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Working Paper Archives

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

Monetary Policy/Macroeconomics

Nonlinearities, Smoothing and Countercyclical Monetary Policy

Empirical analysis of the Fed’s monetary policy behavior suggests that the Fed smooths interest rates— that is, the Fed moves the federal funds rate target in several small steps instead of one large step with the same magnitude.

The Postwar Conquest of the Home Ownership Dream

Post-World War II witnessed the largest housing boom in recent history. This paper develops a quantitative equilibrium model of tenure choice to analyze the key determinants in the co-movement between home-ownership and house prices over the period 1940-1960.

Local and Aggregate Fiscal Policy Multipliers

In this paper, I estimate the effect of defense spending on the U.S. macroeconomy since World War II.

Individual and Aggregate Constrained Efficient Intertemporal Wedges in Dynamic Mirrleesian Economies

Assuming a neoclassical production technology, this paper characterizes constrained efficient intertemporal wedges for the macro aggregate as well as the micro individual allocation of dynamic Mirrleesian economies. We frst construct "Pareto-Negishi weights" from the multipliers on a sequence of temporary incentive constraints.

The Sufficient Statistic Approach: Predicting the Top of the Laffer Curve

We provide a formula for the tax rate at the top of the Laffer curve as a function of three elasticities. Our formula applies to static models and to steady states of dynamic models.

Natural Resources and Global Misallocation

How efficiently are physical and human capital allocated across countries? Observing differences in the countries' ratios of physical and human capital to output is not conclusive evidence of distortions since those differences may be driven by factor intensity differences in the countries' production functions.

A Racial Inequality Trap

Why has the U.S. black/white earnings gap remained around 40 percent for nearly 40 years? This paper's answer consists of a model of skill accumulation and neighborhood formation featuring a trap: Initial racial inequality and racial preferences induce racial segregation and asymmetric skill accumulation choices that perpetuate racial inequality.

Mortgages and Monetary Policy

Mortgages are long-term loans with nominal payments. Consequently, under incomplete asset markets, monetary policy can affect housing investment and the economy through the cost of new mortgage borrowing and real payments on outstanding debt.

Interest Rate Dynamics, Variable-Rate Loan Contracts, and the Business Cycle

The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates forecast booms in GDP, consumption, investment, and employment.

A State-Level Analysis of Okun's Law

Okun's law is an empirical relationship that measures the correlation between the deviation of the unemployment rate from its natural rate and the deviation of output growth from its potential.

Breaking the Curse of Kareken and Wallace with Private Information

We study the endogenous choice to accept fiat objects as media of exchange and their implications for nominal exchange rate determination. We consider a two-country environment with two currencies which can be used to settle any transactions.

On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound

We construct a monetary economy in which agents face aggregate demand shocks and hetero- generous idiosyncratic preference shocks.

Local Fiscal Multipliers, Negative Spillovers and the Macroeconomy

This paper analyzes the impact of within-state military spending and national military spending on a state's employment.

Interest on Reserves, Interbank Lending, and Monetary Policy

A two-sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention.

Credit Search and Credit Cycles

The supply and demand of credit are not always well aligned and matched, as is reflected in the countercyclical excess reserve-to-deposit ratio and interest spread between the lending rate and the deposit rate.

Multidimensional Skill Mismatch

What determines the earnings of a worker relative to his peers in the same occupation? What makes a worker fail in one occupation but succeed in another? More broadly, what are the factors that determine the productivity of a worker-occupation match? In this paper, we propose an empirical measure of skill mismatch for a worker-occupation match, which sheds light on these questions.

Current Federal Reserve Policy Under the Lens of Economic History: A Review Essay

This review essay is intended as a critical review of Humpage (2015), and it expands on the issues raised in that volume.

Banker Preferences, Interbank Connections, and the Enduring Structure of the Federal Reserve System

Established by a three person committee in 1914, the structure of the Federal Reserve System has remained essentially unchanged ever since, despite criticism at the time and over ensuing decades.

Optimal Monetary Policy at the Zero Lower Bound

We study optimal monetary policy at the zero lower bound. The macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market.

Fertility Shocks and Equilibrium Marriage-Rate Dynamics

Why did the marriage probability of single females in France after World War 1 rise 50% above its pre-war average, despite a 33% drop in the male/female singles ratio? We conjecture that war-time disruption of the marriage market generated an abnormal abundance of men with relatively high marriage propensities.

The Making of an Economic Superpower―Unlocking China’s Secret of Rapid Industrialization

The rise of China is no doubt one of the most important events in world economic history since the Industrial Revolution. Mainstream economics, especially the institutional theory of development based on a dichotomy of extractive vs. inclusive political institutions, is highly inadequate in explaining China’s rise.

Self-Fulfilling Credit Cycles

In U.S. data 1981–2012, unsecured firm credit moves procyclically and tends to lead GDP, while secured firm credit is acyclical; similarly, shocks to unsecured firm credit explain a far larger fraction of output fluctuations than shocks to secured credit.

Schools and Stimulus

This paper analyzes the impact of the education funding component of the 2009 American Recovery and Reinvestment Act (the Recovery Act) on public school districts.

Rehypothecation and Liquidity

Rehypothecation refers to the practice of spending a borrowed security that is ostensibly assigned as collateral in a lending arrangement. We develop a dynamic general equilibrium monetary model where an “asset shortage” and incomplete markets motivates the formation of credit relationships and the rehypothecation of assets.

Scarcity of Safe Assets, Inflation, and the Policy Trap

We construct a model in which all consolidated government debt is used in transactions, with money being more widely acceptable.

Institutions Do Not Rule: Reassessing the Driving Forces of Economic Development

We use cross-country data and instrumental variables widely used in the literature to show that (i) institutions (such as property rights and the rule of law) do not explain industrialization and (ii) agrarian countries and industrial countries have entirely different determinants for income levels.

Equilibrium Sovereign Default with Exchange Rate Depreciation

This study proposes and quantitatively assesses a terms-of-trade penalty for defaulting: defaulters must exchange more of their own goods for imports, which causes an adjustment to the equilibrium exchange rate.

Explaining Educational Attainment across Countries and over Time

Consider the following facts. In 1950, the richest countries attained an average of 8 years of schooling whereas the poorest countries 1.3 years, a large 6-fold difference. By 2005, the difference in schooling declined to 2-fold because schooling increased faster in poor than in rich countries.

Universal Basic Income versus Unemployment Insurance

In this paper we compare the welfare effects of unemployment insurance (UI) with an universal basic income (UBI) system in an economy with idiosyncratic shocks to employment. Both policies provide a safety net in the face of idiosyncratic shocks.

Technology Innovation and Diffusion as Sources of Output and Asset Price Fluctuations

We develop a model in which innovations in an economy's growth potential are an important driving force of the business cycle.


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