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Bank:Federal Reserve Bank of Richmond  Series:Economic Quarterly 

Journal Article
Sovereign CDS Market: The Role of Dealers in Credit Events

In this paper, we study the credit default swaps (CDS) position of the main dealers in the CDS market close to credit events of sovereign countries. We focus on the credit events of three countries that have faced significant financial distress in the past decade: Argentina, Venezuela, and Ukraine. After introducing the historical background of each country, we find that CDS dealers, defined as the top ten traders of CDS in their respective countries, tend to sell sovereign CDS (hold more negative or less positive positions) when yields/CDS spreads go up. This finding suggests that dealers ...
Economic Quarterly , Volume 3Q , Pages 97-113

Journal Article
How Likely Is the Zero Lower Bound?

We estimate the probability that the federal funds rate will be at or below the zero lower bound over a ten-year time horizon. We do so by specifying and estimating a time-varying parameter vector autoregressive model for key US macroeconomic aggregates. Based on the estimated model, we generate a distribution of future outcomes from which we compute such probabilities. We find that the zero lower bound probability ranges between 15 percent and 30 percent in the longer term depending on the specific measure used. In the near term, this probability is effectively zero. Robustness checks for ...
Economic Quarterly , Issue 1Q , Pages 41-54

Journal Article
Regulation and the composition of CEO pay

A look at the recent trends in the use of grants of restricted stocks and options in the compensation packages of chief executive officers (CEOs) of large, public U.S. companies reveals that there have been important changes. These changes coincide with the introduction of two new regulations: the modifications of reporting requirements for option grants introduced by the Sarbanes-Oxley Act in 2002, and the adoption in 2006 of revised accounting standards from the Financial Accounting Standards Board (FASB) included in statement no. 123R (FAS 123R), which mandated the expensing of option ...
Economic Quarterly , Volume 98 , Issue 4Q , Pages 309-348

Journal Article
Does monetarism retain relevance?

Implicitly, central banks reject the propositions of monetarism. They do not characterize themselves as creators of money, but instead emphasize their role in influencing financial intermediation. They do not discuss monetary policy in terms of a rule, but instead use the language of discretion. They refer to the low level of interest rates to characterize monetary policy as stimulative despite low rates of growth of money and nominal gross domestic product. The question arises of whether monetarist ideas retain any relevance for central banks
Economic Quarterly , Volume 98 , Issue 2Q , Pages 77-110

Journal Article
What Can We Learn from Online Wage Postings? Evidence from Glassdoor

We use millions of user-entry salaries from Glassdoor to evaluate how well data from online wage postings compare with more traditional, aggregated data, such as the Quarterly Census for Employment and Wages (QCEW) or household-level data such as the Panel Study of Income Dynamics (PSID). We perform our analysis across industries as well as geographical areas. We find that industry employment shares differ substantially between Glassdoor and QCEW. However, the correlation between industry- and region-specific average salaries in Glassdoor and the QCEW is fairly high. Similarly, the ...
Economic Quarterly , Issue 4Q , Pages 173-189

Journal Article
Legal protection to foreign investors

Foreign investment is typically considered an important source of growth for developing countries. This article describes the legal protection granted to foreign investors and its enforcement mechanisms. Governments have signed international investment agreements intended to protect foreign investors from the risk of expropriation and have increasingly chosen to issue sovereign debt in international financial centers, which expose defaulting governments to litigations in foreign national courts. In most cases, governments have complied with unfavorable rulings of international arbitration ...
Economic Quarterly , Volume 97 , Issue 2Q , Pages 175-187

Journal Article
Financial firm resolution policy as a time-consistency problem

In this article, we describe a time-consistency problem that can arise in the government's policy toward insolvent financial firms. We present this problem using a simple model in which shareholders of a large financial firm can raise low-cost debt financing and take on an excessive amount of risk. If this risk backfires, there are spillover effects harmful to the economy as a whole. In such a crisis event, the government's best action is to bail the firm out. The prospect of this bailout is the very reason why the firm can raise debt at low cost while taking on excessive risk. Given the ...
Economic Quarterly , Volume 97 , Issue 2Q , Pages 133-152

Journal Article
Inequality Across and Within US Cities around the Turn of the Twenty-First Century

We review key facts about inequality across and within US cities around the turn of the twenty-first century and discuss theoretical interpretations. Large cities are cities with a greater proportion of skilled workers. In those large and skill-intensive cities, wages are overall higher but are offset by higher rents. Those higher wages are particularly prevalent among high-skilled workers, so that the skill premium increases with city size and skill mix. Over the last few decades, these facts have become increasingly salient. We discuss possible explanations for these facts with the help of ...
Economic Quarterly , Issue Q1-Q4 , Pages 1-35

Journal Article
A perspective on modern business cycle theory

In this article I provide a perspective on the current state of modern business cycle theory. This theory has developed from an application of the Arrow-Debreu general equilibrium framework to the neoclassical growth model. On the positive side, this approach is able to accommodate various sources of heterogeneity in preferences and production within its complete markets framework. On the negative side, this approach has to rely on persistent exogenous shocks to account for business cycles since its internal propagation mechanism is weak. I discuss the implications of three important ...
Economic Quarterly , Volume 97 , Issue 3Q , Pages 195-208

Journal Article
Inefficiency in a Simple Model of Production and Bilateral Trade

We study a simple model of over-the-counter trade with production. We characterize the equilibrium, and we show that the equilibrium is always inefficient, independent of how the trade surplus is split among trade participants. We argue that this is due to a double hold-up problem that it is at the core of models used to study trade in over-the-counter markets. Finally, we show an example, which we interpret as a limiting case of the general model where the inefficiency vanishes.
Economic Quarterly , Issue 3Q , Pages 137-151




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