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

Monetary Policy/Macroeconomics

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.

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.

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.

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.

International Channels of the Fed’s Unconventional Monetary Policy

Previous research has established that the Federal Reserve’s large scale asset purchases (LSAPs) significantly influenced international bond yields.

The Zero Lower Bound and the Dual Mandate

This article uses a DSGE framework to evaluate the role of monetary policy in determining the likelihood of encountering the zero lower bound. We find that the probability of experiencing episodes of being at zero lower bound depends almost exclusively on the monetary policy rule.

Capital Controls or Exchange Rate Policy? A Pecuniary Externality Perspective

In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distor- tions have become part of the standard policy toolkit (the so-called macro-prudential policies).

Unemployment Insurance Fraud and Optimal Monitoring

An important incentive problem for the design of unemployment insurance is the fraudulent collection of unemployment benefits by workers who are gainfully employed.

A Model of Price Swings in the Housing Market

In this paper we use a standard neoclassical model supplemented by some frictions to understand large price swings in the housing market.

Did Housing Policies Cause the Postwar Boom in Homeownership?

After the collapse of housing markets during the Great Depression, the U.S. government played a large role in shaping the future of housing finance and policy. Soon thereafter, housing markets witnessed the largest boom in recent history.

Monetary Policy: Why Money Matters, and Interest Rates Don’t

Since the late 1980s the Fed has implemented monetary policy by adjusting its target for the overnight federal funds rate. Money’s role in monetary policy has been tertiary, at best.

U.S. Monetary Policy: A View from Macro Theory

We use a dynamic stochastic general equilibrium model to address two questions about U.S. monetary policy: 1) Can monetary policy elevate output when it is below potential? and 2) Is the zero lower bound a trap?

Foreclosure Delay and U.S. Unemployment

Through a purely positive lens, we study and document the growing trend of mortgagors who skip mortgage payments as an extra source of "informal" unemployment insurance during the 2007 recession and the subsequent recovery.

Two-Way Capital Flows and Global Imbalances: A Neoclassical Approach

Financial capital and fixed capital tend to flow in opposite directions between poor and rich countries. Why? What are the implications of such two-way capital flows for global trade imbalances and welfare in the long run? This paper introduces frictions into a standard two- country neoclassical growth model to explain the pattern of two-way capital flows between emerging economies (such as China) and the developed world (such as the United States).

Evidence on The Portfolio Balance Channel of Quantitative Easing

The Federal Open Market Committee has recently attempted to stimulate economic growth using unconventional methods. Prominent among these is quantitative easing (QE)—the purchase of a large quantity of longer-term debt on the assumption that QE reduces long-term yields through the portfolio balance channel.

An Endogenously Clustered Factor Approach to International Business Cycles

Factor models have become useful tools for studying international business cycles. Block factor models [e.g., Kose, Otrok, and Whiteman (2003)] can be especially useful as the zero restrictions on the loadings of some factors may provide some economic interpretation of the factors.

Information Disclosure and Exchange Media

When commitment is lacking, intertemporal trade is facilitated with the use of exchange media—interpreted broadly to include monetary and collateral assets.

News Shocks and the Slope of the Term Structure of Interest Rates

We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one single shock can explain the majority of all unpredictable movements in the slope over a 10-year forecast horizon.

The Risk Premium and Long-Run Global Imbalances

This study proposes that heterogeneous household portfolio choices within a country and across countries offer an explanation for global imbalances.

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.

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.


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