Search

We examine the financial conditions of dealers that participated in two of the Federal Reserve's lender-of-last-resort (LOLR) facilities—the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF)—that provided liquidity against a range of assets during 2008–2009. Dealers with lower equity returns and greater leverage prior to borrowing from the facilities were more likely to participate in the programs, borrow more, and, in the case of the TSLF, at higher bidding rates. Dealers with less liquid collateral on their balance sheets before the facilities were introduced also tended to borrow more. The results suggest that both financial performance and balance sheet liquidity play a role in LOLR utilization.

Several programs have been introduced by U.S. fiscal and monetary authorities in response to the financial crisis. We examine the responses involving Treasury debt - the Term Securities Lending Facility (TSLF), the Supplemental Financing Program, increases in Treasury issuance, and open market operations - and their impacts on the overnight Treasury general collateral repo rate, a key money market rate. Our contribution is to consider each policy in light of the others, both to help guide policy responses to future crises and to emphasize policy interactions. Only the TSLF was designed to directly address stresses in short-term money markets by temporarily changing the supply of Treasury collateral in the marketplace. We find that the TSLF is uniquely effective relative to other policies and that, while changes in Treasury collateral do affect repo rates, the impacts are not equivalent across sources of Treasury collateral.

The Term Securities Lending Facility (TSLF) was recently introduced by the Federal Reserve to promote liquidity in the financing markets for Treasury and other collateral. We evaluate one aspect of the program – the extent to which it has narrowed repo spreads between Treasury collateral and lower quality collateral. We find that TSLF operations have precipitated a significant narrowing of repo spreads. More refined tests indicate the market conditions and types of operations associated with the program's effectiveness. Various additional tests, including a split sample test, suggest that our findings are robust.

The taxable income elasticity is relevant to dynamic scoring because it broadly encompasses many ways taxpayers respond to changes in tax rates. The elasticity includes, for example, changes in labor supply and participation, savings and portfolio allocation, the form of compensation, the timing of income and deductions, and tax evasion and avoidance on the tax base, all subsumed in this one statistic. This one statistic summarizes how the tax base expands or contracts in response to changes in tax rates and, consequently, the extent taxpayer behavior offsets the static revenue loss (gain) of tax rate reductions (increases). In contrast to conventional revenues estimates, which assume that output and other key macroeconomic aggregates remain fixed when considering changes in the tax law, the taxable income elasticity imposes no such constraint. Nevertheless, some macro-dynamic responses, such as investment and savings-related supplyside effects and crowding out, are only partially captured in the taxable income elasticity, and demand effects are generally not reflected at all. Also, the taxable income elasticity generally does not account for shifting between the individual and corporate tax bases and is primarily useful to only evaluate policies that involve changes in tax rates. While large is in the eye of the beholder, the taxable income literature has generally found evidence of at least a modest behavioral response with some of the more recent studies suggesting a taxable income elasticity of about 0.4. This paper uses a 0.4 elasticity to simulate the revenue effect of repealing the recent reduction in the top two tax rates to 35 percent and to motivate a discussion of what the this elasticity can tell us about the dynamic response to changes in tax policy.

This paper uses data from the 1988 to 1991 PSID to examine the relationship between parental net wealth and consumption behavior of adult children. In a model where the probability of receiving a future transfer from the parent is an increasing function of the level of parental net wealth, a non-linear relationship is expected. The results in this study are consistent with such a relationship. Parental net wealth is found to have a positive influence on children’s consumption only at very high levels. In addition, this relationship appears to apply only to parental housing wealth and not parental non-housing wealth.

I Introduction U.S. TAXPAYERS REPORTED ALMOST $100 billion of contributions to charity in 1997 (Internal Revenue Service 1999: 64). Most studies of charitable giving focus on total contributions, while studies on the economics of religion naturally focus only on religious contributions. This study investigates religious giving and nonreligious giving separately. A positive relationship between age and religious giving is found to exist, but no such relationship is found for nonreligious giving. The results are consistent with theoretical predictions that religious giving is fundamentally different from nonreligious giving. Religious giving is assumed to be directly related to after-life consumption, while nonreligious giving is not related to after-life consumption. Previous studies focusing only on total charitable contributions should therefore examine whether or not their results hold for both religious and nonreligious giving. Section II presents a literature review of studies on charitable giving and the economics of religion. A theoretical model of charitable giving with after-life consumption is presented in Section III. The empirical results are found in Section IV, and Section V concludes. II Literature Review STUDIES ON CHARITABLE GIVING typically focus on total contributions and the price elasticity of contributions (for example, see Feldstein and Clotfelter 1976; Steuerle 1987; Randolph 1995; Auten and Joulfaian 1996; Duquette 1999; Joulfaian 2000). This focus is due to the tax deduction for charitable contributions. A high price elasticity suggests a role for tax policy in terms of influencing contributions in an "efficient" manner (Barrett 1991). In most of these studies, there is a positive relationship between age and total contributions to charity. (See Clotfelter 1985 and Steinberg 1990 for a review of this literature.) Other studies on charitable contributions focus on topics such as the substitutability between time and money devoted to charity (Duncan 1999) and the interdependence of gifts to charity among similar individuals (Andreoni 1988; Andreoni and Scholz 1998). Studies on the economics of religion focus on religious contributions of time and money. Economic analysis of religious behavior began with Azzi and Ehrenberg (1975) (AE, hereafter). Their model assumes that households maximize an intertemporal utility function that depends on secular consumption and expected after-life consumption. The time and money devoted to religious activity determine the level of after-life consumption. The assumption that the marginal product of religious activity does not decrease with age leads to the prediction that religious activity will increase with age. Their empirical analysis as well as later work (Iannaccone 1998) finds support for this prediction. Since AE, a large literature has emerged examining a wide range of religious behavior. Iannaccone (1998) provides an excellent review of this literature. Very few studies examine religious giving separately from total charitable contributions. This is largely due to the fact that many data sets do not provide a breakdown of total contributions into their religious and nonreligious components. The use of tax data is limited because regular tax data only provide information on cash/noncash charitable contributions. The only tax data with information on religious and nonreligious giving is estate tax data. Morgan, Dye, and Hybels (1977), Joulfaian (1991), and Clain and Zech (1999) are some of the few studies that do examine religious giving separately from total charitable contributions. Morgan, Dye, and Hybels (1977) show that religious giving declines as a percentage of total giving as income increases. Contributions to higher education is the main category that increases as a percentage of total giving as income increases. They also find that the relationship between age and any type of charitable giving disappears after income is taken into account. …

This paper will study the link between parental housing values and consumption by children. Previous studies of the relationship between housing values and consumption/savings behavior involve own-housing values and consumption decisions. A relationship between parental housing values and children’s consumption behavior is anticipated if an expected inheritance includes parental housing wealth. This is quite possible since housing is the single largest asset homeowners hold. Using information from the 1988 PSID on estimated parental housing values and constructing a measure of total consumption, a positive relationship between parental housing values and children’s consumption is found. Furthermore, the marginal propensity to consume out of parental housing wealth is found to be around half that of own-housing wealth.

In a precautionary savings setting, since Individual Retirement Accounts (IRAs) are poor substitutes for precautionary savings due to early withdrawal penalties, those facing more income uncertainty are expected to prefer more liquid assets. This paper investigates the role of income uncertainty in IRA participation. Confidential tax panel data is used to construct a measure of income uncertainty. Greater income uncertainty is found to have a negative influence on IRA participation for those in the immediate pre-retirement stage of the life-cycle. The results appear to be consistent with buffer-stock models of savings where income uncertainty is predicted to have a large effect on wealth accumulation beginning around age 50.

We examine the financial conditions of dealers that participated in two of the Federal Reserve’s lender-of-last-resort (LOLR) facilities -- the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF) -- that provided liquidity against a range of assets during 2008-09. Dealers with lower equity returns and greater leverage prior to borrowing from the facilities were more likely to participate in the programs, borrow more, and--in the case of the TSLF -- at higher bidding rates. Dealers with less liquid collateral on their balance sheets before the facilities were introduced also tended to borrow more. There also appear to be some interaction effects between financial performance and balance sheet liquidity in explaining dealer behavior. The results suggest that both financial performance and balance sheet liquidity play a role in LOLR utilization.

The steep drop-off in the number of Individual Retirement Account (IRA) contributors after 1986 has led to suggestions that taxpayers misunderstood and over-reacted to the restrictions on deductible contributions imposed by the Tax Reform Act of 1986. Tax panel data is used to investigate the role of taxpayer misunderstanding in the drop-off in IRA contributors after 1986. The hiring of a tax preparer is the transmission mechanism for knowledge of the deductibility rules after 1986. The results suggest that more information and promotion of IRAs would have increased the probability of contributing to an IRA in 1987 for high income taxpayers, but would have decreased this probability for middle-income taxpayers. Taxpayer confusion over the deductibility restrictions appears to have been resolved by 1988. Therefore, taxpayer misunderstanding did not play a major role in the steep drop-off in the number of IRA contributors after 1986.

Following the financial crisis of 2007, many global financial firms faced difficulties in borrowing U.S. dollars (USD). We estimate the premium global banks paid to obtain USD (the “USD basis”) by the rate banks pay to swap euros into USD in the foreign exchange (FX) market, while fully hedging the FX risk, relative to the interbank rate for borrowing USD. We find that the bank basis is higher the day following increases in CDS prices and in asymmetric information measures. Controlling for fundamental risk, the basis is lower the day after successful borrowing at the Fed’s dollar liquidity facilities and it is higher for European banks following an unanticipated decrease in repo funding amounts, implying that USD funding constraints were binding for European banks during the crisis. Our results show that increased asymmetric information and “repo runs” (through unanticipated withdrawals of repo funding) combined to increase bank funding costs during the crisis.

We provide robust evidence of a deviation in the covered interest rate parity (CIP) relation since the onset of the financial crisis in August 2007. The CIP deviation exists with respect to several different dollar-denominated interest rates and exchange rate pairings of the dollar vis-a-vis other currencies. The results show that our proxies for margin conditions and for the cost of capital are significant determinants of the CIP deviations, especially during the crisis period. The supply of dollars by the Federal Reserve to foreign central banks via reciprocal currency arrangements (swap lines) reduced CIP deviations at this time. Following the bankruptcy of Lehman Brothers, uncertainty about counterparty risk became a significant determinant of CIP deviations, and the swap lines program no longer affected the CIP deviations significantly. These results indicate a breakdown of arbitrage transactions in the international capital markets that owes partly to lack of capital and partly to heightened counterparty credit risk. Central bank interventions helped reduce the funding liquidity risk of global institutions.

The Federal Reserve launched the Term Securities Lending Facility (TSLF) in 2008 to promote liquidity in the funding markets and improve the operation of the broader financial markets. The facility increases the ability of dealers to obtain cash in the private market by enabling them to pledge securities temporarily as collateral for Treasuries, which are relatively easy to finance. The TSLF thus reduces the need for dealers to sell assets into illiquid markets as well as lessens the likelihood of a loss of confidence among lenders.

Facing a shortage of U.S. dollars and a growing need to support their dollar-denominated assets during the financial crisis, international firms increasingly turned to the foreign exchange swap market and other secured funding sources. An analysis of the ensuing strains in the swap market shows that the dollar "basis"--the premium international institutions pay for dollar funding--became persistently large and positive, chiefly as a result of the higher funding costs paid by smaller firms and non-U.S. banks. The widening of the basis underscores the severity and breadth of the crisis as markets designed to facilitate the flow of dollars faltered and institutions worldwide struggled to obtain funds.

In November 2003, the Term Investment Option (TIO) program became an official cash management tool of the U.S. Treasury Department. Through TIO, the Treasury lends funds to banks for a set number of days at an interest rate determined by a single-rate auction. One reason why the Treasury introduced TIO was to try to earn a market rate of return on its excess cash balances. This article studies 166 TIO auctions from November 2003 to February 2006 to determine how TIO interest rates have compared with market rates. The author investigates the spread between TIO rates and rates on mortgage-backed-security repos, a close benchmark for TIO rates. He finds that aside from offerings with very short term lengths, the Treasury receives an interest rate on TIO auctions comparable to market rates. He also documents a negative relationship between an auction's size and the spread between TIO and repo rates. Furthermore, the Treasury's announcement and auctioning of funds on the same day does not adversely affect rate spreads, a finding that suggests that banks are indifferent to more advance notice of TIO auctions.

We analyze the impact of aggregate reserve levels on the intraday behavior of the federal funds rate over a sample period extending from 2002 to 2005. We study both how the reserve levels accumulated earlier in a maintenance period influence the morning level of the funds rate relative to the target set by the FOMC, and how same-day reserve levels as well as the reserve levels accumulated earlier affect intraday movements of the funds rate. The impact of recurring calendar events on the behavior of the federal funds rate is also explored. In general, we find a negative relationship between our measures of reserve levels and our two measures of federal funds rate behavior.

This study investigates the issue of whether part of the increase in total IRA contributions from 1997 to 1998 can be attributed to increased advertising due to the introduction of Roth IRAs in 1998. In this study, the use of a tax preparer will proxy for exposure to information regarding IRAs. A preparer is expected to have less of an influence on IRA participation in 1998 relative to 1997. I find evidence supporting this prediction amongst taxpayers eligible for an IRA contribution in both 1997 and 1998. However, I also find evidence suggesting that more information would have led to a potentially sizable increase in participation for taxpayers newly eligible for an IRA contribution in 1998.

This paper examines the progressivity of tax benefits for child care over time. We find that the Child and Dependent Care Tax Credit (CDCTC) became more progressive between 1989 and 1998. However, total tax benefits for child care, which include the employer exclusion for child care, were less progressive than the CDCTC alone and became less progressive over time. In simple simulations using 1998 data as the base, we find that the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increases the progressivity of the CDCTC and total tax benefits for child care.