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Content Type:Report 

Sunk costs, contestability, and the latent contract market

The idea that an industry with sunk costs may be contestable even in the absence of long-term contracts has received little attention from formal economic theory yet is popular among monopolists facing antitrust suits. The paper formally illustrates the argument. In an infinitely repeated game, there exists a class of contestable outcomes in which the monopolist sells only on the spot market and charges low prices along the equilibrium path to prevent customers from resorting to long-term contracts. Then, the crucial test for contestability is the level of transaction costs in the latent ...
Staff Reports , Paper 75

Equity Volatility Term Premia

This paper estimates the term-structure of volatility risk premia for the stock market. Realized variance term premia are increasing in systematic risk and predict variance swap returns. Implied volatility term premia are decreasing in risk initially, but then increase at a lag, predicting VIX futures returns. By modeling the logarithm of realized variance, the paper derives a closed-form relationship between the prices of variance swaps and VIX futures. The model provides accurate pricing and highlights periods of dislocation between the index options and VIX futures markets. Term premia ...
Staff Reports , Paper 867

Vouchers, responses, and the test-taking population: regression discontinuity evidence from Florida

While there is a rich literature that investigates whether accountability regimes induce schools to manipulate their test-taking population by strategically excluding weaker students, no study thus far investigates whether voucher programs induce schools to engage in similar strategic behavior. This paper analyzes a Florida program that embedded vouchers in an accountability regime. Specifically, it investigates whether the threat of vouchers and the stigma associated with the Florida program induced schools to strategically manipulate their test-taking population. Under Florida rules, scores ...
Staff Reports , Paper 486

Assessing financial stability: the Capital and Loss Assessment under Stress Scenarios (CLASS) model

The CLASS model is a top-down capital stress testing framework that uses public data, simple econometric models, and auxiliary assumptions to project the effect of macroeconomic scenarios on U.S. banking firms. Through the lens of the model, we find that the total banking system capital shortfall under stressful macroeconomic conditions began to rise four years before the financial crisis, peaking in the fourth quarter of 2008. The capital gap has since fallen sharply, and is now significantly below pre-crisis levels. In the cross section, banking firms estimated to be most sensitive to ...
Staff Reports , Paper 663

Trade and growth in New England

From the time when New England timber built the British navy and Salem boys sailed ginseng root to China and returned as wealthy men, New England?s growth has been tightly linked with international trade. The ties are no less compelling today. Trade raises living standards by promoting the efficient use of resources and encouraging the adoption of new technologies and productivity improvements. New England is a region that specializes in new technologies, a region with limited natural resources, and trade is essential to its future well-being. However, like technological change, increased ...
Annual Report

Financial Frictions Conference: Reviews Paths to Monetary Policy Objectives

The Globalization and Monetary Policy Institute hosted ?Financial Frictions and Monetary Policy in an Open Economy,? March 16?17, in Dallas. The conference brought together theoretical and empirical researchers to examine how financial frictions?often using models in which company balance sheets appear prominently?affect monetary policy in an open economy.
Annual Report, Globalization and Monetary Policy Institute

Term Structures of Inflation Expectations and Real Interest Rates: The Effects of Unconventional Monetary Policy

Inflation expectations have recently received increased interest because of the uncertainty created by the Federal Reserve?s unprecedented reaction to the Great Recession. The effect of this reaction on the real economy is also an important topic. In this paper I use various surveys to produce a term structure of inflation expectations ? inflation expectations at any horizon from 3 to 120 months ? and an associated term structure of real interest rates. Inflation expectations extracted from this model track actual (ex-post) realizations of inflation quite well, and in terms of forecast ...
Staff Report , Paper 502

Slow Convergence in Economies with Organization Capital

Most firms begin very small, and large firms are the result of typically decades of persistent growth. This growth can be understood as the result of some form of organization capital accumulation. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This is shown to imply that incumbent firms account for most aggregate organization capital accumulation. And it implies potentially extremely slow aggregate convergence rates. A benchmark model is proposed in which managers can use incumbent organization capital to create new organization capital. Workers ...
Staff Report , Paper 585

Malthus to Solow

A unified growth theory is developed that accounts for the roughly constant living standards displayed by world economies prior to 1800 as well as the growing living standards exhibited by modern industrial economies. Our theory also explains the industrial revolution, which is the transition from an era when per capita incomes are stagnant to one with sustained growth. We use a standard growth model with one good and two available technologies. The first, denoted the Malthus technology, requires land, labor, and reproducible capital as inputs. The second, denoted the Solow technology, does ...
Staff Report , Paper 257

Local banking markets and the relation between structure, prices, and nonprices in rural areas

Although many studies have investigated the relationship between market structure and the prices of bank services, most have been concerned with metropolitan areas. These studies generally have used bank balance sheet and income statement ratios as bank conduct proxies. Moreover, prior studies have approximated local banking markets with county or SMSA boundaries. ; This study develops a methodology for delineating the geographic boundaries of local banking markets through the use of secondary economic and demographic data. This methodology is utilized to delineate rural banking markets in ...
Staff Report , Paper 11



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