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

2011

Basel Accord and Financial Intermediation: The Impact of Policy

This paper studies loan activity in a context where banks must follow Basel Accord-type rules and acquire financing from households. Loan activity typically decreases when entrepreneurs’ investment returns decline, and we study which type of policy could revigorate an economy in a trough.

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.

Credit Scoring and Loan Default

This paper introduces a measure of credit score performance that abstracts from the influence of "situational factors." Using this measure, we study the role and effectiveness of credit scoring that underlied subprime securities during the mortgage boom of 2000-2006.

What do happiness and health satisfaction data tell us about relative risk aversion?

In this paper we provide estimates of the coefficient of relative risk aversion using information on self-reports of subjective personal well-being from multiple datasets.

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.

The (Non-)Resiliency of Foreign Direct Investment in the United States during the 2007-2009 Financial Crisis

We study the contraction of foreign direct investment (FDI) flows in the United States during the recent financial crisis and show their unusual non-resiliency, which depends in part on the global nature of the economic recession, but also on the increases in the cost of financing FDI in the economies in which the flows originate.

The Effect of Neighborhood Spillovers on Mortgage Selection

In this paper we analyze how spillovers in mortgage adoption affect mortgage product choice across neighborhoods and across borrowers of different racial or ethnic groups.

The Effects of Female Labor Force Participation on Obesity

This paper assesses whether a causal relationship exists between recent increases in female labor force participation and the increased prevalence of obesity amongst women.

Capital Flows and Japanese Asset Volatility

Characterizing asset price volatility is an important goal for financial economists. The literature has shown that variables that proxy for the information arrival process can help explain and/or forecast volatility.

Differences in Subprime Loan Pricing Across Races and Neighborhoods

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion

Why Do Education Vouchers Fail at the Ballot Box?

We compare a uniform voucher regime against the status quo mix of public and private education, focusing on the distribution of welfare gains and losses across house- holds by income.

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.

Speculation in the Oil Market

The run-up in oil prices since 2004 coincided with growing investment in commodity markets and increased price comovement among different commodities.

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.

Advances in Forecast Evaluation

This paper surveys recent developments in the evaluation of point forecasts. Taking West’s (2006) survey as a starting point, we briefly cover the state of the litera- ture as of the time of West’s writing.

Tests of Equal Forecast Accuracy for Overlapping Models

This paper examines the asymptotic and finite-sample properties of tests of equal forecast accuracy when the models being compared are overlapping in the sense of Vuong (1989).

Should Easier Access to International Credit Replace Foreign Aid?

We examine the interaction between foreign aid and binding borrowing constraint for a recipient country. We also analyze how these two instruments affect economic growth via non-linear relationships. First of all, we develop a two-country, two-period trade-theoretic model to develop testable hypotheses and then we use dynamic panel analysis to test those hypotheses empirically. Our main findings are that: (i) better access to international credit for a recipient country reduces the amount of foreign aid it receives, and (ii) there is a critical level of international financial transfer, and the marginal effect of foreign aid is larger than that of loans if and only if the transfer (loans or foreign aid) is below this critical level.

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.

Lessons from the Evolution of Foreign Exchange Trading Strategies

The adaptive markets hypothesis posits that trading strategies evolve as traders adapt their behavior to changing circumstances.

Optimal Auditing and Insurance in a Dynamic Model of Tax Compliance

We study the optimal auditing of a taxpayer’s income in a dynamic principal- agent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state.

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.

Explaining China's Trade Imbalance Puzzle

The current global-imbalance literature (which explains why capital flows from poor to rich countries) is unable to explain China’s foreign asset positions because capital cannot flow out of China under capital controls. Hence, this literature has not succeeded in explaining China’s large and persistent trade imbalances with the United States.

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?

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.

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.

OPEC’s Oil Exporting Strategy and Macroeconomic (In)Stability

Aguiar-Conraria and Wen (2008) argued that dependence on foreign oil raises the likelihood of equilibrium indeterminacy (economic instability) for oil importing countries. We argue that this relation is more subtle.


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