An overlapping-generations model with income heterogeneity is developed to analyze the impact of introducing a Central Bank Digital Currency (CBDC) on financial inclusion, and its potential adverse effect on bank funding. We highlight the role of two design parameters: the fixed cost of CBDC usage and the interest rate it pays, and derive principles for maximum inclusion and for mitigating the inclusion-intermediation trade-off. Agents’ choice of money instrument is endogenously driven by income heterogeneity. Pre-CBDC, wealthier agents adopt deposits, while poorer agents adopt cash and remain unbanked. CBDCs with low fixed costs (and low interest rates) are adopted by cash holders and directly increase inclusion. CBDCs with high fixed costs (and high interest rates) are adopted by deposit holders and increase inclusion by raising deposit rates. The former allows for more favorable inclusion-intermediation trade-offs. We calibrate the model to match the US income distribution and aggregate share of unbanked households. A CBDC 50% cheaper (30% more expensive) than bank deposits decreases financial exclusion by 93% (71%) without impacting intermediation. In comparison, making the deposit market perfectly competitive would only decrease exclusion by 45%.
{"title":"Central Bank Digital Currency: Financial Inclusion vs Disintermediation","authors":"Jeremie Banet, Lucie Lebeau","doi":"10.24149/wp2218","DOIUrl":"https://doi.org/10.24149/wp2218","url":null,"abstract":"An overlapping-generations model with income heterogeneity is developed to analyze the impact of introducing a Central Bank Digital Currency (CBDC) on financial inclusion, and its potential adverse effect on bank funding. We highlight the role of two design parameters: the fixed cost of CBDC usage and the interest rate it pays, and derive principles for maximum inclusion and for mitigating the inclusion-intermediation trade-off. Agents’ choice of money instrument is endogenously driven by income heterogeneity. Pre-CBDC, wealthier agents adopt deposits, while poorer agents adopt cash and remain unbanked. CBDCs with low fixed costs (and low interest rates) are adopted by cash holders and directly increase inclusion. CBDCs with high fixed costs (and high interest rates) are adopted by deposit holders and increase inclusion by raising deposit rates. The former allows for more favorable inclusion-intermediation trade-offs. We calibrate the model to match the US income distribution and aggregate share of unbanked households. A CBDC 50% cheaper (30% more expensive) than bank deposits decreases financial exclusion by 93% (71%) without impacting intermediation. In comparison, making the deposit market perfectly competitive would only decrease exclusion by 45%.","PeriodicalId":322311,"journal":{"name":"Federal Reserve Bank of Dallas, Working Papers","volume":"192 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121413076","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
: We document large differences between the United States and Europe in allocations of expenditures and time for both market and home activities. Using a life-cycle model with home production and endogenous retirement, we find that the cross-country differences in consumption tax, social security system, income tax, and total factor productivity (TFP) together can account for from 68 to 95 percent of the cross-country variations in aggregate hours and expenditures. These factors can also account well for the cross-country differences in allocations by age and generate substantially lower market hours in Europe for the age group of 60 and above as in the data. All the factors, except income tax, are quantitatively important for determining cross-country differences in expenditure allocations. Although the differences in social security system and income tax are crucial in explaining the difference in market hours around retirement ages, TFP and consumption tax are more important for the difference in market hours for prime ages.
{"title":"Consumption and Hours in the United States and Europe","authors":"Lei Fang, Fang Yang","doi":"10.24149/wp2216","DOIUrl":"https://doi.org/10.24149/wp2216","url":null,"abstract":": We document large differences between the United States and Europe in allocations of expenditures and time for both market and home activities. Using a life-cycle model with home production and endogenous retirement, we find that the cross-country differences in consumption tax, social security system, income tax, and total factor productivity (TFP) together can account for from 68 to 95 percent of the cross-country variations in aggregate hours and expenditures. These factors can also account well for the cross-country differences in allocations by age and generate substantially lower market hours in Europe for the age group of 60 and above as in the data. All the factors, except income tax, are quantitatively important for determining cross-country differences in expenditure allocations. Although the differences in social security system and income tax are crucial in explaining the difference in market hours around retirement ages, TFP and consumption tax are more important for the difference in market hours for prime ages.","PeriodicalId":322311,"journal":{"name":"Federal Reserve Bank of Dallas, Working Papers","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115984589","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Interest rate surprises around FOMC announcements reveal both the surprise in the monetary policy stance (the pure policy shock) and interest rate movements driven by exogenous information about the economy from the central bank (the information shock). In order to disentangle the effects of these two shocks, we use interest rate changes on days of macroeconomic data releases. On these release dates, there are no pure policy shocks, which allows us to identify the impact of information shocks and thereby distill pure policy shocks from interest rate surprises around FOMC announcements. Our results show that there is a prominent central bank information component in the widely used high-frequency policy rate surprise measure. When we remove this central bank information component, the estimated effects of monetary policy shocks are more pronounced relative to those estimated using the entire policy rate surprise.
{"title":"Interest Rate Surprises: A Tale of Two Shocks","authors":"Ricardo Nunes, Ali K. Ozdagli, Jenny Tang","doi":"10.24149/wp2213","DOIUrl":"https://doi.org/10.24149/wp2213","url":null,"abstract":"Interest rate surprises around FOMC announcements reveal both the surprise in the monetary policy stance (the pure policy shock) and interest rate movements driven by exogenous information about the economy from the central bank (the information shock). In order to disentangle the effects of these two shocks, we use interest rate changes on days of macroeconomic data releases. On these release dates, there are no pure policy shocks, which allows us to identify the impact of information shocks and thereby distill pure policy shocks from interest rate surprises around FOMC announcements. Our results show that there is a prominent central bank information component in the widely used high-frequency policy rate surprise measure. When we remove this central bank information component, the estimated effects of monetary policy shocks are more pronounced relative to those estimated using the entire policy rate surprise.","PeriodicalId":322311,"journal":{"name":"Federal Reserve Bank of Dallas, Working Papers","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115721159","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Heterogeneity and the Effects of Aggregation on Wage Growth","authors":"Robert W. Rich, J. Tracy","doi":"10.24149/wp2211","DOIUrl":"https://doi.org/10.24149/wp2211","url":null,"abstract":",","PeriodicalId":322311,"journal":{"name":"Federal Reserve Bank of Dallas, Working Papers","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127078975","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using the recent U.S.-China trade war as a laboratory, we show that policy uncertainty shocks have a significant impact on stock prices. This impact is less negative for firms that heavily rely on bank debt whereas non-bank debt does not have a mitigating effect. Moreover, the mitigating effect of bank debt is concentrated among zombie firms. A zombie firm that derives half of its capital from bank debt has no negative stock price reaction to increased uncertainty. These results are consistent with bank debt providing insurance for zombie firms in bad economic times. Our results are robust to controlling various firm-level characteristics that have been shown to affect the responsiveness of stock prices to macroeconomic shocks, including Tobin’s Q, firm size, balance sheet liquidity, along with firm and industry-date fixed effects. We further show that our results are not driven by changes in firms’ debt structure in anticipation of a trade war, using the firm-level debt structure before Donald Trump’s presidency as an instrument. Additionally, our results remain consistent when we restrict our sample to firms with a zero revenue share from China, suggesting that the revenue exposure to China does not explain our results. Our findings also cannot be explained by the differential usage of bank debt and non-bank debt between the zombie and non-zombie firms because the two groups’ utilization of both types of debt turn out to be similar. Finally, we show that our results are robust after creating matched samples of zombie and non-zombie firms based on their firm-level characteristics.
{"title":"Uncertainty, Stock Prices, and Debt Structure: Evidence from the U.S.-China Trade War","authors":"Ali K. Ozdagli, Jianlin Wang","doi":"10.24149/wp2212","DOIUrl":"https://doi.org/10.24149/wp2212","url":null,"abstract":"Using the recent U.S.-China trade war as a laboratory, we show that policy uncertainty shocks have a significant impact on stock prices. This impact is less negative for firms that heavily rely on bank debt whereas non-bank debt does not have a mitigating effect. Moreover, the mitigating effect of bank debt is concentrated among zombie firms. A zombie firm that derives half of its capital from bank debt has no negative stock price reaction to increased uncertainty. These results are consistent with bank debt providing insurance for zombie firms in bad economic times. Our results are robust to controlling various firm-level characteristics that have been shown to affect the responsiveness of stock prices to macroeconomic shocks, including Tobin’s Q, firm size, balance sheet liquidity, along with firm and industry-date fixed effects. We further show that our results are not driven by changes in firms’ debt structure in anticipation of a trade war, using the firm-level debt structure before Donald Trump’s presidency as an instrument. Additionally, our results remain consistent when we restrict our sample to firms with a zero revenue share from China, suggesting that the revenue exposure to China does not explain our results. Our findings also cannot be explained by the differential usage of bank debt and non-bank debt between the zombie and non-zombie firms because the two groups’ utilization of both types of debt turn out to be similar. Finally, we show that our results are robust after creating matched samples of zombie and non-zombie firms based on their firm-level characteristics.","PeriodicalId":322311,"journal":{"name":"Federal Reserve Bank of Dallas, Working Papers","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121120754","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We show that much of the profitability in equity option return strategies, which try to capture option mispricing by taking exposure to underlying volatility, can be explained by an IPCA model. The alpha reduction, relative to competing static factor models, is between 50% and 75% depending on the computing model and the type of option position.
{"title":"Are Equity Option Returns Abnormal? IPCA Says No","authors":"Amit Goyal, Alessio Saretto","doi":"10.24149/wp2214","DOIUrl":"https://doi.org/10.24149/wp2214","url":null,"abstract":"We show that much of the profitability in equity option return strategies, which try to capture option mispricing by taking exposure to underlying volatility, can be explained by an IPCA model. The alpha reduction, relative to competing static factor models, is between 50% and 75% depending on the computing model and the type of option position.","PeriodicalId":322311,"journal":{"name":"Federal Reserve Bank of Dallas, Working Papers","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121645466","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We build a unified framework to quantitatively examine the demographic transition and industrial policies in contributing to China’s economic growth between 1976 and 2015. We find that the demographic transition and industrial policy changes by themselves account for a large fraction of the rise in household and corporate savings relative to total output and the rise in the country’s per capita output growth. Importantly, their interactions also lead to a sizable fraction of the increases in savings since the late 1980s and reduce growth after 2010. A novel and important factor that drives these dynamics is endogenous human capital accumulation, which depresses household savings between 1985 and 2010 but leads to substantial gains in per capita output growth after 2005.
{"title":"Demographic Transition, Industrial Policies, and Chinese Economic Growth","authors":"M. Dotsey, Wenli Li, Fang Yang","doi":"10.24149/wp2210","DOIUrl":"https://doi.org/10.24149/wp2210","url":null,"abstract":"We build a unified framework to quantitatively examine the demographic transition and industrial policies in contributing to China’s economic growth between 1976 and 2015. We find that the demographic transition and industrial policy changes by themselves account for a large fraction of the rise in household and corporate savings relative to total output and the rise in the country’s per capita output growth. Importantly, their interactions also lead to a sizable fraction of the increases in savings since the late 1980s and reduce growth after 2010. A novel and important factor that drives these dynamics is endogenous human capital accumulation, which depresses household savings between 1985 and 2010 but leads to substantial gains in per capita output growth after 2005.","PeriodicalId":322311,"journal":{"name":"Federal Reserve Bank of Dallas, Working Papers","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129029213","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
G. Bhat, Hemang Desai, W. Frame, Christoffer Koch, Erik J. Mayer
This paper uses confidential data on audit engagement partner names from regulatory filings of bank holding companies (BHC) to investigate whether partners display individual style that affects the financial reporting of the BHCs. We focus on loan loss provisioning. We construct an audit partner-BHC matched panel data set that enables us to track different partners across different BHCs over time. We employ two empirical approaches to investigate partner style. The first approach tests whether partner fixed effects are statistically significant in loan loss provisioning models. The second approach tests whether a partner’s history of loan loss provisioning predicts future practices for the same partner. Our empirical evidence does not support systematic differences in loan loss provisioning across audit engagement partners, suggesting that the audit firm’s standards and quality control constrain personal partner style. of the real estate, commercial, and consumer loans in the loan portfolio. The results are similar to those for the two primary variables
{"title":"The Effects of Audit Partners on Financial Reporting: Evidence from U.S. Bank Holding Companies","authors":"G. Bhat, Hemang Desai, W. Frame, Christoffer Koch, Erik J. Mayer","doi":"10.24149/wp2209","DOIUrl":"https://doi.org/10.24149/wp2209","url":null,"abstract":"This paper uses confidential data on audit engagement partner names from regulatory filings of bank holding companies (BHC) to investigate whether partners display individual style that affects the financial reporting of the BHCs. We focus on loan loss provisioning. We construct an audit partner-BHC matched panel data set that enables us to track different partners across different BHCs over time. We employ two empirical approaches to investigate partner style. The first approach tests whether partner fixed effects are statistically significant in loan loss provisioning models. The second approach tests whether a partner’s history of loan loss provisioning predicts future practices for the same partner. Our empirical evidence does not support systematic differences in loan loss provisioning across audit engagement partners, suggesting that the audit firm’s standards and quality control constrain personal partner style. of the real estate, commercial, and consumer loans in the loan portfolio. The results are similar to those for the two primary variables","PeriodicalId":322311,"journal":{"name":"Federal Reserve Bank of Dallas, Working Papers","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133746611","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"A Robust Test for Weak Instruments with Multiple Endogenous Regressors","authors":"Daniel J. Lewis, Karel Mertens","doi":"10.24149/wp2208","DOIUrl":"https://doi.org/10.24149/wp2208","url":null,"abstract":",","PeriodicalId":322311,"journal":{"name":"Federal Reserve Bank of Dallas, Working Papers","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131468668","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Sílvia Gonçalves, Ana María Herrera, L. Kilian, E. Pesavento
Many empirical studies estimate impulse response functions that depend on the state of the economy. Most of these studies rely on a variant of the local projection (LP) approach to estimate the state-dependent impulse response functions. Despite its widespread application, the asymptotic validity of the LP approach to estimating state-dependent impulse responses has not been established to date. We formally derive this result for a structural state-dependent vector autoregressive process. The model only requires the structural shock of interest to be identified. A sufficient condition for the consistency of the state-dependent LP estimator of the response function is that the first- and second-order conditional moments of the structural shocks are independent of current and future states, given the information available at the time the shock is realized. This rules out models in which the state of the economy is a function of current or future realizations of the outcome variable of interest, as is often the case in applied work. Even when the state is a function of past values of this variable only, consistency may hold only at short horizons. These results show that the state-dependent LP regression (7) recovers the conditional IRF obtained in Proposition 3.1 with h = 0 under Assumption 1. No further assumptions are required (provided a law of large numbers can be applied to ^ Q 11 : 2 and ^ Q 1 y: 2 ; 0 ). In particular, conditional homoskedasticity of " t is not required. Nor do we need to impose further restrictions on the process driving state dependence.
{"title":"When Do State-Dependent Local Projections Work?","authors":"Sílvia Gonçalves, Ana María Herrera, L. Kilian, E. Pesavento","doi":"10.24149/wp2205","DOIUrl":"https://doi.org/10.24149/wp2205","url":null,"abstract":"Many empirical studies estimate impulse response functions that depend on the state of the economy. Most of these studies rely on a variant of the local projection (LP) approach to estimate the state-dependent impulse response functions. Despite its widespread application, the asymptotic validity of the LP approach to estimating state-dependent impulse responses has not been established to date. We formally derive this result for a structural state-dependent vector autoregressive process. The model only requires the structural shock of interest to be identified. A sufficient condition for the consistency of the state-dependent LP estimator of the response function is that the first- and second-order conditional moments of the structural shocks are independent of current and future states, given the information available at the time the shock is realized. This rules out models in which the state of the economy is a function of current or future realizations of the outcome variable of interest, as is often the case in applied work. Even when the state is a function of past values of this variable only, consistency may hold only at short horizons. These results show that the state-dependent LP regression (7) recovers the conditional IRF obtained in Proposition 3.1 with h = 0 under Assumption 1. No further assumptions are required (provided a law of large numbers can be applied to ^ Q 11 : 2 and ^ Q 1 y: 2 ; 0 ). In particular, conditional homoskedasticity of \" t is not required. Nor do we need to impose further restrictions on the process driving state dependence.","PeriodicalId":322311,"journal":{"name":"Federal Reserve Bank of Dallas, Working Papers","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2022-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128944539","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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