Federal Reserve Bank of St. Louis Review

A bimonthly research journal intended for an economically informed but broad readership—from the undergraduate student to the PhD. In print and online.


NOVEMBER/DECEMBER 2009 Vol. 91, No. 6

Auctions as a Vehicle to Reduce Airport Delays and Achieve Value Capture

Congestion at airports imposes large costs on airlines and their passengers. A key reason for congestion is that an airline schedules its flights without regard to the costs imposed on other airlines and their passengers. As a result, during some time intervals, airlines schedule more flights to and from an airport than that airport can accommodate and flights are delayed.

Figure 6 in this article has been revised: The combination of bids closest to Vickrey prices was incorrectly shown as 19 (bidder 1) and 13 (bidder 2), but has been corrected to 17 (bidder 1) and 15 (bidder 2).

The Commercial Paper Market, the Fed, and the 2007-2009 Financial Crisis

Since its inception in the early nineteenth century, the U.S. commercial paper market has grown to become a key source of short-term funding for major businesses, with issuance averaging over 0 billion per day. In the fall of 2008, the commercial paper market achieved national prominence when increasing market stress caused some to fear that, given its size and importance, the market’s failure would sharply worsen the recession.

Local Price Variation and Labor Supply Behavior

In standard economic theory, labor supply decisions depend on the complete set of prices: wages and the prices of relevant consumption goods. Nonetheless, most theoretical and empirical work in labor supply studies ignore prices other than wages. We address the question of whether the common practice of ignoring local price variation in labor supply studies is as innocuous as generally assumed.

What Happened to the U.S. Stock Market? Accounting for the Past 50 Years

The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that in the long run the market reverts to well-established fundamentals. The authors' research suggests this belief should be questioned.

 

SEPTEMBER/OCTOBER 2009 Vol. 91, No. 5, Part 2

Milton Friedman and U.K. Economic Policy: 1938-1979

Milton Friedman’s publications and commentaries became the subject of enormous publicity and scrutiny in the United Kingdom. This paper analyzes the interaction of Milton Friedman and U.K. economic policy from 1938 to 1979.

Do Macroeconomic Announcements Move Inflation Forecasts?

This paper presents an empirical strategy that bridges the gap between event studies and macroeconomic forecasts based on common-factor models. Event studies examine the response of financial variables to a market-sensitive "surprise" component using a narrow event window.

Challenges in Macro-Finance Modeling

This article discusses various challenges in the specification and implementation of "macro-finance" models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. The author classifies macro-finance models into pure latent-factor models ("internal basis models") and models that have observed macroeconomic variables as state variables ("external basis models") and examines the underlying assumptions behind these models.

Investment Analysts' Forecasts of Earnings

The literature on investment analysts' forecasts of firms' earnings and their forecast errors is enormous. This paper summarizes the evidence on the distribution of analysts' forecasts and forecast errors using data for all U.S. firms from 1990 to 2004.

 

SEPTEMBER/OCTOBER 2009 Vol. 91, No. 5, Part 1

The Credit Crisis and Cycle-Proof Regulation

This article was originally presented as the Homer Jones Memorial Lecture, organized by the Federal Reserve Bank of St. Louis, St. Louis, Missouri, April 15, 2009.

Systemic Risk and the Financial Crisis: A Primer

How did problems in a relatively small portion of the home mortgage market trigger the most severe financial crisis in the United States since the Great Depression? Several developments played a role, including the proliferation of complex mortgage-backed securities and derivatives with highly opaque structures, high leverage, and inadequate risk management.

Can the Term Spread Predict Output Growth and Recessions? A Survey of the Literature

This article surveys recent research on the usefulness of the term spread (i.e., the difference between the yields on long-term and short-term Treasury securities) for predicting changes in economic activity.

Mexico’s Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates

The authors use a threshold autoregressive model to confirm the presence of nonlinearities in sectoral real exchange rate dynamics across Mexico, Canada, and the United States for the periods before and after the North American Free Trade Agreement (NAFTA).

 

JULY/AUGUST 2009 Vol. 91, No. 4

Projecting Potential Growth: Issues and Measurements

Proceedings of the Thirty-Third Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis

What Do We Know (And Not Know) About Potential Output?

Potential output is an important concept in economics. Policymakers often use a one-sector neoclassical model to think about long-run growth, and they often assume that potential output is a smooth series in the short run—approximated by a medium- or long-run estimate.

Commentary

Commentary on What Do We Know (And Not Know) About Potential Output?

Issues on Potential Growth Measurement and Comparison: How Structural Is the Production Function Approach?

This article aims to better understand the factors driving fluctuations in potential output measured by the production function approach (PFA.) To do so, the authors integrate a production function definition of potential output into a large-scale dynamic stochastic general equilibrium (DSGE) model in a fully consistent manner and give two estimated versions based on U.S. and euro-area data.

Commentary

Commentary on Issues on Potential Growth Measurement and Comparison: How Structural Is the Production Function Approach?

Parsing Shocks: Real-Time Revisions to Gap and Growth Projections for Canada

The output gap—the deviation of output from potential output—has played an important role in the conduct of monetary policy in Canada. This paper reviews the Bank of Canada’s definition of potential output, as well as the use of the output gap in monetary policy.

Commentary

Commentary on Parsing Shocks: Real-Time Revisions to Gap and Growth Projections for Canada

The Challenges of Estimating Potential Output in Real Time

Potential output is an estimate of the level of gross domestic product attainable when the economy is operating at a high rate of resource use. A summary measure of the economy’s productive capacity, potential output plays an important role in the Congressional Budget Office (CBO)’s economic forecast and projection.

Commentary

Commentary on The Challenges of Estimating Potential Output in Real Time

Trends in the Aggregate Labor Force

Trend growth in the labor force is a key determinant of trends in employment and gross domestic product (GDP). Forecasts by Macroeconomic Advisers (MA) have long anticipated a marked slowing in trend growth of the labor force that would contribute to a slowing in potential GDP growth.

Commentary

Commentary on Trends in the Aggregate Labor Force

Potential Output in a Rapidly Developing Economy: The Case of China and a Comparison with the United States and the European Union

The authors use a growth accounting framework to examine growth of the rapidly developing Chinese economy. Their findings support the view that, although feasible in the intermediate term, China’s recent pattern of extensive growth is not sustainable in the long run.

Commentary

Commentary on Potential Output in a Rapidly Developing Economy: The Case of China and a Comparison with the United States and the European Union

Estimating U.S. Output Growth with Vintage Data in a State-Space Framework

This study uses a state-space model to estimate the “true” unobserved measure of total output in the U.S. economy. The analysis uses the entire history (i.e., all vintages) of selected real-time data series to compute revisions and corresponding statistics for those series.

Commentary

Commentary on Estimating U.S. Output Growth with Vintage Data in a State-Space Framework

Panel Discussion

 

MAY/JUNE 2009 Vol. 91, No. 3

The Impact of Inflation and Unemployment on Subjective Personal and Country Evaluations

The authors use data from the Gallup World Poll to analyze what determines individual assessments of past, present, and future personal and country well-being. These measures allow the analysis of two dimensions of happiness data not previously examined in the literature: the better-than-average effect and optimism.

A Journal Ranking for the Ambitious Economist

The authors devise an “ambition-adjusted” journal ranking based on citations from a short list of top general-interest journals in economics. Underlying this ranking is the notion that an ambitious economist wishes to be acknowledged not only in the highest reaches of the profession, but also outside his or her subfield.

Do Donors Care About Declining Trade Revenue from Liberalization? An Analysis of Bilateral Aid Allocation

Many developing-country governments rely heavily on trade tax revenue. Therefore, trade liberalization can be a potential source of significant fiscal instability and may affect government spending on development activities—at least in the short run. This article investigates whether donors use aid to compensate recipient nations for lost trade revenue or perhaps to reward them for moving toward freer trade regimes.

Supply Shocks, Demand Shocks, and Labor Market Fluctuations

The authors use structural vector autoregressions to analyze the responses of worker flows, job flows, vacancies, and hours to demand and supply shocks. They identify these shocks by restricting the short-run responses of output and the price level. On the demand side, they disentangle a monetary and nonmonetary shock by restricting the response of the interest rate.

 

MARCH/APRIL 2009 Vol. 91, No. 2

More Money: Understanding Recent Changes in the Monetary Base

The financial crisis that began in the summer of 2007 took a turn for the worse in September 2008. Until then, Federal Reserve actions taken to improve the functioning financial markets did not affect the monetary base.

Foreign Direct Investment, Productivity, and Country Growth: An Overview

The authors review the empirical literature that studies the relationship between foreign direct investment, productivity, and growth using aggregate data and focus on two questions: Is there evidence of a positive relationship between foreign direct investment and national growth? And does the output of the “multinational sectors” exhibit higher labor productivity?

Quick Exits of Subprime Mortgages

All holders of mortgage contracts, regardless of type, have three options: keep their payments current, prepay (usually through refinancing), or default on the loan. The latter two options terminate the loan. The termination rates of subprime mortgages that originated each year from 2001 through 2006 are surprisingly similar: about 20, 50, and 80 percent, respectively, at one, two, and three years after origination.

Firm Volatility and Credit: A Macroeconomic Analysis

This paper examines a tractable real business cycle model with idiosyncratic productivity shocks and binding credit constraints on entrepreneurs. The model shows how firm volatility increases in combination with credit market development.

 

JANUARY/FEBRUARY 2009 Vol. 91, No. 1

Three Funerals and a Wedding

This article is a modified and updated version of a speech presented at the Regional Economic Summit, Evansville, Indiana, November 20, 2008.

The Fed, Liquidity, and Credit Allocation

The current financial turmoil has generated considerable discussion of liquidity. Moreover, it has been widely reported that the Federal Reserve played a major role in supplying liquidity to financial markets during this distressed time. This article describes two ways in which the Fed has supplied liquidity since late 2007.

Disallowances and Overcapitalization in the U.S. Electric Utility Industry

Regulation of an industry often produces unintended consequences. Averch and Johnson (1962) argue that certain regulation of electric utilities provides utilities the incentive to purchase an inefficiently large amount of capital. Another possible and related unintended consequence of electric utility regulation is that regulatory cost disallowances on capital may also increase utilities’ incentives to overcapitalize.

Optimal Response to a Transitory Demographic Shock in Social Security Financing

The authors consider a transitory demographic shock that affects negatively the financing of retirement pensions—that is, workers either would have to pay more or retirees would receive less. In contrast to the existing literature, the authors endogenously determine optimal policies rather than explore the implications of exogenous parametric responses.

Programs are available upon request. Please contact Carlos Garriga at Carlos.Garriga@stls.frb.org.

 


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