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

Monetary Policy/Macroeconomics

Is Government Spending a Free Lunch? -- Evidence from China

Most empirical studies based on U.S. data suggest that the fiscal multiplier is less than 1 (e.g., Barro and Redlick, 2011). However, Keynes argued that the multiplier would be the largest when markets have failed to the greatest extent in coordinating economic activities (such as during the Great Depression with rampant unemployment and low capacity utilization).

Uncertainty and Sentiment-Driven Equilibria

We construct a model to capture the Keynesian idea that production and employment decisions are based on expectations of aggregate demand driven by sentiments and that realized demand follows from the production and employment decisions of firms.

Two Monetary Models with Alternating Markets

We present a thought-provoking study of two monetary models: the cash-in-advance and the Lagos and Wright (2005) models. We report that the different approach to modeling money—reduced-form vs. explicit role—neither induces fundamental theoretical nor quantitative differences in results.

The Effect of Underreporting on LIBOR Rates

On May 29, 2008, the Wall Street Journal reported that several large international banks were reporting unjustifiably low LIBOR rates. Since then two large banks, Barclays and UBS, have paid significant fines for manipulating their LIBOR rates, and additional banks are expected to be fined.

Global Dynamics at the Zero Lower Bound

This article presents global solutions to standard New Keynesian models with a zero lower bound (ZLB) constraint on the nominal interest rate.

Reconstructing the Great Recession

This paper evaluates the role of the construction sector in accounting for the performance of the U.S. economy in the last decade.

How Did the Financial Crisis Alter the Correlations of U.S. Yield Spreads?

We investigate the pairwise correlations of 11 U.S. fixed income yield spreads over a sample that includes the Great Financial Crisis of 2007-2009.

Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data

A key question that has arisen during recent debates is whether government spending multipliers are larger during times when resources are idle.

Financial Development and Long-Run Volatility Trends

Countries with more developed financial markets (as measured by the private debt- to-GDP ratio) tend to have significantly lower aggregate volatility.

Too Big to Cheat: Efficiency and Investment in Partnerships

Many economic activities are organized as partnerships. These are ventures formed with capital contributions by partnership members that in exchange obtain a share of ownership.

How Effective Is Central Bank Forward Guidance?

This paper investigates the effectiveness of forward guidance for the central banks of four countries: New Zealand, Norway, Sweden, and the United States.

What Inventories Tell Us about Aggregate Fluctuations -- A Tractable Approach to (S,s) Policies

We estimate a DSGE model with (S,s) inventory policies. We find that (i) taking inventories into account can significantly improve the empirical fit of DSGE models in matching the standard business-cycle moments (in addition to explaining inventory fluctuations); (ii) (S,s) inventory policies can significantly amplify aggregate output fluctuations, in contrast to the findings of the recent general-equilibrium inventory literature; and (iii) aggregate demand shocks become more important than technology shocks in explaining the business cycle once inventories are incorporated into the model.

Understanding the Distributional Impact of Long-Run Inflation

The impact of fully anticipated inflation is systematically studied in heterogeneous agent economies with an endogenous labor supply and portfolio choices.

The Lender of Last Resort: Lessons from the Fed’s First 100 Years

We review the responses of the Federal Reserve to financial crises over the past 100 years. The authors of the Federal Reserve Act in 1913 created an institution that they hoped would prevent banking panics from occurring.

Foreign Firms and the Diffusion of Knowledge

This paper constructs a model to examine the impact of foreign firms on a developing Country’s own accumulation of entrepreneurial knowledge.

The Federal Reserve's response to the financial crisis: what it did and what it should have done

This paper analyzes the Federal Reserve’s major policy actions in response to the financial crisis. The analysis is divided into the pre-Lehman and post-Lehman monetary policies.

Capital Misallocation and Aggregate Factor Productivity

We propose a sectoral–shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, and a constant production possibilities frontier.

A Two-sector Model of Endogenous Growth with Leisure Externalities

This paper considers the impact of leisure preference and leisure externalities on growth and labor supply in a Lucas [12] type model, as in Gómez [7], with a separable non‐homothetic utility and the assumption that physical and human capital are both necessary inputs in both the goods and the education sectors.

The Optimal Inflation Target in an Economy with Limited Enforcement

We formulate the central bank’s problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted stationary utility for a heterogeneous population of infinitely-lived households in an economy with constant aggregate income and public information.

Bankruptcy and Delinquency in a Model of Unsecured Debt

The two channels of default on unsecured consumer debt are (i) bankruptcy, which legally grants partial or complete removal of unsecured debt under certain circumstances, and (ii) delinquency, which is informal default via nonpayment.

Optimal Policy for Macro-Financial Stability

In this paper we study whether policy makers should wait to intervene until a … financial crisis strikes or rather act in a preemptive manner.

Why Doesn’t Technology Flow from Rich to Poor Countries?

What determines the technology that a country adopts? While there could be many factors, the efficiency of the country’s financial system may play a significant role.

Sentiments and Aggregate Demand Fluctuations

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations.

Housing Prices and the High Chinese Saving Rate Puzzle

China’s over 25% aggregate household saving rate is one of the highest in the world. One popular view attributes the high saving rate to fast-rising housing prices in China. However, cross-sectional data do not show a significant relationship between housing prices and household saving rates.

Liquidity and Welfare

This paper develops an analytically tractable Bewley model of money featuring capital and financial intermediation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large.

Greenspan’s Conundrum and the Fed’s Ability to Affect Long-Term Yields

In February 2005 Federal Reserve Chairman Alan Greenspan noticed that the 10-year Treasury yields failed to increase despite a 150-basis-point increase in the federal funds rate as a “conundrum.” This paper shows that the connection between the 10-year yield and the federal funds rate was severed in the late 1980s, well in advance of Greenspan’s observation.

International Channels of the Fed’s Unconventional Monetary Policy

Previous research has established that the Federal Reserve’s large scale asset purchases (LSAPs) significantly influenced international bond yields.

The Zero Lower Bound and the Dual Mandate

This article uses a DSGE framework to evaluate the role of monetary policy in determining the likelihood of encountering the zero lower bound. We find that the probability of experiencing episodes of being at zero lower bound depends almost exclusively on the monetary policy rule.

Capital Controls or Exchange Rate Policy? A Pecuniary Externality Perspective

In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distor- tions have become part of the standard policy toolkit (the so-called macro-prudential policies).

Unemployment Insurance Fraud and Optimal Monitoring

An important incentive problem for the design of unemployment insurance is the fraudulent collection of unemployment benefits by workers who are gainfully employed.


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