Money Time

Kevin Lewis

September 26, 2022

Long-Run Trends in Long-Maturity Real Rates 1311-2021
Kenneth Rogoff, Barbara Rossi & Paul Schmelzing
NBER Working Paper, September 2022


Taking advantage of key recent advances in long-run financial and economic data, this paper analyzes the statistical properties of global long-maturity real interest rates over the past seven centuries. In contrast to existing consensus, which has overwhelmingly concentrated on short samples for short-maturity rates, we find that long-maturity real interest rates across advanced economies are in fact trend stationary, and exhibit a persistent downward trend since the Renaissance. We investigate structural breaks in real interest rates over time using multiple statistical approaches, and find that only the Black Death and the "Trinity default" of 1557 appear as consistent inflection points in capital markets on both global and country levels. While a 1914 break is also suggested in multiple series (though less robust than existing literature would lead one to expect), the evidence for an inflection point in 1981 appears much weaker. We further examine trends in persistence, as well as commonly-invoked drivers of global real rates: exploiting significant data advances, we argue that historically, demographic and productivity factors appear to show no promising causal role, and in fact diverge from real interest rates over the long run.

Wealth, endogenous collateral quality, and financial crises
Zehao Liu & Andrew Sinclair
Journal of Economic Theory, September 2022


We propose a model of collateralized lending in which (1) borrowers endogenously determine collateral quality and (2) lenders can produce costly information about collateral payoffs. Our model yields several novel predictions: wealthier economies use lower quality collateral in equilibrium, have more severe financial crises, and have less frequent crises. We provide both micro and macro empirical evidence. In the U.S. mortgage market wealthier lenders accept lower quality collateral, and, looking across countries, wealthier economies use lower quality collateral and the collateral channel explains the link between wealth and crisis severity.

A Comparison of Living Standards Across the United States of America
Elena Falcettoni & Vegard Nygaard
International Economic Review, forthcoming


We use an expected utility model to examine how living standards, or welfare, vary across the U.S. and how each state's welfare has evolved over time, accounting for cross-state variations in mortality, consumption, education, leisure, and inequality. We find considerable cross-state heterogeneity in welfare levels. This is robust to allowing for endogenous interstate migration and to computing welfare conditional on education, gender, and race. Although states experienced heterogeneous welfare growth rates between 1999 and 2015 (1.68–3.73 percent per year), there is no evidence of convergence in welfare levels, including during the sub-periods preceding and following the Great Recession.

Vertical Migration Externalities
Mark Colas & Emmett Saulnier
University of Oregon Working Paper, June 2022


State income taxes affect federal income tax revenue by shifting the spatial distribution of households between high- and low-productivity states, thereby changing household incomes and tax payments.  We derive an expression for these fiscal externalities of state taxes in terms of estimable statistics. An empirical quantification using American Community Survey data reveals that the externalities range from large and negative in some states, to large and positive in others. In California, an increase in the state income tax rate and the resulting change in the distribution of households across states lead to a decrease in federal income tax revenue of 39 cents for every dollar of California tax revenue raised. The externality amounts to a 0.27% decrease in total federal income tax revenue for a 1 pp increase in California's state tax rate. Our results raise the possibility that state taxes may be set too high in high-productivity states, and set too low in low-productivity states.

Explanations for the Decline in Spending at Older Ages
Susann Rohwedder, Michael Hurd & Péter Hudomiet
NBER Working Paper, September 2022


We use new data from the 2019 wave of the Consumption and Activities Mail Survey to help interpret the observed decline in spending as individuals age. At one extreme, forward-looking individuals optimally chose the decline; at the other, myopic individuals overspent and were forced to reduce spending because they had run out of wealth. Which interpretation is correct has important implications for the measurement of economic preparation for retirement. According to their own assessments, the fraction of respondents feeling financially constrained is lower at advanced ages, and the fraction satisfied with their economic situation is considerably higher at older ages than at ages near retirement. An important mechanism reconciling the evidence of reduced spending and greater economic satisfaction at older ages may be that individuals’ enjoyment of several activities declines with worsening health, widowing, and increasing age, leading to a lessening desire to spend on them. We find strong support for this hypothesis. Nonetheless, close to 20% of those older than 80 report not being satisfied with their financial situation, pointing to heterogeneity in economic security.

Social Capital and Mortgages
Xudong An et al.
Federal Reserve Working Paper, July 2022


We discover that social capital is associated with higher mortgage approval rates, shorter screening times, longer maturities, lower interest rates, and reduced loan delinquency rates. The results hold when conditioning on extensive consumer and market characteristics, a battery of fixed effects, including individual fixed effects data permitting, and using instrumental variables and propensity score matching. Consistent with social capital shaping mortgage credit by enhancing interpersonal connections, falsification tests show that (a) social capital does not affect credit decisions by automated systems, and (b) the social capital effect weakens when examining Fintech and other lenders with minimal direct interactions with borrowers.

Is Social Protection a Luxury Good?
Michael Lokshin, Martin Ravallion & Iván Torre
NBER Working Paper, September 2022


The claim that social protection is a luxury good — with a national income elasticity exceeding unity — has been influential. The paper tests the “luxury good hypothesis” using newly-assembled data on social protection spending across countries since 1995, treating the pandemic period separately, as it entailed a large expansion in social protection efforts. While the mean income share devoted to social protection rises with income, this is attributable to multiple confounders, including relative prices, weak governance in low-income countries and access to information-communication technologies. Controlling for these, social protection is not a luxury good. This was also true during the pandemic.

Can Human Capital Explain Income-based Disparities in Financial Services?
Ruidi Huang et al.
Southern Methodist University Working Paper, July 2022


Research shows that access to high-quality financial services varies with local income and wealth. We explore the extent to which financial firms’ internal labor allocation decisions contribute to these disparities. Using a near-comprehensive panel of over 350,000 U.S. mortgage loan officers, we document large and persistent differences in loan officer productivity and performance. We then show that firms’ hiring and promotion policies disproportionately assign workers with less experience or poor track records to branches serving low-income customers. Further, the consequences of poor performance differ by branch location: low sales numbers, underwriting bad loans, and committing misconduct are tolerated more in low-income branches, exacerbating income-based disparities in financial services.

Dollar Reserves and U.S. Yields: Identifying the Price Impact of Official Flows
Rashad Ahmed & Alessandro Rebucci 
Working Paper, September 2022


This paper shows that the price impact of foreign official (FO) purchases or sales of U.S. Treasuries (USTs) is about twice as large as previously reported in the literature once critical sources of endogeneity are addressed. We also show that prevailing estimates of this price impact suffer from omitted variable bias when foreign government bond yields and Federal Reserve policies are not controlled for. By exploiting changes in the volatility of FO flows and U.S. yields after the 2008 Global Financial Crisis, we identify a FO flow shock via heteroskedasticity in a structural VAR. We estimate that a $100B flow shock moves the 5-year, 10-year, and 30-year yields by more than 100 basis points on impact, compared to the 19-44 basis points range that we estimate by assuming FO flows are price inelastic and without controlling for foreign yields and Fed actions. Our findings suggest that FO sales of USTs played a critical role during the March 2020 episode of Treasury market turmoil and that even a small reduction in the Dollar's share of China's reserves could have a significant impact on U.S. long-term interest rates.

The Digital Credit Divide: Marketplace Lending and Entrepreneurship
Douglas Cumming et al.
Journal of Financial and Quantitative Analysis, forthcoming 


We conjecture that marketplace lending provokes an increase in the quantity of entrepreneurship, particularly in more regionally disadvantaged areas, albeit at lower average quality. Using a fuzzy regression discontinuity design that exploits exogenous variation in borrowers’ access to marketplace loans along U.S. state borders, we estimate a 10% increase in marketplace lending causes a 0.44% increase in business establishments per capita. The effects are more pronounced for less experienced entrepreneurs, for small and less profitable firms, firms more dependent upon external finance, in industries with lower sunk costs of entry, and for low-income regions with inferior access to financial institutions.

Adverse selection in the market for mortgage servicing rights
Tom Mayock & Lan Shi
Journal of Housing Economics, forthcoming 


Transfer activity in the U.S. market for mortgage servicing rights has increased in recent years. Incumbent servicers are at an informational advantage relative to potential buyers of these servicing rights, introducing the possibility of adverse selection. This paper marks the first investigation of adverse selection in the market for mortgage servicing rights. Using data from mortgage servicers, we find that loans with higher ex ante measures of prepayment and default risk were more likely to experience a servicing transfer. Results from an ex post analysis in which we condition on these risk measures reveals that loans that experienced a servicing transfer were more likely to prepay and default, a finding that suggests that the market for servicing rights is characterized by adverse selection.

Taking no chances: Lender concentration and corporate acquisitions
Luca Lin
Journal of Corporate Finance, forthcoming 


This paper shows that exogenous increases in a firm’s lender concentration induced by bank mergers significantly reduce its propensity to pursue acquisitions, particularly large public deals. The effect is driven by mergers involving lead lenders, and mainly pronounced when lenders have less bargaining power ex-ante. This suggests that the result can be explained by increased lead-lender bargaining power beyond contractual provisions. Moreover, lender mergers reduce shareholder-value-enhancing acquisitions as well as value-destroying ones. Deals that do happen are more likely to target cash-rich firms with stable cash flows, while creating no additional shareholder value. The evidence suggests that managers tend to behave more conservatively amid higher lender concentration, sometimes at the expense of forgoing good growth opportunities for shareholders.



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