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Bank:Federal Reserve Bank of Philadelphia  Series:Working Papers 

Working Paper
Optimal prediction under asymmetric loss

Prediction problems involving asymmetric loss functions arise routinely in many fields, yet the theory of optimal prediction under asymmetric loss is not well developed. We study the optimal prediction problem under general loss structures and characterize the optimal predictor. We compute it numerically in less tractable cases. A key theme is that the conditionally optimal forecast is biased under asymmetric loss and that the conditionally optimal amount of bias is time-varying in general and depends on higher-order conditional moments. Thus, for example, volatility dynamics (e.g., GARCH ...
Working Papers , Paper 97-11

Working Paper
Limited and varying consumer attention: evidence from shocks to the salience of bank overdraft fees

The authors explore dynamics of limited attention in the $35 billion market for checking overdrafts, using survey content as shocks to the salience of overdraft fees. Conditional on selection into surveys, individuals who face overdraft-related questions are less likely to incur a fee in the survey month. Taking multiple overdraft surveys builds a "stock" of attention that reduces overdrafts for up to two years. The effects are significant among consumers with lower education and financial literacy. Consumers avoid overdrafts not by increasing balances but by making fewer debit transactions ...
Working Papers , Paper 11-17

Working Paper
Inference for VARs identified with sign restrictions

There is a fast growing literature that partially identifies structural vector autoregressions (SVARs) by imposing sign restrictions on the responses of a subset of the endogenous variables to a particular structural shock (sign-restricted SVARs). To date, the methods that have been used are only justified from a Bayesian perspective. This paper develops methods of constructing error bands for impulse response functions of sign-restricted SVARs that are valid from a frequentist perspective. The authors also provide a comparison of frequentist and Bayesian error bands in the context of an ...
Working Papers , Paper 11-20

Working Paper
Local, open economies within the U.S.: how do industries respond to immigration?

A series of studies has found that relative wages and employment rates in different local labor markets of the US are surprisingly unaffected by local factor supplies. This paper evaluates two explanations for this puzzling empirical fact: (1) Interregional trade mitigates the local impact of supply shocks. (2) Production technology rapidly adapts to the local mix of workers. The author tests these alternative explanations by estimating the effect of increases in relative supplies of particular skill groups on the relative growth rates of different industries and on the relative utilization ...
Working Papers , Paper 04-1

Working Paper
The emergence and future of central counterparties

The authors explain why central counterparties (CCPs) emerged historically. With standardized contracts, it is optimal to insure counterparty risk by clearing those contracts through a CCP that uses novation and mutualization. As netting is not essential for these services, it does not explain why CCPs exist. In over-the-counter markets, as contracts are customized and not fungible, a CCP cannot fully guarantee contract performance. Still, a CCP can help: As bargaining leads to an inefficient allocation of default risk relative to the gains from customization, a transfer scheme is needed. A ...
Working Papers , Paper 10-30

Working Paper
Optimal monetary policy in a model of money and credit

The authors investigate the extent to which monetary policy can enhance the functioning of the private credit system. Specifically, they characterize the optimal return on money in the presence of credit arrangements. There is a dual role for credit: It allows buyers to trade without fiat money and also permits them to borrow against future income. However, not all traders have access to credit. As a result, there is a social role for fiat money because it allows agents to self-insure against the risk of not being able to use credit in some transactions. The authors consider a (nonlinear) ...
Working Papers , Paper 11-28

Working Paper
Testing neoclassical convergence in regional incomes and earnings

Working Papers , Paper 93-22

Working Paper
Interest rate versus money supply instruments: on the implementation of Markov-perfect optimal monetary policy

Currently there is a growing literature exploring the features of optimal monetary policy in New Keynesian models under both commitment and discretion. With respect to time consistent policy, the literature focuses on solving for allocations. Recently, however, King and Wolman (2004) have examined implementation issues involved under time consistent policy when the monetary authority chooses nominal money balances. Surprisingly, they find that equilibria are no longer unique under a money stock regime. Indeed, there exist multiple steady states. Dotsey and Hornstein find that King and ...
Working Papers , Paper 07-27

Working Paper
Common and idiosyncratic disturbances in developed small open economies

Using an estimated dynamic stochastic general equilibrium model, I show that shocks to a common international stochastic trend explain on average about 10% of the variability of output in several small developed economies. These shocks explain roughly twice as much of the volatility of consumption growth as the volatility of output growth. Country-speci c disturbances account for the bulk of the volatility in the data. Substantial heterogeneity in the estimated parameters and stochastic processes translates into a rich array of impulse responses across countries.
Working Papers , Paper 12-3

Working Paper
Revisiting the role of home production in life-cycle labor supply

This paper revisits the argument, posed by Rupert, Rogerson, and Wright (2000), that estimates of the intertemporal elasticity of labor supply that do not account for home production are biased downward. The author uses the American Time Use Survey, a richer and more comprehensive data source than those used previously, to replicate their analysis, but he also explores how other factors interact with household and market work hours to affect the elasticity of labor supply. An exact replication of their analysis yields an elasticity of about 0.4, somewhat larger than previously estimated. Once ...
Working Papers , Paper 10-3

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