Rates of descent
Threats to Central Bank Independence: High-Frequency Identification with Twitter
Francesco Bianchi, Howard Kung & Thilo Kind
NBER Working Paper, September 2019
Abstract:
This paper presents market-based evidence that President Trump influences expectations about monetary policy. The main estimates use tick-by-tick fed funds futures data and a large collection of Trump tweets criticizing the conduct of monetary policy. These collected tweets consistently advocate that the Fed lowers interest rates. Identification in our high-frequency event study exploits a small time window around the precise time stamp for each tweet. The average effect of these tweets on the expected fed funds rate is strongly statistically significant and negative, with a cumulative effect of around negative 10 bps. Therefore, we provide evidence that market participants believe that the Fed will succumb to the political pressure from the President, which poses a significant threat to central bank independence.
On the Rise of FinTechs: Credit Scoring Using Digital Footprints
Tobias Berg et al.
Review of Financial Studies, forthcoming
Abstract:
We analyze the information content of a digital footprint — that is, information that users leave online simply by accessing or registering on a Web site — for predicting consumer default. We show that even simple, easily accessible variables from a digital footprint match the information content of credit bureau scores. A digital footprint complements rather than substitutes for credit bureau information and affects access to credit and reduces default rates. We discuss the implications for financial intermediaries’ business models, access to credit for the unbanked, and the behavior of consumers, firms, and regulators in the digital sphere.
Cross-ideological coordination by private interests: Evidence from mortgage market regulation under Dodd-Frank
Sanford Gordon & Howard Rosenthal
Business and Politics, forthcoming
Abstract:
Rulemaking pursuant to the 2010 Dodd-Frank Act provides a useful setting to assess theories of interest group influence. In the wake of the financial crisis, Congress delegated new rulemaking authority to federal agencies to regulate mortgage markets. A critical aspect of this new regulatory regime engendered significant controversy from affected interests: “credit risk retention” would require sponsors of asset-backed securities to retain a stake in the risk of securitized assets. Contrary to unrefined industry capture-based accounts stressing the disproportionate role of larger, well-established regulated entities in setting policy, we find little evidence of sustained effort by large lenders to dilute regulatory standards via political investments. Rather, a diverse coalition of housing sector, community, and civil rights groups, backed by an ideologically diverse swath of legislators, forced substantial regulatory retrenchment. Our analysis suggests a more nuanced view of private influence, in which coordination plays a more substantial role than political investments alone.
Monetary stimulus and bank lending
Indraneel Chakraborty, Itay Goldstein & Andrew MacKinlay
Journal of Financial Economics, forthcoming
Abstract:
The US Federal Reserve purchased both agency mortgage-backed securities (MBS) and Treasury securities to conduct quantitative easing. Using micro-level data, we find that banks benefiting from MBS purchases increase mortgage origination, compared with other banks. At the same time, these banks reduce commercial lending and firms that borrow from these banks decrease investment. The effect of Treasury purchases is different: either positive or insignificant in most cases. Our results suggest that MBS purchases caused unintended real effects and that Treasury purchases did not cause a large positive stimulus to the economy through the bank lending channel.
A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt
Jens Christensen & Glenn Rudebusch
Review of Economics and Statistics, forthcoming
Abstract:
The downtrend in U.S. interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest. We examine this issue using dynamic term structure models that account for time-varying term and liquidity risk premiums and are estimated directly from prices of individual inflation-indexed bonds. Our finance-based approach avoids two potential pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and misspecification of output and inflation dynamics. We estimate that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.
Stress Tests and Small Business Lending
Kristle Cortés et al.
Journal of Financial Economics, forthcoming
Abstract:
Post-crisis stress tests have altered banks’ credit supply to small business. Banks most affected by stress tests reallocate credit away from riskier markets and toward safer ones. They also raise interest rates on small loans. Quantities fall most in high-risk markets where stress-tested banks own no branches, and prices rise mainly where they do. The results suggest that banks price the stress-test induced increase in capital requirements where they have local knowledge, and exit where they do not. Stress tests do not, however, reduce aggregate credit. Small banks seem to increase their share in geographies formerly reliant on stress-tested lenders.
Riders on the Storm
Òscar Jordà & Alan Taylor
NBER Working Paper, September 2019
Abstract:
Interest rates in major advanced economies have drifted down and in greater unison over the past few decades. A country’s rate of interest can be thought of as reflecting movements in the global neutral rate of interest, the domestic neutral rate, and the stance of monetary policy. Only the latter is controlled by the central bank. Estimates from a state space New Keynesian model show that central bank policy explains less than half of the variation in interest rates. The rest of the time, the central bank is catching up to trends dictated by productivity growth, demography, and other factors outside of its control.
The Economic Consequences of Bankruptcy Reform
Tal Gross et al.
NBER Working Paper, September 2019
Abstract:
A more generous consumer bankruptcy system provides greater insurance against financial risks, but it may also raise the cost of credit to consumers. We study this trade-off using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which raised the costs of filing for bankruptcy. We identify the effects of BAPCPA on borrowing costs by exploiting variation in the effects of the reform on bankruptcy risk across credit-score segments. Using a combination of administrative records, credit reports, and proprietary market-research data, we find that the reform reduced bankruptcy filings, and reduced the likelihood that an uninsured hospitalization received bankruptcy relief by 70 percent. BAPCPA led to a decrease in credit card interest rates, with an implied pass-through rate of 60–75 percent. Overall, BAPCPA decreased the gap in offered interest rates between prime and subprime consumers by roughly 10 percent.
Demographic Effects on the Impact of Monetary Policy
John Leahy & Aditi Thapar
NBER Working Paper, September 2019
Abstract:
We study whether the effects of monetary policy are dependent on the demographic structure of the population. We exploit cross-sectional variation in the response of US states to an identified monetary policy shock. We find that there are three distinct age groups. In response to an increase in interest rates, the responses of private employment and personal income are weaker the greater the share of population under 35 years of age, are stronger the greater the share between 40 and 65 years of age, and are relatively unaffected by the share older than 65 years. We find that all age groups become more responsive to monetary policy shocks when the proportion of middle aged increases. We provide evidence consistent with middle aged entrepreneurs starting and expanding businesses in response to an expansionary monetary shock.
Retirement in the Shadow (Banking)
Guillermo Ordoñez & Facundo Piguillem
NBER Working Paper, October 2019
Abstract:
The U.S. economy has recently experienced two, seemingly unrelated, phenomena: a large increase in post-retirement life expectancy and a major expansion in securitization and shadow banking activities. We argue they are intimately related. Agents rely on financial intermediaries to save for post-retirement consumption. When expecting to live longer, they rely more heavily on intermediaries that use securitization, with riskier but higher returns. A quantitative evaluation of the model shows the potential of the demographic transition to account for a boom in credit and output, but only when it triggers a more extensive use of securitization and shadow banking.
As Goes the City? Older Americans’ Home Upkeep in the Aftermath of the Great Recession
Markus Schafer, Jason Settels & Laura Upenieks
Social Problems, forthcoming
Abstract:
The private home is a crucial site in the aging process, yet the upkeep of this physical space often poses a challenge for community-dwelling older adults. Previous efforts to explain variation in disorderly household conditions have relied on individual-level characteristics, but ecological perspectives propose that home environments are inescapably nested within the dynamic socioeconomic circumstances of surrounding spatial contexts, such as the metro area. We address this ecological embeddedness in the context of the Great Recession, an event in which some U.S. cities saw pronounced and persistent declines across multiple economic indicators while other areas rebounded more rapidly. Panel data (2005–6 and 2010–11) from a national survey of older adults were linked to interviewer home evaluations and city-level economic data. Results from fixed-effects regression support the hypothesis that older adults dwelling in struggling cities experienced an uptick in disorderly household conditions. Findings emphasize the importance of city-specificity when probing effects of a downturn. Observing changes in home upkeep also underscores the myriad ways in which a city’s most vulnerable residents — older adults, in particular — are affected by its economic fortunes.