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Superseded by Working Paper 17-03.
(2.5 MB, 59 pages)
Superseded by Working Paper 19-53.
(1 MB, 39 pages)
This paper seeks to delimit the conditions so that market-based probabilities provide all the information required by the policymaker to arrive at the best decision possible. While there are several practical considerations regarding how to derive market-based probabilities from financial prices, the discussion here is confined to a theoretical analysis that assumes no impediment to obtaining the market-based probabilities.
(404 KB, 11 pages)
Superseded by Working Paper 18-04.
(656 KB, 54 pages)
Superseded by Working Paper 17-06/R.
(1.00 MB, 45 pages)
The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policymaking. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? An analysis of U.S. state fiscal policies shows state deficits (in particular from tax cuts) can stimulate state economies in the short run but that there are significant job spillovers to neighboring states. Central government fiscal policies can best internalize these spillovers. Second, what central government fiscal policies are most effective for stimulating income and job growth? A structural vector autoregression analysis for the U.S. aggregate economy from 1960 to 2010 shows that federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance are both effective, with one- and two-year multipliers greater than 2.0. Third, how are states, as politically independent agents, motivated to provide increased transfers to lower income households? The answer is matching (price subsidy) assistance for such spending. The intergovernmental aid is spent immediately by the states and supports assistance to those most likely to spend new transfers.
(893 KB, 67 pages)
Entry barriers into social insurance programs will be effective screening devices if they cause only those individuals receiving higher benefits from a program to participate in that program. We find evidence for this by using plausibly exogenous variations in travel-related entry costs into the Canadian consumer bankruptcy system. Using detailed balance sheet and travel data, we find that higher travel-related entry costs reduce bankruptcies from individuals with lower financial benefits of bankruptcy (unsecured debt discharged, minus secured assets forgone). When compared across filers, each extra kilometer traveled to access the bankruptcy system requires approximately $11 more in financial benefits from bankruptcy.
Supersedes Working Paper 14-18.
(869 KB, 40 pages)
This paper develops a dynamic model of bank liquidity provision to characterize the ex post efficient policy response to a banking panic and study its implications for the behavior of output in the aftermath of a panic. It is shown that the trajectory of real output following a panic episode crucially depends on the cost of converting long-term assets into liquid funds. For small values of this liquidation cost, the recession associated with a banking panic is protracted. For intermediate values, the recession is more severe but short lived. For relatively large values, the contemporaneous decline in real output in the event of a panic is substantial but followed by a vigorous rebound in real activity above the long-run level. The author argues that these theoretical predictions are consistent with the observed disparity in crisis-related output losses.
(458 KB, 40 pages) Revises Working Paper 14-37.
In many U.S. states, the law firms that represent lenders in foreclosure proceedings must hire auctioneers to carry out the foreclosure auctions. The authors empirically test whether processing times differ for law firms that integrate the mortgage foreclosure auction process compared with law firms that contract with independent auction companies. They find that independent firms are able to initially schedule auctions more quickly, but when postponements occur, they are no faster to adapt. Since firms schedule the initial auction before contracting, independent auction companies have an incentive to conform to the law firms’ schedules in order to secure the contracts. The authors argue that this is evidence of a cost of integration stemming from poorly aligned incentives within the firm.
(539 KB, 28 pages)
An analytically tractable city model with external increasing returns is presented. The equilibrium city structure is either monocentric or decentralized. Regardless of which structure prevails, intracity variation in endogenous variables displays exponential decay from the city center, where the decay rates depend only on parameters. Given population, the equilibrium of the model is generically unique. Tractability permits explicit expressions for when a central business district (CBD) will emerge in equilibrium, how external increasing returns affect the steepness of downtown rent gradients, and how wages and welfare vary with population. An application to urban growth boundary is presented.
(845 KB, 55 pages)
Gentrification has provoked considerable controversy surrounding its effects on residential displacement. Using a unique individual-level, longitudinal data set, this study examines mobility rates and residential destinations of residents in gentrifying neighborhoods during the recent housing boom and bust in Philadelphia for various strata of residents and different types of gentrification. We find that vulnerable residents, those with low credit scores and without mortgages, are generally no more likely to move from gentrifying neighborhoods compared with their counterparts in nongentrifying neighborhoods. When they do move, however, they are more likely to move to lower-income neighborhoods. Residents in gentrifying neighborhoods at the aggregate level have slightly higher mobility rates, but these rates are largely driven by more advantaged residents. These findings shed new light on the heterogeneity in mobility patterns across residents in gentrifying neighborhoods and suggest that researchers should focus more attention on the quality of residential moves and nonmoves for less advantaged residents, rather than mobility rates alone.
(680 KB, 50 pages)
Superseded by Working Paper 16-33.
(709 KB, 41 pages)
An equilibrium model with firm and worker heterogeneity is constructed to analyze labor market implications of the Affordable Care Act (ACA). The authors’ model indicates that the ACA lowers the uninsured rate from 22.6 to 5.4 percent, with a moderate welfare gain due to increased redistribution through health insurance subsidies and Medicaid expansion. Because of the weakened link between full-time employment and access to insurance, 2.1 million more part-time jobs are created at the expense of 1.6 million full-time jobs. The predicted negative effect on total hours (0.36 percent) is smaller than other estimates, partly due to the general equilibrium effect.
(784 KB, 66 pages)
The authors develop a simple general equilibrium framework to study the effects of global competition on banking industry dynamics and welfare. They apply the framework to the Mexican banking industry, which underwent a major structural change in the 1990s as a consequence of both government policy and external shocks. Given the high concentration in the Mexican banking industry, domestic and foreign banks act strategically in the authors’ framework. After calibrating the model to Mexican data, the authors examine the welfare consequences of government policies that promote global competition. They find relatively high economywide welfare gains from allowing foreign bank entry.
(630 KB, 42 pages)
Brent Moulton and Nicole Mayerhauser (2015) point out that, for more than 50 years, economists have featured the concept of human capital in their models of labor, growth, productivity, and distribution of income. The authors recommend the addition to the System of National Accounts (SNA) of supplemental person-level accounts: i.e., a System of Person Accounts (SPA). They see this as the best way of recognizing the processes of human capital creation as well as related issues of how income is distributed among individuals and families. The authors argue that this change would support three different perspectives from which economic activity can be viewed: (1) a current period outcomes perspective, (2) a risky possibilities perspective, and (3) a resources perspective. Moreover, these gains could be realized without changing the SNA in any substantial respects.
(500 KB, 50 pages)
Should regulatory bank examinations be made public? Regulators have argued that the confidentiality of the examination process promotes frank exchanges between bankers and examiners and that public disclosure of examination results could have a chilling effect. The author examines the tradeoffs in a world in which examination results can be kept confidential, but regulatory interventions are observable by market participants, as they typically are for stress tests. Inducing banks to communicate truthfully requires regulators to engage in forbearance, which is priced into banks’ uninsured debt and raises the costs of inducing truthful communication. Regulators that disclose exam results bear higher monitoring costs and impose excessive capital requirements because interventions are not as sensitive to underlying risks. My model predicts that disclosure is optimal when the regulator’s model is relatively inaccurate.
(396 KB, 28 pages)
This paper investigates the impact of unconventional monetary policy on firm financing constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), which was intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms with stronger balance sheets. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier debt also rose during the MEP. The authors’ results suggest that unconventional monetary policy may have helped to relax financing constraints and stimulate economic activity in part by affecting the pricing of risk in the bond market.
(610 KB, 50 pages)
Superseded by Working Paper 18-06.
(803 KB, 44 pages)
The accuracy of appraisals came into scrutiny during the housing crisis, and a set of policies and regulations was adopted to address the conflict-of-interest issues in the appraisal practices. In response to an investigation by the New York State Attorney General’s office, the Home Valuation Code of Conduct (HVCC) was agreed to by Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency. Using unique data sets that contain both approved and nonapproved mortgage applications, this study provides an empirical examination of the impact of the HVCC on appraisal and mortgage outcomes. The results suggest that the HVCC has led to a reduction in the probability of inflated valuations, although valuations remained inflated on average, and induced a significant increase in the incidence of low appraisals. The well-intentioned HVCC rule made it more difficult to obtain mortgages to purchase homes during the housing price crash, possibly exacerbating the fall in prices.
Supersedes Working Paper 14-23.
(747 KB, 36 pages)
In this paper, the authors investigate to what extent shocks in housing and financial markets account for wage and employment variations in a frictional labor market. To explain these interactions, the authors use a model of job search with accumulation of wealth as liquid funds and residential real estate, in which house prices are randomly persistent. First, the authors show that reservation wages and unemployment are increasing in total wealth. And, second, they show that reservation wages and unemployment are also responsive to the composition of wealth. Specifically, when house prices are expected to rise, holding a larger share of wealth as residential real estate tends to increase reservation wages, which deteriorates employment transitions and increases unemployment. The authors estimate their model structurally using National Longitudinal Survey of Youth data from 1978 to 2005, and they find that more relaxed house financing conditions, in particular lower down payment requirements, decrease employment rates by 5 percentage points in the short run and by 2 percentage points in the long run. The authors also find that worse labor market conditions immediately increase homeownership rates by up to 5 percentage points, whereas in the long run homeownership decreases by 8 percentage points.
(617 KB, 53 pages)
Small businesses are the backbone of the U.S. economy and account for approximately one-half of the private-sector economy and 99% of all businesses. To start a small business, individuals need access to capital. Given the importance of an entrepreneur’s personal debt capacity in financing a startup business, student loan debt, which is difficult to discharge via bankruptcy, can have lasting effects and may have an impact on the ability of future small business owners to raise capital. This study examines the impact of the growth in student debt on net small business formation. The authors find a significant and economically meaningful negative correlation between changes in student loan debt and net business formation for the smallest group of small businesses, those employing one to four employees. This is important since these small businesses depend heavily on personal debt to finance new business formation. Based on the authors’ model, an increase of one standard deviation in student debt reduced the number of businesses with one to four employees by 14% on average between 2000 and 2010. The effect on larger firm formation decreased with firm size, which the authors interpret to mean that these firms have greater access to outside capital.
(1.25 MB, 31 pages)
“Free” consumer entertainment and information from the Internet, largely supported by advertising revenues, has had a major impact on consumer behavior. Some economists believe that measured gross domestic product (GDP) growth since 2000 is too low because it excludes online entertainment. Similar large effects on consumers occurred with the arrival of free radio and television entertainment. The authors provide an experimental methodology that uses previously established GDP measurement procedures to value advertising-supported entertainment around the world.
(1.20 MB, 36 pages)
The deep housing market recession from 2008 through 2010 was characterized by a steep rise in the number of foreclosures. The average length of time from the onset of delinquency through the end of the foreclosure process also expanded dramatically. Although most individuals undergoing foreclosure were experiencing serious financial stress, the extended foreclosure timelines enabled them to live in their homes without making mortgage payments until the end of the foreclosure process, thus providing temporary income and liquidity benefits from lower housing costs. This paper investigates the impact of extended foreclosure timelines on borrower performance with credit card debt. The authors’ results indicate that a longer period of nonpayment of mortgage expenses results in higher cure rates on delinquent credit cards and reduced credit card balances. Thus, foreclosure process delays may have mitigated the impact of the economic downturn on credit card default, suggesting that improvement in credit card performance during the postcrisis period would likely be slowed by the removal of the temporary liquidity benefits as foreclosures reach completion.
Supersedes Working Paper 14-8.
(762 KB, 40 pages)
Superseded by Working Paper 20-06.
(1.19 MB, 88 pages)
Superseded by Working Paper 19-44.
(615 KB, 56 pages)
The current era of globalization is dominated by the rise of investments in intangible capital rather than tangible capital — the ascendance of creativity over plant and equipment. This brief paper is motivated by the possibility that emerging market economies such as Morocco might take greater advantage of new tools and policies designed for this new era. To begin, the author discusses the transformation of the global economy and the consequences of the transformed global economy for economic thinking and measurement. The author refers to both old and new literature on the measurement of intangible investment and capital. Then, the author discusses the rising role of creativity and cultural difference in the development of these new economic forces, using the example of the Harry Potter book series. The author then considers how cultural enhancement serves multiple purposes for a nation. Finally, the author turns to some of the possible implications of these economic forces for Morocco, stressing that these implications are speculative.
(292 KB, 12 pages)
Monetary economists have long recognized a tension between the benefits of fractional reserve banking, such as the ability to undertake more profitable (long-term) investment opportunities, and the difficulties associated with it, such as the risk of insolvency for each bank and the associated losses to bank liability holders. The author shows that a specific banking arrangement (a joint-liability scheme) provides an effective mechanism for ensuring the ex-post transfer of reserves from liquid banks to illiquid banks, so it is possible to select a socially efficient reserve ratio in the banking system that preserves the safety of bank liabilities as a store of value and maximizes the rate of return paid to bank liability holders.
Supersedes Working Paper 13-32/R.
(305 KB, 36 pages)
The authors show that a competitive banking system is inconsistent with an optimum quantity of private money. Because bankers cannot commit to their promises and the composition of their assets is not publicly observable, a positive franchise value is required to induce the full convertibility of bank liabilities. Under perfect competition, a positive franchise value can be obtained only if the return on bank liabilities is sufficiently low, which imposes a cost on those who hold these liabilities for transaction purposes. If the banking system is monopolistic, then an efficient allocation is incentive-feasible. In this case, the members of the banking system obtain a higher return on assets, making it feasible to pay a sufficiently high return on bank liabilities. Finally, the authors argue that the regulation of the banking system is required to obtain efficiency.
Supersedes Working Paper 12-11/R.
(526 KB, 46 pages)
A primary concern in monetary economics is whether a purely private monetary regime is consistent with macroeconomic stability. The author shows that a competitive regime is inherently unstable due to the properties of endogenously determined limits on private money creation. Precisely, there is a continuum of equilibria characterized by a self-fulfilling collapse of the value of private money and a persistent decline in the demand for money. The author associates these equilibrium allocations with self-fulfilling banking crises. It is possible to formulate a fiscal intervention that results in the global determinacy of equilibrium, with the property that the value of private money remains stable. Thus, the goal of monetary stability necessarily requires some form of government intervention.
Supersedes Working Paper 12-19/R.
(470 KB, 42 pages)
Superseded by Working Paper 17-38.
(618 KB, 39 pages)
Superseded by Working Paper 17-26.
(569 KB, 38 pages)
The author finds that private-securitized loans perform worse than observably similar, nonsecuritized loans, which provides evidence for adverse selection. The effect of securitization is strongest for prime mortgages, which have not been studied widely in the previous literature and particular prime adjustable-rate mortgages (ARMs): These become delinquent at a 30 percent higher rate when privately securitized. By contrast, the author’s baseline estimates for subprime mortgages show that private-securitized loans default at lower rates. The author shows, however, that “early defaulting loans” account for this: those that were so risky that they defaulted before they could be securitized.
Supersedes Working Paper 09-21/R.
(633 KB, 38 pages)
Since the start of the financial crisis, the authors have seen an extraordinary lengthening of foreclosure timelines, particularly in states that require judicial review to complete a foreclosure but also recently in nonjudicial states. The authors’ analysis synthesizes findings from several lines of research, updates results, and presents new analysis to examine the costs and benefits of judicial foreclosure review. Consistent with previous studies, the authors find that judicial review imposes large costs with few, if any, offsetting benefits. They also provide early analysis of the new mortgage servicing rules enacted by the Consumer Financial Protection Bureau (CFPB) and find that these rules are contributing to even longer timelines, especially in nonjudicial states.
(640 KB, 34 pages)
The authors present a model of long-duration collateralized debt with risk of default. Applied to the housing market, it can match the homeownership rate, the average foreclosure rate, and the lower tail of the distribution of home-equity ratios across homeowners prior to the recent crisis. The authors stress the role of favorable tax treatment of housing in matching these facts. They then use the model to account for the foreclosure crisis in terms of three shocks: overbuilding, financial frictions, and foreclosure delays. The financial friction shock accounts for much of the decline in house prices, while the foreclosure delays account for most of the rise in foreclosures. The scale of the foreclosure crisis might have been smaller if mortgage interest payments were not tax deductible. Temporarily higher inflation might have lowered the foreclosure rate as well.
Supersedes Working Paper 11-26.
(565 KB, 44 pages)
A life-cycle model with equilibrium default in which consumers with and without temptation coexist is constructed to evaluate the 2005 bankruptcy law reform and other counterfactual reforms. The calibrated model indicates that the 2005 bankruptcy reform achieves its goal of reducing the number of bankruptcy filings, as seen in the data, but at the cost of loss in social welfare. The creditor-friendly reform provides borrowers with a stronger commitment to repay and thus yields lower default premia and better consumption smoothing. However, those who borrow and default due to temptation or unavoidable large expenditures suffer more under the reform due to higher costs or means-testing requirement. Moreover, those who borrow due to temptation suffer from overborrowing when the borrowing cost declines. The model indicates that the negative welfare effects dominate.
(656 KB, 47 pages)
Home appraisals are produced for millions of residential mortgage transactions each year, but appraisals are rarely below the transaction price. The authors exploit a unique data set to show that the mortgage application process creates an incentive to substitute the transaction price for the true appraised value when the latter is lower. The authors relate the frequency of information loss (appraisals set equal to transaction price) to market conditions and other factors that plausibly determine the degree of distortion. Information loss in appraisals may increase the procyclicality of housing booms and busts.
(547 KB, 37 pages)
Superseded by Working Paper 17-28.
(558 KB, 57 pages)
From 2007 to 2010, more than 200 community banks in the United States failed. Many of these failed community banking organizations (CBOs) held less than $1 billion in total assets. As economic conditions worsen, banking organizations are expected to preserve capital to withstand unexpected losses. This study examines CBOs prior to failure or becoming problem institutions to understand if, on average, a run on capital by insiders via dividend payouts led to greater financial fragility at the onset of the crisis. The authors use a control group of similar-sized banks that did not fail or become problem institutions to compare their results and to draw statistical conclusions. They use standard control variables highlighting corporate governance and managerial ownership, such as S-corporation designation and bank complexity that might create incentives more conducive to insider enrichment than to the welfare of depositors or debtholders. Although the new Dodd-Frank legislation exempted smaller banks from many proposed requirements, the authors’ results show that capital distributions to insiders contributed to community bank weakness during the financial crisis.
(686 KB, 32 pages)
The Great Recession offers a unique opportunity to analyze the performance of credit risk models under conditions of economic stress. The authors focus on the performance of models of credit risk applied to risk-segmented credit card portfolios. Specifically, the authors focus on models of default and loss and analyze three important sources of model risk: model selection, model specification, and sample selection. Forecast errors can be significant along any of these three model-risk dimensions. Simple linear regression models are not generally outperformed by more complex or stylized models. The impact of macroeconomic variables is heterogeneous across risk segments. Model specifications that do not consider this heterogeneity display large projection errors across risk segments. Prime segments are proportionally more severely impacted by a downturn in economic conditions relative to the subprime or near-prime segments. The sensitivity of modeled losses to macroeconomic factors is conditional on the model development sample. Models estimated over a period that does not incorporate a significant period of the Great Recession may fail to project default rates, or loss rates, consistent with those experienced during the Great Recession.
(527 KB, 25 pages)
A sovereign’s inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate the debt dilution problem is the inclusion of a seniority clause in sovereign debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the “absolute priority” or “first-in-time” rule). In this paper, the authors propose a modification of the absolute priority rule that is more suited to the sovereign debt context and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default.
(708 KB, 38 pages)
The authors contrast evidence of urban path dependence with efforts to analyze calibrated models of city sizes. Recent evidence of persistent city sizes following the obsolescence of historical advantages suggests that path dependence cannot be understood as the medium-run effect of legacy capital but instead as the long-run effect of equilibrium selection. In contrast, a different, recent literature uses stylized models in which fundamentals uniquely determine city size. The authors show that a commonly used model is inconsistent with evidence of long-run persistence in city sizes and propose several modifications that might allow for multiplicity and thus historical path dependence.
(1.46 MB, 12 pages)
This paper proposes and implements a statistical methodology for adjusting employment data for the effects of deviation in weather from seasonal norms. This is distinct from seasonal adjustment, which only controls for the normal variation in weather across the year. Unusual weather can distort both the data and the seasonal factors. The authors control for both of these effects by integrating a weather adjustment step in the seasonal adjustment process. They use several indicators of weather, including temperature, snowfall and hurricanes. Weather effects can be very important, shifting the monthly payrolls change number by more than 100,000 in either direction. The effects are largest in the winter and early spring months and in the construction sector.
(464 KB, 26 pages)
The authors estimate a structural model of optimal life-cycle housing and nonhousing consumption in the presence of labor income and house price uncertainties. The model postulates constant elasticity of substitution between housing service and nonhousing consumption and explicitly incorporates a housing adjustment cost. The authors’ estimation fits the cross-sectional and time-series household wealth and housing profiles from the Panel Study of Income Dynamics (1984 to 2005) reasonably well and suggests an intratemporal elasticity of substitution between housing and nonhousing consumption of 0.487. The low elasticity estimate is largely driven by moments conditional on state house prices and moments in the latter half of the sample period and is robust to different assumptions of housing adjustment cost. The authors then conduct policy analyses in which they let house price and income take values as those observed between 2006 and 2011. The authors show that the responses depend importantly on the housing adjustment cost and the elasticity of substitution between housing and nonhousing consumption. In particular, compared with the benchmark, the impact of the shocks on homeownership rates is reduced, but the impact on nonhousing consumption is magnified when the house selling cost is sizable or when housing service and nonhousing consumption are highly substitutable.
Supersedes Working Paper 09-7.
(368 KB, 40 pages) | Online Appendix (164 KB, 11 pages)
Superseded by Working Paper 16-25.
(15.3 MB, 78 pages)
The state of Nevada passed legislation in 2009 that abolished deficiency judgments for purchase mortgage loans made after October 1, 2009, and collateralized by primary single-family homes. In this paper, the authors study how the law change affected lenders’ decisions to grant mortgages and borrowers’ decisions to apply for them and subsequently default. Using unique mortgage loan-level application and performance data, the authors find evidence that lenders tightened their lending standards for mortgages affected by the new legislation. In particular, lenders reduced approval rates and loan sizes for mortgages after implementation of the law. Borrowers also increased the loan size at application after the law change but the total number of loan applications did not increase. Finally, the law change did not appear to have affected borrowers’ default decisions though the power of the test may be limited due to the overall low loan default rates at the time.
(1.06 MB, 39 pages)
Rapid house-price depreciation and rising unemployment were the main drivers of the huge increase in mortgage default during the downturn years of 2007 to 2010. However, mortgage default was also associated with an increased reliance on alternative mortgage products such as pay-option and interest-only adjustable rate mortgages (ARMs), which allow the borrower to defer principal amortization. The goal of this paper is to better understand the forces that spurred use of alternative mortgages during the housing boom and the resulting impact on default patterns, relying on a unifying conceptual framework to guide the empirical work. The conceptual framework allows borrowers to choose the extent of mortgage “backloading,” the postponement of loan repayment through various mechanisms that constitutes a main feature of alternative mortgages. The model shows that, when future house-price expectations become more favorable, reducing default concerns, mortgage choices shift toward alternative products. This prediction is confirmed by empirical evidence showing that an increase in past house-price appreciation, which captures more favorable expectations for the future, raises the market share of alternative mortgages. In addition, using a proportional-hazard default model, the paper tests the fundamental presumption that backloaded mortgages are more likely to default, finding support for this view.
(608 KB, 44 pages)