Nonlinearities, Smoothing and Countercyclical Monetary Policy
Empirical analysis of the Fed?s monetary policy behavior suggests that the Fed smooths interest rates? that is, the Fed moves the federal funds rate target in several small steps instead of one large step with the same magnitude. We evaluate the effect of countercyclical policy by estimating a Vector Autoregression (VAR) with regime switching. Because the size of the policy shock is important in our model, we can evaluate the effect of smoothing the interest rate on the path of macro variables. Our model also allows for variation in transition probabilities across regimes, depending on the ...
Interregional Migration and Housing Vacancy: Theory and Empirics
We examine homeowner vacancy rate interdependencies over time and space through the channel of migration. Our theoretical analysis extends the Wheaton (1990) search and matching model for housing by incorporating interregional spillovers due to some households’ desires to migrate between regions and by allowing for regime-switching behavior. Our empirical analysis of vacancy rates for the entire U.S. and for Census regions provides visual evidence for the possibility of regime-switching behavior. We explicitly test our model by estimating basic Vector Autoregression (VAR) and ...
National and Regional Housing Vacancy: Insights Using Markov-switching Models
We examine homeowner vacancy rates over time and space using Markov-switching models. Our theoretical analysis extends the Wheaton (1990) search and matching model for housing by incorporating regime-switching behavior and interregional spillovers. Our approach is strongly supported by our empirical results. Estimations, using constant-only as well as Vector Autoregressions, allow us to examine differences in vacancy rates as well as explore the possibility of asymmetries within and across housing markets, depending on the state/regime (e.g., low or high vacancy) of a given housing market. ...
Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States
In economic unions the ﬁscal authority consists not of one, but many governments. We analyze whether partisanship of state-level politicians aﬀects federal policies, such as ﬁscal stimulus in the U.S. Using data from close elections, we ﬁnd partisan diﬀerences in the marginal propensity to spend federal transfers: Republican governors spend less. This partisan diﬀerence has tended to increase with measures of polarization. We quantify the aggregate eﬀects in a New Keynesian model of Republican and Democratic states in a monetary union: Lowering partisan diﬀerences to levels ...
Mortgage Loss Severities: What Keeps Them So High?
Mortgage loss-given-default (LGD) increased significantly when house prices plummeted and delinquencies rose during the financial crisis, but it has remained over 40 percent in recent years despite a strong housing recovery. Our results indicate that the sustained high LGDs post-crisis are due to a combination of an overhang of crisis-era foreclosures and prolonged foreclosure timelines, which have offset higher sales recoveries. Simulations show that cutting foreclosure timelines by one year would cause LGD to decrease by 5?8 percentage points, depending on the trade-off between lower ...
Measuring the Natural Rate of Interest: International Trends and Determinants
U.S. estimates of the natural rate of interest?the real short-term interest rate that would prevail absent transitory disturbances?have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams ...
Should Children Do More Enrichment Activities? Leveraging Bunching to Correct for Endogeneity
We study the effects of enrichment activities such as reading, homework, and extracurricular lessons on children's cognitive and non-cognitive skills. We take into consideration that children forgo alternative activities, such as play and socializing, in order to spend time on enrichment. Our study controls for selection on unobservables using a novel approach which leverages the fact that many children spend zero hours per week on enrichment activities. At zero enrichment, confounders vary but enrichment does not, which gives us direct information about the effect of confounders on skills. ...
Comparing Cross-Country Estimates of Lorenz Curves Using a Dirichlet Distribution Across Estimators and Datasets
Chotikapanich and Griffiths (2002) introduced the Dirichlet distribution to the estimation of Lorenz curves. This distribution naturally accommodates the proportional nature of income share data and the dependence structure between the shares. Chotikapanich and Griffiths (2002) fit a family of five Lorenz curves to one year of Swedish and Brazilian income share data using unconstrained maximum likelihood and unconstrained non-linear least squares. We attempt to replicate the authors' results and extend their analyses using both constrained estimation techniques and five additional years of ...
Financial variables and macroeconomic forecast errors
A large set of financial variables has only limited power to predict a latent factor common to the year-ahead forecast errors for real Gross Domestic Product (GDP) growth, the unemployment rate, and Consumer Price Index (CPI) inflation for three sets of professional forecasters: the Federal Reserve?s Greenbook, the Survey of Professional Forecasters (SPF), and the Blue Chip Consensus Forecasts. Even when a financial variable appears to be fairly robust across sample periods in explaining the latent factor, from an economic standpoint its contribution appears modest. Still, several financial ...
Correcting for Endogeneity in Models with Bunching
We show that in models with endogeneity, bunching at the lower or upper boundary of the distribution of the treatment variable may be used to build a correction for endogeneity. We derive the asymptotic distribution of the parameters of the corrected model, provide an estimator of the standard errors, and prove the consistency of the bootstrap. An empirical application reveals that time spent watching television, corrected for endogeneity, has roughly no net effect on cognitive skills and a significant negative net effect on non-cognitive skills in children.