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Transparency and Deliberation within the FOMC: A Computational Linguistics Approach
Stephen Hansen, Michael McMahon & Andrea Prat
Quarterly Journal of Economics, forthcoming
How does transparency, a key feature of central bank design, affect monetary policymakers' deliberations? Theory predicts a positive discipline effect and negative conformity effect. We empirically explore these effects using a natural experiment in the Federal Open Market Committee in 1993 and computational linguistics algorithms. We first find large changes in communication patterns after transparency. We then propose a difference-in-differences approach inspired by the career concerns literature, and find evidence for both effects. Finally, we construct an influence measure that suggests the discipline effect dominates.
Did Saving Wall Street Really Save Main Street? The Real Effects of TARP on Local Economic Conditions
Allen Berger & Raluca Roman
Journal of Financial and Quantitative Analysis, October 2017, Pages 1827-1867
We investigate whether saving Wall Street through TARP really saved Main Street during the recent financial crisis. Our difference-in-difference analysis suggests that TARP statistically and economically significantly increased net job creation and net hiring establishments and decreased business and personal bankruptcies. The results are robust, including accounting for endogeneity. The main mechanisms driving the results appear to be increases in commercial real estate lending and off-balance-sheet real estate guarantees. These results suggest that saving Wall Street via TARP may have helped save Main Street, complementing the TARP literature and contributing to the cost-benefit debate.
Consumer Lending Discrimination in the FinTech Era
Robert Bartlett et al.
University of California Working Paper, November 2017
Lending discrimination can stem from loan officer facial biases or algorithmic scoring, especially with big data use in FinTech. Using never-before-linked mortgage data covering loan-level ethnicity, scoring variables, contract terms, and lender identifiers, we implement a treatment-based Oaxaca-Blinder discrimination estimation, based on the unique default risk setting of the GSEs. We find that African-American and Hispanic borrowers have a 2% higher loan rejection rate, especially among low-credit-score applicants. Consistent with facial biases, differences are more pronounced among smaller lenders and independent mortgage companies, not FinTech lenders. Ethnic-minority borrowers pay a 0.2% higher interest rate fairly uniformly across lenders, probably resulting from profit-taking opportunities in weaker competitive environments.
Household Financial Distress and Voter Participation
Duke University Working Paper, November 2017
How does household finance affect political economics? In this paper, I focus on one particular channel of influence and ask if financially distressed homeowners are more or less likely to participate in elections. To address this question, I merge deeds records with voter rolls to create a novel panel dataset, and then exploit variation in the magnitude and timing of house price declines during the recession. I find that, for highly leveraged homeowners, a ten percent decline in local house prices decreases voter participation by two percentage points. Furthermore, homeowners, especially highly leveraged homeowners, are significantly more affected by house price declines than their renter-neighbors. Back of the envelope calculations suggest that mortgage distress can explain approximately 500,000 abstentions in the 2012 general election.
Does Going Easy on Distressed Banks Help Economic Growth?
Federal Reserve Working Paper, October 2017
During banking crises, regulators often relax their normal requirements and refrain from closing financially troubled banks. I estimate the real effects of such regulatory forbearance by comparing differences in state-level economic outcomes by the amount of forbearance extended during the U.S. savings and loan crisis. To instrument for forbearance, I use historical variation in deposit insurance - and hence supervision - of similar financial intermediaries (thrifts) and exploit fixed differences between regional supervisors of the same regulator. The evidence suggests a policy-induced increase in high-risk loans during the official forbearance period (1982-89), followed by a broader bust in house prices and real GDP.
Regulating Household Leverage
Anthony DeFusco, Stephanie Johnson & John Mondragon
Northwestern University Working Paper, October 2017
This paper studies how credit markets respond to policy constraints on household leverage. Exploiting a sharp policy-induced discontinuity in the cost of originating certain high-leverage mortgages, we study how the Dodd-Frank "Ability-to-Repay" rule affected the price and availability of credit in the U.S. mortgage market. Our estimates show that the policy had only moderate effects on prices, increasing interest rates on affected loans by 10-15 basis points. The effect on quantities, however, was significantly larger; we estimate that the policy eliminated 15 percent of the affected market completely and reduced leverage for another 20 percent of remaining borrowers. This reduction in quantities is much greater than would be implied by plausible demand elasticities and suggests that lenders responded to the policy primarily by rationing credit. Finally, while the policy succeeded in reducing leverage, our estimates suggest this effect would have only slightly reduced aggregate default rates during the housing crisis.
The Effects of a Foreclosure Moratorium on Loan Repayment Behaviors
Michael Collins & Carly Urban
Regional Science and Urban Economics, January 2018, Pages 73-83
During the 2008 housing crisis, lenders were accused of making mistakes when repossessing homes, spurring some policymakers to call for a moratorium on foreclosure filings. Using a New Jersey court-ordered stay on foreclosure-related filings that applied to six high-profile lenders and a difference-in-difference-in-differences strategy, this paper shows that loans impacted by the moratorium are no more likely to be observed as in default as comparable loans not subject to the court order. Borrowers, and lenders, appear to respond in ways that did not result in the strongly negative effects initially predicted by critics at the time, and this policy may have accomplished the intended consumer protection goals.
Bank Branching Deregulation and High School Graduation
West Virginia University Working Paper, October 2017
Financial deregulation affects the real economy in multiple ways. This paper utilizes variation in timing of deregulation to analyze the relationship between bank branching deregulation and educational outcomes for individuals in 39 states over the period 1977-1999. This paper focuses on the relationship between deregulation and high school graduation, as opposed to recent studies focusing on the relationship between deregulation and college attendance. Results indicate increases in the likelihood of graduating high school after deregulation. Results also suggest heterogeneity in effects due to race and age at deregulation. Finally, models testing the relationship between bank deregulation and postsecondary education outcomes generate results similar to previous studies.
The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity
John (Jianqiu) Bai, Daniel Carvalho & Gordon Phillips
NBER Working Paper, November 2017
We provide evidence that the deregulation of U.S. state banking markets leads to a significant increase in the relative employment and capital growth of local firms with higher productivity and that this effect is concentrated among young firms. Using financial data for a broad range of firms, our analysis suggests that this effect is driven by a shift in the composition of local bank credit supply towards more productive firms. We estimate that this effect translates into economically important gains in aggregate industry productivity and that changes in the allocation of labor play a central role in driving these gains.
The Impact of Bank Branching Deregulations on the U.S. Agricultural Sector
Amy Kandilov & Ivan Kandilov
American Journal of Agricultural Economics, forthcoming
We demonstrate how states that lifted restrictions on interstate bank expansions, thereby improving access to cheaper credit, experienced increased farm sales and net farm income. In our empirical analysis, we use nationwide county-level data from 1970 through 2001 and a difference-in-differences econometric framework, exploiting only within-state variation in banking deregulation, to distinguish the effect of an increase in bank competition from potential confounding factors. By including region-by-year fixed effects in our econometric equation, we compare changes in farm sales and expenditures in states that lift restrictions on interstate banking to changes in states that do not lift such restrictions within the same census region. Our estimates indicate that county-level farm sales increase by about 3.4% and county-level net farm income rises by $1.57 million (in 1982 dollars) after a state deregulates its banking sector by allowing interstate bank expansion. We also find evidence that farm expenditures, in particular expenditures on feed, fuel, machine and equipment rental, as well as interest payments, grew as a result of the banking deregulation. The positive impacts on farm sales, net income, and interest payments are larger in metropolitan counties than in rural counties, consistent with the notion that interstate bank entry following deregulation was concentrated in larger metropolitan markets, leading to a greater reduction in the cost of credit in those areas.
Are Negative Nominal Interest Rates Expansionary?
Gauti Eggertsson, Ragnar Juelsrud & Ella Getz Wold
NBER Working Paper, November 2017
Following the crisis of 2008 several central banks engaged in a radical new policy experiment by setting negative policy rates. Using aggregate and bank-level data, we document a collapse in pass-through to deposit and lending rates once the policy rate turns negative. Motivated by these empirical facts, we construct a macro-model with a banking sector that links together policy rates, deposit rates and lending rates. Once the policy rates turns negative the usual transmission mechanism of monetary policy breaks down. Moreover, because a negative interest rate on reserves reduces bank profits, the total effect on aggregate output can be contractionary.
Bank CEO Materialism: Risk Controls, Culture and Tail Risk
Robert Bushman et al.
Journal of Accounting and Economics, forthcoming
We investigate how the prevalence of materialistic bank CEOs has evolved over time, and how risk management policies, non-CEO executives' behavior and tail risk vary with CEO materialism. We document that the proportion of banks run by materialistic CEOs increased significantly from 1994 to 2004, that the strength of risk management functions is significantly lower for banks with materialistic CEOs, and that non-CEO executives in banks with materialistic CEOs insider trade more aggressively around government intervention during the financial crisis. Finally, we find that banks with materialistic CEOs have significantly more downside tail risk relative to banks with non-materialistic CEOs.
CEO tenure and corporate misconduct: Evidence from US banks
Yener Altunbaş, John Thornton & Yurtsev Uymaz
Finance Research Letters, forthcoming
We test for a link between CEO tenure and misconduct by US banks. We find that banks are more likely to commit misconduct when CEOs have a relatively long tenure and banks have relatively poor balance sheets. Large and independent corporate boards can mitigate but not prevent misconduct.
The Ostrich in Us: Selective Attention to Financial Accounts, Income, Spending, and Liquidity
Arna Olafsson & Michaela Pagel
NBER Working Paper, October 2017
A number of theoretical research papers in micro as well as macroeconomics model and analyze attention but direct empirical evidence remains scarce. This paper investigates the determinants of attention to financial accounts using panel data from a financial management software provider containing daily logins, discretionary spending, income, balances, and credit limits. We find that individuals are considerably more likely to log in because they get paid utilizing exogenous variation in paydays due to weekends and holidays. Beyond looking at the causal effect of income on attention, we examine how attention depends on individual spending, balances, and credit limits within individuals' own histories. We find that attention is decreasing in spending and overdrafts and increasing in cash holdings, savings, and liquidity. Moreover, attention jumps discretely when balances change from negative to positive. We argue that our findings cannot be explained by rational theories of inattention. Instead our findings are consistent with Ostrich effects and anticipatory utility as the main motivation for paying attention to financial accounts and thus provide new tests for information- or belief-dependent utility models. Furthermore, we show that some of our findings can be explained by a recent influential one of those models (Kőszegi and Rabin, 2009), which assumes individuals experience utility over news or changes in expectations about consumption.