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

Applied Econometrics

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.

The Cyclical Properties of Disaggregated Capital Flows

We analyze the second-moment properties of the components of international capital flows and their relationship to business cycle variables (output, investment, and real interest rate) in 22 industrial and emerging countries.

Combining Forecasts From Nested Models

Motivated by the common finding that linear autoregressive models often forecast better than models that incorporate additional information, this paper presents analytical, Monte Carlo, and empirical evidence on the effectiveness of combining forecasts from nested models. In our analytics, the unrestricted model is true, but a subset of the coefficients are treated as being local-to-zero. This approach captures the practical reality that the predictive content of variables of interest is often low. We derive MSE-minimizing weights for combining the restricted and unrestricted forecasts. Monte Carlo and empirical analyses verify the practical effectiveness of our combination approach.

Are Credit Unions Too Small?

U.S. credit unions serve 93 million members, hold 10 percent of U.S. savings deposits, and make 13.2 percent of all non-revolving consumer loans. Since 1985, the share of U.S. depository institution assets held by credit unions has nearly doubled, and the average (inflation-adjusted) size of credit unions has increased over 600 percent.

Asset Prices, Exchange Rates and the Current Account

This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance.

Averaging Forecasts from VARs with Uncertain Instabilities

Recent work suggests VAR models of output, inflation, and interest rates may be prone to instabilities. In the face of such instabilities, a variety of estimation or forecasting methods might be used to improve the accuracy of forecasts from a VAR.

Tests of Equal Predictive Ability with Real-Time Data

This paper examines the asymptotic and finite-sample properties of tests of equal forecast accuracy applied to direct, multi–step predictions from both non-nested and nested linear regression models.

Improving Forecast Accuracy by Combining Recursive and Rolling Forecasts

This paper presents analytical, Monte Carlo, and empirical evidence on combining recursive and rolling forecasts when linear predictive models are subject to structural change.

Threshold Adjustment in Deviations from the Law of One Price

Using self-exciting threshold autoregressive models, we explore the validity of the law of one price (LOOP) for sixteen sectors in nine European countries.

City Business Cycles and Crime

We explore the influence of city-level business cycle fluctuations on crime in 20 large cities in the United States. Our monthly time-series analysis considers seven crimes over an approximately 20-year period: murder, rape, assault, robbery, burglary, larceny, and motor vehicle theft.


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