1handedecon

[1handedecon]

FEDS Paper: Why Does the Yield Curve Predict GDP Growth? The Role of Banks

Camelia Minoiu, Andres Schneider, Min Wei We provide evidence on the effect of the slope of the yield curve on economic activity through bank lending. Using detailed data on banks’ lending activities coupled with term premium shocks identified using high-frequency event study or instrumental variables, we show that a steeper yield curve associated with higher term premiums (rather than higher expected short rates) boosts bank profits and the supply of bank loans. Intuitively, a higher term premium represents greater expected profits on maturity transformation, which is at the core of banks’ business model, and therefore incentivizes bank lending. This effect is stronger for ex-ante more leveraged banks. We rationalize our findings in a portfolio model for banks. from FRB: Working Papers https://ift.tt/MK0h4j8 via IFTTT

#IFTTT #FRB: Working Papers

[1handedecon]

FEDS Paper: Your Friends, Your Credit: Social Capital Measures Derived from Social Media and the Credit Market

Jesse Bricker and Geng Li Chetty et al. (2022a) introduced an array of social capital measures derived from Facebook friendships and found that one of these indicators, economic connectedness (EC), predicted upward income mobility well. Bricker and Li (2017) proposed the average credit score of a community's residents as an indicator of local social trust. We show in this paper that the average credit scores are robustly correlated with EC, negatively correlated with the friending-bias measure introduced in Chetty et al. (2022b), and predict economic mobility to a comparable extent after controlling for EC. The consistency and complementarity between these two indicators, despite being derived from individuals' activities in distinct contexts, underscore trust as a crucial component of social capital and provide insights that are useful for understanding the formation and accumulation of social capital. from FRB: Working Papers https://ift.tt/4heV1Tf via IFTTT

#IFTTT #FRB: Working Papers

[1handedecon]

Unobserved components model(s): output gaps and financial cycles

The Global Financial Crisis established that policymakers should consider the stage of the financial cycle to better evaluate the cyclical position of the economy when designing monetary policy decisions. If financial variables are omitted from the estimations of the output gap, a common and unobserved indicator of the business cycle, important financial or external imbalances that may lead to future recessions may not be captured. This paper presents a suite of estimates of output gaps incorporating financial variables. The estimates are based both on small unobserved components models and a large unobserved components model that follows a production function approach. The results show that exploiting the information content of financial variables, which co-move strongly with the output cycle, can sometimes improve output gap estimates. However, these improvements are of a limited magnitude and very sensitive to the choice of the chosen financial variables. from ECB - European Central Bank https://ift.tt/PGrazTp via IFTTT

#IFTTT #ECB - European Central Bank

[1handedecon]

FEDS Paper: Affording Degree Completion: An Experimental Study of Completion Grants at Accessible Public Universities

Sara Goldrick-Rab, Christine Baker-Smith, Travis T. York, Kallie Clark, Douglas Webber, and Christel Perkins To improve college affordability and graduation rates, universities are increasingly allocating “completion grants” to students who are nearing the finish line but facing financial challenges. Using an experimental design and common program model across 11 broad-access public universities in ten states, we assessed the impact of a completion grants averaging $1,200 distributed among more than 14,000 students. We find that, despite university expectations that most students were near completion, only two-thirds of students eligible to receive a completion grant graduated within the academic year. Receiving a completion grant did not improve that rate. However, nearly all eligible students (95%) graduated within three years or were still working on their degrees. While completion grants are intended to enhance equity, we do not find evidence that they exerted positive impacts for marginalized groups as designed in this study. Moreover, while there was some program implementation variation across universities, it did not lead to differences in program impact. from FRB: Working Papers https://ift.tt/6EVPMTL via IFTTT

#IFTTT #FRB: Working Papers

[1handedecon]

New technologies and jobs in Europe

We examine the link between labour market developments and new technologies such as artificial intelligence (AI) and software in 16 European countries over the period 2011-2019. Using data for occupations at the 3-digit level in Europe, we find that on average employment shares have increased in occupations more exposed to AI. This is particularly the case for occupations with a relatively higher proportion of younger and skilled workers. This evidence is in line with the Skill Biased Technological Change theory. While there exists heterogeneity across countries, only very few countries show a decline in employment shares of occupations more exposed to AI-enabled automation. Country heterogeneity for this result seems to be linked to the pace of technology diffusion and education, but also to the level of product market regulation (competition) and employment protection laws. In contrast to the findings for employment, we find little evidence for a relationship between wages and potential exposures to new technologies. from ECB - European Central Bank https://ift.tt/PBDmCj4 via IFTTT

#IFTTT #ECB - European Central Bank

[1handedecon]

Density forecasts of inflation: a quantile regression forest approach

Density forecasts of euro area inflation are a fundamental input for a medium-term oriented central bank, such as the European Central Bank (ECB). We show that a quantile regression forest, capturing a general non-linear relationship between euro area (headline and core) inflation and a large set of determinants, is competitive with state-of-the-art linear benchmarks and judgemental survey forecasts. The median forecasts of the quantile regression forest are very collinear with the ECB point inflation forecasts, displaying similar deviations from “linearity”. Given that the ECB modelling toolbox is overwhelmingly linear, this finding suggests that the expert judgement embedded in the ECB forecast may be characterized by some mild non-linearity. from ECB - European Central Bank https://ift.tt/1I6l4tf via IFTTT

#IFTTT #ECB - European Central Bank

[1handedecon]

IFDP Paper: Forward Looking Exporters

Francois de Soyres, Erik Frohm, Emily Highkin, and Carter Mix This paper studies the role of expectations in driving export adjustment. We assemble bilateral data on spot exchange rates, one year ahead exchange rate forecasts and HS2-product export data for 11 exporting countries and 64 destinations, covering the 2006–2014 period. Results from fixed effects regressions and an instrumental variables approach show that expectations of exchange rate changes are an important channel for export adjustment. A one percent expected exchange rate depreciation over the next year is associated with a 0.96 percent increase in the extensive margin (entry of new exporters) in the 2SLS regression, with statistically insignificant effects on total exports or the intensive margin. We provide intuition for these findings with a simple model with heterogeneous firms and sticky prices, and use our model to discuss the implications of anticipation for subsequent export growth and trade elasticity measurement. from FRB: Working Papers https://ift.tt/I81PGEa via IFTTT

#IFTTT #FRB: Working Papers

[1handedecon]

Life insurance convexity

Life insurers sell savings contracts with surrender options, which allow policyholders to prematurely receive guaranteed surrender values. These surrender options move toward the money when interest rates rise. Hence, higher interest rates raise surrender rates, as we document empirically by exploiting plausibly exogenous variation in monetary policy. Using a calibrated model, we then estimate that surrender options would force insurers to sell up to 2% of their investments during an enduring interest rate rise of 25 bps per year. We show that these fire sales are fueled by surrender value guarantees and insurers’ long-term investments. from ECB - European Central Bank https://ift.tt/hMCmf0B via IFTTT

#IFTTT #ECB - European Central Bank

[1handedecon]

The state-dependent impact of changes in bank capital requirements

Based on a non-linear equilibrium model of the banking sector with an occasionally-binding equity issuance constraint, we show that the economic impact of changes in bank capital requirements depends on the state of the macro-financial environment. In ”normal” states where banks do not face problems to retain enough profits to satisfy higher capital requirements, the impact on bank loan supply works through a ”pricing channel” which is small: around 0.1% less loans for a 1pp increase in capital requirements. In ”bad” states where banks are not able to come up with sufficient equity to satisfy capital requirements, the impact on loan supply works through a ”quantity channel”, which acts like a financial accelerator and can be very large: up to 10% more loans for a capital requirement release of 1pp. Compared to existing DSGE models with a banking sector, which usually feature a constant lending response of around 1%, our state-dependent impact is an order of magnitude lower in ”normal” states and an order of magnitude higher in ”bad” states. Our results provide a theoretical justification for building up a positive countercyclical capital buffer in ”normal” macro-financial environments. from ECB - European Central Bank https://ift.tt/maALWRj via IFTTT

#IFTTT #ECB - European Central Bank

[1handedecon]

FEDS Paper: Termination of SNAP Emergency Allotments Food Sufficiency and Economic Hardships

Kabir Dasgupta and Alexander Plum To meet the rising need for food and nutrition assistance during the pandemic in the United States, all states were approved to provide Emergency Allotments (EA) to households enrolled in the Supplemental Nutrition Assistance Program (SNAP). In this analysis, we use the Census Bureau’s Household Pulse Surveys and exploit staggered state-level variation in dissolution of the SNAP EA payments to study whether the end of EA is associated with food-related challenges and economic hardships. Our findings indicate that EA termination is followed by a decrease in the likelihood that adult survey respondents had sufficient food for consumption and an increase in the probability of experiencing difficulty in paying meeting with usual household expenses. These findings provide policy-relevant insights into the potential impact of the nationwide termination of the EA payments that came into effect in early 2023. from FRB: Working Papers https://ift.tt/ybwHSad via IFTTT

#IFTTT #FRB: Working Papers

[1handedecon]

FEDS Paper: Aggregate Implications of Deviations from Modigliani-Miller: A Sufficient Statistics Approach

Robert Kurtzman and David Zeke A few sufficient statistics can identify the aggregate effects of distortions to firm investment in a class of general equilibrium models that can accommodate rich general equilibrium effects including endogenous firm entry. This result does not depend on the microfoundation of the distortion; one can generate inferences about aggregate effects that apply for multiple microfoundations or in cases where a fully specified model is difficult to solve. To demonstrate the relevance of the methodology, we use it to quantify the aggregate consequences of costly external equity financing and a manager-shareholder friction, relying on estimates from the corporate finance literature to identify the sufficient statistics. The results elucidate differences between partial and general equilibrium findings and demonstrate how labor supply elasticities, complementarities in production, and firm entry interact with the different firm-level distortions. from FRB: Working Papers https://ift.tt/O5Adyfu via IFTTT

#IFTTT #FRB: Working Papers

[1handedecon]

Rational inattention and the business cycle effects of productivity and news shocks

We solve a real business cycle model with rational inattention (an RI-RBC model). In the RIRBC model, the growth rates of employment, investment, and output are about as persistent as in the data, with an amount of inattention consistent with survey data on expectations. Moreover, consumption, employment, and output move in the same direction in response to news about future productivity. By contrast, the baseline RBC model produces neither persistent growth rates nor business cycle comovement after news shocks. from ECB - European Central Bank https://ift.tt/H1TuzCm via IFTTT

#IFTTT #ECB - European Central Bank

[1handedecon]

FEDS Paper: Women's Labor Force Exits during COVID-19: Differences by Motherhood Race and Ethnicity(Revised)

Katherine Lim and Mike Zabek While the descriptive impacts of the pandemic on women have been well documented in the aggregate, we know much less about the impacts of the pandemic on different groups of women. After controlling for detailed job and demographic characteristics, including occupation and industry, we find that the pandemic led to significant excess labor force exits among women living with children under age six relative to women without children. We also find evidence of larger increases in exits among lower-earning women. The presence of children predicted larger increases in exits during the pandemic among Latina and Black women relative to White women. Overall, we find evidence that pandemic induced disruptions to childcare, including informal care from family and friends. Our results suggest that the unique effect of childcare disruptions during the pandemic exacerbated pre-existing racial and income inequalities among women. from FRB: Working Papers https://ift.tt/p0wfbzC via IFTTT

#IFTTT #FRB: Working Papers

[1handedecon]

FEDS Paper: Interconnected DeFi: Ripple Effects from the Terra Collapse

Anton Badev and Cy Watsky The emerging world of decentralized finance (DeFi), facilitated by smart contracts operating on blockchain networks, has been notable both for its rapid growth and the high-profile collapses of several of its largest participants. In this paper, we provide a technical account of the financial mechanisms which facilitated the growth and eventual collapse of the Terra Network. From this analysis, we outline a generalizable economic theory of blockchains which aims to differentiate the economics of blockchains as programmable environments from blockchains as accounting ledgers for crypto-assets. This adds to the existing literature on crypto-assets, which largely focuses on the financial characteristics of the crypto-assets themselves rather than their underlying blockchains. We argue that DeFi is structured so as to offer consumers distinct blockchain networks as competing choices differentiated by several key characteristics. We test several implications of this theory using Terra’s collapse as a natural experiment, finding evidence that bridges between programmable blockchain networks create increased risk of spillover effects to other blockchains’ programmable environments in the wake of a major shock event like Terra’s collapse. Specifically, blockchains suffered a time-bound loss of market share and the likelihood of this loss grew approximately 40% for each additional bridge that was deployed in common with Terra at the time of Terra’s collapse. from FRB: Working Papers https://ift.tt/T5JN9S4 via IFTTT

#IFTTT #FRB: Working Papers

[1handedecon]

FEDS Paper: College Networks and Re-employment of Displaced Workers

Ben Ost, Weixiang Pan, and Douglas Webber We provide the first evidence on the role of college networks in the re-employment of displaced workers. An extensive literature examines the consequences of layoffs, but the factors which facilitate re-employment are relatively under-studied. Using administrative data and a cross-cohort design, we find that network connections with actively-hiring employers increase the re-employment rate. This result is driven by re-employment at contact’s firms suggesting that a stronger network does not improve worker quality more broadly. These results suggest that college has the potential to improve employment outcomes beyond improved human capital and signaling. from FRB: Working Papers https://ift.tt/i7OqkIx via IFTTT

#IFTTT #FRB: Working Papers

[1handedecon]

FEDS Paper: A Comprehensive Empirical Evaluation of Biases in Expectation Formation

Kenneth Eva and Fabian Winkler We revisit predictability of forecast errors in macroeconomic survey data, which is often taken as evidence of behavioral biases at odds with rational expectations. We argue that to reject rational expectations, one must be able to predict forecast errors out of sample. However, the regressions used in the literature often perform poorly out of sample. The models seem unstable and could not have helped to improve forecasts with access only to available information. We do find some notable exceptions to this finding, in particular mean bias in interest rate forecasts, that survive our out-of-sample tests. Our findings help narrow down the set of biases that merit closer attention of researchers in behavioral macroeconomics. from FRB: Working Papers https://ift.tt/0e51VGj via IFTTT

#IFTTT #FRB: Working Papers

[1handedecon]

IFDP Paper: The Price of Macroeconomic Uncertainty: Evidence from Daily Options

Juan M. Londono and Mehrdad Samadi Using recently available daily S&P 500 index option expirations, we examine the ex ante pricing of uncertainty surrounding key economic releases and the determinants of risk premia associated with these releases. The cost of insurance against price, variance, and downside risk is higher for options that span U.S. CPI, FOMC, Nonfarm Payroll, and GDP releases compared to neighboring expirations. We calculate release-driven forward equity and variance risk premia and find that premia vary considerably across economic releases and increase with risk aversion as well as with monetary policy and real economic uncertainty. The empirical framework presented in this paper can be used to examine the ex ante pricing of a wide variety of events. from FRB: Working Papers https://ift.tt/46H9XVE via IFTTT

#IFTTT #FRB: Working Papers