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

Applied Econometrics

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.

International Comovements in Inflation Rates and Country Characteristics

Common shocks, similarities in central bank reaction functions, and international trade potentially produce common components in international inflation rates.

Real Interest Rate Persistence: Evidence and Implications

The real interest rate plays a central role in many important financial and macroeconomic models, including the consumption-based asset pricing model, neoclassical growth model, and models of the monetary transmission mechanism. We selectively survey the empirical literature that examines the time-series properties of real interest rates.

Inflation, Monetary Policy and Stock Market Conditions: Quantitative Evidence from a Hybrid Latent-Variable VAR

This paper examines the association between inflation, monetary policy and U.S. stock market conditions during the second half of the 20th century.

Non-Linear Predictability in Stock and Bond Returns: When and Where Is It Exploitable?

We systematically examine the comparative predictive performance of a number of alternative linear and non-linear models for stock and bond returns in the G7 countries.

The Dynamic Interaction of Trading Flows, Macroeconomic Announcements and the CAD/USD Exchange Rate: Evidence from Disaggregated Data

We explore the relationship between disaggregated trading flows, the Canada/U.S. dollar (CAD/USD) market and U.S. macroeconomic announcements with a novel data set of unprecedented breadth and length. <a href="">Data Appendix</a>.

Equity Portfolio Diversification under Time-Varying Predictability and Comovements: Evidence from Ireland, the US, and the UK

We use multivariate regime switching vector autoregressive models to characterize the time-varying linkages among short-term interest rates (monetary policy) and stock returns in the Irish, the US and UK markets.

Income and Lottery Sales: Transfers Trump Income from Work and Wealth

The effect of income on lottery expenditures has generally been studied using an aggregate measure of income, usually personal income.

Multivariate Markov Switching With Weighted Regime Determination: Giving France More Weight than Finland

This article deals with using panel data to infer regime changes that are common to all of the cross section. The methods presented here apply to Markov switching vector autoregressions, dynamic factor models with Markov switching and other multivariate Markov switching models.

Multivariate Forecast Evaluation and Rationality Testing

In this paper, we propose a new family of multivariate loss functions that can be used to test the rationality of vector forecasts without assuming independence across individual variables.

Jumps, Cojumps and Macro Announcements

We use recently proposed tests to extract jumps and cojumps from three types of assets: stock index futures, bond futures, and exchange rates. We then characterize the dynamics of these discontinuities and informally relate them to U.S. macroeconomic releases before using limited dependent variable models to formally model how news surprises explain (co)jumps.

Managing International Portfolios with Small Capitalization Stocks

In the context of an international portfolio diversification problem, we find that small capitalization equity portfolios become riskier in bear markets, i.e. display negative co-skewness with other stock indices and high co-kurtosis. Because of this feature, a power utility investor ought to hold a well-diversified portfolio, despite the high risk premium and Sharpe ratios offered by small capitalization stocks.

Monetary Policy and Stock Market Booms and Busts in the 20th Century

This paper examines the association between monetary policy and stock market booms and busts in the United States, United Kingdom, and Germany during the 20th century.

Multivariate Contemporaneous Threshold Autoregressive Models

In this paper we propose a contemporaneous threshold multivariate smooth transition autoregressive (C-MSTAR) model in which the regime weights depend on the ex ante probabilities that latent regime-specific variables exceed certain threshold values.

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