/feds/2013/201326/201326pap.pdf PDF version Andrew Paciorek Andrew Paciorek Board of Governors of the Federal Reserve System Andrew D. Paciorek 2013-05-13T08:45:45-04:00 2013-26 D1 R2 http://www.federalreserve.gov/pubs/feds/2013/201325/201325abs.html Fatih Guvenen, Serdar Ozkan, and Jae Song. This paper studies the nature of business cycle variation in individual earnings risk using a dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of anonymous individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2010. We use these data to decompose individual earnings growth during recessions into "between-group" and "within-group" components. We begin with the behavior of within-group shocks. Contrary to past research, we do not find the variance of idiosyncratic earnings shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses--large upward earnings movements become less likely--whereas the bottom end expands--large drops in earnings become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left skewed and, hence, riskier during recessions. Second, to study between-group differences, we group individuals based on several observable characteristics at the time a recession hits. One of these characteristics--the average earnings of an individual at the beginning of a business cycle episode--proves to be an especially good predictor of fortunes during a recession: prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings (such "asymmetry" is not evident in expansions). Finally, we find that the cyclical nature of earnings risk is dramatically different for the top 1 percent compared with all other individuals--even relative to those in the top 2 to 5 percent. 2013-05-09T08:26:05-04:00 en The Nature of Countercyclical Income Risk 2013-05-09T08:26:05-04:00 Countercyclical income risk idiosyncratic labor income 2013-25: The Nature of Countercyclical Income Risk http://www.federalreserve.gov/pubs/feds/2013/201325/201325pap.pdf PDF version Fatih Guvenen Fatih Guvenen University of Minnesota and NBER Serdar Ozkan Serdar Ozkan Board of Governors of the Federal Reserve System Jae Song Jae Song Social Security Administration Fatih Guvenen, Serdar Ozkan, and Jae Song 2013-05-09T08:26:05-04:00 2013-25 E24 E32 J21 J31 http://www.federalreserve.gov/pubs/feds/2013/201324/201324abs.html Olesya V. Grishchenko, Joel M. Vanden, and Jianing Zhang. In this paper we estimate the value of the embedded option in U.S. Treasury Inflation Protected Securities (TIPS). The option value exhibits significant time variation that is correlated with periods of deflationary expectations. We use our estimated option values to construct an embedded option price index and an embedded option return index. We then use our embedded option indices as independent variables and examine their statistical and economic significance for explaining the future inflation rate. In almost all of our regressions, the embedded option return index is significant even in the presence of traditional inflation variables, such as lagged inflation, the return on gold, the return on crude oil, the VIX index return, and the yield spread between nominal Treasuries and TIPS.We conduct several robustness tests, including alternative weighting schemes, alternative variable specifications, and alternative control variables. We conclude that the embedded option in TIPS contains useful information for future inflation, both in-sample and out-of-sample. Our results should be valuable to anyone who is interested in assessing inflationary expectations. 2013-05-09T08:27:10-04:00 en The Informational Content of the Embedded Deflation Option in TIPS 2013-05-09T08:27:10-04:00 TIPS embedded option inflation deflation term structure 2013-24: The Informational Content of the Embedded Deflation Option in TIPS http://www.federalreserve.gov/pubs/feds/2013/201324/201324pap.pdf PDF version Olesya Grishchenko Olesya Grishchenko Board of Governors of the Federal Reserve System Joel Vanden Joel Vanden The Pennsylvania State University Jianing Zhang Jianing Zhang The Pennsylvania State University Olesya V. Grishchenko, Joel M. Vanden, and Jianing Zhang 2013-05-09T08:27:10-04:00 2013-24 E31 G12 E43 E44 http://www.federalreserve.gov/pubs/feds/2013/201323/201323abs.html Javed I. Ahmed, Brad M. Barber, and Terrance Odean. Can the freedom to choose how retirement funds are invested leave workers worse off? We analyze social risks of allowing choice, using the Social Security system as an example. Comparing a privatized alternative with the current system via simulation, we document that choice in both equity allocation and equity composition lead to increased income inequality and risk of shortfalls relative to currently promised benefits. While private accounts disproportionately increase shortfall risk for low-income workers, allowing choice increases risk for all workers (even with high return outcomes). Our results suggest that restricted choice should be a central component of private-account-based systems. 2013-05-03T15:42:15-04:00 en Made Poorer by Choice: Worker Outcomes in Social Security v. Private Retirement Accounts 2013-05-03T15:42:15-04:00 Social Security private retirement accounts behavioral finance 2013-23: Made Poorer by Choice: Worker Outcomes in Social Security v. Private Retirement Accounts http://www.federalreserve.gov/pubs/feds/2013/201323/201323pap.pdf PDF version Javed Ahmed Javed Ahmed Federal Reserve Board Brad Barber Brad Barber University of California, Davis Terrance Odean Terrance Odean University of California, Berkeley Javed I. Ahmed, Brad M. Barber, and Terrance Odean 2013-05-03T15:42:15-04:00 2013-23 D14 G11 H55 http://www.federalreserve.gov/pubs/feds/2013/201322/201322abs.html Robert Argento, Victoria L. Bryant, and John Sabelhaus. Early withdrawals from retirement accounts are a double-edged sword, because withdrawals reduce retirement resources, but they also allow individuals to smooth consumption when they experience demographic and economic shocks. Using tax data, we show that pre-retirement withdrawals increased between 2004 and 2010, especially after 2007, but early withdrawal rates are substantial (relative to new contributions) in all of those years. Early withdrawal events are strongly correlated with shocks to income and marital status, and lower-income taxpayers are more likely to experience the types of shocks associated with early withdrawals and more likely to have a taxable withdrawal when they experience a given shock. 2013-05-03T15:42:24-04:00 en Early Withdrawals from Retirement Accounts During the Great Recession 2013-05-03T15:42:24-04:00 Retirement plans withdrawals 2013-22: Early Withdrawals from Retirement Accounts During the Great Recession http://www.federalreserve.gov/pubs/feds/2013/201322/201322pap.pdf PDF version Robert Argento Robert Argento Board of Governors of the Federal Reserve System Victoria Bryant Victoria Bryant Statistics of Income Division, Internal Revenue Service John Sabelhaus John Sabelhaus Board of Governors of the Federal Reserve System Robert Argento, Victoria L. Bryant, and John Sabelhaus 2013-05-03T15:42:24-04:00 2013-22 G23 H24 H31 http://www.federalreserve.gov/pubs/ifdp/2013/1079/default.htm Brendan Epstein and Ryan Nunn. A large public finance literature argues that taxable income elasticities are a sufficient statistic for the social welfare consequences of taxation. We develop calibrations that show such deadweight loss calculations are overestimates proportional to the quantitative significance of heterogeneity in amenities across job matches. In particular, the endogenous supply of amenities can substantially exacerbate this overestimation in both static and dynamic environments. Given the possibility of gradual migration of workers into more amenity-focused job matches in response to tax increases, welfare calculations based on long-run taxable income elasticities can be more misleading than those based on short-run elasticities. 2013-05-01T09:00:50-04:00 en Taxation, Match Quality and Social Welfare 2013-05-01T08:14:09-04:00 FRB Taxable income elasticity endogenous amenities match quality deadweight loss IFDP1079: Taxation, Match Quality and Social Welfare http://www.federalreserve.gov/pubs/ifdp/2013/1079/ifdp1079.pdf PDF version Brendan Epstein and Ryan Nunn 2013-05-01T08:14:09-04:00 1079 H21 J32 J63 http://www.federalreserve.gov/pubs/feds/2013/201321/201321abs.html Tobias Adrian, Daniel Covitz, and Nellie Liang. While the Dodd Frank Act (DFA) broadens the regulatory reach to reduce systemic risks to the U.S. financial system, it does not address some important risks that could migrate to or emanate from entities outside the federal safety net. At the same time, it limits the types of interventions by financial authorities to address systemic events when they occur. As a result, a broad and forward-looking monitoring program, which seeks to identify financial vulnerabilities and guide the development of pre-emptive policies to help mitigate them, is essential. Systemic vulnerabilities arise from market failures that can lead to excessive leverage, maturity transformation, interconnectedness, and complexity. These vulnerabilities, when hit by adverse shocks, can lead to fire sale dynamics, negative feedback loops, and inefficient contractions in the supply of credit. We present a framework that centers on the vulnerabilities that propagate adverse shocks, rather than shocks themselves, which are difficult to predict. Vulnerabilities can emerge in four areas: (1) systemically important financial institutions (SIFIs), (2) shadow banking, (3) asset markets, and (4) the nonfinancial sector. This framework also highlights how policies that reduce the likelihood of systemic crises may do so only by raising the cost of financial intermediation in non-crisis periods. 2013-04-17T09:15:51-04:00 en Financial Stability Monitoring 2013-04-17T09:15:51-04:00 Stability monitoring vulnerabilities 2013-21: Financial Stability Monitoring http://www.federalreserve.gov/pubs/feds/2013/201321/201321pap.pdf PDF version Tobias Adrian Tobias Adrian Federal Reserve Bank of New York Daniel Covitz Daniel Covitz Board of Governors of the Federal Reserve System Nellie Liang Nellie Liang Board of Governors of the Federal Reserve System Tobias Adrian, Daniel Covitz, and Nellie Liang 2013-04-17T09:15:51-04:00 2013-21 G01 G23 G28 E58 G20 http://www.federalreserve.gov/pubs/feds/2013/201320/201320abs.html Fatih Guvenen, Burhanettin Kuruscu, and Serdar Ozkan. Wage inequality has been significantly higher in the United States than in continental European countries (CEU) since the 1970s. Moreover, this inequality gap has further widened during this period as the US has experienced a large increase in wage inequality, whereas the CEU has seen only modest changes. This paper studies the role of labor income tax policies for understanding these facts, focusing on male workers. We construct a life cycle model in which individuals decide each period whether to go to school, work, or stay non-employed. Individuals can accumulate skills either in school or while working. Wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks. Progressive taxation compresses the (after-tax) wage structure, thereby distorting the incentives to accumulate human capital, in turn reducing the cross-sectional dispersion of (before-tax) wages. Consistent with the model, we empirically document that countries with more progressive labor income tax schedules have (i) significantly lower before-tax wage inequality at different points in time and (ii) experienced a smaller rise in wage inequality since the early 1980s. We then study the calibrated model and find that these policies can account for half of the difference between the US and the CEU in overall wage inequality and 84% of the difference in inequality at the upper end (log 90-50 differential). In a two-country comparison between the US and Germany, the combination of skill-biased technical change and changing progressivity of tax schedules explains all the difference between the evolution of inequality in these two countries since the early 1980s. 2013-04-17T14:39:44-04:00 en Taxation of Human Capital and Wage Inequality: A Cross-Country Analysis 2013-04-17T14:39:44-04:00 Wage inequality human capital skill-biased technical change tax policies 2013-20: Taxation of Human Capital and Wage Inequality: A Cross-Country Analysis http://www.federalreserve.gov/pubs/feds/2013/201320/201320pap.pdf PDF version Fatih Guvenen Fatih Guvenen University of Minnesota and NBER Burhanettin Kuruscu Burhanettin Kuruscu University of Toronto Serdar Ozkan Serdar Ozkan Board of Governors of the Federal Reserve System Fatih Guvenen, Burhanettin Kuruscu, and Serdar Ozkan 2013-04-17T14:39:44-04:00 2013-20 http://www.federalreserve.gov/pubs/feds/2013/201318/201318abs.html Zhiguo He, Si Li, Bin Wei, and Jianfeng Yu. Uncertainty has qualitatively different implications than risk in studying executive incentives. We study the interplay between profitability uncertainty and moral hazard, where profitability is multiplicative with managerial effort. Investors who face greater uncertainty desire faster learning, and consequently offer higher managerial incentives to induce higher effort from the manager. In contrast to the standard negative risk-incentive trade-off, this "learning-by-doing" effect generates a positive relation between profitability uncertainty and incentives. We document empirical support for this prediction. 2013-04-17T14:37:54-04:00 en Uncertainty, Risk, and Incentives: Theory and Evidence 2013-04-17T14:37:54-04:00 Executive compensation optimal contracting learning uncertainty risk-incentive trade-off 2013-18: Uncertainty, Risk, and Incentives: Theory and Evidence http://www.federalreserve.gov/pubs/feds/2013/201318/201318pap.pdf PDF version Zhiguo He Zhiguo He University of Chicago Si Li Si Li Wilfrid Laurier University Bin Wei Bin Wei Board of Governors of the Federal Reserve System Jianfeng Yu Jianfeng Yu University of Minnesota Zhiguo He, Si Li, Bin Wei, and Jianfeng Yu 2013-04-17T14:37:54-04:00 2013-18 D86 J33 http://www.federalreserve.gov/pubs/feds/2013/201317/201317abs.html Michael T. Kiley. While uncovered interest parity (UIP) fails unconditionally, UIP conditional on monetary policy actions remains a cornerstone of macroeconomic models used for monetary policy analysis. We posit that monetary policy actions are partially revealed by FOMC statements and propose a new identification strategy to uncover the degree to which such policy actions induce comovement in exchange rates and long-term interest rates consistent with uncovered interest parity. We reach three conclusions. First, there is evidence in favor of UIP at long horizons, conditional on monetary policy actions, for Dollar/Euro and Dollar/Yen exchange rates. Second, short-run movements in exchange rates following monetary policy surprises are consistent with the overshooting prediction of Dornbusch (1976), although our approach cannot test UIP at short horizons. Finally, we examine the degree to which monetary policy statements since the onset of the zero-lower bound (ZLB) on the short-term interest rate in the United States have engendered different comovement between long-term interest rates and exchange rates and find little evidence for a change in relationships. 2013-04-17T14:38:26-04:00 en Exchange Rates, Monetary Policy Statements, and Uncovered Interest Parity: Before and After the Zero Lower Bound 2013-04-17T14:38:26-04:00 Monetary policy exchange rates 2013-17: Exchange Rates, Monetary Policy Statements, and Uncovered Interest Parity: Before and After the Zero Lower Bound http://www.federalreserve.gov/pubs/feds/2013/201317/201317pap.pdf PDF version Michael Kiley Michael Kiley Board of Governors of the Federal Reserve System Michael T. Kiley 2013-04-17T14:38:26-04:00 2013-17 E52 F31 G14 http://www.federalreserve.gov/pubs/feds/2013/201316/201316abs.html Michael T. Kiley. Monetary policy actions since 2008 have influenced long-term interest rates through forward guidance and quantitative easing - both "unconventional" strategies. We examine whether the effect of such actions on Treasury yields have passed through to private yields to a degree comparable to experience before 2008. In order to perform this examination, we propose a strategy to identify the comovement between Treasury yields and private yields induced by monetary policy when an observable representing policy changes, such as changes in the interbank rate, is not available, or when other systematic factors may be important. Our strategy implies that least squares regressions, even within an event window, can be misleading, and our empirical results find evidence for such misleading effects. Implementation of our instrumental variables strategy suggests that the movements in Treasury yields induced by monetary policy statements have passed through to private yields, but to a smaller degree than typical prior to the end of 2008. This may suggest that the effectiveness of unconventional policy actions in stimulating activity are attenuated relative to conventional policy actions. 2013-04-17T14:38:32-04:00 en Monetary Policy Statements, Treasury Yields, and Private Yields: Before and After the Zero Lower Bound 2013-04-17T14:38:32-04:00 Monetary policy Treasury yields private yields 2013-16: Monetary Policy Statements, Treasury Yields, and Private Yields: Before and After the Zero Lower Bound http://www.federalreserve.gov/pubs/feds/2013/201316/201316pap.pdf PDF version Michael Kiley Michael Kiley Board of Governors of the Federal Reserve System Michael T. Kiley 2013-04-17T14:38:32-04:00 2013-16 E52 G14 http://www.federalreserve.gov/pubs/feds/2013/201315/201315abs.html Michael T. Kiley. Monetary policy actions since 2008 have influenced long-term interest rates through forward guidance and quantitative easing. We propose a strategy to identify the comovement between interest rate and equity price movements induced by monetary policy when an observable representing policy changes, such as changes in the interbank rate, is not available. A decline in long-term interest rates induced by monetary policy statements prior to 2009 is accompanied by a 6- to 9-percent increase in equity prices. This association is substantially attenuated in the period since the zero-lower bound has been binding - with a policy-induced 100 basis-point decline in 10-year Treasury yields associated with a 1½- to 3-percent increase in equity prices. Empirical analysis suggests this attenuation does not represent a change in responses to monetary-policy induced movements in interest rates, but reflects the importance of both short- and long-term interest rates. 2013-04-17T14:38:38-04:00 en The Response of Equity Prices to Movements in Long-term Interest Rates Associated With Monetary Policy Statements: Before and After the Zero Lower Bound 2013-04-17T14:38:38-04:00 Monetary policy stock market 2013-15: The Response of Equity Prices to Movements in Long-term Interest Rates Associated With Monetary Policy Statements: Before and After the Zero Lower Bound http://www.federalreserve.gov/pubs/feds/2013/201315/201315pap.pdf PDF version Michael Kiley Michael Kiley Board of Governors of the Federal Reserve System Michael T. Kiley 2013-04-17T14:38:38-04:00 2013-15 E52 G14