Skip to main content Skip to main content

Working Papers

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

Recent Working Papers

EBITDA Add-backs in Debt Contracting: A Step Too Far?

Financial covenants in syndicated loan agreements often rely on definitions of EBITDA that deviate from the GAAP definition. We document the increased usage of non-GAAP addbacks to EBITDA in recent times. Using the 2013 Interagency Guidance on Leveraged Lending, which we argue led to an exogenous increase in non-GAAP EBITDA addbacks, we show that these addbacks increase the likelihood of loan delinquency and default, and also increase the likelihood of the borrower experiencing a ratings downgrade. Greater use of non-GAAP EBITDA addbacks also makes it more likely that lead arrangers lower their loan share exposures through secondary market sales. Our results highlight that covenants based on customized measures of EBITDA hurt loan performance by worsening lead arrangers’ incentives to monitor borrowers and by hampering their ability to take timely corrective actions.

COVID-19: fiscal implications and financial stability in developing countries

The COVID-19 pandemic is unlike any other crisis that we have experienced in that it hit all economies in the world at the same time, compromising the risk sharing ability of nations. At the onset of the pandemic, the World Bank (WB) and the International Monetary Fund (IMF) jointly pledged 1.16 trillion dollars to help emerging economies deal with COVID-19. Would this amount have been enough to preserve financial stability in a worst case scenario? What were the fiscal implications of the pandemic? In this paper we aim to answer these questions by documenting the size of the fiscal measures implemented by different countries, the aid they received from the IMF and the WB to finance those fiscal measures, the resulting changes in gross debt, debt composition and maturity, and fiscal deficits. We find that given the amount of debt that was maturing in Asia and Latin America in 2020 and 2021, if there had been a rollover crisis due to lack of demand for their newly issued debt, then what was pledge by the WB and IMF at the onset of the pandemic would not have been enough to preserve financial stability. However, there was no rollover crisis, and although fiscal deficits got considerable worse in 2020, they improved in 2021, albeit, leaving gross debt at higher levels than those observed pre-pandemic.

Labor Force Exiters around Recessions: Who Are They?

This paper identifies workers who experience a job separation during a recession and tracks their labor force status in the following year using the Current Population Survey. Workers are classified as exiters if they leave the labor force shortly after their job loss and non-exiters if they do not. The pool of exiters is disproportionately female, less-educated, and older. During the pandemic recession, there were even more older workers in the exiters pool, although they were less likely to report being retired compared to in the Great Recession. In addition, statuses were more persistent during the Great Recession: for both exiters and non-exiters the majority were in the same labor force status a year later. I then use the patterns of these samples of job-separators to estimate the propensity of being re-employed in a year and apply the estimates to the general out-of-work pools during the two recessions. I find that changes in the likelihood of being re-employed as well as the composition of individuals out of work are important for understanding the differences between the labor market in the two recessions.

Causes and Consequences of Student-College Mismatch

College admissions are highly meritocratic in the U.S. today. It is not the case in many other countries. What is the tradeoff? On one hand, meritocracy produces more human capital overall if higher ability students learn more in college and if they learn more in higher quality colleges. This leads to a higher overall level of earnings (i.e. greater efficiency, loosely speaking). On the other hand, more meritocracy generates a higher degree of earnings inequality. In this paper, we quantify this efficiency-equality tradeoff. Our results suggest small efficiency losses/gains from student reassignment across colleges, suggesting it as an effective policy for fighting inequality and/or altering intergenerational mobility.

Gender Gap

We employ the Ben-Porath (1967) human capital model to study the evolution of the gender wage gap over the long run. We consider the effect of changing lifecycle profiles of female market hours. We find that the implied response in unobserved investment in human capital accumulation accounts for most of the long run gender wage gap dynamics. This finding is consistent with the labor economists’ view that changing selection on unobservables played a critical role in the gender wage gap dynamics. Our contribution is to make explicit and quantify the link between market hours and (unobserved) investment in human capital.

Dissecting Idiosyncratic Earnings Risk

This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) Both wages and hours contribute to negative skewness and high kurtosis for earnings changes, although hour-wage interactions are quantitatively more important. (iv) When considering household earnings and disposable household income, the deviations from normality are mitigated relative to individual labor earnings: changes in disposable household income are approximately symmetric and less leptokurtic.

Voluntary participation in a terror group and counterterrorism policy

A three-stage game investigates how counterterrorism measures are affected by volunteers’ choice in joining a terrorist group. In stage 1, the government chooses both proactive and defensive countermeasures, while looking ahead to the anticipated size and actions of terrorist groups. After radicalized individuals choose whether to join a terrorist group in stage 2, group members then allocate their time between work and terrorist operations. Based on wages and government counterterrorism, the game characterizes the extensive margin determining group size and the intensive margin indicating the group’s level of attacks. Comparative statics show how changes in wages or radicalization impact the optimal mix between defensive and proactive countermeasures. Higher (lower) wages favor a larger (smaller) mix of proactive measures over defensive actions. In the absence of backlash, enhanced radicalization of terrorist members calls for a greater reliance on defensive actions. The influence of backlash on counterterrorism is also examined.

Liquidity and Investment in General Equilibrium

This paper studies the implications of trading frictions in financial markets for firms' investment and dividend choices and their aggregate consequences. When equity shares trade in frictional asset markets, the firm's problem is time-inconsistent, and it is as if it faces quasi-hyperbolic discounting. The transmission of trading frictions to the real economy crucially depends on the firms' ability to commit. In a calibrated economy without commitment, larger trading frictions imply lower capital and production. In contrast, if firms can commit, trading frictions affect asset prices but have no effect on capital and production. Our findings rationalize several empirical regularities on liquidity and investment.

The Dual Beveridge Curve

When firms decide to post a vacancy they can hire from the pool of unemployed workers or they can poach a worker from another firm. In this paper we show that if there are two different matching processes, one for unemployed workers and another one for job-to-job transitions, then implications for the Beveridge curve are potentially very different, influencing the effects of monetary policy on unemployment. We show that over the years the hiring process and how job postings are used as an input into this process has changed dramatically.

Interbank Networks and the Interregional Transmission of Financial Crises: Evidence from the Panic of 1907

This paper provides quantitative evidence on the interbank network’s role in transmitting the Panic of 1907 across the United States. Originating in a few New York City banks and trust companies, the panic led to payment suspensions and emergency currency issuance in many cities. Data on the universe of correspondent relationships shows that i) suspensions were more likely in cities whose banks had closer ties to New York, ii) banks with correspondents at the Panic’s center were more likely to close, and iii) banks responded to the panic by rearranging their correspondent relationships, with implications for network structure.

Demand-Supply imbalance during the COVID-19 pandemic: The role of fiscal policy

To mitigate the health and economic fallout from the COVID-19 pandemic, governments worldwide engaged in massive fiscal support programs. We show that generous fiscal support is associated with an increase in the demand for consumption goods during the pandemic, but industrial production did not adjust quickly enough to meet the sharp increase in demand. This imbalance between supply and demand across countries contributed to high inflation. Our findings suggest a sizable role for fiscal policy in affecting price stability, above and beyond what a monetary authority can do.

Policy Rules and Large Crises in Emerging Markets

In response to the COVID-19 pandemic, Latin American countries temporarily suspended rules limiting debt, fiscal and monetary policies. Despite this increase in flexibility, the crisis implied a substantial deterioration of macroeconomic variables (e.g., real GDP declined by 9.5%) and high welfare costs (which we estimate as equivalent to a 13% one-time reduction in non-tradable consumption). This paper studies a sovereign default model with fiscal and monetary policies to assess the policy response and evaluate the gains from flexibility in times of severe distress.

Shipping Prices and Import Price Inflation

During the pandemic there have been unprecedented increases in the cost of shipping goods accompanied by delays and backlogs at the ports. At the same time, import price inflation has reached levels unseen since the early 1980s. This has led many to speculate that the two trends are linked. In this article, we use new data on the price of shipping goods between countries to analyze the extent to which increases in the price of shipping can account for the increase in U.S. import price inflation. We find that the pass-through of shipping costs is small. Nevertheless, because the rise in shipping prices has been so extreme, it can account for between 3.60 and 5.87 percentage points per year of the increase in import price inflation during the post-Pandemic period.

Labor Market Shocks and Monetary Policy

We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the role of worker flows in inflation dynamics and monetary policy. Motivated by our empirical finding that the historical negative correlation between the unemployment rate and the employer-to-employer (EE) transition rate up to the Great Recession disappeared during the recovery, we use the model to quantify the effect of EE transitions on inflation in this period. We find that the four-quarter inflation rate would have been 0.6 percentage points higher between 2016 and 2019 if the EE rate increased commensurately with the decline in unemployment. We then decompose the channels through which a change in EE transitions affects inflation. We show that an increase in the EE rate leads to an increase in the real marginal cost, but the direct effect is partially mitigated by the equilibrium decline in market tightness through aggregate demand that exerts downward pressure on the marginal cost. Finally, we study the normative implications of job mobility for monetary policy responding to inflation and labor market variables according to a Taylor rule, and find that the welfare cost of ignoring the EE rate in setting the nominal interest rate is 0.2 percent in additional lifetime consumption.

Age and Gender Differentials in Unemployment and Hysteresis

We use a time-varying panel unobserved components model to estimate unemployment gaps disaggregated by age and gender. Recessions before COVID affected men's labor market outcomes more than women's; however, the reverse was true for the COVID recession, with effects amplified for younger workers. The aggregate Phillips curve flattens over time and hysteresis is countercyclical for all groups. We find heterogeneity in both the Phillips curve and hysteresis coefficients, with wages responding more to workers with an outside option (high school- and retirement-age) and larger effects of hysteresis for younger workers.

The Sine Aggregatio Approach to Applied Macro

We develop a method to use disaggregate data to conduct causal inference in macroeconomics. The approach permits one to infer the aggregate effect of a macro treatment using regional outcome data and a valid instrument. We estimate a macro effect without (sine) the aggregation (aggregatio) of the outcome variable. We exploit cross-series parameter restrictions to increase precision relative to traditional, aggregate series estimates and provide a method to assess robustness to modest departures from these restrictions. We illustrate our method via estimating the jobs effect of oil price changes using regional manufacturing employment data and an aggregate oil supply shock.

Private Information and Optimal Infant Industry Protection

We study infant industry protection using a dynamic model in which the industry's cost is initially higher than that of foreign competitors. The industry can stochastically lower its cost via learning by doing. Whether the industry has transitioned to low cost is private information. We use a mechanism-design approach to induce the industry to reveal its true cost. We show that (i) the optimal protection, measured by infant industry output, declines over time and is less than that under public information, (ii) the optimal protection policy is time consistent under public information but not under private information, (iii) the optimal protection policy can be implemented with minimal information requirements, and (iv) a government with a limited budget can use a simple approach to choose which industries to protect.

Employer Reallocation During the COVID-19 Pandemic: Validation and Application of a Do-It-Yourself CPS

Economists have recently begun using independent online surveys to collect national labor market data. Questions remain over the quality of such data. This paper provides an approach to address these concerns. Our case study is the Real-Time Population Survey (RPS), a novel online survey of the US built around the Current Population Survey (CPS). The RPS replicates core components of the CPS, ensuring comparable measures that allow us to weight and rigorously validate our results using a high-quality benchmark. At the same time, special questions in the RPS yield novel information regarding employer reallocation during the COVID-19 pandemic. We document that 26% of pre-pandemic workers were working for a new employer one year into the COVID-19 outbreak in the US, at least double the rate of any previous episode in the past quarter century. Our discussion contains practical suggestions for the design of novel labor market surveys and highlights other promising applications of our methodology.

Did Doubling Reserve Requirements Cause the 1937-38 Recession? New Evidence on the Impact of Reserve Requirements on Bank Reserve Demand and Lending

In 1936-37, the Federal Reserve doubled member banks' reserve requirements. Friedman and Schwartz (1963) famously argued that the doubling increased reserve demand and forced the money supply to contract, which they argued caused the recession of 1937-38. Using a new database on individual banks, we show that higher reserve requirements did not generally increase banks' reserve demand or contract lending because reserve requirements were not binding for most banks. Aggregate effects on credit supply from reserve requirement increases were therefore economically small and statistically zero.

The Jobs Effect of Ending Pandemic Unemployment Benefits: A State-Level Analysis

This note uses the asynchronous cessation of emergency unemployment benefits (EUB) in 2021 to investigate the jobs impact of ending unemployment benefits. While some states stopped providing EUB in September, other states stopped in June and July. Using the cessation month as an instrument, we estimate the causal effect on employment of reducing unemployment rolls. In the first three months following a state’s program termination, for every 100 person reduction in beneficiaries, state employment causally increased by about 35 persons. The effect is statistically different from zero and robust to a wide array of alternative specifications.

The Ramsey Steady-State Conundrum in Heterogeneous-Agent Economies

In infinite horizon, heterogeneous-agent and incomplete-market models, the existence of an interior Ramsey steady state is often assumed instead of proven. This paper makes two fundamental contributions: (i) We prove that the interior Ramsey steady state assumed by Aiyagari (1995) does not exist in the standard Aiyagari model. Specifically, a steady state featuring the modified golden rule and a positive capital tax is feasible but not optimal. (ii) We design a modified, analytically tractable version of the standard Aiyagari model to unveil the necessary and/or sufficient conditions for the existence of a Ramsey steady state. These conditions are shown to be quite demanding and sensitive to structural parameter values pertaining to the economy's fiscal space for providing full self-insurance, such as the government's capacity to finance public debt, the degree of intertemporal elasticity of substitution, and the extent of history dependence of individual wealth on idiosyncratic shocks. In addition, we characterize the basic properties of both interior and non-interior Ramsey steady states and show that researchers may draw fundamentally misleading conclusions on optimal fiscal policies (such as the optimal capital tax rate) from their analysis when an interior Ramsey steady state is erroneously assumed to exist.

Work from Home Before and After the COVID-19 Outbreak

Based on novel survey data, we document a persistent rise in work from home (WFH) over the course of the COVID-19 pandemic. Using theory and direct survey evidence, we argue that three quarters of this increase reflects adoption of new work arrangements that will likely be permanent for many workers. A quantitative model matched to survey data predicts that twice as many workers will WFH full-time post-pandemic compared to pre-pandemic, and that one in every five instead of seven workdays will be WFH. These model predictions are consistent with survey evidence on workers' own expectations about WFH in the future.

Politically influenced counterterrorism policy and welfare efficiency

The paper examines how two targeted countries strategically deploy their counterterror forces when lobbying defense firms influence counterterror provision. For proactive measures, lobbying activities in a single targeted country lessen underprovision, raise overall counterterrorism, and reduce terrorism. Welfare decreases in the politically influenced country but increases in the other targeted country owing to enhanced free riding. Lobbying influence on the targeted countries’ welfare is tied to terrorists’ targeting preferences and how the lobbied government weighs citizens’ welfare. For key parametric values, lobbying in both targeted countries may result in the first-best equilibrium. With two-country lobbying, international policy coordination by at-risk governments may lead, surprisingly, to less efficient outcomes than the noncooperative equilibrium. Additionally, lobby-influenced defensive countermeasures generally affect efficiency adversely.

Structural Change in Labor Supply and Cross-Country Differences in Hours Worked

This paper studies how structural change in labor supply along the development spectrum shapes cross-country differences in hours worked. We emphasize two main forces: sectoral reallocation from self-employment to wage work, and declining fixed costs of wage work. We show that these forces are crucial for understanding how the extensive margin (the employment rate) and intensive margin (hours per worker) of aggregate hours worked vary with income per capita. To do so we build and estimate a quantitative model of labor supply featuring a traditional self-employment sector and a modern wage-employment sector. When estimated to match cross-country data, the model predicts that sectoral reallocation explains more than half of the total hours decrease at lower levels of development. Declining fixed costs drive the rise in employment rates at higher levels of income per capita, and imply higher hours in the future, in contrast to the lower hours resulting from income effects and expansions in tax-and-transfer systems.

Hours and Wages

We document two robust features of the cross-sectional distribution of usual weekly hours and hourly wages. First, usual weekly hours are heavily concentrated around 40 hours, while at the same time a substantial share of total hours come from individuals who work more than 50 hours. Second, mean hourly wages are non-monotonic across the usual hours distribution, with a peak at 50 hours. We develop and estimate a model of labor supply to account for these features. The novel feature of our model is that earnings are non-linear in hours, with the extent of nonlinearity varying over the hours distribution. Our estimates imply significant wage penalties for individuals that deviate from 40 hours in either direction, leading to a large mass of individuals that work 40 hours and are not very responsive to shocks. This has important implications for the role of labor supply as a mechanism for self-insurance in a standard heterogeneous agent-incomplete markets model and for empirical strategies designed to estimate labor supply parameters.

Attention and Fluctuations in Macroeconomic Uncertainty

This paper studies a dispersed information economy in which agents can exert costly attention to learn about an unknown aggregate state of the economy. Under certain conditions, attention and four measures of uncertainty are countercyclical: Agents pay more attention when they expect the economy to be in a bad state, and their reaction generates higher (i) aggregate output volatility, (ii) cross-sectional output dispersion, (iii) forecast dispersion about aggregate output, and (iv) subjective uncertainty about aggregate output faced by each agent. All these phenomena are prominent features of the U.S. data. When attention cost is calibrated to forecast survey data, the model generates countercyclical fluctuations in attention and uncertainty, consistent with untargeted moments from the data. Fluctuations in attention and uncertainty are higher-order properties of the model. A new method is developed to solve higher-order dynamics of the equilibrium under an infinite regress problem.

On the Real-Time Predictive Content of Financial Conditions Indices for Growth

We provide evidence on the real-time predictive content of the National Financial Conditions Index (NFCI), for conditional quantiles of U.S. real GDP growth. Our work is distinct from the literature in two specific ways. First, we construct (unofficial) real-time vintages of the NFCI. This allows us to conduct out-of-sample analysis without introducing the kind of look-ahead biases that are naturally introduced when using a single current vintage. We then develop methods for conducting asymptotic inference on tests of equal tick loss between nested quantile regression models when the data are subject to revision. We conclude by evaluating the real-time predictive content of NFCI vintages for quantiles of real GDP growth. While our results largely reinforce the literature, we find gains to using real-time vintages leading up to recessions — precisely when policymakers need such a monitoring device.

Anatomy of Lifetime Earnings Inequality: Heterogeneity in Job Ladder Risk vs. Human Capital

We study the determinants of lifetime earnings (LE) inequality in the U.S. by focusing on job ladder dynamics and on-the-job learning as sources of wage growth. Using administrative data, we document that i) lower LE workers change jobs more often, which is mainly driven by nonemployment; ii) average annual earnings growth for job stayers is similar, around 2% in the bottom two-thirds of the LE distribution, whereas for job switchers it rises with LE; iii) top LE workers enjoy around 10% average earnings growth regardless of job switching. We estimate a job ladder model with on-the-job learning featuring a rich set of worker types and firm heterogeneity. We find that the vast differences across worker types in job ladder risk—job loss, job finding, and contact rates—account for 80% of wage growth differences among workers below median LE. Above the median, almost all lifetime wage growth differences are a result of Pareto-distributed learning ability. We conclude that different economic forces are driving the inequality in different parts of the LE distribution.

Reconsidering the Fed's Forecasting Advantage

Previous studies show the Fed has a forecast advantage over the private sector, either because it devotes more resources to forecasting or because it has an informational advantage in knowing the path of future monetary policy. We evaluate the Fed's forecast advantage to determine how much of it results from the Fed's knowledge of the conditioning path. We develop two tests---an instrumental variable encompassing test and a path-dependent encompassing test---to equalize the Fed's information set with the private sector's. We find that, generally, the Fed does not encompass the private sector when the latter has knowledge of the future of monetary policy. Further, we find that between 20 and 30 percent of the difference between the Fed's average mean squared forecast error and the private sector's can be explained by monetary policy.

Earnings Dynamics and Its Intergenerational Transmission: Evidence from Norway

Using administrative data, we provide an extensive characterization of labor earnings dynamics in Norway. Some of our findings are as follows. (i) Norway has not been immune to the increase in top earnings inequality seen in other countries. (ii) The earnings distribution compresses in the bottom 90% over the life cycle but expands in the top 10%. (iii) The earnings growth distribution is left skewed and leptokurtic, and the extent of these nonnormalities varies with age and past income. Linking individuals to their parents, we also investigate the intergenerational transmission of income dynamics. We find that children of high-income, high-wealth fathers enjoy steeper income growth over the life cycle and face more volatile but more positively skewed income changes, suggesting that they are more likely to pursue high-return, high-risk careers. Income growth for children of poorer fathers is more gradual and more left skewed, displaying higher left tail risk. Furthermore, the income dynamics of fathers and children are strongly correlated: children of fathers with steeper life-cycle income growth, more volatile incomes, or higher downside risk also have income streams of similar properties. These findings shed new light on the determinants of intergenerational mobility.


Next 30 Working Papers

Archives

Year

Category

Author

JEL Code


Tools

Related Links