Search Results
Discussion Paper
Which Market Indicators Best Forecast Recessions?
In this note, we use econometric methods to infer which economic and financial indicators reliably identify and predict recessions.
Working Paper
Monetary policy and the corporate bond market: How important is the Fed information effect?
Does expansionary monetary policy drive up prices of risky assets? Or, do investors interpret monetary policy easing as a signal that economic fundamentals are weaker than they previously believed, prompting riskier asset prices to fall? We test these competing hypotheses within the U.S. corporate bond market and find evidence strongly in favor of the second explanation—known as the "Fed information effect". Following an unanticipated monetary policy tightening (easing), returns on corporate bonds with higher credit risk outperform (underperform). We conclude that monetary policy surprises ...
Working Paper
To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income
Do corporate tax increases destroy jobs? And do corporate tax cuts boost employment? Answering these questions has proved empirically challenging. We propose an identification strategy that exploits variation in corporate income tax rates across U.S. states. Comparing contiguous counties straddling state borders over the period 1970 to 2010, we find that increases in corporate tax rates lead to significant reductions in employment and income. We find little evidence that corporate tax cuts boost economic activity, unless implemented during recessions when they lead to significant increases in ...
Working Paper
End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns
I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples. I argue, however, that the boost to profits and valuations from ever-declining interest and corporate tax rates is unlikely to continue, indicating significantly ...
Working Paper
Non-monetary news in Fed announcements: Evidence from the corporate bond market
When the Federal Reserve tightens monetary policy, do the prices of riskier assets fall relative to safer assets? Or, do investors interpret policy tightening as a signal that economic fundamentals are stronger than they previously believed, thus leading riskier assets to outperform? We present evidence that the latter of these two forces empirically dominates within the U.S. corporate bond market. Following an unanticipated monetary policy tightening, riskier corporate bonds outperform safer corporate bonds, demonstrating the importance of an informational, or nonmonetary, component within ...