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Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.

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How Effective Is Central Bank Forward Guidance?

This paper investigates the effectiveness of forward guidance for the central banks of four countries: New Zealand, Norway, Sweden, and the United States.

Analysis of Numerical Errors

This paper provides a general framework for the quantitative analysis of stochastic dynamic models. We review convergence properties of some numerical algorithms and available methods to bound approximation errors.

Lobbying for a Common External Tariff from Inside and Out

We consider the interactions between domestic lobbying and two types of cross-border lobbying in a Customs Union (CU). The two types of cross-border lobbying are (i) lobbying from firms in one CU country to the governments of other CU countries, and (ii) that from firms outside the CU.

Multi-Step Ahead Forecasting of Vector Time Series

This paper develops the theory of multi-step ahead forecasting for vector time series that exhibit temporal nonstationarity and co-integration.

What Inventories Tell Us about Aggregate Fluctuations -- A Tractable Approach to (S,s) Policies

We estimate a DSGE model with (S,s) inventory policies. We find that (i) taking inventories into account can significantly improve the empirical fit of DSGE models in matching the standard business-cycle moments (in addition to explaining inventory fluctuations); (ii) (S,s) inventory policies can significantly amplify aggregate output fluctuations, in contrast to the findings of the recent general-equilibrium inventory literature; and (iii) aggregate demand shocks become more important than technology shocks in explaining the business cycle once inventories are incorporated into the model.

Understanding the Distributional Impact of Long-Run Inflation

The impact of fully anticipated inflation is systematically studied in heterogeneous agent economies with an endogenous labor supply and portfolio choices.

Informal Unemployment Insurance and Labor Market Dynamics

How do job losers use default -- a phenomenon 6x more prevalent than bankruptcy --as a type of “informal" unemployment insurance, and more importantly, what are the social costs and benefits of this behavior?

The Lender of Last Resort: Lessons from the Fed’s First 100 Years

We review the responses of the Federal Reserve to financial crises over the past 100 years. The authors of the Federal Reserve Act in 1913 created an institution that they hoped would prevent banking panics from occurring.

Foreign Firms and the Diffusion of Knowledge

This paper constructs a model to examine the impact of foreign firms on a developing Country’s own accumulation of entrepreneurial knowledge.

What Do We Know about the Relationship between Access to Finance and International Trade?

The recent financial crisis has focused attention on the relationship between access to finance and international trade, triggering a burgeoning segment of the literature evaluating this link empirically.

International Trade, Female Labor, and Entrepreneurship in MENA Countries

Middle Eastern and North African (MENA) countries stand out in international comparisons of de jure obstacles to female employment and entrepreneurship. These obstacles manifest themselves in low rates of female labor participation, entrepreneurship, and ownership.

Interjurisdictional Competition with Adverse Selection

In this paper, we study the welfare consequences of imposing alternative regimes of competition between two non-benevolent local governments that compete for mobile firms which have private information on their degree of locational attachment or home bias.

Cognitive skills gaps in India: can (late) nutrition ameliorate them?

This paper explores the (late) nutrition-cognition link using novel panel data from India for very young children. We estimate a value-added model of cogni- tive development that corrects for biases in the previous literature.

The Federal Reserve's response to the financial crisis: what it did and what it should have done

This paper analyzes the Federal Reserve’s major policy actions in response to the financial crisis. The analysis is divided into the pre-Lehman and post-Lehman monetary policies.

Testing the Economic Value of Asset Return Predictability

Economic value calculations are increasingly used to compare the predictive performance of competing models of asset returns. However, they lack a rigorous way to validate their evidence.

Endogenous Credit Limits with Small Default Costs

We analyze an exchange economy of unsecured credit where borrowers have the option to declare bankruptcy in which case they are temporarily excluded from financial markets.

Self-Fulfilling Credit Cycles

This paper argues that self-fulfilling beliefs in credit conditions can generate endoge- nously persistent business cycle dynamics. We develop a tractable dynamic general equi- librium model in which heterogeneous firms face idiosyncratic productivity shocks.

Capital Misallocation and Aggregate Factor Productivity

We propose a sectoral–shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, and a constant production possibilities frontier.

A Two-sector Model of Endogenous Growth with Leisure Externalities

This paper considers the impact of leisure preference and leisure externalities on growth and labor supply in a Lucas [12] type model, as in Gómez [7], with a separable non‐homothetic utility and the assumption that physical and human capital are both necessary inputs in both the goods and the education sectors.

The Optimal Inflation Target in an Economy with Limited Enforcement

We formulate the central bank’s problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted stationary utility for a heterogeneous population of infinitely-lived households in an economy with constant aggregate income and public information.

On the Substitutability between Foreign Aid and International Credit

We examine the effect of relaxing a binding borrowing constraint for a recipient country on theamount of foreign aid it receives.

Bankruptcy and Delinquency in a Model of Unsecured Debt

The two channels of default on unsecured consumer debt are (i) bankruptcy, which legally grants partial or complete removal of unsecured debt under certain circumstances, and (ii) delinquency, which is informal default via nonpayment.

Optimal Policy for Macro-Financial Stability

In this paper we study whether policy makers should wait to intervene until a … financial crisis strikes or rather act in a preemptive manner.

Why Doesn’t Technology Flow from Rich to Poor Countries?

What determines the technology that a country adopts? While there could be many factors, the efficiency of the country’s financial system may play a significant role.

Sentiments and Aggregate Demand Fluctuations

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations.

Housing Prices and the High Chinese Saving Rate Puzzle

China’s over 25% aggregate household saving rate is one of the highest in the world. One popular view attributes the high saving rate to fast-rising housing prices in China. However, cross-sectional data do not show a significant relationship between housing prices and household saving rates.

Liquidity and Welfare

This paper develops an analytically tractable Bewley model of money featuring capital and financial intermediation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large.

Greenspan’s Conundrum and the Fed’s Ability to Affect Long-Term Yields

In February 2005 Federal Reserve Chairman Alan Greenspan noticed that the 10-year Treasury yields failed to increase despite a 150-basis-point increase in the federal funds rate as a “conundrum.” This paper shows that the connection between the 10-year yield and the federal funds rate was severed in the late 1980s, well in advance of Greenspan’s observation.

The Case Against Patents

The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity.

An Approximate Dual-Self Model and Paradoxes of Choice under Risk

We derive a simplified version of the model of Fudenberg and Levine [2006, 2011] and show how this approximate model is useful in explaining choice under risk.

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