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Creator: Atkeson, Andrew, Eisfeldt, Andrea L., and Weill, Pierre-Olivier Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 484 Abstract:
Building on the Merton (1974) and Leland (1994) structural models of credit risk, we develop a simple, transparent, and robust method for measuring the financial soundness of individual firms using data on their equity volatility. We use this method to retrace quantitatively the history of firms’ financial soundness during U.S. business cycles over most of the last century. We highlight three main findings. First, the three worst recessions between 1926 and 2012 coincided with insolvency crises, but other recessions did not. Second, fluctuations in asset volatility appear to drive variation in firms’ financial soundness. Finally, the financial soundness of financial firms largely resembles that of nonfinancial firms.
Palabra clave: Volatility, Credit Risk Modeling, Distance to Default, and Financial Frictions and Business Cycles Tema: E32 - Business Fluctuations; Cycles, G01 - Financial Crises, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, and E44 - Financial Markets and the Macroeconomy
Creator: Arellano, Cristina, Bai, Yan, and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 466 Abstract:
The U.S. Great Recession featured a large decline in output and labor, tighter financial conditions, and a large increase in firm growth dispersion. We build a model in which increased volatility at the firm level generates a downturn and worsened credit conditions. The key idea is that hiring inputs is risky because financial frictions limit firms' ability to insure against shocks. An increase in volatility induces firms to reduce their inputs to reduce such risk. Out model can generate most of the decline in output and labor in the Great Recession and the observed increase in firms' interest rate spreads.
Palabra clave: Uncertainty shocks, Credit crunch, Great Recession, Firm credit spreads, Firm heterogeneity, Labor wedge, and Credit constraints Tema: E23 - Macroeconomics: Production, E32 - Business Fluctuations; Cycles, D52 - Incomplete Markets, E44 - Financial Markets and the Macroeconomy, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, and D53 - General Equilibrium and Disequilibrium: Financial Markets
Creator: Guerrieri, Veronica and Kondor, Péter Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 446 Abstract:
We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on the default probability. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which affect investment decisions, generating a positive or negative “reputational premium.” For example, when the default probability is high, the return on the risky bond has to be high to compensate the uninformed managers for the high risk of being fired. As the default probability changes over time, the reputational premium amplifies price volatility.
Creator: Guler, Bulent, Guvenen, Fatih, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 426 Abstract:
Search theory routinely assumes that decisions about the acceptance/rejection of job offers (and, hence, about labor market movements between jobs or across employment states) are made by individuals acting in isolation. In reality, the vast majority of workers are somewhat tied to their partners—in couples and families—and decisions are made jointly. This paper studies, from a theoretical viewpoint, the joint job-search and location problem of a household formed by a couple (e.g., husband and wife) who perfectly pools income. The objective of the exercise, very much in the spirit of standard search theory, is to characterize the reservation wage behavior of the couple and compare it to the single-agent search model in order to understand the ramifications of partnerships for individual labor market outcomes and wage dynamics. We focus on two main cases. First, when couples are risk averse and pool income, joint search yields new opportunities—similar to on-the-job search—relative to the single-agent search. Second, when the two spouses in a couple face job offers from multiple locations and a cost of living apart, joint search features new frictions and can lead to significantly worse outcomes than single-agent search.
Tema: J64 - Unemployment: Models, Duration, Incidence, and Job Search, J61 - Geographic Labor Mobility; Immigrant Workers, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Amador, Manuel, Bianchi, Javier, Bocola, Luigi, and Perri, Fabrizio Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 740 Abstract:
Recently, several economies with interest rates close to zero have received large capital inflows while their central banks accumulated large foreign reserves. Concurrently, significant deviations from covered interest parity have appeared. We show that, with limited international arbitrage, a central bank's pursuit of an exchange rate policy at the ZLB can explain these facts. We provide a measure of the costs associated with this policy and show they can be sizable. Changes in external conditions that increase capital inflows are detrimental, even when they are beneficial away from the ZLB. Negative nominal rates and capital controls can reduce the costs.
Palabra clave: Negative interest rates, Currency pegs, CIP deviations, International reserves, Capital flows, and Foreign exchange interventions Tema: F32 - Current Account Adjustment; Short-term Capital Movements, F31 - Foreign Exchange, and F41 - Open Economy Macroeconomics
Creator: Bhandari, Anmol and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 560 Abstract:
We develop a theory of sweat equity—which is the value of business owners’ time and expenses to build customer bases, client lists, and other intangible assets. We discipline the theory using data from U.S. national accounts, business censuses, and brokered sales to estimate a value for sweat equity for the private business sector equal to 1.2 times U.S. GDP, which is roughly the value of fixed assets in use in these businesses. Although latent, the equity values are positively correlated with business incomes, ages, and standard measures of markups based on accounting data, but not with financial assets of owners or standard measures of business total factor productivity (TFP). We use our theory to show that abstracting from sweat activity leads to a significant understatement of the impacts of lowering tax rates on business incomes—on both the extensive and intensive margins. We also document large differences in the effective tax rates and the effects of tax changes for owner and employee labor inputs. Lower tax rates on owners results in increased self-employment and smaller firm sizes, whereas lower rates on employees has the opposite effects. Allowing for financial constraints and superstar firms does not overturn our main findings.
Palabra clave: Intangibles and Business valuation Tema: E13 - General Aggregative Models: Neoclassical, H25 - Business Taxes and Subsidies including sales and value-added (VAT), and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Fogli, Alessandra and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 512 Abstract:
Does macroeconomic volatility/uncertainty affect accumulation of net foreign assets? In OECD economies over the period 1970-2012, changes in country specific aggregate volatility are, after controlling for a wide array of factors, significantly positively associated with net foreign asset position. An increase in volatility (measured as the standard deviation of GDP growth) of 0.5% over period of 10 years is associated with an increase in the net foreign assets of around 8% of GDP. A standard open economy model with time varying aggregate uncertainty can quantitatively account for this relationship. The key mechanism is precautionary motive: more uncertainty induces residents to save more, and higher savings are in part channeled into foreign assets. We conclude that both data and theory suggest uncertainty/volatility is an important determinant of the medium/long run evolution of external imbalances in developed countries.
Palabra clave: Global imbalances, Precautionary saving, Business cycles, Current account, and Uncertainty Tema: F34 - International Lending and Debt Problems, F41 - Open Economy Macroeconomics, and F32 - Current Account Adjustment; Short-term Capital Movements
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 541 Abstract:
We produce a theoretical framework that helps explain the co-evolution of the real and financial sectors of an economy in the growth process, as described by Gurley and Shaw. According to them, self-financed capital investment first gives way to debt finance and later to the emergence of equity as an additional instrument for raising funds externally. As the economy develops further, the aggregate ratio of debt to equity will generally fall. We analyze that portion of their account concerning the evolution of equity markets. We show that in an important sense, debt equity are complementary sources for the financing of capital investments.
Creator: Bryant, John B. and Wallace, Neil Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 034 Abstract:
In “The Inefficiency of Interest-Bearing National Debt,” (JPE, April 1979) we argued that private sector transaction costs are needed in order to explain interest on government debt. It follows that if the government’s transaction costs do not depend on its portfolio, then, barring special circumstances, an open-market purchase is deflationary and welfare improving. In this paper we show that this result can survive a potentially relevant special circumstance: reserve requirements which limit the size of insured intermediaries.
Creator: Sargent, Thomas J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 077 Abstract:
This paper surveys recent issues in macroeconomics from the viewpoint of dynamic economic theory. The need to look beyond demand and supply curves and the insights that come from doing so are emphasized. Examples of issues in debt management and fiscal policy are analyzed.