Federal Reserve System is composed of the Board of Governors and twelve regional Federal Reserve Banks (the "Feds").While the Board of Governors is a government agency, the Feds are semiprivate corporations with a governance structure similar to that of companies in the private sector, with the Feds'presidents serving as CEOs of their Banks.In particular, each Bank has a board of directors with oversight responsibilities similar to those of their private sector counterparts.Moreover, each board nominates
The Fed's discount window makes loans to depository institutions on a regular basis. Recent publicly available transaction-level data permit a closer look at the particular circumstances under which some of those loans happened. The analysis of nine specific cases produces some general insights that can be useful in evaluating whether the discount window should be open to making loans during periods of relatively calm financial conditions.
In a simple new keyenesian model of monetary policy under discretion constraining the Central Bank to put inflation within a pre-specified Inflation Target Zone can eliminate the inflation bias and, at least for certain parameter ranges, significantly reduce the stabilization bias. Also, it is possible to investigate what is the optimal Inflation Target Zone for different economies. These seem to depend of the structural parameters in a non-linear and often non-monotonic way.
Using data from the Health and Retirement Survey, we document the changes in assets that occur before a person's death. Applying an event study approach, we find that during the 6 years preceding their deaths, the assets of single decedents decline, relative to those of similar single survivors, by an additional $20,000 on average. Over the same time span, the assets of couples who lose a spouse fall, relative to those of similar surviving couples, by an additional $90,000 on average. Households experiencing a death also incur higher out-of-pocket medical spending and other end-of-life expenses. This elevated spending is sufficient to explain (in accounting terms) the asset declines observed for singles but falls short of explaining the declines observed for couples. Bequests from the dying spouse to non-spousal heirs such as children are more than sufficient to explain the remainder.
In booms, households substitute luxuries for necessities, e.g., food away from home for food at home. Ignoring this cyclical pattern of composition changes in the consumption basket makes the labor-market wedge - a measure of inefficiency that reflects the gap between the marginal rate of substitution and the real wage - appear to be more volatile than it actually is. Based on the household expenditure pattern across 10 consumption categories in the Consumer Expenditure Survey, we show that taking into account these composition changes can explain 6-15% of the cyclicality in the measured labor-market wedge.
A large literature has studied how the presence of uninsurable labor-income risk affects the patterns of savings and portfolio allocation over the life cycle. For example, workers in risky companies, occupations, or industries may have a larger incentive to accumulate wealth to insure against adverse events, such as unemployment, and to prepare for retirement. Moreover, they are likely to hold different investment portfolios, e.g., how much they invest in risky assets and how much of their investment is directed toward liquid versus illiquid accounts. In models with heterogeneous agents, income risk is usually represented by a probability distribution over income draws with a constant variance. Nonetheless, there is increasing evidence that labor-income risk is itself idiosyncratic. For example, Meghir and Pistaferri (2004) use income data from the Panel Study of Income Dynamics to show that there is strong support in favor of income dynamics with a time-varying volatility. Guvenen, Karahan, Ozkan, and Song (2015) show that an income process where variance switches stochastically between low and high regimes can match several higher-order of income moments including the high kurtosis of earnings in the U.S. data. Chang, Hong, Karabarbounis, Wang, and Zhang (2020) use administrative data from Statistics Norway to calibrate a life-cycle model with stochastic volatility in earnings and explore its implications for portfolio choice.
In this paper, we study the credit default swaps (CDS) position of the main dealers in the CDS market close to credit events of sovereign countries. We focus on the credit events of three countries that have faced significant financial distress in the past decade: Argentina, Venezuela, and Ukraine. After introducing the historical background of each country, we find that CDS dealers, defined as the top ten traders of CDS in their respective countries, tend to sell sovereign CDS (hold more negative or less positive positions) when yields/CDS spreads go up. This finding suggests that dealers perform the role of liquidity providers in times of financial distress and take the credit risk that smaller traders want to unload into the market.
he conventional framework in modern macroeconomics assumes that households know all information pertinent to the trade-o¤s they face and have rational expectations.Within this framework, they optimally adjust their behavior in response to disturbances in the economy in a way that is forward-looking.Thus, the persistence of shocks matters.Moreover, in an economy driven by shocks that differ in their degree of persistence, households can perfectly distinguish between these shocks.Permanent shocks move the economy to a new steady state while transitory shocks have no e¤ect in the long run.The idea that persistent and transitory shocks have di¤erent e¤ects in a setting where agents are forward-looking is well-documented.Blanchard and Quah (1989), for example, use this fact to identify demand shocks as those that only have temporary e¤ects on unemployment and output but supply shocks as those that have permanent e¤ects on output.In a similar vein, King et al. (1991) identify permanent productivity shocks to the common trend in output, consumption, and investment.They …nd that permanent shocks account for over two-thirds of output ‡uctuations over the two-to …ve-year horizon.However, they also show that including nominal variables decreases the explanatory power of balanced-growth shocks on output ‡uctuations.The underlying class of models used, for example, by either Blanchard and Quah (1989) or King et al. (1991), is one in which agentsThe views expressed in this paper are those of the authors and do not necessarily re ‡ect those of the Federal Reserve Bank of Richmond, the Federal Reserve Bank of San Francisco, or the Federal Reserve System.We thank Mark Watson for highlighting the imperfect information problem discussed herein and suggesting the solution we describe.We also thank Reiko Laski for outstanding research assistance.
Taking internet banking as an example, we study diffusion of cost-saving technological innovations. We show that the diffusion of internet banking follows an S-shaped logistic curve as it penetrates a log-logistic bank-size distribution. We test the theoretical hypothesis with an empirical study of internet banking diffusion among banks across fifty U.S. states. Using an instrument-variable approach, we estimate the positive effect of average bank size on internet banking diffusion. The empirical findings allow us to examine the technological, economic, and institutional factors governing the diffusion process and explain the variation in diffusion rates across geographic regions.
Theoretical formulations of dynamic heterogeneous-agent economiestypically include a distribution as an aggregate state variable. This paperintroduces a method for computing equilibrium of these models by including a distribution directly as a state variable if it is finite-dimensional or a fine approximation of it if infinite-dimensional. The method accurately computes equilibrium in an extreme calibration of Huffman's (1987) overlapping-generations economy where quasi-aggregation, the accurate forecasting of prices using a small state space, fails to obtain. The method also accurately solves for equilibrium in a version of Krusell and Smith's (1998) economy wherein quasi-aggregation obtains but households face occasionally binding constraints. The method is demonstrated to be not only accurate but also feasible with equilibria for both economies being computed in under ten minutes in Matlab. Feasibility is achieved by using Smolyak's (1963) sparse-grid interpolation algorithm to limit the necessary number of gridpoints by many orders of magnitude relative to linear interpolation. Accuracy is achieved by using Smolyak's algorithm, which relies on smoothness, only for representing the distribution and not for other state variables such as individual asset holdings.
The likelihood of returning to near-zero interest rates is relevant to policymakers in considering the path of future interest rates. At the zero lower bound, the Fed can no longer lower rates and thus can respond to a contraction only through alternative policy measures, such as quantitative easing. Recent research at the Richmond Fed has used repeated simulations of the U.S. economy to estimate the probability of such an occurrence over the next ten years. The estimated probability of returning to the zero lower bound one or more times during this period is approximately one chance in four.
This article uses basic text analytic techniques to examine the sentiment embodied in two surveys conducted by the Richmond Fed: the Manufacturing and Service Sector Surveys. Specifically, the article develops several sentiment indicators based on the comments provided by survey participants, contrasts the sentiment measures against responses to other survey questions, and analyzes the monthly evolution of the sentiment indicators during the period 2002-18. Two main conclusions emerge from the analysis. First, the indicators reflect reasonably well changes in economic sentiment along time. Second, negative sentiment has been increasing since approximately August 2017. However, during this same period, the composite DI reported by the Richmond Fed (an indicator that intends to capture the strength of economic conditions in the Fifth District) has been increasing as well.
growing literature in macroeconomics and …nance has found important economic e¤ects of variations in risk, in particular shocks to the volatility of key macroeconomic variables (such as total factor productivity).However, much less is known about the importance of shocks to the skewness of macroeconomic variables. 1 In this paper, we seek to quantify the economic e¤ects of skewness shocks.To this end, we augment a small open economy real business cycle model with a novel feature: discrete regime changes in the higherorder moments of exogenous shocks, modeled as shocks to total factor productivity (TFP).We assume that in each period the economy can be in one of two possible Markov states: an unrest state or a quiet state.The unrest state is assumed to be associated with a substantial increase in volatility and negative skewness of shocks.This assumption is motivated by our empirical …ndings about the moments of business cycles of many countries that experience political unrest (see the discussion of our calibration below).Hence, unrest is e¤ectively a shock to the second-order and third-order moments of the distribution of economic shocks.
In this article, we study wealth effects, i.e., the response of consumption to exogenous changes in wealth. We use a consumption-saving model with endogenous retirement to show that the endogenous response of the value of a worker's human capital to changes in her wealth helps to account for the weak wealth effects observed in the data.
We discuss the historical background of the credit default swap (CDS) market, why CDS auctions were developed, and the most recent literature. We describe the auction rules using the Toys R Us auction as an example. Furthermore, we discuss the theoretical and empirical results presented in Chernov et al. (2013). Empirically, we extend their data to include more recent CDS auctions. Our results support their findings that dealers have incentive to manipulate the auction price downward when the net open interest is positive. Finally, we use novel dealer-level CDS positions to support Chernov et al.'s (2013) findings.
Following the financial crisis of 2007-08, capital requirements were revised along a number of important dimensions with the intent of shoring up the banking system and reducing the likelihood of another crisis. Changes included new measures of capital and increased minimum requirements, with special emphasis on requirements for the largest and most systemically important banks. In this article, I survey the history of bank capital requirements and review the new capital rules.
latforms that intermediate transactions between sellers and buyers have become increasingly important in the economy.People are familiar with, for example, online marketplaces (such as Amazon and eBay), payment platforms (such as Visa, MasterCard, and Paypal), and hotel booking sites (such as Booking.com and Expedia).However, there has been a great pricing puzzle associated with these platforms in that they almost universally rely on ad valorem fees, in which cases platforms charge sellers fees proportional to the transaction value plus sometimes small per-transaction fees.Given that these platforms do not incur signi…cant costs that vary with transaction value, it is puzzling why ad valorem fees are so prevalently used.In this article, we review two alternative explanations on this pricing puzzle.One theory, provided by Shy and Wang (2011) and others, emphasizes the vertical relation between the platform and the sellers.It is shown that in the case where the platform (i.e., the upstream) and the sellers (i.e., the downstream) both have market power (i.e., socalled "double marginalization") 1 , the platform extracts a higher pro…t
We use millions of user-entry salaries from Glassdoor to evaluate how well data from online wage postings compare with more traditional, aggregated data, such as the Quarterly Census for Employment and Wages (QCEW) or household-level data such as the Panel Study of Income Dynamics (PSID). We perform our analysis across industries as well as geographical areas. We find that industry employment shares differ substantially between Glassdoor and QCEW. However, the correlation between industry- and region-specific average salaries in Glassdoor and the QCEW is fairly high. Similarly, the within-industry dispersion in salaries in Glassdoor is fairly close to the dispersion in the PSID.
We evaluate the Federal Reserve Bank of Richmond (FRBR) manufacturing survey and assess its contribution to explaining national and regional economic conditions. Specifically, we examine the predictive accuracy of a variety of static and dynamic models. The models include the composite diffusion index reported by the FRBR and other information readily available from the FRBR surveys but not currently employed in the calculation of the composite index. The paper concludes, first, that the diffusion indices currently reported perform reasonably well at explaining both the national and the regional economy. Second, it is possible to improve the predictive power of the indices by considering models that account for a richer dynamic structure given the high persistence of the series under study. Third, the predictive accuracy of the current FRBR composite index can be improved further by adjusting the weights used in its calculation and by including other diffusion indices. Also, the composite indices that track the national and regional economy would not necessarily be the same, and the paper provides a few insights on what those diffusion indices would look like.
I propose a nonparametric structural estimator for the distribution of liquidity needs in a version of the Diamond and Dybvig (1983) model when only the aggregate level of withdrawals is observed. The model is an extension of Peck and Shell (2003) with a continuum of depositors. I show how the characterization of the optimal contract proposed in Sultanum (2014) can be used to estimate the distribution of aggregate liquidity needs. The method builds on the literature of estimation of auctions. More precisely, it uses the indirect approach proposed by Guerre et al. (2000). Guerre et al. (2000) use the differential equation associated with the first-order condition for the optimal bid to recover the unobserved distribution of agents' valuations from the distribution of bids in an auction. The method I propose uses the differential equation associated with the first-order condition for an optimal bank contract to recover the unobserved distribution of liquidity needs from the observed distribution of total bank withdrawals. I use a numerical simulation to illustrate the estimation procedure
