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Series:Finance and Economics Discussion Series  Bank:Board of Governors of the Federal Reserve System (U.S.) 

Working Paper
Effects of Changing Monetary and Regulatory Policy on Overnight Money Markets
Money markets have been operating under a new monetary policy implementation framework since the Federal Reserve started paying interest on bank reserves in late 2008. The regulatory environment has also evolved substantially over this period. We develop and test hypotheses regarding the effects of changes in the monetary and regulatory policy on dynamics of key overnight funding markets. We find that the federal funds rate continued to provide an anchor, albeit weaker, for unsecured funding rates amid substantial decline in activity and changing composition of trades, while its transmission to the repo market had been hampered. The overnight reverse repurchase (ON RRP) operations that started in late 2013 contributed to stronger co-movement among overnight funding rates and markedly reduced their volatility. The change in the FDIC assessment fees and Basel III leverage ratio regulations have exacerbated financial-reporting-day effects in unsecured markets. In contrast, consistent with lower dealer leverage in the post-crisis period, such effects have weakened in the repo market, especially after the inception of the ON RRP facility. Finally, superabundant bank reserves appear to have significantly diminished the effects of reserve-maintenance on the money market rates.
AUTHORS: Klee, Elizabeth C.; Yoldas, Emre; Senyuz, Zeynep
DATE: 2016-09

Working Paper
The Money View Versus the Credit View
We argue that Schularick and Taylor?s (2012) comparison of credit growth and monetary growth as financial-crisis predictors does not necessarily provide a valid basis for achieving one of their stated intentions: evaluating the relative merits of the ?money view? and ?credit view? as accounts of macroeconomic outcomes. Our own analysis of the postwar evidence suggests that money outperforms credit in predicting economic downturns in the 14 countries in Schularick and Taylor?s dataset. This contrasts with Schularick and Taylor?s (2012) highly negative verdict on the money view. In accounting for the difference in findings, we first explain that Schularick and Taylor?s characterization of the money view is defective, both because their criterion for its validity (that rapid monetary growth predicts financial crises) is misplaced, and because they incorrectly take the money view?s proponents as relying on the notion that monetary aggregates are a good proxy for credit aggregates. In fact, the money view of Friedman and Schwartz does not predict an automatic relationship between rapid monetary growth and (financial or economic) downturns, nor does it rest on money being a good proxy for credit. We further show that Schularick and Taylor?s data on money have systematic faults. For our reexamination of the evidence, we have constructed new, and more reliable, annual data on money for the countries studied by Schularick and Taylor.
AUTHORS: Baker, Sarah S.; Lopez-Salido, J. David; Nelson, Edward
DATE: 2018-06-25

Working Paper
On a problem in identifying linear parametric models
AUTHORS: Swamy, P. A. V. B.; Peter von zur Muehlen
DATE: 1988

Working Paper
Housing, house prices, and the equity premium puzzle
Many recent papers have claimed that when housing services are treated separately from other forms of consumption in utility, a wide range of economic puzzles such as the equity premium puzzle can be explained. Our paper challenges these claims. The key assumption embedded in this literature is that households are not very willing to substitute housing services for consumption. We show that housing services and consumption must be much more substitutable than has been assumed for a neoclassical consumption model to be consistent with U.S. house price data. Further, when forced to match both historical house prices and stock returns, the lowest risk-free rate the model can generate is 11 percent.
AUTHORS: Davis, Morris A.; Martin, Robert F.
DATE: 2005

Working Paper
GSEs, mortgage rates, and secondary market activities
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that purchase mortgages and issue mortgage-backed securities (MBS). In addition, the GSEs are active participants in the primary and secondary mortgage markets on behalf of their own portfolios of MBS. Because these portfolios have grown quite large, portfolio purchases as well as MBS issuance are likely to be important forces in the mortgage market. This paper examines the statistical evidence of a connection between GSE actions and the interest rates paid by mortgage borrowers. We find that both portfolio purchases and MBS issuance have negligible effects on mortgage rate spreads and that purchases are not any more effective than securitization at reducing mortgage interest rate spreads. We also examine the 1998 liquidity crisis and find that GSE portfolio purchases did little to affect interest rates paid by borrowers. These results are robust to alternative assumptions about causality and to model specification.
AUTHORS: Sherlund, Shane M.; Passmore, Wayne; Lehnert, Andreas
DATE: 2005

Working Paper
A Shadow Rate or a Quadratic Policy Rule? The Best Way to Enforce the Zero Lower Bound in the United States
We study whether it is better to enforce the zero lower bound (ZLB) in models of U.S. Treasury yields using a shadow rate model or a quadratic term structure model. We show that the models achieve a similar in-sample fit and perform comparably in matching conditional expectations of future yields. However, when the recent ZLB period is included in the sample, the models ' ability to match conditional expectations away from the ZLB deteriorates because the time-series{{p}}dynamics of the pricing factors change. In addition, neither model provides a reasonable description of conditional volatilities when yields are away from the ZLB.
AUTHORS: Andreasen, Martin M.; Meldrum, Andrew C.
DATE: 2018-08-13

Working Paper
Measurement Error in Macroeconomic Data and Economics Research: Data Revisions, Gross Domestic Product, and Gross Domestic Income
We analyze the effect of measurement error in macroeconomic data on economics research using two features of the estimates of latent US output produced by the Bureau of Economic Analysis (BEA). First, we use the fact that the BEA publishes two theoretically identical estimates of latent US output that only differ due to measurement error: the more well-known gross domestic product (GDP), which the BEA constructs using expenditure data, and gross domestic income (GDI), which the BEA constructs using income data. Second, we use BEA revisions to previously published releases of GDP and GDI. Using a sample of 23 published economics papers from top economics journals that utilize GDP as a key component of an estimated model, we assess whether using either revised GDP or GDI instead of GDP in the published paper would change reported results. We find that estimating models using revised GDP generates the same qualitative result as the original paper in all 23 cases. Estimatin g models using GDI, both with the GDI data originally available to the authors and with revised GDI, instead of GDP generates larger differences in results than those obtained with revised GDP. For 3 of 23 papers (13%), the results we obtain with GDI are qualitatively different than the original published results.
AUTHORS: Li, Phillip; Chang, Andrew C.
DATE: 2015-11-10

Working Paper
The use of high-frequency data in model-based forecasting at the Federal Reserve Board
AUTHORS: Corrado, Carol; Haltmaier, Jane
DATE: 1988

Working Paper
Credit scoring and the availability, price, and risk of small business credit
We examine the economic effects of small business credit scoring (SBCS) and find that it is associated with expanded quantities, higher average prices, and greater risk levels for small business credits under $100,000. These findings are consistent with a net increase in lending to relatively risky "marginal borrowers" that would otherwise not receive credit, but pay relatively high prices when they are funded. We also find that: 1) bank-specific and industrywide learning curves are important; 2) SBCS effects differ for banks that adhere to "rules" versus "discretion" in using the technology; and 3) SBCS effects differ for slightly larger credits.
AUTHORS: Miller, Nathan H.; Frame, W. Scott; Berger, Allen N.
DATE: 2002

Working Paper
Labor Force Transitions at Older Ages : Burnout, Recovery, and Reverse Retirement
Partial and reverse retirement are two key behaviors characterizing labor force dynamics for individuals at older ages, with half working part-time and over a third leaving and later re-entering the labor force. The high rate of exit and re-entry is especially surprising given the declining wage profile at older ages and opportunities for re-entry in the future being uncertain. In this paper we study the effects of wage and health transition processes as well as the role of accrues work-related strain on the labor force participation on older males. We find that a model incorporating a work burnout-recovery process can account for such reverse retirement behavior that cannot be generated by health and wealth shocks alone, suggesting re-entry patterns result in large part from planned behavior. We first present descriptive statistics of the frequency and timing of re-entry and characteristics of those who re-enter using Health and Retirement Study (HRS) panel data. We then develop and estimate a dynamic model of retirement that captures the occurrence and timing of re-entry decisions observed in the data-as well as the transition to part-time work-while incorporating uncertainty in earnings, health, and stress accumulation. The burnout-recovery process allows us to account for about 40 percent of re-entry, and one-quarter of the shifts to part-time work with age. We also consider the lower exit and re-entry rates after 2008, and attribute this to high option values of work in an environment where future re-entry is less certain. Consistent with our burnout-recovery model, we see that respondents are more likely to report high levels of job stress as they continue to work when they would have otherwise stopped working, recovered, and re-entered. This offers us some information about the relative option value of work versus the burnout-recovery process.
AUTHORS: Jacobs, Lindsay; Piyapromdee, Suphanit
DATE: 2016-04-29

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