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Working Paper
Forecasts of inflation and interest rates in no-arbitrage affine models
Wei, Bin; Gospodinov, Nikolay (2016-02-01)
In this paper, we examine the forecasting ability of an affine term structure framework that jointly models the markets for Treasuries, inflation-protected securities, inflation derivatives, and oil future prices based on no-arbitrage restrictions across these markets. On the methodological side, we propose a novel way of incorporating information from these markets into an affine model. On the empirical side, two main findings emerge from our analysis. First, incorporating information from inflation options can often produce more accurate inflation forecasts than those based on the Survey of ...
FRB Atlanta Working Paper , Paper 2016-3

Working Paper
Real Rates and Consumption Smoothing in a Low Interest Rate Environment: The Case of Japan
Lecznar, Jonathan; Lubik, Thomas A. (2017-05-18)
We study the dynamics of consumption, the real interest rate, and measures of labor input in Japan over the period from 1985-2014. We identify structural breaks in macroeconomic aggregates during the 1990s and associate them with the zero interest rate policy pursued by the Bank of Japan and the surprise increase in the consumption tax rate in April 1997. Formal estimation using the Generalized Methods of Moments shows that the mid-1990s are characterized by breaks in the structural parameters governing household consumption and labor supply decisions. Specifically, following the tax hike and ...
Working Paper , Paper 17-8

Working Paper
Aging and the Real Interest Rate in Japan: A Labor Market Channel
Fujiwara, Ippei; Fujita, Shigeru (2021-06-08)
This paper explores a causal link between aging of the labor force and declining trends in the real interest rate in Japan. We develop a search/matching model that features heterogeneous workers with respect to their ages and firm-specific skills. Using the model, we examine the long-run implications of the sharp drop in labor force entry in the 1970s. We show that the changes in the demographic structure induce significant low-frequency movements in per capita consumption growth and the real interest rate. The model suggests that aging of the labor force accounts for 40 percent or more of ...
Working Papers , Paper 21-23

Working Paper
Funding Liquidity Risk and the Cross-section of MBS Returns
Kitsul, Yuriy; Ochoa, Marcelo (2016-06-07)
This paper shows that funding liquidity risk is priced in the cross-section of excess returns on agency mortgage-backed securities (MBS). We derive a measure of funding liquidity risk from dollar-roll implied financing rates (IFRs), which reflect security-level costs of financing positions in the MBS market. We show that factors representing higher net MBS supply are generally associated with higher IFRs, or higher funding costs. In addition, we find that exposure to systematic funding liquidity shocks embedded in the IFRs is compensated in the cross-section of expected excess returns| agency ...
Finance and Economics Discussion Series , Paper 2016-052

Working Paper
The Reversal Interest Rate
Brunnermeier, Markus K.; Abadi, Joseph; Koby, Yann (2022-09-01)
The reversal interest rate is the rate at which accommodative monetary policy reverses andbecomes contractionary for lending. We theoretically demonstrate its existence in a macroeconomic model featuring imperfectly competitive banks that face financial frictions. When interest rates are cut too low, further monetary stimulus cuts into banks’ profit margins, depressing their net worth and curtailing their credit supply. Similarly, when interest rates are low for too long, the persistent drag on bank profitability eventually outweighs banks’ initial capital gains, also stifling credit ...
Working Papers , Paper 22-28

Working Paper
The Rising Cost of Climate Change: Evidence from the Bond Market
Rudebusch, Glenn D.; Bauer, Michael D. (2020-07-07)
The level of the social discount rate (SDR) is a crucial factor for evaluating the costs ofclimate change. We demonstrate that the equilibrium or steady-state real interest rate isthe fundamental anchor for market-based SDRs. Much recent research has pointed to adecrease in the equilibrium real interest rate since the 1990s. Using new estimates of thisdecline, we document a pronounced downward shift in the entire term structure of SDRsin recent decades. This lower new normal for interest rates and SDRs has substantiallyboosted the estimated economic loss from climate change and the social ...
Working Paper Series , Paper 2020-25

Working Paper
Bankruptcy and delinquency in a model of unsecured debt
Athreya, Kartik B.; Young, Eric; Sanchez, Juan M.; Tam, Xuan S. (2012)
This paper documents and interprets two facts central to the dynamics of informal default or ?delinquency? on unsecured consumer debt. First, delinquency does not mean a persistent cessation of payment. In particular, we observe that for individuals 60 to 90 days late on payments, 85% make payments during the next quarter that allow them to avoid entering more severe delinquency. Second, many in delinquency (40%) have smaller debt obligations one quarter later. To understand these facts, we develop a theoretically and institutionally plausible model of debt delinquency and bankruptcy. Our ...
Working Papers , Paper 2012-042

Working Paper
FOMC communication and interest rate sensitivity to news
Tang, Jenny (2017-10-01)
In this paper, I examine whether communications by the Federal Open Market Committee (FOMC) play a role in determining the types of macroeconomic news that financial markets pay attention to. To do so, I construct novel measures of the intensity with which FOMC statements and meeting minutes discussed labor relative to other topics. I find that these labor topic intensity measures are related to the amount by which interest rates? response to labor-related news exceeds their response to all other news. This relationship is especially strong for interest rates of longer maturities and is also ...
Working Papers , Paper 17-12

Working Paper
How Persistent Are Unconventional Monetary Policy Effects?
Neely, Christopher J. (2020-11-08)
This paper argues that one cannot precisely estimate the persistence of unconventional monetary policy (UMP) effects, especially with short samples and few observations. To make this point, we illustrate that the most influential model on the topic exhibits structural instability, and sensitivity to specification and outliers that render the conclusions unreliable. Restricted models that respect more plausible asset return predictability are more stable and imply that UMP shocks were persistent. Estimates of the dynamic effects of shocks should respect the limited predictability in asset ...
Working Papers , Paper 2014-04

Working Paper
Bond Flows and Liquidity: Do Foreigners Matter?
Christensen, Jens H. E.; Fischer, Eric; Shultz, Patrick (2019-12-05)
In their search for yield in the current low interest rate environment, many investors have turned to sovereign debt in emerging economies, which has raised concerns about risks to financial stability from these capital flows. To assess this risk, we study the effects of changes in the foreign-held share of Mexican sovereign bonds on their liquidity premiums. We find that recent increases in foreign holdings of these securities have played a significant role in driving up their liquidity premiums. Provided the higher compensation for bearing liquidity risk is commensurate with the chance of a ...
Working Paper Series , Paper 2019-08

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