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

Applied Econometrics

Out-of-School Suspensions and Parental Involvement in Children’s Education

Do parents alter their investment in their child’s human capital in response to changes in school inputs? If they do, then ignoring this effect will bias the estimates of school and parental inputs in educational production functions.

Where is an Oil Shock?

Much of the literature examining the effects of oil shocks asks the question ―What is an oil shock? and has concluded that oil-price increases are asymmetric in their effects on the US economy. That is, sharp increases in oil prices affect economic activity adversely, but sharp decreases in oil prices have no effect.

Inflation in the G7: Mind the Gap(s)?

We investigate the importance of trend inflation and the real-activity gap for explaining observed inflation variation in G7 countries since 1960. Our results are based on a bivariate unobserved-components model of inflation and unemployment in which inflation is decomposed into a stochastic trend and transitory component.

The Low-Frequency Impact of Daily Monetary Policy Shocks

With rare exception, studies of monetary policy tend to neglect the timing of innovations to monetary policy instruments. Models which take timing seriously are often difficult to compare to standard monetary VARs because each uses different frequencies.

Connectionist-Based Rules Describing the Pass-through of Individual Goods Prices into Trend Inflation in the United States

This paper examines the inflation "pass-through" problem in American monetary policy, defined as the relationship between changes in the growth rates of individual goods and the subsequent economy-wide rate of growth of consumer prices.

A Bayesian Multi-Factor Model of Instability in Prices and Quantities of Risk in U.S. Financial Markets

This paper analyzes the empirical performance of two alternative ways in which multi-factor models with time-varying risk exposures and premia may be estimated. The first method echoes the seminal two-pass approach advocated by Fama and MacBeth (1973).

Technical Analysis in the Foreign Exchange Market

This article introduces the subject of technical analysis in the foreign exchange market, with emphasis on its importance for questions of market efficiency. “Technicians” view their craft, the study of price patterns, as exploiting traders’ psychological regularities.

Decomposing the Gender Wage Gap with Sample Selection Adjustment: Evidence from Colombia

Despite the remarkable improvement of female labor market characteristics, a sizeable gender wage gap exists in Colombia. We employ quantile regression techniques to examine the degree to which current small differences in the distribution of observable characteristics can explain the gender gap.

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 Nested Forecast Model Comparisons

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 analyze comovements in four measures of budget surpluses for 18 OECD countries for 1980–2008 with a dynamic latent factor model.

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.


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