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Working Papers

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

Recent Working Papers

Technology and the Task Content of Jobs across the Development Spectrum

The tasks workers perform on the job are informative about the direction and the impact of technological change. We harmonize occupational task content measures between two worker-level surveys, which separately cover developing and developed countries. Developing countries use routine-cognitive tasks and routine-manual tasks more intensively than developed countries, but less intensively use non-routine analytical tasks and non-routine interpersonal tasks. This is partly because developing countries have more workers in occupations with high routine contents and fewer workers in occupations with high non-routine contents. More important, a given occupation has more routine contents and less non-routine contents in developing countries than in developed countries. Since 2006, occupations with high non-routine contents gained employment relative to those with high routine contents in most countries, regardless of their income level or initial task intensity, indicating the global reaches of the technological change that reduces the demand for occupations with high routine contents.

TFP, Capital Deepening, and Gains from trade

We study welfare gains from trade in a dynamic, multicountry model with capital accumulation. We compute the exact transition paths for 93 countries following a permanent, uniform, unanticipated trade liberalization. We find that while the dynamic gains are different across countries, consumption transition paths look similar except for scale. In addition, dynamic gains accrue gradually and are about 60 percent of steady-state gains for every country. Finally, the contribution of capital accumulation to dynamic gains is four times that of TFP.

A Quantitative Theory of Relationship Lending

Banks' loan pricing decisions reflect the fact that borrowers tend to have long-lasting relationships with lenders. Therefore, pricing decisions have an inherently dynamic component: high interest rates may yield higher static profits per loan, but in the long run they erode a banks' customer base and reduce future profitability. We study this tradeoff using a dynamic banking model which embeds lending relationships using deep habits (“customer capital”) and costs of adjusting loan portfolio composition. High customer capital raises the level and decreases the interest rate elasticity of loan demand. When faced with an adverse shock to net worth, banks with high customer capital recapitalize quickly by charging high interest rates and eroding customer capital in the short term, while banks with low customer capital face persistent financial distress. Using Call Report data to measure the franchise value of banks' loan portfolios, we find that this effect has strong implications for how individual banks and the financial sector as a whole recover from shocks.

Financial market reactions to the Russian invasion of Ukraine

This article analyzes financial market reactions to the Russia-Ukraine war with a focus on the opening weeks. Markets did not completely anticipate the war and asset price reactions strengthened from the first week—when there were hopes for a quick resolution—to the second week, when prices generally peaked and began to partially revert to pre-war values. Exposure to commodity trade and trade with Russia-Ukraine determined market perceptions of the riskiness of equity and foreign exchange assets. Credit default swap prices on sovereign debt and breakeven inflation rates indicate that markets saw the war as a measurable fiscal risk even for non-belligerents.

An Elementary Model of VC Financing and Growth

This article uses an endogenous growth model to study how the improvements in financing for innovative start-ups brought by venture capital (VC) affect firm innovation and growth. Partial equilibrium results show how lending contracts change as financing efficiency improves, while general equilibrium results demonstrate that better screening and development of projects by VC investors leads to higher aggregate productivity growth.

The Economic Impact of COVID-19 around the World

For over two years, the world has been battling the health and economic consequences of the COVID‐19 pandemic. This paper provides an account of the worldwide economic impact of the COVID‐19 shock, measured by GDP growth, employment, government spending, monetary policy, and trade. We find that the COVID‐19 shock severely impacted output growth and employment in 2020, particularly in middle‐income countries. The government response, mainly consisting of increased expenditure, implied a rise in debt levels. Advanced countries, having easier access to credit markets, experienced the highest increase in indebtedness. All regions also relied on monetary policy to support the fiscal expansion. The specific circumstances surrounding the COVID‐19 shock implied that the expansionary fiscal and monetary policies did not put upward pressure on prices until 2021. We also find that the adverse effects of the COVID‐19 shock on output and prices have been significant and persistent, especially in emerging and developing countries.

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.

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