Working Papers
Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critical comment.
Recent Working Papers
Capital, Finance, and Trade Collapse
This paper proposes a model of international trade with capital accumulation and financial intermediation. This is achieved by embedding the Melitz (2003) model into an incomplete-markets neoclassical framework with an endogenous credit market.
Extensive and Intensive Trade Margins: A State-by-State View
This paper examines a topic of increasing interest, the potential determinants of extensive (i.e., number of firms) and intensive (i.e., average exports per firm) trade margins, using state-level trade to 190 countries. In addition to distance and country size, other factors affecting trade costs and export demand are explored.
Optimal Disclosure Policy and Undue Diligence
While both public and private financial agencies supply asset markets with large amounts of information, they do not generally disclose all asset-related information to the general public.
Basel Accord and Financial Intermediation: The Impact of Policy
This paper studies loan activity in a context where banks must follow Basel Accord-type rules and acquire financing from households. Loan activity typically decreases when entrepreneurs’ investment returns decline, and we study which type of policy could revigorate an economy in a trough.
How Does the FOMC Learn About Economic Revolutions? Evidence from the New Economy Era, 1994-2001
Forecasting is a daunting challenge for business economists and policymakers, often made more difficult by pervasive uncertainty. No such uncertainty is more difficult than projecting the reaction of policymakers to major shifts in the economy.
Credit Scoring and Loan Default
This paper introduces a measure of credit score performance that abstracts from the influence of "situational factors." Using this measure, we study the role and effectiveness of credit scoring that underlied subprime securities during the mortgage boom of 2000-2006.
What do happiness and health satisfaction data tell us about relative risk aversion?
In this paper we provide estimates of the coefficient of relative risk aversion using information on self-reports of subjective personal well-being from the 2006 Gallup World Poll.
The Simple Analytics of Money and Credit in a Quasi-linear Environment
Lagos and Wright (2005) demonstrate how the essential properties of a money-search model are preserved in an environment that is rendered highly tractable with the use of quasi-linear preferences.
We study the contraction of foreign direct investment (FDI) flows in the United States during the recent financial crisis and show their unusual non-resiliency, which depends in part on the global nature of the economic recession, but also on the increases in the cost of financing FDI in the economies in which the flows originate.
The Effect of Neighborhood Contagion on Mortgage Selection
In this paper we conduct an empirical investigation of how neighborhood mortgage adoption contagion affects mortgage product choice, with an emphasis on Hispanic borrowers.
The Effects of Female Labor Force Participation on Obesity
This paper assesses whether a causal relationship exists between recent increases in female labor force participation and the increased prevalence of obesity amongst women.
Capital Flows and Japanese Asset Volatility
Characterizing asset price volatility is an important goal for financial economists. The literature has shown that variables that proxy for the information arrival process can help explain and/or forecast volatility.
Race, Redlining, and Subprime Loan Pricing
We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida.
Why Do Education Vouchers Fail at the Ballot Box?
We compare a uniform voucher regime against the status quo mix of public and private education, focusing on the distribution of welfare gains and losses across house- holds by income.
Policy and Welfare Effects of Within-Period Commitment
I study the implications of different institutional frameworks for the conduct of fiscal policy, under the assumption that the government cannot commit to future policy choices.
Moral Hazard and Lack of Commitment in Dynamic Economies
We revisit the role of limited commitment in a dynamic risk-sharing setting with private information. We show that a Markov-perfect equilibrium, in which agent and insurer cannot commit beyond the current period, and an infinitely-long contract to which only the insurer can commit, implement identical consumption, effort and welfare outcomes.
Dynamic Optimal Insurance and Lack of Commitment
This paper analyzes dynamic risk-sharing contracts between profit-maximizing insurers and risk-averse agents who face idiosyncratic income uncertainty and may self-insure through savings.
Government Policy Response to War-Expenditure Shocks
A theory of government policy determination, based on intertemporal distortion-smoothing and limited commitment, matches the set of stylized facts of U.S. wartime policy.
The run-up in oil prices since 2004 coincided with growing investment in commodity markets and increased price comovement among different commodities.
Government Policy in Monetary Economies
I study how the general and specific details of a micro founded monetary framework affect the determination of policy when the government has limited commitment.
Advances in Forecast Evaluation
This paper surveys recent developments in the evaluation of point forecasts. Taking West's (2006) survey as a starting point, we briefly cover the state of the literature as of the time of West's writing.
Tests of Equal Forecast Accuracy for Overlapping Models
This paper examines the asymptotic and finite-sample properties of tests of equal forecast accuracy when the models being compared are overlapping in the sense of Vuong (1989).
Should Easier Access to International Credit Replace Foreign Aid?
We examine the interaction between foreign aid and binding borrowing constraint for a recipient country. We also analyze how these two instruments affect economic growth via non-linear relationships. First of all, we develop a two-country, two-period trade-theoretic model to develop testable hypotheses and then we use dynamic panel analysis to test those hypotheses empirically. Our main findings are that: (i) better access to international credit for a recipient country reduces the amount of foreign aid it receives, and (ii) there is a critical level of international financial transfer, and the marginal effect of foreign aid is larger than that of loans if and only if the transfer (loans or foreign aid) is below this critical level.
Out-of-School Suspensions and Parental Involvement in Children’s Education
Do parents alter their investment in their child's human capital in response to changes in school inputs? If they do, then ignoring this effect will bias the estimates of school and parental inputs in educational production functions.
Lessons from the Evolution of Foreign Exchange Trading Strategies
The adaptive markets hypothesis posits that trading strategies evolve as traders adapt their behavior to changing circumstances. This paper studies the evolution of trading strategies for a hypothetical trader who chooses portfolios from foreign exchange (forex) technical rules in major and emerging markets, the carry trade, and U.S. equities.
Optimal Auditing and Insurance in a Dynamic Model of Tax Compliance
We study the optimal auditing of a taxpayer’s income in a dynamic principal- agent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state.
We incorporate house price risk and mortgages into a standard incomplete market (SIM) model. We calibrate the model to match U.S. data and we show that the model also ac- counts for non-targeted features of the data such as the distribution of down payments, the life-cycle profile of home ownership, and the mortgage default rate.
Explaining China's Trade Imbalance Puzzle
The current global-imbalance literature (which explains why capital flows from poor to rich countries) is unable to explain China’s foreign asset positions because capital cannot flow out of China under capital controls. Hence, this literature has not succeeded in explaining China’s large and persistent trade imbalances with the United States.
Sectoral Shocks, Reallocation Frictions, and Optimal Government Spending
What is the optimal policy response to a negative sectoral shock? How do frictions in goods and labor markets affect the nature and speed of the process of reallocating resources across alternative uses?
Much of the literature examining the effects of oil shocks asks the question ― “What is an oil shock?” and has concluded that oil-price increases are asymmetric in their effects on the US economy. That is, sharp increases in oil prices affect economic activity adversely, but sharp decreases in oil prices have no effect.