Legal Tender
More than words: Fed Chairs' communication during congressional testimonies
Michelle Alexopoulos et al.
Journal of Monetary Economics, forthcoming
Abstract:
We study soft information contained in congressional testimonies by the Federal Reserve Chairs and analyze its effects on financial markets. Using machine learning, we construct high-frequency measures of Fed Chair's and Congress members' emotions expressed via their words, voice and face. Increases in the Chair's text-, voice-, or face-emotion indices during the testimony generally raise the S&P500 index and lower the VIX. Stock prices are particularly sensitive to the Fed Chair's answers to questions directly related to monetary policy. The effects during the testimony add up and propagate after the testimony, reaching magnitudes comparable to those after a policy rate cut. Our findings resonate with the view in psychology that communication is much more than words and underscore the need for a holistic approach to central bank communication.
Monetary Policy and Innovation
Yueran Ma & Kaspar Zimmermann
NBER Working Paper, September 2023
Abstract:
We document that monetary policy has a substantial impact on innovation activities. After a tightening shock of 100 basis points, research and development (R&D) spending declines by about 1 to 3 percent and venture capital (VC) investment declines by about 25 percent in the following 1 to 3 years. Patenting in important technologies, as well as a patent-based aggregate innovation index, declines by up to 9 percent in the following 2 to 4 years. Based on previous estimates of the sensitivity of output to innovation activities, these magnitudes imply that output could be 1 percent lower after another 5 years. Monetary policy can influence innovation activities by changing aggregate demand and correspondingly the profitability of innovation, and by changing financial market conditions. Both channels appear relevant in the data. Our findings suggest that monetary policy may affect the productive capacity of the economy in the longer term, in addition to the well-recognized near-term effects on economic outcomes.
Quantitative analysis of a wealth tax for the United States: Exclusions and expenditures
Rachel Moore & Brandon Pecoraro
Journal of Macroeconomics, December 2023
Abstract:
We use a quantitative overlapping generations model with endogenous tax avoidance and rich tax detail to analyze two major issues in the design of a wealth tax for the United States: the provision of exclusions for certain housing and business equity, and the range of government expenditure options allowed for by additional revenues. First, we find that while the exclusion for owner-occupied housing results in quantitatively insignificant macroeconomic and budgetary effects, the exclusion for privately-held noncorporate business equity results in a shift of productive activity towards that sector which can significantly undermine the revenue-raising potential of the tax. Second, we find that the macroeconomic effects of a given wealth tax regime can vary in magnitudes of contraction or expansion depending on the type of expenditures that are assumed to be financed by the additional revenues.
Estimating the Effects of Government Spending Through the Production Network
Alessandro Barattieri, Matteo Cacciatore & Nora Traum
NBER Working Paper, September 2023
Abstract:
We estimate the effects of government spending along the supply chain using disaggregated U.S. government procurement data. We first identify sectoral public spending shocks and combine them with input-output tables to measure upstream and downstream exposure through the production network. We then estimate panel local projections and find that sector-specific government purchases have sizable effects both in industries that receive procurement contracts and industries across the supply chain. Employment increases significantly in recipient industries and in sectors supplying intermediate inputs to these industries, while employment decreases downstream. The response of prices and wages suggest higher intermediate-input demand by recipient industries translates into higher intermediate-input prices across the network, accounting for the crowding out of downstream employment. We then estimate the aggregate implications of sectoral shocks and the influence of sectoral heterogeneity using a granular instrumental variable approach. Consistent with existing models, we find that aggregate effects are higher when recipient sectors are more downstream, have stickier prices, and when the government accounts for most of the recipient's total sales.
Shock me like a Hurricane: How Hurricane Katrina changed Louisiana's formal and informal institutions
Veeshan Rayamajhee, Raymond March & Corbin Clark
Journal of Institutional Economics, forthcoming
Abstract:
Institutions matter for postdisaster recovery. Conversely, natural disasters can also alter a society's institutions. Using the synthetic control method, this study examines the effects that Hurricane Katrina (2005) had on the formal and informal institutions in Louisiana. As measures of formal institutions, we employ two economic freedom scores corresponding to government employment (GE) (as a share of total employment at the state-level) and property tax (PT). These measures serve as proxies for the level of governmental interference into the economy and the protection of private property rights respectively. To assess the impact on informal institutions, we use state-level social capital data. We find that Hurricane Katrina had lasting impacts on Louisiana's formal institutions. In the post-Katrina period, we find that actual Louisiana had persistently higher economic freedom scores for both GE and PT than the synthetic Louisiana that did not experience the hurricane. These findings imply that the hurricane led to a reduction in both PTs and GE, which indicates a decrease in the relative size of the public sector as a share of the state's economy. On the other hand, we find no impact on our chosen measure of informal institution.
Judging Banks' Risk by the Profits They Report
Ben S. Meiselman, Stefan Nagel & Amiyatosh Purnanandam
NBER Working Paper, August 2023
Abstract:
In competitive capital markets, risky debt claims that offer high yields in good times have high systematic risk exposure in bad times. We apply this idea to bank risk measurement. We find that banks with high accounting return on equity (ROE) prior to a crisis have higher systematic tail risk exposure during the crisis. Proximate causes of crises differ, but the predictive power of ROE is pervasive, including during the financial crisis of 2007-2010 and the recent crisis triggered by the collapse of Silicon Valley Bank. ROE predicts systematic tail risk much better than conventional measures based on risk-weighted assets.
Government Deficits and Corporate Tax Avoidance
Mary Cowx, Felipe Bastos Silva & Kelvin Yeung
Arizona State University Working Paper, September 2023
Abstract:
We investigate how government deficits affect corporate-tax avoidance. We find that deficits are positively associated with corporate-tax avoidance, consistent with a deterioration in the government's finances leading to expectations of weaker tax enforcement or future tax increases. To disentangle the effect of deficits from other macroeconomic conditions, we perform an instrumental variables estimation using military-spending data and two event studies exploiting the Carter-Reagan military buildup and the end of the Cold War. Altogether, our results underscore an important unintended consequence of increasing government deficits, with important implications for corporate-tax collection and fiscal stability.
The Reserve Supply Channel of Unconventional Monetary Policy
William Diamond, Zhengyang Jiang & Yiming Ma
NBER Working Paper, September 2023
Abstract:
We find that central bank reserves injected by QE crowd out bank lending. We estimate a structural model with cross-sectional instrumental variables for deposit and loan demand. Our results are determined by the elasticity of loan demand and the impact of reserve holdings on the cost of supplying loans. The reserves injected by QE raise loan rates by 8.2 basis points, and each dollar of reserves reduces bank lending by 8.1 cents. Our results imply that a large injection of central bank reserves has the unintended consequence of crowding out bank loans because of bank balance sheet costs.
Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
Metthew Denes et al.
Journal of Finance, October 2023, Pages 2621-2671
Abstract:
Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting their staggered implementation in 31 U.S. states, we find that they increase angel investment yet have no significant impact on entrepreneurial activity. Two mechanisms explain these results: crowding out of alternative financing and low sensitivity of professional investors to tax credits. With a large-scale survey and a stylized model, we show that low responsiveness among professional angels may reflect the fat-tailed return distributions that characterize high-growth startups. The results contrast with evidence that direct subsidies to firms have positive effects, raising concerns about promoting entrepreneurship with investor subsidies.
Regulatory Arbitrage or Random Errors? Implications of Race Prediction Algorithms in Fair Lending Analysis
Daniel Greenwald et al.
NBER Working Paper, August 2023
Abstract:
When race is not directly observed, regulators and analysts commonly predict it using algorithms based on last name and address. In small business lending -- where regulators assess fair lending law compliance using the Bayesian Improved Surname Geocoding (BISG) algorithm -- we document large prediction errors among Black Americans. The errors bias measured racial disparities in loan approval rates downward by 43%, with greater bias for traditional vs. fintech lenders. Regulation using self-identified race would increase lending to Black borrowers, but also shift lending toward affluent areas because errors correlate with socioeconomics. Overall, using race proxies in policymaking and research presents challenges.
The effect of market-based sourcing on labor outcomes
Anthony Welsch
Journal of Public Economics, September 2023
Abstract:
This study examines how income tax sourcing rules affect business activity in U.S. states. As technology has enabled companies to provide services to consumers globally, a growing number of governments seek to tax service companies based on the customer location ("market-based sourcing") rather than the location of the company's labor and capital. Consistent with market-based sourcing reducing the tax cost of locating marginal labor in the state, I find that state adoption of market-based sourcing increases the total number of employees and total labor earnings in affected service industries by roughly 2 to 5 percent, after controlling for concurrent tax policy changes. I find indirect evidence that the effects are mostly attributable to business expansion rather than employee reallocation across states. Market-based sourcing does not seem to adversely affect state corporate tax revenues. This study provides timely insights for policymakers given increased adoption of market-based sourcing by U.S. states and related international proposals.
Government Loan Guarantees, Market Liquidity, and Lending Standards
Toni Ahnert & Martin Kuncl
Management Science, forthcoming
Abstract:
We study third-party loan guarantees in a model in which lenders can screen and sell loans before maturity when in need of liquidity. Loan guarantees improve market liquidity, reduce lending standards, and can have a positive overall welfare effect. Guarantees improve the average quality of nonguaranteed loans traded and thus, the market liquidity of these loans because of selection. This positive pecuniary externality provides a rationale for guarantee subsidies. Our results contribute to a debate about reforming government-sponsored mortgage guarantees by Fannie Mae and Freddie Mac, suggesting that the excessively high subsidies to these guarantees should be reduced but not completely eliminated.