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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

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?

Quantifying the Shadow Economy: Measurement with Theory

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.

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.

Input and Output Inventory Dynamics

This paper develops an analytically tractable general-equilibrium model of inventory dynamics based on a precautionary stockout-avoidance motive.

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.

Making Sense of China’s Excessive Foreign Reserves

Large uninsured risk, severe borrowing constraints, and rapid income growth can create excessively high household saving rates and large current account surpluses for emerging economies.

Did Doubling Reserve Requirements Cause the Recession of 1937-1938? A Microeconomic Approach

In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy.

Floor Systems for Implementing Monetary Policy: Some Unpleasant Fiscal Arithmetic

An increasing number of central banks implement monetary policy via a channel system or a floor system. We construct a general equilibrium model to study the properties of these systems.

Can Rising Housing Prices Explain China’s High Household Saving Rate?

China’s average household saving rate is one of the highest in the world. One popular view attributes the high saving rate to fast rising housing prices and other costs of living in China. This article uses simple economic logic to show that rising housing prices and living costs per se cannot explain China’s high household saving rate.

Understanding Permanent Black-White Earnings Inequality

For more than 30 years, the ratio of average black earnings to average white earnings has remained close to 0.6. Additionally, US cities have remained dramatically segregated by race.

Interpreting Life-Cycle Inequality Patterns as an Efficient Allocation: Mission Impossible?

The life-cycle patterns of consumption, wage and hours inequality observed in U.S. cross-section data are commonly viewed as incompatible with a Pareto efficient allocation.

The Effectiveness of Unconventional Monetary Policy: The Term Auction Facility

This paper investigates the effectiveness of one of the Fed’s unconventional monetary policy tools, the term auction facility (TAF). At issue is whether the TAF reduced the spread between LIBOR rates and equivalent-term Treasury rates by reducing the liquidity premium embedded in LIBOR rates.

Hayashi Meets Kiyotaki and Moore: A Theory of Capital Adjustment Costs

Firm-level investment is lumpy and volatile but aggregate investment is much smoother and highly serially correlated. These different patterns of investment behavior have been viewed as indicating convex adjustment costs at the aggregate level but non-convex adjustment costs at the firm level.

The Promise and Performance of the Federal Reserve as Lender of Last Resort 1914-1933

This paper examines the origins and early performance of the Federal Reserve as lender of last resort. The Fed was established to overcome the problems of the National Banking era, in particular an “inelastic” currency and the absence of an effective lender of last resort.


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