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We use Texas's constitutional amendment in 1997 that expanded the scope of home equity loans as a source of exogenous variation to estimate the effects of relaxing credit constraints on small businesses. We find, using standard panel data methods and restricted-use micro-data from the US Census Bureau, that the Texas amendment increased the use of home equity finance by small businesses, increased new business and job creation and reduced establishment exit and job loss. The effects are larger and significant for businesses with fewer than ten employees.

We propose an alternative measure of system-wide connectedness to the popular generalized spillover index, based on generalized forecast error variance decompositions, of Diebold and Yilmaz (2012, 2014). Our measure relies on joint conditional forecasts to decompose variance, as opposed to the popular method's reliance on single-variable conditioning sets, and is a more precise measure of aggregate spillovers. We show in an application to US industry sector stock returns that the difference between the two measures can be substantial.

This paper is one of the first to quantify the welfare effects of proposed cash suppression policies. We work within the context of a general equilibrium framework in which households face an endogenous cash-in-advance constraint and firms use cash transactions to evade taxes. Eliminating currency increases transactions costs and raises effective tax rates by curbing tax evasion. Our quantitative experiments imply that a total cash ban improves steady-state welfare, but only if paired with a revenue-neutral decrease in the tax rate on capital. We show in an extension with heterogeneous agents that curtailing cash harms frequent-cash users more than others. Such distributional effects of cash suppression may be a concern for policymakers.

This paper examines the link between household credit shocks, consumption and income inequality at the national level. Empirically, we use country-specific VAR models to estimate the dynamic responses of aggregate consumption to household credit shocks. We then show in cross-country regressions that the consumption response is more sensitive to such shocks in countries with higher levels of inequality, even after controlling for financial development. Theoretically, we construct and simulate a dynamic model based on the effect of inequality on the incidence of credit constraints, to illustrate potential causal mechanisms.

We estimate the effect of asylum seekers on house prices in England and Wales from 2004 to 2015, and find, using panel data and time series methods, that the government’s dispersal policies have had small but statistically significant negative effects on housing prices, especially for lower-priced and lower-quality housing units. Our panel data regressions rely on variation across time and localities, and account for endogeneity bias using instrumental variables, to identify these causal effects. Time series regressions depend on plausibly exogenous nationwide flows of new asylum seekers, and provide evidence that negative house price effects are larger in areas that supported Brexit.

This paper estimates the effects of gender and social caste on poverty in India using measures of household wealth from the National Family Health Survey (NFHS). Our asset-based measures of poverty are conceptually different than official measures based on consumption expenditures. For the period 2005–2006, we find that female-headed households and households belonging to marginalized social classes are more likely to be poor than their counterparts. Whether a household belongs to marginalized social class is more strongly associated with poverty than the gender of the household head.

Due to copyright restrictions, the access to the full text of this article is only available via subscription. We use a Factor Augmented VAR model to estimate the dynamic responses of interest rates in emerging market economies to the ‘world’ interest rate, which we extract from a dynamic factor model of yields in industrialized countries. Our results provide evidence that many emerging market yields respond to world rate shocks, at least gradually, which is broadly consistent with capital market integration. Our findings also suggest that the world rate captures information about emerging market yields not contained in US rates, which are typically used to proxy for the world rate.

The objective of this study is provide estimates of the economic effects of the National Flood Insurance Program. In particular, we estimate the response of countywide housing development in Florida to community-level participation in the program, and find that housing permits and starts were up to 30 percent higher in member communities compared to non-members. This increase in development is driven by housing activity in non-coastal counties; we find no evidence that housing construction increased in coastal counties where greater flooding is expected. We speculate that higher compliance costs explain this result, but further research is needed to verify this claim.

We estimate the relationship between mental health drug prescriptions and the level of labor market activity in the USA. Based on monthly data from the National Ambulatory Medical Care Survey of physicians and aggregated by US census regions, we find that the number of mental health drug prescriptions (those aimed at alleviating depression and anxiety) rises by about 10% when employment falls by 1% and when unemployment rises by 100 basis points, but only for patients in the Northeast region. This paper is one of the first to look at compensatory health behavior in response to the business cycle.

We estimate the dynamic effects of U.S. housing market shocks on state-level spending and home prices from a dynamic common factor model, and identify housing demand and supply shocks using a sign-restrictions approach. While state-level spending and house prices gradually respond positively and persistently to aggregate housing demand shocks, there is significant variation across states in the magnitude of these responses. Cross-state regressions of the estimated responses on an index of mortgage market development suggest that spending in states with greater opportunities for home equity borrowing is more sensitive to housing demand shocks than in states with fewer opportunities, which is consistent with the prominence of a “collateral” channel over a “wealth” channel in explaining the link between housing and the overall economy.

We study the effect of asylum seeker dispersal on house prices in England and Wales between 2004 and 2015. Using data from the UK Land Registry, we find that dispersal has a negative effect on house prices, and that this negative effect is stronger for smaller and less expensive dwellings. Moreover, this negative effect extends across district boundaries but diminishes with distance. Literature generally attributes this negative effect to an outward mobility response of natives, which results in reduced housing demand and prices. We find no evidence of such an effect. Instead, we show that dispersal leads to a sharp decrease in the sales of new property, while not affecting the sales of established property. In other words, households do not change their selling plans as a result of asylum seeker inflows, but properties that are sold sell at a lower price, which in turn discourages the construction of new property. Since dispersal is nonrandom, but driven by the costs of housing, our analysis relies on instruments that exploit the variation of dispersal but are plausibly exogenous to the evolution of housing prices.

As the 100th anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation’s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.

Modern paper currency contributes little to productive investment. This shortcoming is not inherent to paper money. It stems from the fact that currency today is monopolistically supplied by public monetary authorities that are poor intermediaries. Commercial banknotes may, in contrast, support efficient intermediation, just as private bank deposits do. We demonstrate this advantage in an endogenous growth model, and use the model to simulate, for a sample of developing countries, steady-state growth-rate gains from various degrees of banknote deregulation. The simulated gains are generally large compared with those from conventional forms of financial liberalization.

We estimate how spending in Texas responded to a 1997 constitutional amendment that relaxed severe restrictions on home equity lending. We use this event as a natural experiment to estimate the importance of credit constraints. If households are credit-constrained, such an increase in credit availability will increase their spending. We find that Texas retail sales at the county and state levels increased significantly after the amendment, lending support to the credit-constraint hypothesis. We confirm these findings and refine our interpretation of the estimated aggregate-level responses using household-level data on home equity loans. (JEL D14, E21, G21, G28)

This article empirically re-examines the importance of the cost channel of monetary transmission–the effect of money supply shocks on the costs of production and supply, as opposed to the traditional effect on demand. Unlike Barth and Ramey (2002), this article identifies the response of industry-level wages to money supply shocks by assuming long-run monetary neutrality. The pervasive findings of a positive response of real wages to money supply shocks in this study provide even stronger support for the cost channel than Barth and Ramey (2002).

This paper examines the role of aggregate productivity and money supply shocks in determining the relationship between inflation and the distribution of relative commodity prices. I estimate a restricted VAR that includes aggregate variables and individual commodity prices, and compute the distribution of the dynamic responses of commodity prices to these aggregate shocks for each forecast horizon. The findings indicate that both shocks lead to positive correlation between inflation and the dispersion of relative prices, and that the response of prices across commodities is not uniform, even in the long-run.

I show how to estimate and identify a large-scale vector autoregression when the variables in a subset of the system are mutually independent after conditioning on a separate set of variables (diagonality), and when the conditioning variables are independent of the former subset (block exogeneity). Least squares estimation is efficient and restrictions only on the set of common variables are sufficient to fully identify the economic structure. This approach will be most useful when using VARs to estimate the responses of a cross-section of variables, such as industry-level output or prices, to aggregate shocks.

This paper examines cross-country variation in the liquidity effect – the negative response of interest rates to money supply shocks – focusing on the role of financial factors in explaining this variation. We estimate the liquidity effect for each of 21 countries using VAR models in which money supply shocks are restricted to be neutral in the long-run, then regress the estimated liquidity effect on financial market variables across countries. We find that financial factors play an important role in determining the magnitude of the liquidity effect, and that this evidence is most consistent with generalised versions of limited-participation models.

In this paper, we estimate the dynamic effects of domestic money supply shocks in Chile over its post-reform era. We analyze Chile since inflationary expectations could be very sensitive to changes in the money supply, given past inflationary experience. In the context of a VAR model containing both Chilean and US variables, we identify money supply shocks using long-run monetary neutrality and block exogeneity restrictions. Our findings suggest that in Chile over the period from 1977 to 1998, unexpected domestic money supply shocks have had a positive impact on interest rates, in the short-run, and a negative impact on real money balances. This differs markedly from the estimated responses of the US. The findings are consistent with the notion that, at least in Chile, inflationary expectations are very sensitive to news about the nominal money supply, possibly due to high inflationary uncertainty and the lack of credibility of monetary reforms. Our results are generally robust to alternative model specification and identifying restrictions.

I estimate the dynamic response of aggregate owner-occupied housing prices to money supply shocks and interpret these responses using a dynamic equilibrium model of the housing market that relies on the asset view of housing demand. Money supply shocks are identified empirically from a vector autoregression (VAR) using restrictions that are consistent with a wide class of theoretical models. Using monthly data, I find that money shocks have real effects on the housing market: both real housing prices and housing sales (new starts and existing homes) rise in the short-run in response to positive shocks to the money supply. Simulations of the theoretical model suggest that, for reasonable parameter values, the estimated price responses are generally consistent with the theory.

This paper proposes a Bayesian approach to incorporating specification and identification uncertainty into a VAR analysis of the dynamic effects of money supply shocks on the macroeconomy. The approach follows Poirier (1991) in averaging over discrete model specifications in forming posterior densities of the dynamic responses to such shocks. Two distinct means of identifying money supply shocks are considered here: one that imposes contemporaneous restrictions, and one that imposes long-run monetary neutrality. I estimate bounds on dynamic responses that account for specification and parameter uncertainty, and find strong evidence of short-run real effects of money on the economy, including a liquidity effect for both long-term and short-term interest rates. Furthermore, some results differ substantially across identifying restrictions if model uncertainty is ignored. © 1998 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog

In this article, I estimate the dynamic response of output and asset prices — bond yields and real equity price indices — to money supply shocks in eight industrialized economies over the post-war period. To identify money supply shocks, I assume only that such shocks are neutral in the long-run. The reliability of this identification procedure is examined in light of the recent critique by Faust and Leeper. The findings indicate that a real liquidity effect exists in both bond and stock markets, for most of the countries in the sample, although there is substantial variation in the magnitudes of the effects across countries. The response of real equity prices to money supply innovations has not been well-documented in the literature, and has typically been ignored in the debate over the monetary transmission mechanism. The importance of these findings lies in suggesting ways to improve our understanding of the monetary transmission mechanism and the role of asset markets.

This paper examines the dynamic responses of industry-level output to money supply shocks. We identify money supply shocks by imposing long-run monetary neutrality on the vector autoregression of four aggregate variables (interest rate, output, real money, nominal money), and combine these with weak contemporaneous restrictions to identify the dynamic impact on industry-level output. We find that there is substantial variation in the response to such shocks across industries. Cross-industry regressions show that these responses are positively related to the variance of industry-specific shocks, which provides support for Lucas's model of imperfect information. This result is consistent with some findings in the literature, but overturns others.

Recent evidence suggests that announcements of bank holding company acquisitions result in wealth transfers from the bidding to target shareholders. Empirically, this is demonstrated through findings of negative average abnormal returns to bank holding company acquirers and positive average abnormal returns to targets on announcement. Using a sample of acquisitions from the early 1990s—a period marked by the removal of significant geographic entry barriers—this paper reexamines the issue by applying a general statistical model to the event study framework to more precisely measure abnormal returns. In particular, we model returns according to the GARCH process to control for time-varying volatility. With respect to the unconditional distributions of acquirer and target abnormal returns, our findings are consistent with prior research. Further investigation into the conditional distribution of acquirer returns finds that, on announcement, interstate acquisitions using the purchase method of accounting actually increased shareholder wealth for acquirers (on average) by 1.44%. However, over a longer event horizon, the most important determinants of acquirer abnormal returns appear to be the relative size of the transaction and the method of accounting.

The impact of monetary policy on agriculture has been much debated. This study examines the dynamic responses of U.S. agricultural prices to money-supply shocks using three innovations. First, the variables' responses are identified by long-run money neutrality restrictions instead of the more common contemporaneous ordering. Second, a Bayesian approach to model uncertainty is used to add robustness to the estimation process. Third, agricultural prices are disaggregated into crop and livestock components. The empirical results find that both agricultural sectors benefit in the short run from positive money-supply shocks with agricultural prices increasing relative to the general price level. Copyright 1996, Oxford University Press.

This paper identifies money supply shocks using long-run money neutrality restrictions within a vector autoregression framework to estimate the dynamic response of interest rates to such shocks—the liquidity effect. This identification procedure has several advantages over procedures used in previous studies, including the fact that it is consistent with a larger class of theoretical models. Using this approach on a sample of monthly macroeconomic data, we find evidence for a liquidity effect. This finding is robust across alternative measures of the money stock.

We estimate the relationship between mental health drug prescriptions and the level of labor market activity in the USA. Based on monthly data from the National Ambulatory Medical Care Survey of physicians and aggregated by US census regions, we find that the number of mental health drug prescriptions (those aimed at alleviating depression and anxiety) rises by about 10% when employment falls by 1% and when unemployment rises by 100 basis points, but only for patients in the Northeast region. This paper is one of the first to look at compensatory health behavior in response to the business cycle.

This article examines the ability of volume data to shed light on the source of persistence in stock-return volatility. A mixture model, in which a latent common factor restricts the joint density of volume and returns, is used to relax the assumption of exogenous volume used in previous studies. We use a point-in-time signal-extraction procedure to identify this latent process and a calibrated simulation to conduct analysis of the viability of the model to explain important properties of the data. Using daily returns and volume on individual stocks, our procedure cannot accommodate serial dependence in squared returns.

We estimate the dynamic effects of aggregate US housing market shocks on state-level retail sales and home prices from 1976 to 2008. We use a common factor VAR model to account for the dynamics of the state-level variables, and identify housing demand and supply shocks using a signs-restriction approach. We find that local spending and real house prices generally respond positively but with a lag to aggregate housing demand shocks, that these responses vary significantly across states, and that differences in the level of mortgage market development most likely explain this variation.

In this paper, we use a multivariate GARCH-in-mean model of the reduced form of multilateral exports to examine the relationship between nominal exchange rate volatility and export flows and prices. The model imposes rationality on perceived exchange rate volatility, unlike conventional, two-step strategies. Tests are performed for five industrialized countries over the post-Bretton Woods era. We find that the GARCH conditional variance has a statistically significant impact on the reduced form equations for all countries. For most of the countries, the magnitude of the effect is stronger for export prices than quantities. In addition, the estimated magnitude of the impact of volatility on exports is not robust to using the conventional estimation strategy. (JEL F41, F31).

We examine the behavior of measured variances from the options market and the underlying stock market. Under the joint hypotheses that markets are informationally efficient and that option prices are explained by a particular asset pricing model, forecasts from time-series models of the stock-return process should not have predictive content given the market forecast as embodied in option prices. Both in-sample and out-of-sample tests suggest that this hypothesis can be rejected. Using simulations, we show that biases inherent in the procedure we use to imply variances cannot explain this result. Thus, we provide evidence inconsistent with the orthogonality restrictions of option pricing models that assume that variance risk is unpriced. These results also have implications for optimal variance forecast rules. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

This paper analyzes the transmission of aggregate shocks between the USA and three major European economies—the UK, France, and Germany —under fixed and flexible exchange rate regimes, using time series techniques. Short-run linkages are investigated in the context of vector autoregression models, while long-run relations are analyzed by testing for cointegration. Empirical findings indicate that flexible exchange rates have not, in general, completely insulated domestic economies from foreign shocks and that the degree of insulation and interdependence, across exchange rate regimes and over the long and short runs, differs substantially across the European countries.

This paper investigates the relation between exchange rate volatility, international trade and the macroeconomy in the context of a VAR model. The model is estimated for U.S. multilateral trade over the current floating rate period and includes a moving standard deviation measure of real exchange volatility. There is some evidence of a statistically significant relationship between volatility and trade, but the moving average representation of the system suggests that the effects are quantitatively small. We do find that exchange rate volatility is influenced by the state of the economy.

This article examines the persistence of the variance, as measured by the generalized autoregressive conditional heteroskedasticity (GARCH) model, in stock-return data. In particular, we investigate the extent to which persistence in variance may be overstated because of the existence of, and failure to take account of, deterministic structural shifts in the model. Both an analysis of daily stock-return data and a Monte Carlo simulation experiment confirm the hypothesis that GARCH measures of persistence in variance are sensitive to this type of model misspecification.

This paper provides empirical support for the notion that Autoregressive Conditional HeterQskedasticity (ARCH) in daily stock return data reflects time dependence in the process generating information flow to the market. Daily trading volume, used as a proxy for information arrival time, is shown to have significant explanatory power regarding the variance of daily returns, which is an implication of the assumption that daily returns are subordinated to intraday equilibrium returns. Furthermore, ARCH effects tend to disappear when volume is included in the variance equation. THE AUTOREGRESSIVE CONDITIQNAL HETEROSKEDASTICITY (ARCH) process of Engle (1982) has been shown to provide a good fit for many financial return time series,1 ARCH imposes an autoregressive structure on conditional variance, allQwing volatility shocks to persist over time. This persistence captures the propensity of returns of like magnitude to clu~ter in time and can explain the well documented nonnormality and nonstability of empirical asset return distributions. (See especially Fama (1965).) An appealing explanation for the presence of ARCH is based upon the hypothesis that daily returns are generated by a maiture of distributions, in which the rate of daily information arrival is the stochastic mixing variable. As suggested by Diebold (1986), Gallant, Hsieh, and Tauchen (1988), and Stock (1987, 1988), ARCH might capture the time series properties (e.g., serial correlation) of this mixing variable. HQwever, this linkage has not been broadly documented with the datia. The objective of this study is to examine the validity of this explanation for daily stock returns. The empirical strategy exploits the implication of the mixture model that the variance of daily price increments is heteroskedastic-specifically, positively related to the rate of daily information arrival. Using daily trading volume as a proxy for the mixing variable, we show that, for a sample of 20 common stocks, ARCH effects vanish when volume is included as an explanatory variable in the conditional variance equation.

Modern paper currency contributes little to productive investment. This shortcoming is not inherent to paper money. It stems from the fact that such money is monopolistically supplied by public monetary authorities that are poor intermediaries. Commercial banknotes, in contrast, are just as capable as commercial bank deposits are of supporting efficient intermediation and, through it, more rapid economic growth. We demonstrate this advantage of commercial banknotes in a modified endogenous growth model, and use the model to simulate, for a sample of developing countries, steady-state growth rate gains from various degrees of banknote deregulation. The simulated gains are large compared to those from conventional forms of financial liberalization.

The monetary contraction of the early 1930s involved a massive switch from bank deposits to currency. Although bank failures and fallen real income and interest rates deserve the lion's share of blame for the contraction, fiscal policy also played a part. In June 1932 the federal government imposed, as part of its effort to balance its budget, a two-cent tax on bank checks, equivalent to about 30 cents per check in today's money. By giving the public another motive for switching from deposits to currency, the tax substantially deepened the money stock's already deep slump. According to the estimates made here, this now-forgotten measure, which most monetary historians have overlooked, accounted-ceteris paribus-for about a 15 percent increase in the currency-demand deposit ratio, and about a 12 percent decline in the MI money stock. When the check tax was first proposed, legislators realized that a major monetary crisis was in progress. They heard the testimony of dozens of witnesses who argued that the tax would promote a large-scale switch to currency-based payments and that the already crippled banking system could ill afford the extra strain such a switch would place on it. Yet the tax found its way into the 1932 Revenue Act and, despite dozens of bills and joint resolutions calling for its early repeal, remained in effect through December 1934.

Time-series techniques are used to assess the quantitative importance of buffer-stock money--the short-run response of real money holdings to nominal money supply shocks. The empirical model, a vector autoregression of real and nominal money balances, captures general dynamic properties of the time series but requires theoretical restrictions for sensible interpretation. The authors just-identify the system by imposing a long-run neutrality restriction: nominal money shocks have no permanent effects on real money. They find that buffer-stock effects play an important role in the evolution of real M1 in the short-run. The evidence for M2 is less conclusive. Copyright 1994 by Ohio State University Press.

This paper uses VAR models to investigate the impact of real exchange rate volatility on U.S. bilateral imports from the United Kingdom, France, Germany, Japan and Canada. The VAR systems include U.S. and foreign macro variables, and are estimated separately for each country. The major results suggest that the effect of volatility on imports is weak, although permanent shocks to volatility do have a negative impact on this measure of trade, and those effects are relatively more important over the flexible rate period. Copyright 1989 by MIT Press.

This paper examines the effect of shifts in U.S. monetary policy regimes on the stochastic process that generates foreign exchange rates. To account for the observed behavior of the data record, the author models nominal, dollar exchange rates as univariate autoregressive conditional heteroskedastic processes. He then tests the stability of this process across U.S. monetary policy regimes. For four of the currencies in the sample, accounting for regime shifts improves the fit of the model. Regime shifts also appear to diminish the degree of persistence of variance, making it less likely that exchange rates are integrated-in-variance. Copyright 1989 by Ohio State University Press.