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This paper estimates a time-varying reaction function of the median participant of the Federal Open Market Committee, using a Taylor rule with time-varying coefficients estimated on one-to three-year ahead median forecasts of the federal funds rate, ination, and the unemployment rate from the Summary of Economic Projections (SEP). We estimate the model with Bayesian methods, incorporating the effective lower bound on the median federal funds rate projections. The results indicate that the monetary policy rule has become significantly more persistent after the pandemic than in the years prior, and it currently reacts strongly to ination, at more than twice the responsiveness estimated prior to 2020. Our proposed policy rule produces accurate predictions of the median federal funds rate projections in real time for given SEP forecasts of ination and the unemployment rate, suggesting that the median participant's reaction function is well-represented by our assumed Taylor rule with time-varying coe fficients. Our results show that the median participant's reaction function becomes less persistent and less responsive to ination yet more responsive to the output gap in anticipation of tighter monetary policy conditions, measured by a steeper yield curve. We also find that labor market activity, ination, and macroeconomic uncertainty correlate significantly with the evolution of the time-varying coefficients of the rule. Finally, we show that in times of a less persistent policy rule or more responsiveness to ination, markets perceive nominal bonds as better macroeconomic hedges. [ABSTRACT FROM AUTHOR]

Operational risk is a substantial source of risk for US banks. Improving the performance of operational risk models allows banks' management to make more informed risk decisions by better matching economic capital and risk appetite, and allows regulators to enhance their understanding of banks' operational risk. We show that past operational losses are informative of future losses, even after controlling for a wide range of financial characteristics. We propose that the information provided by past losses results from them capturing hard to quantify factors such as the quality of operational risk controls, the risk culture, and the risk appetite of the bank. [ABSTRACT FROM AUTHOR]

Since November 2007, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve has regularly published participants' qualitative assessments of the uncertainty attending their individual forecasts of real activity and inflation, expressed relative to that seen on average in the past. The benchmarks used for these historical comparisons are the average root mean squared forecast errors (RMSEs) made by various private and government forecasters over the past twenty years. This paper documents how these benchmarks are constructed and discusses some of their properties. We draw several conclusions. First, if past performance is a reasonable guide to future accuracy, considerable uncertainty surrounds all macroeconomic projections, including those of FOMC participants. Second, different forecasters have similar accuracy. Third, estimates of uncertainty about future real activity and interest rates are now considerably greater than prior to the financial crisis; in contrast, estimates of inflation accuracy have changed little. Finally, fan charts--constructed as plus-or-minus one RMSE intervals about the median FOMC forecast, under the expectation that future projection errors will be unbiased and symmetrically distributed, and that the intervals cover about 70 percent of possible outcomes--provide a reasonable approximation to future uncertainty, especially when viewed in conjunction with the FOMC's qualitative assessments. That said, an assumption of symmetry about the interest rate outlook is problematic if the expected path of the federal funds rate is expected to remain low. [ABSTRACT FROM AUTHOR]

This paper is a companion to our recent paper, "ICT Prices and ICT Services: What do they tell us about Productivity and Technology?" It provides the sources and methods used to construct national accounts-style price deators for the major components of ICT investment--communications equipment, computer equipment, and software--that were presented and analyzed in that paper. The ICT equipment measures described herein were also used in Byrne, Fernald, and Reinsdorf (2016). [ABSTRACT FROM AUTHOR]

This paper reassesses the link between ICT prices, technology, and productivity. To understand how the ICT sector could come to the rescue of a whole economy, we introduce a simple model that sets out the steady-state contribution of the sector to the growth in U.S. labor productivity. The model extends Oulton (2012) to include ICT services (e.g., cloud computing) which has implications for the relationship between prices for ICT services and prices for the capital stocks (i.e., ICT assets) used to supply them. ICT asset prices are then put under a microscope, and official prices are found to substantially understate ICT price declines. And because ICT use continues to diffuse through the economy--increasingly via cloud and related services which are not fully accounted for in the standard narrative on ICT's contribution to economic growth--the contribution of ICT to growth in output per hour going forward is calibrated to be substantially larger than thought in the past. [ABSTRACT FROM AUTHOR]

This paper answers two questions that help those analyzing FinTech understand its origins, growth, and potential to affect financial stability. First, it answers the question of why "FinTech" is happening right now. Many of the technologies that support FinTech innovations are not new, but financial institutions and entrepreneurs are only now applying them to financial products and services. Analysis of the supply and demand factors that drive "traditional" financial innovation reveals a confluence of factors driving a large quantity of innovation. Second, this paper answers the question of why FinTech is getting so much more attention than traditional innovation normally does. The answer to this question has to do with the 'depth' of innovation, a concept introduced in this paper. The deeper an innovation, the greater the ability of that innovation to transform financial services. The paper shows that many FinTech innovations are deep innovations and hence have a greater potential to change financial services. A greater potential to transform can also lead to a greater chance of affecting financial stability. [ABSTRACT FROM AUTHOR]

This paper investigates the impact of international trade on input market distortions. We focus on a specific friction, binding borrowing constraints in capital markets. We propose a theoretical model where a firm's demand for capital is constrained by an initial asset allocation and past sales. While the initial distribution of assets induces misallocation if the asset endow- ment at more productive firms does not fully cover their demand for capital, the dependence of the borrowing constraint from past sales proxies for cross-firm differences in the cost of default, which is empirically higher at larger firms. Overtime, an increase in sales relaxes the borrowing constraint; similarly, shocks to market access-such as opening to trade-contribute to easing the financial constraints, thus accelerating the convergence toward the frictionless allocation. To analyze the empirical relationship between market access and credit frictions, we draw on the annual surveys conducted by the Chinese National Bureau of Statistics (NBS) for 1998 to 2007, and we construct firm-level measures of distortions that control for firm heterogeneity. We find smaller labor and capital distortions across exporting firms; such distortions are even smaller in sectors where firms face lower tariffs or are more dependent on external financing, a proxy for the presence of binding financial constraints. Our empirical analysis also shows that export shocks significantly reduce the dispersion across input returns over time, with the effect mostly occurring at constrained firms. Our findings point to within-sector input reallocation as an important channel to overcome misallocation in open economies. [ABSTRACT FROM AUTHOR]

In this paper, we examine the results of GDP trend-cycle decompositions from the estimation of bivariate unobserved components models that allow for correlated trend and cycle innovations. Three competing variables are considered in the bivariate setup along with GDP: the unemployment rate, the inflation rate, and gross domestic income. We find that the unemployment rate is the best variable to accompany GDP in the bivariate setup to obtain accurate estimates of its trend-cycle correlation coefficient and the cycle. We show that the key feature of unemployment that allows for precise estimates of the cycle of GDP is that its nonstationary component is "small" relative to its cyclical component. Using quarterly GDP and unemployment rate data from 1948:Q1 to 2015:Q4, we obtain the trend-cycle decomposition of GDP and find evidence of correlated trend and cycle components and an estimated cycle that is about 2 percent below its trend at the end of the sample. [ABSTRACT FROM AUTHOR]

The article presents a study which estimated the supply elasticities of mining, farm, and construction machinery. The study made use of the output price increases. Results show the rapid increase of supplied quantity of machinery during the booms. The study concludes that public policies stimulating investment demand will only affect the investment good prices modestly.

There is wide variation in the sizes of manufacturing plants, even within the most narrowly defined industry classifications used by statistical agencies. Standard theories attribute all such size differences to productivity differences. This paper develops an alternative theory in which industries are made up of large plants producing standardized goods and small plants making custom or specialty goods. It uses confidential Census data to estimate the parameters of the model, including estimates of plant counts in the standardized and specialty segments by industry. The estimated model fits the data relatively well compared with estimates based on standard approaches. In particular, the predictions of the model for the impacts of a surge in imports from China are consistent with what happened to U.S. manufacturing industries that experienced such a surge over the period 1997-2007. Large-scale standardized plants were decimated, while small-scale specialty plants were relatively less impacted. [ABSTRACT FROM AUTHOR]

This paper demonstrates the important role of job displacement in the household bankruptcy decision. I develop a dynamic, forward-looking model of unemployment and bankruptcy where persistent negative income shocks increase a household's likelihood of ling for bankruptcy both immediately and in the future. Consistent with the model's predictions, I find that households in the NLSY are 2.5 times more likely to file for bankruptcy in the year immediately following a job loss, at a rate of an additional 10 bankruptcies per 1000 job losses. Heightened bankruptcy risk then declines in magnitude but persists for two to three years. Aggregate patterns in job loss and bankruptcy are also consistent with the micro model. Using county-level data, I similarly and that 1000 job losses are associated with 8 to 11 bankruptcies and that the effects also last two to three years. In addition, the loss of a manufacturing job, a proxy for a more persistent separation, is three times more likely to lead to bankruptcy than the loss of a non-manufacturing job. The results suggest that even relatively brief unemployment spells can have significant long-term consequences on households' credit market outcomes. [ABSTRACT FROM AUTHOR]

An "authorized user" is a person who is permitted by a revolving account holder to use an account without being legally liable for any charges incurred. The Federal Reserve's Regulation B, which implements the 1974 Equal Credit Opportunity Act, requires that information on spousal authorized user accounts be reported to the credit bureaus and considered when lenders evaluate credit history. Since creditors generally furnish to the credit bureaus information on all authorized user accounts, without indicating which are spouses and which are not, credit scoring modelers cannot distinguish spousal from non-spousal authorized user accounts. This effectively requires that all authorized user accounts receive similar treatment. Consequently, becoming an authorized user on an old account with a good payment history, may improve an individual's credit score, potentially increasing access to credit or reducing borrowing costs. As a result, the practice of "piggybacking credit" has developed. In a piggybacking arrangement, an individual pays a fee to be added as an authorized user on an account to "rent" the account's credit history. This paper provides the first comprehensive look at authorized user accounts in individual credit records and how their importance differs across demographic groups. Our analysis suggests that piggybacking credit can materially improve credit scores, particularly for individuals with thin or short credit histories. We also evaluate the effect that eliminating authorized user accounts from credit scoring models would have on individual credit scores. Our results suggest that removing this information has relatively little effect on credit scores, but may reduce model predictiveness. [ABSTRACT FROM AUTHOR]

This paper presents information on the use of chain aggregated National Income and Product Accounts (NIPA) data. In 1996, the U.S. Department of Commerce began using a technique to create all aggregate real series in the NIPA. This technique utilizes the ideal chain index pioneered by Irving Fisher. The methodology had some significant implications that were not familiar to many practicing empirical economists. Consequently, erroneous calculations with NIPA data have become very common. The author explains the motivation for the switch to chain aggregation and then describes the usage of chain-aggregated data with three examples that relate to a different aspect of how information technologies are changing the economy. This working paper is available at the US Federal Reserve Board. You can access

This paper attempts to prove that stabilization of consumption can be worth 25 times the value found by Robert Lucas (1987). The author presents alternative meanings of stabilization that allow an increase in mean consumption. In addition, he shows the value of a permanent increase in the growth rate of consumption to be only one-fourth the value in Lucas (while still quite large), by creating a modified valuation formula that allows the coefficient of relative risk aversion to exceed unity. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

The authors examine research that utilizes longitudinal microdata to document productivity movements and to examine factors behind productivity growth. The research investigates the dispersal of productivity across firms, the persistence of productivity discrepancies, the effects of entry and exit, and the contribution of resource reallocation across firms to aggregate productivity growth. The research also presents important factors associated with productivity growth, such as managerial ability, technology use, human capital, and regulation. This paper addresses the more difficult questions of the causality between these factors and productivity growth. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

This paper presents a dynamic general equilibrium model where agents use conflicting levels of sophistication when they forecast economic conditions. All agents resolve standard dynamic optimization problems and confront strategic complementarity in production, but some resolve their inference problems based on simple forecasting rules of thumb. The author shows that even a minority of rule-of-thumb forecasters can have a considerable effect on the aggregate properties of the economy. The author suggests that as agents try to forecast each other's behavior, they effectively reinforce the internal propagation mechanism of the economy. Analysis highlights the role of strategic complementarity in the heterogeneous expectations literature and analyzes many qualitative claims about the aggregate implications of expectational heterogeneity. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

The design of monetary policy in a low inflation environment is examined in this paper. The authors take into account the limitations imposed by the zero bound on nominal interest rates. They use numerical dynamic programming methods to compute optimal policies in a simple, calibrated open economy model and review the effect of the liquidity trap generated by the zero bound. They consider the possibility that the quantity of base money may have an effect on output and inflation even when the interest rate is constrained at zero and explicitly accounts for the substantial degree of uncertainty regarding such quantity effects. The authors find that the optimal policy near price stability is asymmetric. As inflation declines, policy turns expansionary sooner and more aggressively than would be optimal in the absence of the zero bound. As a consequence, the average level of inflation is biased upwards. Results suggest that policymakers are confronted with a tradeoff between the level of inflation and economic stabilization performance when the economy is operating near the zero bound. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

The intent of this paper is to estimate the effects of oil price changes on U.S. inflation in a Phillips curve framework that allows for some of the asymmetries, nonlinearities, and structural breaks that have been found in the literature on the real effects of oil price shocks. The author finds that since around 1980, oil price changes appear to have affected inflation only through their direct share in a price index. Before 1980, oil shocks contributed substantially to core inflation. Evidence indicates that a change in the reaction of monetary policy to oil shocks is part of the explanation. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

This paper tests for non-linear dynamics in systems of non-stationary economic time series. The authors use Hall and Heyde's (1980) representation theory to show that the stationary integration relations of an integrated system are usually non-linear stochastic processes. They suggest a sequential non-parametric process to examine stationary co-integration relations for non-linear dynamics and apply this process to short-term US interest rates. They show that the weekly federal funds rate is co-integrated with Treasury bill and commercial paper rates and that co-integration relations are non-linear. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

The authors of this paper apply data on historical revisions to real-time estimates of the output gap to examine the implications of measurement error for the design of monetary policy. They use the United States Federal Reserve model of the U.S. economy to measure errors that cause a substantial deterioration in economic performance. The authors also show that it is generally most favorable to place some weight on the level of the output gap in the conduct of policy. They suggest that under extreme conditions it may be better to concentrate on output growth. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

This paper investigates fiscal and monetary policy when savers are uncertain. The authors present a model where the return on assets depends on the joint behavior of all savers. If all savers sell the asset at the same time, the returns would be low. The authors presume that individual savers are risk-neutral but uncertainty-averse and cannot form accurate estimates of the behavior of the market. They determine equilibrium investment using the modern theory of Knightian uncertainty, that shows that savers will act to maximize their minimum payoff in the presence of uncertainty. The authors suggest that during periods of high uncertainty, savers' demand for government bonds increase, and spreads between the return on bonds and the expected return on risky assets will broaden. As a result, investment in the risky asset will decrease. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

The author of this paper shows the strengths and weaknesses of models of sectoral reallocation. He suggests that these models are not able to describe any effects of sectoral reallocation on aggregate productivity or related quantities unless a wedge is presented into the model that drives the marginal products of inputs in different sections apart in steady state. This paper presents a solution to the weaknesses of the models in the form of variable sectoral capital utilization, the marginal product of which can be different across sectors in steady state. The reallocations of production between sectors in this setting are then shown to have first-order effects on aggregate productivity and real wages. They also can explain the procyclicality of these variables without depending on large and persistent technology shocks. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

This paper argues that interest rate smoothing might be optimal when the effect of monetary policy is uncertain. The authors present a model where the United States Federal Reserve learns about the policy multiplier by observing the reaction of the economy to recent choices of the interest rate. As a result, the Federal Reserve experiences greater uncertainty about the impact of its policy as it moves the interest rate away from its previous level. The optimal policy response involved gradual adjustment of the interest rate over a period of time when the Federal Reserve is realizing the effects of its policy, consistent with the smoothness of interest rate movements found in estimated policy rules. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

The author presents a framework for estimating parameters in a variety of rational expectations (RE) models. The framework includes least squares, maximum likelihood, and band restricted maximum likelihood as unique cases. This framework recognizes that dynamic RE models are frequently meant to match the data in limited ways. This paper designs a frequency domain version of general estimation. The author discusses the advantages over traditional general estimation. The paper builds on Diebold, Ohanian and Berkowitz (1995) who suggest techniques for estimating and evaluating dynamic rational expectations models in the frequency domain. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

This paper suggests that output growth and detrended output is positively associated with inflation. The author examines the consistency of these correlations with three model of price adjustment: 1) the partial adjustment model, a staggered price setting model, and 3) the P-bar model. He finds that the ratio of the variance of supply to demand shock necessary to match the pattern of output inflation correlations can be ranked across the three models. The P-bar model requires the lowest ratio, and the partial adjustment model requires the highest ratio. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

Finance and economics provide many examples of securities that have values greater than those of their payoffs in the finite future. This paper defines rational bubbles to be securities with payoffs occurring in the infinitely distant future and investigates the behavior of bubble values. The authors extend their analysis to a setting of uncertainty. They interpret the money account in an arbitrage-free asset model as the value of a particular bubble. The authors present three applications of this characterization of bubbles. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

This paper demonstrates how to create arbitrage-free models of the term structure of interest rates where various expectations hypotheses can hold. The authors generalize a Gaussian non-Markovian example of the unbiased expectations hypothesis (U-EH). In doing so, they contradict the proposition by Cox, Ingersoll, and Ross (CIR, 1981) that suggests the local expectations theory could hold. The example is generalized in three ways: 1) the U-EH is characterized by terms of forward rates, 2) the characterization is extended to a class of expectations hypotheses that includes all of those considered by CIR, and 3) a stationary Markovian and non-Gaussian economies are constructed. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector. [ABSTRACT FROM AUTHOR]

This paper reviews the behavioral literature on inter-temporal choice and decision making under uncertainty and assesses the evidence on behavioral influences affecting consumers' credit decisions, The evidence reviewed suggests that consumers often do not consider all information available in the market nor deliberately evaluate each alternative. Consumers simplify, take shortcuts, and use heuristics, which may not always be optimal but nevertheless may be an economical means for achieving desired goals. While most economists and psychologists agree that cognitive errors and time inconsistent behavior occur, the extent to which these phenomena impair actual decisions in markets is not at all clear. At this time, neither existing behavioral evidence nor conventional economic evidence supports a general conclusion that consumers' credit decisions are not rational or that markets do not work reasonably well. Empirical evidence suggests that behavioral research can help improve required information disclosures and contribute to more effective regulation, which enhances the performance of markets and improves individual outcomes. [ABSTRACT FROM AUTHOR]

Economists and economic policymakers believe that households' and firms' expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors. [ABSTRACT FROM AUTHOR]

The authors analyze the fundamental links between exporting and productivity using firm-level panel data from three semi-industrialized countries. Representing export market participation and production costs as jointly dependent autoregressive processes, the authors search for evidence that a firm's stochastic cost processes shift when they break into foreign markets. They find that efficient firms become exporters, but firms' unit costs are not affected by prior export market participation. They suggest that the efficiency gap between exporters and non-exporters is due to self-selection of the more efficient firms into the export market rather than learning by exporting. Additionally, they find evidence that exporters decrease the costs of breaking into foreign markets for domestically oriented producers but do not seem to help these producers become more efficient. This working paper is available at the US Federal Reserve Board. You can access this site by going to www.federalreserve.gov/pubs/workingpapers.htm.

The article focuses on the association of the Consumer Expenditure Survey (CE) with income. It states that the households with the highest income are less-likely to answer the CE survey, while there is no association between the unit non-response rates and income more than almost all of the income distribution. It adds that increasing representation at income distribution's high end could increase total CE spending.

The article focuses on the study on the association between foreign official purchases of U.S. Department of Treasury securities and its affect on long-term Treasury yields. It states that U.S. Treasuries' official inflows reduced by 100 million-dollar in a month, while Treasury rates will rise by 40-60 points in short run. The study concluded that U.S. foreign official inflows implicate volatility in German and U.S. sovereign bonds and would lower the five-year term premium of treasuries.

The article presents a study on an equilibrium model the predicts the behavior of uninformed commodity index traders (CITs) to future prices. It argues that the model predicts that CIT trading reduces hedging costs. The authors used the CIT position data from the Large Trader Reporting System (LTRS) of the U.S. Commodity Futures Trading Commission to test the model. Results show that asset prices correlate with cash market position of hedgers and CITs position.

The article a study on the impact of bank capital ratios on bank lending in the U.S. It compares the loan growth differences with capital ratio differences having matched geographical location from 2001 to 2009. Results show that the effect of capital ratios on loan growth depends on the loan type such as commercial real estate loans. They add that capital ratios have nonlinear effect to bank lending and the comparisons are effective in local loan demand control and other environmental factors

The article presents a study regarding the experiences of borrowers and their households in the U.S. after their residential mortgages have been foreclosed. It uses a dataset according to the credit reports of individuals between 1999 and 2010 to study the post-foreclosure experiences of the households. Results show that foreclosure does not bring economic problem that could severely cut housing consumption as post-foreclosure migrants do not fall into more crowded living conditions.

We propose a novel approach to estimate household income uncertainty at various future horizons, and characterize how the estimated uncertainty evolves over the life cycle. We measure income uncertainty as the variance of linear forecast errors conditional on information available to households prior to observing the realized income. This approach is semiparametric because we impose essentially no restrictions on the statistical properties of the forecast errors. Relative to previous studies, we find lower and less persistent income uncertainties that call for a life cycle consumption profile with a less pronounced hump. [ABSTRACT FROM AUTHOR]

This paper studies the implications of information-processing limits on the consumption and savings behavior of households through time. It presents a dynamic model in which consumers rationally choose the size and scope of the information they want to process concerning their financial possibilities, constrained by a Shannon channel. The model predicts that people with higher degrees of risk aversion rationally choose more information. This happens for precautionary reasons since, with finite processing rate, risk averse consumers prefer to be well informed about their financial possibilities before implementing a consumption plan. Moreover, numerical results show that consumers with processing capacity constraints have asymmetric responses to shocks, with negative shocks producing more persistent effects than positive ones. This asymmetry results in more savings. I show that the predictions of the model can be effectively used to study the impact of tax reforms on consumers spending. [ABSTRACT FROM AUTHOR]

Deregulation and technological change have reduced the transactions costs that led to the dominance of local financial service suppliers, leading some to question if distance still matters in banking. This debate has been particularly acute in small business banking, where transactions costs are believed to be particularly high. This paper provides a detailed review of the literature on distance in banking markets, highlighting the reasons why geographic proximity is believed to be important and examining the changes that may have affected its importance. Relying on new data from the 2003 Survey of Small Business Finances, we examine how distances between small firms and their financial service suppliers changed over the 1993-2003 decade. Our analysis reveals that distances increased, though the extent varied substantially across financial services and supplier types. Generally, increases were observed in the early half of the decade, while distances declined in the following five years. There was also a trend towards less in person interaction between small firms and their suppliers of financial services. Nevertheless, most relationships remained local, with a median distance of 5 miles in 2003. The results suggest that distance, while perhaps not as tyrannical as in the past, remains an important factor in banking. [ABSTRACT FROM AUTHOR]

This paper points out that several known ways of modeling non-negative nominal interest rates lead to different implications for the risk-neutral distribution of the short rate that can be checked with options data. In particular, Black's boundary models ("interest rates as options") imply a probability density function (pdf) that contains a Dirac delta function and a cumulative distribution function (cdf) that is nonzero at the zero boundary [P(K) ∞ K behavior for put option price for strike K near 0], while models like the CIR and positive-definite quadratic-Gaussian (QG) models have a zero cdf at the boundary [P(K) ∞ Kα, α > 1]. Eurodollar futures options data are found to favor Black's boundary models: the CIR/QG models, even multifactor versions, have difficulty capturing option prices accurately not only in low interest rate environments but also in higher interest rate environments, and data in early 2008 provide an almost tangible signature of the Dirac delta function in Black's boundary pdf models. Options data also contradict the prediction of well-known models whose cdf is zero at the zero boundary, namely that the risk-neutral pdf is always positively skewed. [ABSTRACT FROM AUTHOR]

The article focuses on monetary transmission and housing mechanism. It says that development in the housing market have major effects in economic activity and credit markets. It states that to achieve price stability and sustainable employment, monetary policy makers should understand the role that housing plays in the monetary transmission mechanism if they are to set policy instruments. Moreover, if the monetary policy lifts short-term interest rates, long-term interest rates tend to hike.

The article focuses on the impact of crimes such as kidnapping, homicides and guerilla attacks on the corporate investments in Colombia from 1996-2002. It states that managers are unwilling to invest if their freedom and life are put on risk. It identifies the imbalance in governments and institutions which leads to property damage and threatens lives. It compares the varying impact of kidnappings on foreign and local markets.

We present the first micro-level evidence of the transmission of shocks through financial networks. Using the network of credit default swap (CDS) transactions between banks, we identify bank CDS returns attributable to counterparty losses. A bank's own CDS spread increases whenever counterparties from whom it has purchased default protection themselves experience losses. We find no such effect from losses of non-counterparties, nor from counterparties to whom the bank has sold protection. The effect on bank CDS returns through this counterparty loss channel is large relative to the direct effect on a bank's CDS returns from its own trading losses. [ABSTRACT FROM AUTHOR]

Nominal interest rates may remain substantially below the averages of the last half-century, as central bank's inflation objectives lie below the average level of inflation and estimates of the real interest rate likely to prevail over the long run fall notably short of the average real interest rate experienced over this period. Persistently low nominal interest rates may lead to more frequent and costly episodes at the effective lower bound (ELB) on nominal interest rates. We revisit the frequency and potential costs of such episodes in a low-interest-rate world in a dynamic-stochastic-general-equilibrium (DSGE) model and large-scale econometric model, the FRB/US model. Several conclusions emerge. First, monetary policy strategies based on traditional policy rules lead to poor economic performance when the equilibrium interest rate is low, with economic activity and inflation more volatile and systematically falling short of desirable levels. Moreover, the frequency and length of ELB episodes under such policy approaches is significantly higher than in previous studies. Second, a risk-adjustment to a simple rule in which monetary policymakers are more accommodative, on average, than prescribed by the rule ensures that inflation achieves its 2 percent objective and requires that policymakers aim at inflation near 3 percent when the ELB is not binding. Third, commitment strategies in which monetary accommodation is not removed until either inflation or economic activity overshoot their long-run objectives are very effective in both the DSGE and FRB/US model. Finally, our results suggest that the adverse effects associated with the ELB may be substantial at inflation targets near 2 percent if r* is low and monetary policy follows a traditional policy approach. Whether such adverse effects could justify a higher inflation target depends on whether monetary policy strategies substantially different from traditional approaches are feasible and an assessment of the effects of the inflation target on economic welfare. [ABSTRACT FROM AUTHOR]

We provide new estimates of the wage costs of firms' debt. Our empirical approach exploits within-firm geographical variation in workers' expected unemployment costs due to variation in local labor market size and uses a large representative sample of public firms. We find that, following an increase in firm leverage, workers with higher unemployment costs experience higher wage growth relative to workers at the same firm with lower unemployment costs. Overall, our estimates suggest that a 10 percentage point increase in leverage increases wage compensation for the median worker by 1.9% and total firm wage costs by 17 basis points of firm value. [ABSTRACT FROM AUTHOR]

The widespread emergence of intangible technologies in recent decades may have significantly hurt output growth-even when these technologies replaced considerably less productive tangible technologies-because of structurally low interest rates caused by demographic forces. This insight is obtained in a model in which intangible capital cannot attract external finance, firms are credit constrained, and there is substantial dispersion in productivity. In a tangibles-intense economy with highly leveraged firms, low rates enable more borrowing and faster debt repayment, reduce misallocation, and increase aggregate output. An increase in the share of intangible capital in production reduces the borrowing capacity and increases the cash holdings of the corporate sector, which switches from being a net borrower to a net saver. In this intangibles-intense economy, the ability of firms to purchase intangible capital using retained earnings is impaired by low interest rates, because low rates increase the price of capital and slow down the accumulation of corporate savings. [ABSTRACT FROM AUTHOR]

While a rapidly growing body of research underscores the influence of social capital on financial decisions and economic developments, objective data-based measurements of social capital are lacking. We introduce average credit scores as an indicator of a community's social capital and present evidence that this measure is consistent with, but richer and more robust than, those used in the existing literature, such as electoral participation, blood donations, and survey-based measures. Merging unique proprietary credit score data with two nationwide representative household surveys, we show that households residing in communities with higher social capital are more likely to invest in stocks, even after controlling for a rich set of socioeconomic, preferential, neighborhood, and demographic characteristics. Notably, such a relationship is robustly observed only when social capital is measured using community average credit scores. Consistent with the notion that social capital and trust promote stock investment, we find the following: first, the association between average credit score and stock ownership is more pronounced among the lower educated; second, social capital levels of the county where one grew up appear to have a lasting influence on future stock investment; and third, investors who did not own stocks before have a greater chance of entering the stock market a few years after they relocate to higher-score communities. [ABSTRACT FROM AUTHOR]

Factor models are widely used in summarizing large datasets with few underlying latent factors and in building time series forecasting models for economic variables. In these models, the reduction of the predictors and the modeling and forecasting of the response y are carried out in two separate and independent phases. We introduce a potentially more attractive alternative, Sufficient Dimension Reduction (SDR), that summarizes x as it relates to y, so that all the information in the conditional distribution of y|x is preserved. We study the relationship between SDR and popular estimation methods, such as ordinary least squares (OLS), dynamic factor models (DFM), partial least squares (PLS) and RIDGE regression, and establish the connection and fundamental differences between the DFM and SDR frameworks. We show that SDR significantly reduces the dimension of widely used macroeconomic series data with one or two sufficient reductions delivering similar forecasting performance to that of competing methods in macro-forecasting. [ABSTRACT FROM AUTHOR]

The article focuses on the application of the methodology of signal extraction to multivariate nonstationary time series. Signal extraction problems involve more than one variable to monitor prevailing inflationary conditions. It is stated that the generalization of the Wiener-Kolmogorov (WK) formula provides a mathematical foundation for the construction of jointly optimal estimators for multiple series, and maps signal noise dynamics into optimal estimators for bi-infinite series.