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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

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.

A Model of Price Swings in the Housing Market

In this paper we use a standard neoclassical model supplemented by some frictions to understand large price swings in the housing market.

Did Housing Policies Cause the Postwar Boom in Homeownership?

After the collapse of housing markets during the Great Depression, the U.S. government played a large role in shaping the future of housing finance and policy. Soon thereafter, housing markets witnessed the largest boom in recent history.

Monetary Policy: Why Money Matters, and Interest Rates Don’t

Since the late 1980s the Fed has implemented monetary policy by adjusting its target for the overnight federal funds rate. Money’s role in monetary policy has been tertiary, at best.

U.S. Monetary Policy: A View from Macro Theory

We use a dynamic stochastic general equilibrium model to address two questions about U.S. monetary policy: 1) Can monetary policy elevate output when it is below potential? and 2) Is the zero lower bound a trap?

Foreclosure Delay and U.S. Unemployment

Through a purely positive lens, we study and document the growing trend of mortgagors who skip mortgage payments as an extra source of "informal" unemployment insurance during the 2007 recession and the subsequent recovery.

Two-Way Capital Flows and Global Imbalances: A Neoclassical Approach

Financial capital and fixed capital tend to flow in opposite directions between poor and rich countries. Why? What are the implications of such two-way capital flows for global trade imbalances and welfare in the long run? This paper introduces frictions into a standard two- country neoclassical growth model to explain the pattern of two-way capital flows between emerging economies (such as China) and the developed world (such as the United States).

Evidence on The Portfolio Balance Channel of Quantitative Easing

The Federal Open Market Committee has recently attempted to stimulate economic growth using unconventional methods. Prominent among these is quantitative easing (QE)—the purchase of a large quantity of longer-term debt on the assumption that QE reduces long-term yields through the portfolio balance channel.

An Endogenously Clustered Factor Approach to International Business Cycles

Factor models have become useful tools for studying international business cycles. Block factor models [e.g., Kose, Otrok, and Whiteman (2003)] can be especially useful as the zero restrictions on the loadings of some factors may provide some economic interpretation of the factors.

Information Disclosure and Exchange Media

When commitment is lacking, intertemporal trade is facilitated with the use of exchange media—interpreted broadly to include monetary and collateral assets.

News Shocks and the Slope of the Term Structure of Interest Rates

We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one single shock can explain the majority of all unpredictable movements in the slope over a 10-year forecast horizon.

The Risk Premium and Long-Run Global Imbalances

This study proposes that heterogeneous household portfolio choices within a country and across countries offer an explanation for global imbalances. We construct a stochastic growth multi-country model in which heterogeneous agents face the following restrictions on asset trade.

Capital, Finance, and Trade Collapse

This paper proposes a model of international trade with capital accumulation and financial intermediation. This is achieved by embedding the Melitz (2003) model into an incomplete-markets neoclassical framework with an endogenous credit market.

Optimal Disclosure Policy and Undue Diligence

While both public and private financial agencies supply asset markets with large amounts of information, they do not generally disclose all asset-related information to the general public.

How Does the FOMC Learn About Economic Revolutions? Evidence from the New Economy Era, 1994-2001

Forecasting is a daunting challenge for business economists and policymakers, often made more difficult by pervasive uncertainty. No such uncertainty is more difficult than projecting the reaction of policymakers to major shifts in the economy.

Incentive-Feasible Deflation

For economies in which the real rate of return on money is too low, the standard prescription is to deflate prices according to the Friedman rule.

Policy and Welfare Effects of Within-Period Commitment

Consider the problem of a benevolent government that needs to finance the provision of a public good with distortionary taxes and cannot commit to policies beyond the current period.

Moral Hazard and Lack of Commitment in Dynamic Economies

We revisit the role of limited commitment in a dynamic risk-sharing setting with private information. We show that a Markov-perfect equilibrium, in which agent and insurer cannot commit beyond the current period, and an infinitely-long contract to which only the insurer can commit, implement identical consumption, effort and welfare outcomes.

Dynamic Optimal Insurance and Lack of Commitment

We analyze dynamic risk-sharing contracts between profit-maximizing insurers and risk-averse agents who face idiosyncratic income uncertainty and can self-insure through savings.

Government Policy Response to War-Expenditure Shocks

A theory of government policy determination, based on intertemporal distortion-smoothing and limited commitment, matches the set of stylized facts of U.S. wartime policy.

Government Policy in Monetary Economies

I study how the general and specific details of a micro founded monetary framework affect the determination of policy when the government has limited commitment.

Mortgage Defaults and Prudential Regulations in a Standard Incomplete Markets Model

A model of mortgage defaults is built into the standard incomplete markets model. Households face income and house-price shocks and purchase houses using long-term mortgages.

Sectoral Shocks, Reallocation Frictions, and Optimal Government Spending

What is the optimal policy response to a negative sectoral shock? How do frictions in goods and labor markets affect the nature and speed of the process of reallocating resources across alternative uses?

The shadow economy as an equilibrium outcome

We construct a dynamic, general equilibrium model of tax evasion where agents choose to report some of their income. Unreported income requires using a payment method that avoids recordkeeping – cash.

When Do Inventories Destabilize the Economy? An Analytical Approach to (S,s) Policies

Conventional wisdom has it that inventory investment destabilizes the economy because it is procyclical to sales. Khan and Thomas (2007) show that the conventional wisdom is wrong in a general equilibrium (S,s) model with capital.

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.

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