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Superseded by Working Paper 19-40.
(400 KB, 27 pages)
The author proposes a tractable model of the demand for reserves under nonlinear remuneration schemes that can
encompass quota systems and voluntary reserve target frameworks, among other possibilities. He shows how such
remuneration schemes have several favorable properties regarding interest-rate control by the central bank. In
particular, wider tolerance bands can reduce rate volatility due to variations in the supply of reserves, both
large and small, although they may curtail trading in the interbank market.
(487 KB, 27 pages)
Superseded by Working Paper 20-17.
(418 KB, 45 pages)
In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that
drastically altered the landscape of the federal funds market. The current environment, in which depository
institutions are flush with excess reserves, has forced policymakers to design a new operational framework for
monetary policy implementation. The authors provide a parsimonious model that captures the key features of the
current federal funds market along with the instruments introduced by the Federal Reserve to implement its target
for the federal funds rate. They use this model to analyze the factors that determine rates and volumes under the
new implementation framework and to study the effects of changes in the policy rates and other shocks to the
economic environment. The authors also calibrate the model and use it as a quantitative benchmark for applied
analysis, with a particular emphasis on understanding the role of the overnight reverse repurchase agreement
facility in supporting the federal funds rate.
Supersedes Working Paper 15-35/R.
(709 KB, 41 pages)
It has been largely acknowledged that monetary policy can affect borrowers and lenders differently. This paper
investigates whether the distributional effects of monetary policy are an inherent feature of monetary economies
with private credit instruments. In the authors' framework, both money and credit instruments can potentially be
used as media of exchange to overcome trading frictions in decentralized markets. Entrepreneurs have access to
productive projects but face credit constraints due to limited pledgeability of their returns. Monetary policy
affects the liquidity premium on private credit and thereby influences the cost of borrowing and the level of
investment, but any attempt to ease borrowing constraints results in suboptimal decentralized-market trading
activity. The authors show that this policy trade-off is not an inherent feature of monetary economies
with private credit instruments. If they consider a richer set of aggregate liquidity management instruments, such
as the payment of interest on inside money and capital requirements, it is possible to implement an efficient
(454 KB, 33 pages)
We study a situation in which a regulator relies on risk models that banks produce in order to regulate them. A bank
can generate more than one model
and choose which models to reveal to the regulator. The regulator can find out the other models by monitoring the
bank, but in equilibrium, monitoring
induces the bank to produce less information. We show that a high level of monitoring is desirable when the
bank’s private gain from producing more information is either sufficiently high or sufficiently low. When
public models are more precise, banks produce more information, but the regulator may end up monitoring more.
(531 KB, 51 pages)
A monetary authority can be committed to pursuing an inflation, price-level, or nominal-GDP target yet
systematically fail to achieve the prescribed goal. Constrained by the zero lower bound on the policy rate, the
monetary authority is unable to implement its objectives when private-sector expectations stray far enough from the
target. Low-inflation expectations become self-fulfilling, resulting in an additional Markov equilibrium in which
the monetary authority falls short of the nominal target, average output is below its efficient level, and the
policy rate is typically low. Introducing a stabilization goal for long-term nominal rates can implement a unique
Markov equilibrium without fully compromising stabilization policy.
Supersedes Working Paper 14-02/R.
(704 KB, 53 pages)
The authors explore a causal link between aging of the labor force and declining trends in the real interest rate
and inflation in Japan. They develop a New Keynesian search/matching model that features heterogeneities in age and
firm-specific skills. Using the model, they examine the long-run implications of the sharp drop in labor force
entry in the 1970s. They show that the changes in the demographic structure induce significant low-frequency
movements in per-capita consumption growth and the real interest rate. These changes also lead to similar movements
in the inflation rate when the monetary policy follows the standard Taylor rule, failing to recognize the
time-varying nature of the natural rate of interest. The model suggests that aging of the labor force accounts for
roughly 40% of the declines in the real interest rate observed between the 1980s and 2000s in Japan.
(520 KB, 39 pages)
The authors study government interventions in markets suffering from adverse selection. Importantly, asymmetric
information prevents both the realization of gains from trade and the production of information that is valuable to
other market participants. They find a fundamental tension in maximizing welfare: While some intervention is
required to restore trading, too much intervention depletes trade of its informational content. The authors
characterize the optimal policy that balances these two considerations and explore how it depends on features of
the environment. Their model can be used to study a program introduced in 2009 to restore information production in
the market for legacy assets.
Supersedes Working Paper 13-20.
(690 KB, 65 pages)
Superseded by Working Paper 19-02.
(2 MB, 49 pages)
While the preventive effect of loan modifications on mortgage default has been well-documented, evidence on the
broad consequences of modifications has been fairly limited. Based on two unique loan-level data sets with borrower
credit profiles, this study reports novel empirical evidence on how homeowners manage their credit before and after
receiving modifications. The paper has several main findings. First, loan modifications improve borrowers’
overall credit standing and access to credit. Modifications that provide principal reduction, rate reduction, or
greater payment relief, as well as those received by borrowers not in financial catastrophe, lead to a larger
improvement in borrowers’ credit rating than others. Second, loan modifications lead to a slight increase in
borrowers’ debts, primarily on home equity line of credit (HELOC) accounts and auto loans. Third,
borrowers’ performance on nonmortgage accounts, however, has not been negatively impacted by modifications.
This study demonstrates that interventions designed to improve household balance sheets could have a direct and
sizable impact on borrower financial outcomes.
(625 KB, 46 pages)
Superseded by Working Paper 19-42.
(15.3 MB, 78 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 is badly underestimated because GDP excludes online entertainment (Brynjolfsson and Oh 2012; Ito 2013; Aeppel 2015). This paper introduces an experimental GDP methodology that includes advertising-supported media in both final output and business inputs. For example, Google Maps would be counted as final output when it is used by a consumer to plan vacation driving routes. On the other hand, the same website would be counted as a business input when it is used by a pizza restaurant to plan delivery routes.
Contrary to critics of the U.S. Bureau of Economic Analysis (BEA), the process of including "free" media in the input-output accounts has little impact on either GDP or total factor productivity (TFP). Between 1998 and 2012, measured nominal GDP growth falls 0.005% per year, real GDP growth rises 0.009% per year and TFP growth rises 0.016% per year. Between 1929 and 1998, measured nominal GDP growth rises 0.002% per year, real GDP growth falls 0.002% per year, and TFP growth rises 0.004% per year. These changes are not nearly enough to reverse the recent slowdown in growth.
The authors' method for accounting for free media is production oriented in the sense that it is a
measure of the resource input into the entertainment (or other content) of the medium rather than
a measure of the consumer surplus arising from the content. The BEA uses a similar production-oriented
approach when measuring GDP. In contrast, other researchers use broader approaches to
measure value. Brynjolfsson and Oh (2012) attempt to capture some consumer surplus by
measuring the time expended on the Internet. Varian (2009) argues that much of the value of the
Internet is in time saving, an additional metric for capturing consumer surplus. The McKinsey
Institute (Bughin et al. 2011) attempts to measure the productivity gain from search directly.
In particular, this production-oriented accounting has no method to account for instances
in which the good or service precedes the revenue that it eventually generates. Over the past two
decades, many Silicon Valley firms have followed the disruptive business model described as
URL: ubiquity now, revenue later. Some firms have been creating proprietary software or
research, which is already captured in the national accounts as investment. Other firms have been
creating intangible investments in open source software, customer networks and other
organizational capital. Despite their long-run value, none of these intangible assets are currently
captured in the national accounts as investment. If we treat these asset categories as capital, then
the productivity boom from 1995 to 2000 becomes even stronger and the weak productivity
growth of the past decade may be ameliorated somewhat.
(882 KB, 73 pages)
Europe's debt crisis resembles historical episodes of outright default on domestic public debt about which little
research exists. This paper proposes a theory of domestic sovereign default based on distributional incentives
affecting the welfare of risk-averse debt and non-debtholders. A utilitarian government cannot sustain debt if
default is costless. If default is costly, debt with default risk is sustainable, and debt falls as the
concentration of debt ownership rises. A government favoring bondholders can also sustain debt, with debt rising as
ownership becomes more concentrated. These results are robust to adding foreign investors, redistributive taxes, or
a second asset.
(1 MB, 76 pages)
There have been considerable debate and controversy about the effects of gentrification on neighborhoods and the
people residing in them. This paper draws on a unique large-scale consumer credit database to examine the
relationship between gentrification and the credit scores of residents in the City of Philadelphia from 2002 to
2014. The authors find that gentrification is positively associated with changes in residents’ credit scores
on average for those who stay, and this relationship is stronger for residents in neighborhoods in the more
advanced stages of gentrification. Gentrification is also positively associated with credit score changes for less
advantaged residents (low credit score, older, or longer term residents, and those without mortgages) if they do
not move, though the magnitude of this positive association is smaller than for their more advantaged counterparts.
Nonetheless, moving from gentrifying neighborhoods is negatively associated with credit score changes for less
advantaged residents, residents who move to lower-income neighborhoods, and residents who move to any other
neighborhoods within the city (instead of outside the city) relative to those who stay. The results demonstrate how
the association between gentrification and residents’ financial health is uneven, especially for less
(597 KB, 40 pages)
A life-cycle model with equilibrium default in which agents with and without temptation coexist is constructed to
evaluate the 2005 bankruptcy law reform. The calibrated model indicates that the 2005 reform reduces bankruptcies,
as seen in the data, and improves welfare, as lower default premia allows better consumption smoothing. A
counterfactual reform of changing income garnishment rate is also investigated. Interesting contrasting welfare
effects between two types of agents emerge. Agents with temptation prefer a lower garnishment rate as tighter
borrowing constraint prevents them from over-borrowing, while those without prefer better consumption smoothing
enabled by a higher garnishment rate.
(920 KB, 46 pages)
Since 2000, strengthening gentrification in an expanding section of cities and neighborhoods has renewed interest
from policymakers, researchers, and the public in the causes of gentrification. The identification of causal
factors can help inform analyses of welfare, policy responses, and forecasts of future neighborhood change. The
authors highlight some features of recent gentrification that popular understandings often do not emphasize, and
they review progress on identifying some causal factors. However, a complete account of the relative contribution
of many factors is still elusive. The authors suggest questions and opportunities for future research.
(662 KB, 24 pages)
The authors examine how household balance sheets and income statements interact to affect bankruptcy decisions
following an exogenous income shock. For identification, they exploit government payments in one but not any other
Canadian province that varied exogenously based on family size. Receiving a larger income shock from the payment
(relative to household income) reduces the count of bankruptcies, with fewer remaining filers having higher net
balance sheet benefits of bankruptcy (unsecured debt discharged minus liquidated assets forgone). Receiving an
income shock thus causes households that would receive lower net balance sheet benefits under bankruptcy law to
select out of bankruptcy.
Supersedes Working Paper 14-17.
(458 KB, 38 pages)
There is ample concern that college students are making ill-informed student loan decisions with potentially
negative consequences to themselves and the broader economy. The author reports the results of a randomized field
experiment in which college students are provided salient information about their borrowing choices. The setting is
a large flagship public university in the Midwest, and the sample includes all nongraduating students who
previously borrowed student loan money (~10,000 students). Half of the students received individually tailored
letters with simplified information about future monthly payments, cumulative borrowing, and the typical borrowing
of peers; the other half is the control group that received no additional information. There are at most modest
effects of the letter overall, which suggests that information alone is not sufficient to drive systematically
different borrowing choices among students. However, some key student subgroups changed their borrowing in response
to the letter, particularly those with low GPAs. There is also evidence of intended (more contact with financial
aid professionals) and unintended (lower Pell Grant receipt) consequences of the letter.
(3.17 MB, 41 pages)
The authors examine and extend the results of Ball and Croushore (2003) and Rudebusch and Williams (2009), who show
that the output forecasts in the Survey of Professional Forecasters (SPF) are inefficient. Ball and Croushore show
that the SPF output forecasts are inefficient with respect to changes in monetary policy, as measured by changes in
real interest rates, while Rudebusch and Williams show that the forecasts are inefficient with respect to the yield
spread. In this paper, the authors investigate the robustness of both claims of inefficiency, using real-time data
and exploring the impact of alternative sample periods on the results.
(2.14 MB, 35 pages)
The authors analyze the determinants of underfunding of local government's pension funds using a politico-economic
overlapping generations model. They show that a binding downpayment constraint in the housing market dampens
capitalization of future taxes into current land prices. Thus, a local government's pension funding policy matters
for land prices and the utility of young households. Underfunding arises in equilibrium if the pension funding
policy is set by the old generation. Young households instead favor a policy of full funding. Empirical results
based on cross-city comparisons in the magnitude of unfunded liabilities are consistent with the predictions of the
(520 KB, 62 pages)
Superseded by Working Paper 18-11.
(1.37 MB, 53 pages)
In this paper, the authors use credit rating data from two large Swedish banks to elicit evidence on banks' loan
monitoring ability. For these banks, the authors' tests reveal that banks' internal credit ratings indeed include
valuable private information from monitoring, as theory suggests. Banks' private information increases with the
size of loans.
(703 KB, 37 pages)
Congestion costs in urban areas are significant and clearly represent a negative externality. Nonetheless,
economists also recognize the production advantages of urban density in the form of positive agglomeration
externalities. The long-run equilibrium outcomes in economies with multiple correlated but offsetting externalities
have yet to be fully explored in the literature. Therefore, the author has developed a spatial equilibrium model of
urban structure that includes both congestion costs and agglomeration externalities. The author then estimates the
structural parameters of the model using a computational algorithm to match the spatial distribution of employment,
population, land use, land rents, and commute times in the data. Policy simulations based on the estimates suggest
that congestion pricing may have ambiguous consequences for economic welfare.
Supersedes Working Paper 13-25.
(1.35 MB, 54 pages)
Can competition work among privately issued fiat currencies such as Bitcoin or Ethereum? Only sometimes. To show
this, the authors build a model of competition among privately issued fiat currencies. The authors modify the
current workhorse of monetary economics, the Lagos-Wright environment, by including entrepreneurs who can issue
their own fiat currencies in order to maximize their utility. Otherwise, the model is standard. The authors show
that there exists an equilibrium in which price stability is consistent with competing private monies but also that
there exists a continuum of equilibrium trajectories with the property that the value of private currencies
monotonically converges to zero. These latter equilibria disappear, however, when the authors introduce productive
capital. They also investigate the properties of hybrid monetary arrangements with private and government monies,
of automata issuing money, and the role of network effects.
(637 KB, 44 pages)
Structural DSGE models are used both for analyzing policy and the sources of business cycles. Conclusions based on
full structural models are, however, potentially affected by misspecification. A competing method is to use
partially identified VARs based on narrative shocks. This paper asks whether both approaches agree. First, the
author shows that, theoretically, the narrative VAR approach is valid in a class of DSGE models with Taylor-type
policy rules. Second, the author quantifies whether the two approaches also agree empirically, that is, whether
DSGE model restrictions on the VARs and the narrative variables are supported by the data. To that end, the author
first adapts the existing methods for shock identification with external instruments for Bayesian VARs in the SUR
framework. The author also extends the DSGE-VAR framework to incorporate these instruments. Based on a standard
DSGE model with fiscal rules, the author’s results indicate that the DSGE model identification is at odds
with the narrative information as measured by the marginal likelihood. The author traces this discrepancy to
differences both in impulse responses and identified historical shocks.
(9.87 MB, 70 pages)
Superseded by Working Paper 17-35.
(855 KB, 78 pages)
In this paper, the author uses a statistical model to combine various surveys to produce a term structure of
inflation expectations — inflation expectations at any horizon — and an associated term structure of
real interest rates. Inflation expectations extracted from this model track realized inflation quite well, and in
terms of forecast accuracy, they are at par with or superior to some popular alternatives. Looking at the period
2008-2015, the author concludes that long-run inflation expectations remained anchored, and the policies of the
Federal Reserve provided a large level of monetary stimulus to the economy.
(684 KB, 61 pages)
The recent decline in small business lending (SBL) among U.S. community banks has spurred a growing debate about the
future role of small banks in providing credit to U.S. small businesses. This paper adds to that discussion in
three key ways. First, the authors’ research builds on existing evidence that suggests that the decline in
SBL by community banks is a trend that began at least a decade before the financial crisis. Larger banks and
nonbank institutions have been playing an increasing role in SBL. Second, the authors’ work shows that in the
years preceding the crisis, small businesses increasingly turned to mortgage credit — most notably,
commercial mortgage credit — to fund their operations, exposing them to the property crisis that underpinned
the Great Recession. Finally, the authors’ work illustrates how community banks face an increasingly dynamic
competitive landscape, including the entrance of deep-pocketed alternative nonbank lenders that are using
technology to find borrowers and underwrite loans, often using unconventional lending practices. Although these
lenders may pose a competitive threat to community banks, the authors explore emerging examples of partnerships and
alliances among community banks and nonbank lenders.
(4.77 MB, 53 pages)
The authors analyze a labor market with search and matching frictions in which wage setting is controlled by a
monopoly union. Frictions render existing matches a form of firm-specific capital that is subject to a hold-up
problem in a unionized labor market. The authors study how this hold-up problem manifests itself in a dynamic
infinite horizon model with fully rational agents. They find that wage solidarity, seemingly an important norm
governing union operations, leaves the unionized labor market vulnerable to potentially substantial distortions
because of hold-up. Introducing a tenure premium in wages may allow the union to avoid the problem entirely,
however, potentially allowing efficient hiring. Under an egalitarian wage policy, the degree of commitment to
future wages is important for outcomes: With full commitment to future wages, the union achieves efficient hiring
in the long run but hikes up wages in the short run to appropriate rents from firms. Without commitment, and in a
Markov perfect equilibrium, hiring is well below its efficient level both in the short and the long run. The
authors demonstrate the quantitative impact of the union in an extended model with partial union coverage and
multiperiod union contracting.
(592 KB, 28 pages)
Relative price dispersion is defined as persistent differences in the price that retailers set for the same good
relative to the price they set for their other goods. Using a large-scale dataset on prices in the US retail
market, we document that relative price dispersion accounts for about 30% of the variance of prices for the same
good, in the same market, during the same week. Using a search-theoretic model of the retail market, we show that
relative price dispersion can be rationalized as the equilibrium consequence of a pricing strategy used by sellers
to discriminate between high-valuation buyers who need to make all of their purchases in one store, and
low-valuation buyers who are able to purchase different items in different stores.
(864 KB, 67 pages)
The authors explore the role of consumer risk appetite in the initiation of credit cycles and as an early trigger of
the U.S. mortgage crisis. They analyze a panel data set of mortgages originated between the years 2000 and 2009 and
follow their performance up to 2014. After controlling for all the usual observable effects, the authors show that
a strong residual vintage effect remains. This vintage effect correlates well with consumer mortgage demand, as
measured by the Federal Reserve Board’s Senior Loan Officer Opinion Survey, and correlates well to changes in
mortgage pricing at the time the loan was originated. The authors’ findings are consistent with an economic
environment in which the incentives of low-risk consumers to obtain a mortgage decrease when the cost of obtaining
a loan rises. As a result, mortgage originators generate mortgages from a pool of consumers with changing risk
profiles over the credit cycle. The unobservable component of the shift in credit risk, relative to the usual
underwriting criteria, may be thought of as macroeconomic adverse selection.
(679 KB, 34 pages)
Superseded by Working Paper 18-16.
(1.0 MB, 83 pages)
This paper studies quantitative properties of a multiple-worker firm search/matching model and investigates how
worker transition rates and job flow rates are interrelated. The authors show that allowing for job-to-job
transitions in the model is essential to simultaneously account for the cyclical features of worker transition
rates and job flow rates. Important to this result are the distinctions between the job creation rate and the
hiring rate and between the job destruction rate and the layoff rate. In the model without job-to-job transitions,
these distinctions essentially disappear, thus making it impossible to simultaneously replicate the cyclical
features of both labor market flows.
Supersedes Working Paper 13-9/R.
(1.37 MB, 36 pages)
The authors present a dynamic structural model of subprime adjustable-rate mortgage (ARM) borrowers making payment
decisions, taking into account possible consequences of different degrees of delinquency from their lenders. The
authors empirically implement the model using unique data sets that contain information on borrowers’
mortgage payment history, their broad balance sheets, and lender responses. The authors’ investigation of the
factors that drive borrowers’ decisions reveals that subprime ARMs are not all alike. For loans originated in
2004 and 2005, the interest rate resets associated with ARMs as well as the housing and labor market conditions
were not as important in borrowers’ delinquency decisions as in their decisions to pay off their loans. For
loans originated in 2006, interest rate resets, housing price declines, and worsening labor market conditions all
contributed importantly to their high delinquency rates. Counterfactual policy simulations reveal that even if the
London Interbank Offered Rate (LIBOR) could be lowered to zero by aggressive traditional monetary policies, it
would have a limited effect on reducing the delinquency rates. The authors find that automatic modification
mortgages with cushions, under which the monthly payment or principal balance reductions are triggered only when
housing price declines exceed a certain percentage, may result in a Pareto improvement, in that borrowers and
lenders are both made better off than under the baseline, with lower delinquency and foreclosure rates. The
authors’ counterfactual analysis also suggests that limited commitment power on the part of the lenders
regarding loan modification policies may be an important reason for the relatively low rate of modifications
observed during the housing crisis.
(950 KB, 53 pages)
Superseded by Working Paper 17-27.
(713 KB, 49 pages)