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Report
Time variation in asset price responses to macro announcements
Grisse, Christian; Goldberg, Linda S. (2013-08-01)
Although the effects of economic news announcements on asset prices are well established, these relationships are unlikely to be stable. This paper documents the time variation in the responses of yield curves and exchange rates using high-frequency data from January 2000 through August 2011. Significant time variation in news effects is present for those announcements that have the largest effects on asset prices. The time variation in effects is explained by economic conditions, including the level of policy rates at the time of the news release, and risk conditions: Government bond yields ...
Staff Reports , Paper 626

Working Paper
Financial integration and international business cycle co-movement: the role of balance sheets
Davis, J. Scott (2011)
This paper investigates the effect of international financial integration on international business cycle co-movement. We first show with a reduced form empirical approach how capital market integration (equity) has a negative effect on business cycle co-movement while credit market integration (debt) has a positive effect. We then construct a model that can replicate these empirical results.> ; In the model, capital market integration is modeled as crossborder equity ownership and involves wealth effects. Credit market integration is modeled as cross-border borrowing and lending between ...
Globalization Institute Working Papers , Paper 89

Newsletter
The Rise of Intangible Investment and the Transmission of Monetary Policy
David, Joel M.; Gourio, François (2023-08)
Monetary policy acts on the economy primarily through its effects on investment spending. But the nature of investment has evolved over time: “Intangible assets”—such as intellectual property or software—play an increasingly important role in the modern economy. In this Chicago Fed Letter, we study the implications of this change for the transmission of monetary policy. We show that investment in intangible assets is less sensitive to interest rates than investment in tangible assets. This suggests that the secular shift toward intangibles has reduced the responsiveness of aggregate ...
Chicago Fed Letter , Volume no 482 , Pages 8

Working Paper
Secondary Market Liquidity and the Optimal Capital Structure
Arseneau, David M.; Rappoport, David E.; Vardoulakis, Alexandros (2015-05-12)
We present a model where endogenous liquidity generates a feedback loop between secondary market liquidity and firms' financing decisions in primary markets. The model features two key frictions: a costly state verification problem in primary markets, and search frictions in over-the-counter secondary markets. Our concept of liquidity depends endogenously on illiquid assets put up for sale relative to the resources available for buying those assets in the secondary market. Liquidity determines the liquidity premium, which affects issuance in the primary market, and this effect feeds back into ...
Finance and Economics Discussion Series , Paper 2015-31

Working Paper
Mixed Signals: Investment Distortions with Adverse Selection
Darst, Matt; Refayet, Ehraz (2019-06-21)
We study how adverse selection distorts equilibrium investment allocations in a Walrasian credit market with two-sided heterogeneity. Representative investor and partial equilibrium economies are special cases where investment allocations are distorted above perfect information allocations. By contrast, the general setting features a pecuniary externality that leads to trade and investment allocations below perfect information levels. The degree of heterogeneity between informed agents' type governs the direction of the distortion. Moreover, contracts that complete markets dampen the impact ...
Finance and Economics Discussion Series , Paper 2019-044

Working Paper
Tax Revolts and Sovereign Defaults
Arce, Fernando; Werquin, Nicolas; Morgan, Jan (2024-02)
Protests and fiscal crises often coincide, with complex causal dynamics at play. We examine the interaction between tax revolts and sovereign risk using a quantitative structural model calibrated to Argentina during the Macri administration (2015-2019). In the model, the government can be controlled by political parties with different preferences for redistribution. Households may opt to revolt in response to the fiscal policies of the ruler. While revolts entail economic costs, they also increase the likelihood of political turnover. Our model mirrors the data by generating political crises ...
Working Paper Series , Paper WP 2024-07

Journal Article
To Improve the Accuracy of GDP Growth Forecasts, Add Financial Market Conditions
Cook, Thomas R.; Doh, Taeyoung (2021-06-02)
More timely data on current macroeconomic conditions can reduce uncertainty about forecasts, helping policymakers mitigate the risk of extreme economic outcomes. We find that incorporating financial market conditions along with current macroeconomic conditions improves the forecast accuracy of future GDP growth. Forecasts based only on current macroeconomic conditions eventually converge to those incorporating financial market conditions, lending further support to this approach.
Economic Bulletin , Issue June 2, 2021 , Pages 5

Working Paper
A tale of two commitments: equilibrium default and temptation
Nakajima, Makoto (2013-12-11)
I construct the life-cycle model with equilibrium default and preferences featuring temptation and self-control. The model provides quantitatively similar answers to positive questions such as the causes of the observed rise in debt and bankruptcies and macroeconomic implications of the 2005 bankruptcy reform, as the standard model without temptation. However, the temptation model provides contrasting welfare implications, because of overborrowing when the borrowing constraint is relaxed. Specifically, the 2005 bankruptcy reform has an overall negative welfare effect, according to the ...
Working Papers , Paper 14-1

Working Paper
The Decline in Asset Return Predictability and Macroeconomic Volatility
Qian, Charles; Hsu, Alex; Palomino, Francisco J. (2017-05)
We document strong U.S. stock and bond return predictability from several macroeconomic volatility series before 1982, and a significant decline in this predictability during the Great Moderation. These findings are robust to alternative empirical specifications and out-of-sample tests. We explore the predictability decline using a model that incorporates monetary policy and shocks with time-varying volatility. The decline is consistent with changes in both policy and shock dynamics. While an increase in the response to inflation in the interest-rate policy rule decreases volatility, more ...
Finance and Economics Discussion Series , Paper 2017-050

Working Paper
Financial Stress and Equilibrium Dynamics in Money Markets
Senyuz, Zeynep; Yoldas, Emre (2015-08-27)
Interest rate spreads are widely-used indicators of funding pressures and market functioning in money markets. Using weekly data from 2002 to 2015, we analyze money market dynamics in a long-run equilibrium framework where commonly-monitored spreads serve as error correction terms. We find strong evidence for nonlinearities with respect to levels of the spreads. We provide point and interval estimates for spread thresholds that quantify funding pressure points from a long-run perspective. Our results indicate significant asymmetry in the adjustment toward long-run equilibrium. We show that ...
Finance and Economics Discussion Series , Paper 2015-91

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