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Series:Working Papers (Old Series)  Bank:Federal Reserve Bank of Cleveland 

Working Paper
Optimal fiscal policy when public capital is productive: a business cycle perspective
A presentation of a dynamic general-equilibrium model with productive public capital to help account for differences in the business cycle characteristics of public- versus private- sector expenditures in postwar U.S. data.
AUTHORS: Lansing, Kevin J.
DATE: 1995

Working Paper
Is Bigger Necessarily Better in Community Banking?
We investigate the relative performance of publicly traded community banks (those with assets less than $10 billion) versus larger banks (those with assets between $10 billion and $50 billion). A body of research has shown that community banks have potential advantages in relationship lending compared with large banks, although newer research suggests that these advantages may be shrinking. In addition, the burdens placed on community banks by the regulatory reforms mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the need to increase investment in technology, both of which have fixed-cost components, may have disproportionately raised community banks? costs. We find that, on average, large banks financially outperform community banks as a group and are more efficient at credit-risk assessment and monitoring. But within the community bank segment, larger community banks outperform smaller community banks. Our findings, taken as a whole, suggest that there are incentives for small banks to grow larger to exploit scale economies and to achieve other scale-related benefits in terms of credit-risk monitoring. In addition, we find that small business lending is an important factor in the better performance of large community banks compared with small community banks. Thus, concern that small business lending would be adversely affected if small community banks find it beneficial to increase their scale is not supported by our results.
AUTHORS: Hughes, Joseph P.; Mester, Loretta J.; Jagtiani, Julapa
DATE: 2016-06-29

Working Paper
Clouded Judgment: The Role of Sentiment in Credit Origination
Using daily fluctuations in local sunshine as an instrument for sentiment, we study its effect on day-today decisions of lower-level financial officers. Positive sentiment is associated with higher credit approvals, and negative sentiment has the opposite effect of a larger magnitude. These effects are stronger when financial decisions require more discretion, when reviews are less automated, and when capital constraints are less binding. The variation in approval rates affects ex-post financial performance and produces significant real effects. Our analysis of the economic channels suggests that sentiment influences managers? risk tolerance and subjective judgment.
AUTHORS: Cortes, Kristle Romero; Sosyura, Denis; Duchin, Ran
DATE: 2016-01-07

Working Paper
Pricing daylight overdrafts
An examination of three policy problems associated with daylight credit and an evaluation of three reform proposals to alleviate the payment system risk associated with Federal Reserve Banks' extension of daylight credit to financial institutions.
AUTHORS: Stevens, Edward J.
DATE: 1988

Working Paper
Sources of wage dispersion: the contribution of interemployer differentials within industry
An analysis of variance in individual production workers' wages within and between establishments, using BLS Industry Wage Surveys to examine establishment-based wage differentials.
AUTHORS: Groshen, Erica L.
DATE: 1988

Working Paper
Algorithms for solving dynamic models with occasionally binding constraints
A description and comparison of several algorithms for approximating the solution to a model in which inequality constraints occasionally bind. Their performance is evaluated using various parameterizations of the one-sector growth model with irreversible investment.
AUTHORS: Fisher, Jonas D. M.; Christiano, Lawrence J.
DATE: 1997

Working Paper
Inflation persistence, inflation targeting and the Great Moderation
There is growing evidence that the empirical Phillips curve within the US has changed significantly since the early 1980?s. In particular, inflation persistence has declined sharply. The paper demonstrates that this decline is consistent with a standard Dynamic New Keynesian (DNK) model in which: (i) the variability of technology shocks has declined, and (ii) the central bank more aggressively responds to inflation.
AUTHORS: Carlstrom, Charles T.; Fuerst, Timothy S.; Paustian, Matthias
DATE: 2007

Working Paper
Identifying inflations grease and sand effects in the labor market
An effort to distinguish inflations distortionary effects from its facilitation of adjustments to shocks when wages are rigid downward. It uses the following identification strategy: inflation-induced deviations among employers mean wage changes represent unintended intramarket distortions (sand), while inflation-induced, interoccupational wage changes reflect adjustments that might have been prevented by nominal wage rigidity (grease).
AUTHORS: Groshen, Erica L.; Schweitzer, Mark E.
DATE: 1997

Working Paper
Volatile Lending and Bank Wholesale Funding
The paper presents the first empirical study of the relation between bank loan volume volatility and bank retail and wholesale liabilities. We argue that since the volume of retail deposits is inflexible, banks facing volatile loan demand tend to fund loans with larger shares of wholesale rather than retail liabilities. We empirically confirm this argument using a unique dataset constructed from the weekly financial reports of 104 large U.S. commercial banks. The high frequency of the data allows us to employ dynamic identification schemes which mitigate reverse causality and selection concerns. Our results imply that the introduction of regulatory limits on wholesale liabilities will increase the exposure of banks to loan demand shocks. Such a regulation will also inhibit the ability of the banking sector to service more volatile loans. This may smooth the lending cycles, but it will also slow recoveries of lending volume after a substantial recession.
AUTHORS: Dinger, Valeriya; Craig, Ben R.
DATE: 2014-10-02

Working Paper
Incomplete markets and households’ exposure to interest rate and inflation risk: implications for the monetary policy maker
The present paper studies optimal monetary policy when the representative agent assumption is abandoned and financial wealth heterogeneity across households is introduced. Incomplete markets make households incapable of perfectly insuring against interest rate and inflation risk, creating a trade-off between price level and debt-servicing stabilization. We derive a welfare-based loss function for the policymaker, which includes an additional target related to the cross-sectional distribution of household debt. The extent of the deviation from price stability depends on the initial level of debt dispersion. Using U.S. microdata to calibrate the model, we find an optimal inflation volatility equal to almost 20 percent of the actual volatility of the last 15 years. Finally, the paper studies the design of optimal simple implementable rules. Superinertial rules, which imply a hump-shaped interest rate response to shocks, significantly outperform standard rules.
AUTHORS: Pescatori, Andrea
DATE: 2007

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