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Series:Public Policy Brief  Bank:Federal Reserve Bank of Boston 

Briefing
Asymmetric responses to tax-induced changes in personal income: the 2013 payroll tax hike versus anticipated 2012 tax refunds
As part of the Boston Earned Income Tax Credit Coalition's free tax preparation service offered at the Boston Roxbury Resource Center between January and April 2013, 945 low-to-moderate income individuals were asked about payroll tax changes, financial planning, and their personal characteristics. Using these survey responses, the authors calculated how these individuals planned to respond to the payroll tax hike and their tax refund. The results show that their marginal propensity to consume (MPC) out of the tax refund is 30 percentage points lower than their spending reaction to the tax hike. Specifically, for every dollar less of income due to the payroll tax increase, consumption declines by 90 cents, while for each additional dollar of income from a tax refund, consumption increases by 60 cents. This asymmetric response is persistent across race, gender, and proxies of financial constraints such as credit scores, credit utilization, and so on. The lack of observable explanations for individuals' asymmetric behavior could be the result of the tax changes themselves being different in terms of their timing and method of delivery.
AUTHORS: Bracha, Anat; Cooper, Daniel H.
DATE: 2013

Briefing
A proposal to help distressed homeowners: a government payment-sharing plan
This public policy brief presents a proposal, originally posted on the website of the Federal Reserve Bank of Boston in January of this year, designed to help homeowners who are unable to afford mortgage payments on their principal residence because they have suffered a significant income disruption and because the balance owed on their mortgage exceeds the value of their home. These homeowners represent a subset of the population of distressed homeowners, but according to our research they face an elevated risk of default and are unlikely to be helped by current foreclosure-reduction programs. The plan is a government payment-sharing arrangement that works with the homeowner's existing mortgage and provides a significant reduction in the homeowner's monthly mortgage payment. The plan does not involve principal reduction. Two options are presented; both are designed to help people with negative equity and a significant income disruption, such as job loss. In one version, the assistance comes in the form of a government loan, which must be repaid when the borrower returns to financial health. The second version features government grants that do not have to be repaid. In either case, the homeowner must provide evidence of negative equity in the home and of job loss or other significant income disruption. The costs of the plan are moderate, and the benefits should help not only the participating homeowners but also the housing industry, the financial markets, and the economy more broadly.
AUTHORS: Foote, Christopher L.; Willen, Paul S.; Mauskopf, Eileen; Fuhrer, Jeffrey C.
DATE: 2009

Briefing
Do foreclosures affect Boston public school student academic performance?
Foreclosures have well-documented adverse consequences for families living in or owning properties undergoing foreclosure and on surrounding neighborhoods, but they may also have other costs. This policy brief summarizes our research on the impact of mortgage foreclosures on academic performance among Boston public school students. The data show that students who live at an address that experiences a foreclosure tend to score substantially lower on standardized tests (math and English) and also have substantially worse attendance. However, if we account for the influence of student characteristics, housing, and the student's past academic performance on test scores, the size of the foreclosure effects is reduced to nearly zero. We interpret these findings as indicating that underlying (yet unobserved) factors such as economic stress within the family contribute to both poor academic performance and the foreclosure event, rather than implying that foreclosure per se causes deterioration in a student's academic performance. We also find that foreclosures may harm academic performance indirectly by causing an affected student to change schools during the academic year. However, we cannot say with certainty that the strong negative association between a child's performance and school change ? whether the change is precipitated by foreclosure or by other circumstances ? reflects a causal relationship. Accordingly, public policies aimed at improving student performance should address family stressors that jointly cause decreased academic performance and foreclosures. Existing school assignment policies in Boston ? based as they are on citywide high schools and three broad zones ? loosen the link between residential moves and school changes during the school year. Other policies at the school, district, and community level may help to lessen the disruptive effects of academic-year school changes on performance.
AUTHORS: Burke, Mary A.; Triest, Robert K.; Bradbury, Katharine L.
DATE: 2013

Briefing
A principal components approach to estimating labor market pressure and its implications for inflation
We build a summary measure of labor market pressure that captures the common movement among a variety of labor market series. Obtained as the labor market series? first principal component, this measure explains a large portion of the variability of the underlying series. For this reason, it is a good summary indicator of labor market pressure. We show that the unemployment rate gap has tracked this summary measure closely over the past 35 years. At times, however, the summary measure and the unemployment rate gap have sent somewhat different signals. In terms of relying on the principal components summary measure vis--vis the unemployment rate gap for explaining inflation, we argue that the recent evolution of wage inflation is more consistent with the evolution of the summary measure than with the unemployment rate gap. This is because over the past two years the principal components summary measure has been suggesting less labor market pressure than the unemployment rate gap. Over the past 35 years, however, there is little systematic evidence favoring the summary measure of labor market pressure over the unemployment rate gap as a predictor of inflation.
AUTHORS: Olivei, Giovanni P.; Chahrour, Ryan; Barnes, Michelle L.; Tang, Gaoyan
DATE: 2007

Briefing
The impact of policy uncertainty on U. S. employment: industry evidence
The anemic pace of the recovery of the U. S. economy from the Great Recession has frequently been blamed on heightened uncertainty, much of which concerns the nation?s fiscal policy. Intuition suggests that increased policy uncertainty likely has different impacts on different industries, to the extent that industries differ in their exposure to government policies. This study utilizes industry data to explore whether policy uncertainty indeed affects the dynamics of employment, and particularly its impact on industry employment, during this recovery. This analysis focuses on heterogeneity across industries in terms of the fraction of their product demand that can ultimately be attributed to federal government expenditures. The estimation results reveal that policy uncertainty indeed retards employment growth more in industries that rely more heavily on federal government demand: the growth rate of employment in these industries appears to have been four-tenths of a percentage point lower during the quarters in recent years when policy uncertainty spiked.
AUTHORS: Wang, J. Christina
DATE: 2013

Briefing
Massachusetts employment growth 1996–2006: effects of industry performance and industry composition
This brief examines the effects of industry performance and industry composition on overall changes in Massachusetts employment in the period 1996 to 2006. Through 2000, Massachusetts enjoyed strong economic expansion. Around the time of the nationwide recession of 2001, however, the Massachusetts economy experienced a relatively severe setback, and the state has yet to regain as many jobs in the ensuing expansion as it lost in the downturn. ; The study finds that Massachusetts industries generally experienced slower employment growth than their national counterparts in the early 2000s. The highest-flying industries of the late 1990s did ?give back? some of their gains in the early 2000s, but this fact does not explain the Commonwealth?s overall employment trends relative to national trends. Other, lower-growth industries in Massachusetts also underperformed relative to their national counterparts in the early 2000s, and this disparity accounts for almost all of the observed difference between Massachusetts and U.S. employment growth rates during the post-boom period. ; Cutting the data differently to focus on industries that characterize the ?innovation economy? in Massachusetts allows a richer interpretation of the post-boom period. The industries in key clusters identified by the Massachusetts Technology Collaborative had declining U.S. employment in the early 2000s. In addition, these industries had steeper employment losses in Massachusetts than in the nation during this period. Thus, the identity of the state?s key industry clusters, as well as the comparatively poor performance of these clusters, helps to account for the weakness of employment trends in Massachusetts compared with national trends since the boom ended.
AUTHORS: Bradbury, Katharine L.; Kodrzycki, Yolanda
DATE: 2007

Briefing
The role of expectations and output in the inflation process: an empirical assessment
This brief examines two issues of current interest concerning inflation: (1) whether "well-anchored" expectations will help to restrain inflation's decline and whether an "un-anchoring" of expectations could lead to undesirably high inflation and (2) to what extent output (or utilization) gaps are useful components of empirical models of inflation and, if they are useful, to what extent current gaps might counterbalance the effect of expectations on inflation. The goals of conducting this examination are to articulate a reasonably coherent framework for the discussion, highlight the key areas of uncertainty, and provide new empirical evidence that sheds some light on these areas.
AUTHORS: Olivei, Giovanni P.; Fuhrer, Jeffrey C.
DATE: 2010

Briefing
Structural unemployment
Whenever unemployment stays high for an extended period, it is common to see analyses, statements, and rebuttals about the extent to which the high unemployment is structural, not cyclical. This brief views the Beveridge curve pattern of unemployment and vacancy rates and the related matching function as proxies for the functioning of the labor market, and explores issues in that proxy relationship that complicates such analyses.
AUTHORS: Diamond, Peter A.
DATE: 2013

Briefing
Domestic and foreign announcements on unconventional monetary policy and exchange rates
This brief studies the effects that announcements about unconventional monetary policies (large-scale asset purchases, refinancing operations, and forward guidance) have on nominal exchange rates. To this end, the authors use high-frequency intra-daily data and look at the variations in government future yields and in nominal exchange rates over a narrow window around the time of the announcements. They find that expansionary monetary policy shocks embedded in announcements made by the Federal Reserve depreciate the U. S. dollar. In contrast, the authors also find that similar unexpected expansionary announcements by foreign central banks result in an appreciation of the U. S. dollar.
AUTHORS: Diez, Federico J.; Presno, Ignacio
DATE: 2013

Briefing
Evidence of a credit crunch?: results from the 2010 survey of first district community banks
This policy brief summarizes the findings of the Survey of Community Banks conducted by the Federal Reserve Bank of Boston in May 2010. This survey seeks to understand how the supply of, and demand for, bank business loans changed in the period following the financial crisis. The survey design focuses on assessing how much community banks were willing and able to lend to local businesses that used to be customers of large banks but lost access to credit in the aftermath of the financial crisis. The survey responses provide some evidence that lending standards for commercial loans have tightened moderately at community banks since late 2008, with the tightening being more severe for new customers than for those that already had a relationship with the respondent bank. The survey also reveals that expansions of several SBA guarantee programs since the crisis have ameliorated possible credit constraints on small businesses.
AUTHORS: Wang, J. Christina; Triest, Robert K.; Montoriol-Garriga, Judit; Jeon, Jihye
DATE: 2010

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