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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.

Applied Econometrics

The Role of Schools in the Production of Achievement

What explains differences in pre-market factors? Three types of inputs are believed to determine the skills agents take to the labor market: ability, family inputs, and school inputs.

Regime Shifts in Mean-Variance Efficient Frontiers: Some International Evidence

Regime switching models have been assuming a central role in financial applications because of their well-known ability to capture the presence of rich non-linear patterns in the joint distribution of asset returns.

Does the Macroeconomy Predict U.K. Asset Returns in a Nonlinear Fashion? Comprehensive Out-of-Sample Evidence

We perform a comprehensive examination of the recursive, comparative predictive performance of a number of linear and non-linear models for UK stock and bond returns.

Real-Time Forecast Averaging with ALFRED

This paper presents empirical evidence on the efficacy of forecast averaging using the ALFRED real-time database.

Reality Checks and Comparisons of Nested Predictive Models

This paper develops a novel and effective bootstrap method for simulating asymptotic critical values for tests of equal forecast accuracy and encompassing among many nested models. The bootstrap, which combines elements of fixed regressor and wild bootstrap methods, is simple to use.

Testing for Unconditional Predictive Ability

This chapter provides an overview of pseudo-out-of-sample tests of unconditional predictive ability. We begin by providing an overview of the literature, including both empirical applications and theoretical contributions.

A Time-Varying Threshold STAR Model of Unemployment and the Natural Rate

Smooth-transition autoregressive (STAR) models have proven to be worthy competitors of Markov-switching models of regime shifts, but the assumption of a time-invariant threshold level does not seem realistic and it holds back this class of models from reaching their potential usefulness.

A Yield Spread Perspective on the Great Financial Crisis: Break-Point Test Evidence

We use a simple partial adjustment econometric framework to investigate the effects of the crisis on the dynamic properties of a number of yield spreads. We find that the crisis has caused substantial disruptions revealed by changes in the persistence of the shocks to spreads as much as by in their unconditional mean levels.

Identifying Technology Shocks in the Frequency Domain

Since Galí [1999], long-run restricted VARs have become the standard for identifying the effects of technology shocks. In a recent paper, Francis et al. [2008] proposed an alternative to identify technology as the shock that maximizes the forecast-error variance share of labor productivity at long horizons.

Changes in the Second-Moment Properties of Disaggregated Capital Flows

Using formal statistical tests, we detect (i) significant volatility increases for various types of capital flows for a period of changes in business cycle comovement among the G7 countries, and (ii) mixed evidence of changes in covariances and correlations with a set of macroeconomic variables.

Predictions of Short-Term Rates and the Expectations Hypothesis

Despite its role in monetary policy and finance, the expectations hypothesis (EH) of the term structure of interest rates has received virtually no empirical support.

Do Oil Shocks Drive Business Cycles? Some U.S. and International Evidence

Oil prices rose sharply prior to the onset of the 2007-2009 recession. Hamilton (2005) noted that nine of the last ten recessions in the United States were preceded by a substantial increase in the price of oil.

1/N and Long Run Optimal Portfolios: Results for Mixed Asset Menus

Recent research [e.g., DeMiguel, Garlappi and Uppal, (2009), Rev. Fin. Studies] has cast doubts on the out-of-sample performance of optimizing portfolio strategies relative to naive, equally weighted ones. However, existing results concern the simple case in which an investor has a one-month horizon and meanvariance preferences.

Can VAR Models Capture Regime Shifts in Asset Returns? A Long-Horizon Strategic Asset Allocation Perspective

We examine whether simple VARs can produce empirical portfolio rules similar to those obtained under a range of multivariate Markov switching models, by studying the effects of expanding both the order of the VAR and the number/selection of predictor variables included.

Forecast Disagreement Among FOMC Members

This paper presents empirical evidence on the disagreement among Federal Open Market Committee (FOMC) forecasts.

Common Fluctuations in OECD Budget Balances

We use a dynamic latent factor model to analyze comovements in OECD budget surpluses. The world factor underlying common fluctuations in budget surpluses across countries explains an average of 28 to 44 percent of the variation in individual country surpluses.

Do Large Banks have Lower Costs? New Estimates of Returns to Scale for U.S. Banks

The number of commercial banks in the United States has fallen by more than 50 percent since 1984. This consolidation of the U.S. banking industry and the accompanying large increase in average (and median) bank size have prompted concerns about the effects of consolidation and increasing bank size on market competition and on the number of banks that regulators deem “too–big–to–fail.”

In-Sample Tests of Predictive Ability: A New Approach

This paper presents analytical, Monte Carlo, and empirical evidence linking in-sample tests of predictive content and out-of-sample forecast accuracy.

Nested Forecast Model Comparisons: A New Approach to Testing Equal Accuracy

This paper develops bootstrap methods for testing whether, in a finite sample, competing out-of-sample forecasts from nested models are equally accurate.

The Local Effects of Monetary Policy

Many studies have documented disparities in the regional responses to monetary policy shocks. However, because of computational issues, the literature has often neglected the richest level of disaggregation: the city. In this paper, we estimate the city-level responses to monetary policy shocks in a Bayesian VAR.

The Identification of the Response of Interest Rates to Monetary Policy Actions Using Market-Based Measures of Monetary Policy Shocks

It has become common practice to estimate the response of asset prices to monetary policy actions using market-based measures such as the unexpected change in the federal funds futures rate as proxies for monetary policy shocks.

Does Money Matter in Inflation Forecasting?

This paper provides the most fully comprehensive evidence to date on whether or not monetary aggregates are valuable for forecasting US inflation in the early to mid 2000s.

Journal Rankings in Economics: Handle with Care

Nearly all journal rankings in economics use some weighted average of citations to calculate a journal’s impact. These rankings are often used, formally or informally, to help assess the publication success of individual economists or institutions.

The Propagation of Regional Recessions

This paper develops a framework for inferring common Markov-switching components in a panel data set with large cross-section and time-series dimensions. We apply the framework to studying similarities and differences across U.S. states in the timing of business cycles.

The Evolution of Cost-Productivity and Efficiency Among U.S. Credit Unions

Advances in information-processing technology have significantly eroded the advantages of small scale and proximity to customers that traditionally enabled community banks and other small-scale lenders to thrive.

Is Housing the Business Cycle? Evidence from U.S. Cities

We analyze the relationship between housing and the business cycle in a set of 51 U.S. cities.

Who Benefits from Increased Government Spending? A State-Level Analysis

We simultaneously identify two government spending shocks: military spending shocks as defined by Ramey (2011) and federal spending shocks as defined by Perotti (2008).

Time and Risk Diversification in Real Estate Investments: Assessing the Ex Post Economic Value

Welfare gains to long-horizon investors may derive from time diversification that exploits non-zero intertemporal return correlations associated with predictable returns. Real estate may thus become more desirable if its returns are negatively serially correlated.

Mexico’s Integration into NAFTA Markets: A View from Sectoral Real Exchange Rates

Using a self-exciting threshold autoregressive model, we confirm the presence of nonlinearities in sectoral real exchange rate (SRER) dynamics across Mexico, Canada and the US in the pre-NAFTA and post-NAFTA periods.

Do European Capital Flows Comove?

We study the cross-section correlations of net, total, and disaggregated capital flows for the major source and recipient European Union countries. We seek evidence of changes in these correlations since the introduction of the euro to understand whether the European Union can be considered a unique entity with regard to its international capital flows.

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