Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.
Financial Intermediation and Aggregate Demand: A Sufficient Statistics Approach
We provide a unified framework to study how the financial sector affects the transmission of macroeconomic policies, such as monetary and fiscal policies, and asset purchase programs. Our framework nests models of financial intermediation with various microfoundations and allows for rich household heterogeneity. The financial sector supplies liquidity by issuing liquid assets to finance illiquid capital. The elasticities of liquidity supply with respect to returns are sufficient statistics that summarize how the financial sector determines responses to policy through asset markets. This asset market channel has a strong effect on output when liquidity supply is inelastic. We apply our approach to study the relative effectiveness of policies targeting the financial sector versus households. In commonly used setups, aggregate output responses differ by orders of magnitude due to implicit assumptions about the elasticities. Our estimates of the liquidity supply elasticities for the U.S. economy imply a modest effect through the asset markets and a stronger effect of targeting households.
The Evolution of Regional Beveridge Curves
The slow recovery of the labor market in the aftermath of the Great Recession highlighted mismatch, the misallocation of workers across space or across industries. We consider the historical evolution of regional mismatch. We construct MSA-level unemployment rates and vacancy data using techniques similar to Barnichon (2010) and a new dataset of online help-wanted ads by MSA. We estimate regional Beveridge curves, identifying the slopes by restricting them to be equal across locations with similar labor market characteristics. We find that the 51 U.S. cities in our sample have four groupings which are influenced by industry classification, union membership, and geographic proximity. Additionally, allowing for a structural break suggests match efficiency increased across regions after adoption of the internet.
The Impact of Racial Segregation on College Attainment in Spatial Equilibrium
This paper seeks to understand the forces that maintain racial segregation and the implications for the Black-White gap in college attainment. We incorporate race into an overlapping-generations spatial-equilibrium model with neighborhood spillovers. The model incorporates race in three ways: (i) a Black-White wage gap, (ii) an amenity externality---households care about the racial composition of their neighbors---and (iii) an additional barrier to moving for Black households. These forces quantitatively account for all of the racial segregation and 80% of the Black-White gap in college attainment in the data for the St. Louis metro area. Counterfactual exercises show that all three forces are quantitatively important. The presence of spillovers and externalities generates multiple equilibria. Although St. Louis is in the segregated equilibrium, there also exists an integrated equilibrium with a lower college gap, and we analyze a transition path between the two.
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
What are the tradeoffs of meritocratic college admissions? On one hand, stronger sorting between students and colleges may produce more human capital on aggregate if higher ability students benefit more from attending higher quality colleges. On the other hand, stronger sorting generates a higher degree of earnings inequality and reduces upward mobility. In this paper, we examine student-college sorting and study aggregate implications of redistributive college admissions policies such as affirmative action. To this end, we develop a model with heterogeneous students and college types that differ on human capital production technology and financial costs/subsidies. We quantify our model using NLSY97 student-level and college transcript data, as well as quasi-experimental evidence on returns to college quality and relevance of information provision. Our quantitative model implies small efficiency losses from redistributive college admissions policies such as affirmative action based on socioeconomic status.
The Evolution of Lifetime Hours and the Gender Wage Gap
The gender wage gap decreased (opened) from 1940 to 1975 and then increased (closed) until 2010. We use the model introduced in Ben-Porath (1967) to assess the role of gender differences in life cycle profiles of market time in explaining this dynamics. Men's profiles changed little across cohorts, but women's profiles converged to that of men implying, eventually, stronger incentives for women to accumulate human capital. We calibrate the model and find that (1) The 1940-75 decrease of the gap was because men valued human capital more than women due to their working more. The 1975-10 increase was because men's valuation of human capital remain mostly unchanged while women's increased. (2) If men had the hours profiles of women, the wage gap would have closed continuously since 1940 (ceteris paribus), but its level in 2010 would be close to its observed level.
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.
This study introduces a dual vacancy model to explain the recent anomalous behavior of the Beveridge curve. The model proposes that job vacancies are partitioned into two categories, one for the unemployed and the other for job-to-job transitions, and that they function in separate markets. We estimate the monthly numbers of both job vacancy types for the U.S. economy and its subsectors starting from 2000 and find a significant surge in poaching vacancies in the mid-2010s. Our analysis indicates that the dual vacancy model provides a better fit to the data than traditional models. These findings suggest that a deceleration in worker demand can have a reduced impact on unemployment, with implications for monetary policy.
This paper provides quantitative evidence on interbank transmission of financial distress in the Panic of 1907 and ensuing recession. Originating in New York City, the panic led to payment suspensions and emergency currency issuance in many cities. Data on the universe of interbank connections show that i) suspension was more likely in cities whose banks had closer ties to banks at the center of the panic, ii) banks with such links were more likely to close in the panic and recession, 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
Emerging countries have increasingly adopted rules to discipline government policy. The COVID-19 shock led to widespread suspension and modification of these rules. We study rules and flexibility in a sovereign default model with domestic fiscal and monetary policies and long-term external debt. We find welfare gains from adopting monetary targets and debt limits during normal times. Though government policy cannot itself counteract fundamental shocks hitting the economy, the adoption of rules has a significant impact on policy, macroeconomic outcomes and welfare during large, unexpected crises. We also find moderate gains from suspending monetary targets during a crisis and large losses from abandoning debt limits.
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 positive and normative implications of employer-to-employer (EE) transitions for inflation. We find that EE dynamics played an important role in shaping the differential inflation dynamics observed during the Great Recession and the COVID-19 recoveries, with the former exhibiting subdued EE transitions and inflation despite both episodes sharing similar unemployment dynamics. The optimal monetary policy prescribes a strong positive response to EE fluctuations, implying that central banks should distinguish between recovery episodes with similar unemployment but different EE dynamics.
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-equation parameter restrictions to increase precision relative to traditional, aggregate series estimates and provide a method to assess robustness to 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.
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.
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 paper 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, others stopped as early as June. Using the cessation month as an instrument, we estimate the effect on employment of reducing unemployment rolls. In the second month following a state’s program termination, for every 100 person reduction in beneficiaries, state employment causally increased by about 27 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.
