Board of Governors of the Federal Reserve System

Abstract:

This paper examines corporate mergers and acquisitions (M&A) outcomes under lender scrutiny. Using the unique shocks of U.S. supervisory stress testing, we find that firms under increased lender scrutiny after their relationship banks fail stress tests engage in fewer but higher-quality M&A deals. Evidence from comprehensive supervisory data reveals improved credit quality for newly originated M&A-related loans under enhanced lender scrutiny. This improvement is further evident in positive stock return reactions to M&A deals financed by loans subject to enhanced lender scrutiny. As companies engage in fewer but higher-quality deals, they also experience higher returns on assets. Our findings highlight the importance of lender scrutiny in corporate M&A activities.

Keywords: Mergers and Acquisitions, Lender Scrutiny, Stress Tests

DOI: https://doi.org/10.17016/FEDS.2024.025

Abstract:

We conduct a survey-based experiment with 2,776 students at a non-profit university to analyze income insurance demand in education financing. We offered students a hypothetical choice: either a federal loan with income-driven repayment or an income-share agreement (ISA), with randomized framing of downside protections. Emphasizing income insurance increased ISA uptake by 43%. We observe that students are responsive to changes in contract terms and possible student loan cancellation, which is evidence of preference adjustment or adverse selection. Our results indicate that framing specific terms can increase demand for higher education insurance to potentially address risk for students with varying outcomes.

Keywords: Adverse Selection, Education Finance, Higher Education, Income Share Agreements, Student Loans

DOI: https://doi.org/10.17016/FEDS.2024.024

Abstract:

To encourage survey participation and improve sample representativeness, the Survey of Consumer Finances (SCF) offers an unconditional pre-paid monetary incentive and separate post-paid incentive upon survey completion. We conducted a pre-registered between-subject randomized control experiment within the 2022 SCF, with at least 1,200 households per experimental group, to examine whether changing the pre-paid incentive structure affects survey outcomes. We assess the effects of: (1) altering the total dollar value of the pre-paid incentive (“incentive effect”), (2) giving two identical pre-paid incentives holding the total dollar value fixed (“reminder effect”), and (3) offering multiple pre-paid incentives of different amounts holding the total dollar value fixed (“slope effect”) on survey response rates, interviewer burden, and data quality. Our evidence indicates that a single $15 pre-paid incentive increases response rates and maintains similar levels of interviewer burden and data quality, relative to a single $5 pre-paid incentive. Splitting the $15 into two pre-paid incentives of different amounts increases interviewer burden though lengthening time in the field without improving response rates, reducing the number of contact attempts needed for a response, or improving data quality, regardless of whether the first pre-paid is larger or smaller than the second.

Keywords: Pre-paid incentives, unconditional incentives, sequential incentives, response rates, surveys, data quality, household finance

DOI: https://doi.org/10.17016/FEDS.2024.023

Abstract:

The U.S. banking industry is well suited to assess the common ownership hypothesis (COH), because thousands of private banks without common ownership (CO) compete with hundreds of public banks with high and increasing levels of CO. This paper assesses the COH in the banking industry using more comprehensive ownership data than previous studies. In simple comparisons of raw deposit rate averages we document that (i) private banks do offer substantially more attractive deposit rates than public banks, but (ii) the deposit rates of public banks are similar in markets without CO where a single public bank competes only with private rivals, and in markets with CO where multiple public banks compete with each other. Panel regressions of deposit rates on the profit weights implied by the COH are generally consistent with the COH if only quarter FEs (without other controls) are included but not if bank-quarter FEs are included. Estimates with bank-quarter FEs are “precise zeros” with 95% CIs suggesting that the threefold rise in CO among public banks between 2005 and 2022 moved their deposit rates by less than a quarter of a basis point in either direction. To assess the COH along non-price dimensions we also estimate the effect of CO on deposit quantities, and find that the estimates are also not consistent with the COH.

Keywords: Bank Competition, Common Ownership

DOI: https://doi.org/10.17016/FEDS.2024.022

Abstract:

A Central Bank Digital Currency (CBDC) is a form of digital money that is denominated in the national unit of account and constitutes a direct liability of the central bank. We examine the financial stability risks and benefits of issuing a CBDC under different design options. Our analysis is based on lessons derived from historical case studies as well as on an analytical framework that allows us to characterize the mechanisms through which a CBDC can affect financial stability. We further discuss various policy tools that can be employed to mitigate financial stability risks.

Keywords: CBDC, financial stability, runs, stablecoins, central bank liabilities, regulation

DOI: https://doi.org/10.17016/FEDS.2024.021

Abstract:

We explore a new source of data on layoffs: timely 8-K filings with the Securities and and Exchange Commission. We develop measures of both the number of reported layoff events and the number of affected workers. These series are highly correlated with the business cycle and other layoff indicators. Linking firm-level reported layoff events with WARN notices suggests that 8-K filings are sometimes available before WARN notices, and preliminary regression results suggest our layoff series are useful for forecasting. We also document the industry composition of the data and specific areas where the industry shares diverge.

Keywords: Alternative Data, Forecasting, Labor Markets, Large Language Models, Layoffs, Natural Language Processing

DOI: https://doi.org/10.17016/FEDS.2024.020

Abstract:

We use model-implied volatility to proxy for property risk perceptions in the commercial real estate lending market. Although loan-to-value ratios (LTVs) unconditionally decreased following the Global Financial Crisis, LTVs conditioned on implied volatility and other theoretically motivated fundamental determinants of optimal leverage show no conclusive trend before or after the crisis. Taking reported property and loan attributes at face value, we find no clear pattern of unwarranted credit being extended to commercial real estate assets. We conclude that systematically higher LTV decisions pre-crisis would have primarily stemmed from risk misperceptions rather than imprudent practices. Our findings suggest that the aggregate LTV level should be interpreted as a proxy for lending standards only after controlling for aggregate risk perceptions, among a host of asset and lending market factors. Our findings also highlight the importance of measuring and tracking aggregate risk perceptions in informing regulators and policymakers.

Keywords: Global Financial Crisis, Implied volatility, Lending standards, Loan underwriting, Mortgages, Real estate finance

DOI: https://doi.org/10.17016/FEDS.2024.019

Abstract:

We examine how a student’s field of degree and institution attended contribute to the labor market outcomes of young graduates. Administrative panel data that combines student transcripts with matched employer-employee records allow us to provide the first decomposition of premia into individual and firm-specific components. We find that both major and institutional premia are more strongly related to the firm-specific component of wages than the individual-specific component of wages. On average, a student’s major is a more important predictor of future wages than the selectivity of the institution attended, but major premia (and their relative ranking) can differ substantially across institutions, suggesting the importance of program-level data for prospective students and their parents.

Keywords: College Major, College Premium, Firm Effect, Higher Education, Returns to Institution, Wage Decomposition

DOI: https://doi.org/10.17016/FEDS.2024.018

Abstract:

Targeted financing of transition to a "net zero" global economy entails climate transition risk. We propose a measure of transition risk at the country-sector dyad level composed of five tiers of transition risk based on two factors: i) the gap between a dyad's existing emission factor (EF) – a measure of the greenhouse gas intensity of output – and the global 'frontier' sectoral EF, and ii) a dyad's recent convergence towards the frontier EF. Dyads that are either close to the frontier or converging towards the frontier carry lower transition risk. Our measure, using 45 sectors across 66 countries, accounts for both direct greenhouse gas emissions as well as those that enter into production through complex supply chains as captured by intercountry, input-output tables, and can be applied at different levels of stringency to high-, middle-, and low-income economies. Our measure thus accounts for, and sheds light on, EF reductions through investment in lower emissions production techniques in own facilities as well as sourcing intermediate inputs with lower embodied emissions.

Keywords: convergence, direct emissions, greenhouse gas emissions, production emissions, transition risk

DOI: https://doi.org/10.17016/FEDS.2024.017

Abstract:

We use microdata on the phases of commercial construction projects to document three facts regarding time-to-plan lags: (1) plan times are long—about 1.5 years on average—and highly variable, (2) roughly one-third of projects are abandoned in planning, (3) property price appreciation reduces the likelihood of abandonment. We construct a model with endogenous planning starts and abandonment that matches these facts. Endogenous abandonment make short-term building supply more elastic, as price shocks immediately affect the exercise of construction options rather than just planning starts. The model has the testable implication that supply is more elastic when there are more “shovel ready” projects available to advance to construction. We use local projections to validate that this prediction holds in the cross-section for U.S. cities.

Keywords: Commercial real estate, Construction, Time to plan

DOI: https://doi.org/10.17016/FEDS.2024.016

Abstract:

We show how private equity (PE) buyouts fuel loan sales and non-bank participation in the U.S. syndicated loan market. Combining loan-level data from the Shared National Credit register with buyout deals from Pitchbook, we find that PE-backed loans feature lower bank monitoring, lower loan shares retained by the lead bank, and more loan sales to non-bank financial intermediaries. For PE-backed loans, the sponsor’s reputation and the strength of its relationship with the lead bank further reduce the lead bank’s retained share and monitoring. Our results suggest that PE sponsor engagement substitutes for bank monitoring, allowing banks to retain less skin-in-the game in the loans they originate and to sell greater loan shares to non-banks.

Keywords: Syndicated Loans, Private Equity, LBO, Bank Monitoring, CLO, Securitization, Loan Sales

DOI: https://doi.org/10.17016/FEDS.2024.015

Abstract:

This paper analyzes the properties of expected return estimators on individual assets implied by the linear factor models of asset pricing, i.e., the product of β and λ. We provide the asymptotic properties of factor-model-based expected return estimators, which yield the standard errors for risk premium estimators for individual assets. We show that using factor-model-based risk premium estimates leads to sizable precision gains compared to using historical averages. Finally, inference about expected returns does not suffer from a small-beta bias when factors are traded. The more precise factor-model-based estimates of expected returns translate into sizable improvements in out-of-sample performance of optimal portfolios.

Keywords: Cross Section of Expected Returns, Risk Premium, Small β's

DOI: https://doi.org/10.17016/FEDS.2024.014

Abstract:

This paper explores the impact of two fiscal programs, the Economic Impact Payments and the Paycheck Protection Program, on vehicle purchases and relates our findings to post-pandemic price pressures. We find that receiving a stimulus check increased the probability of purchasing new vehicles. In addition, the disbursement of funds from the Paycheck Protection Program was associated with a rise in local new car registrations. Our estimates indicate that these two programs account for a boost of 1 3/4 million units—or 12 percent—to new car sales in 2020. Furthermore, the induced boost in sales coincided with the presence of significant production constraints and exacerbated an inventory drawdown, thereby contributing to the rapid increase in new vehicle prices that prevailed in the subsequent years.

Keywords: Discretionary Fiscal Policy, Light Vehicle Purchases, Inflation

DOI: https://doi.org/10.17016/FEDS.2024.013

Abstract:

The COVID-19 pandemic had disproportionate impacts on women’s employment, especially for mothers with school-age and younger children. However, the impacts likely varied depending on the type of policy response adopted by various governments. New Zealand presents a unique policy setting in which one of the strictest lockdown restrictions was combined with a generous wage subsidy scheme to secure employment. We utilize tax records to compare employment patterns of parents from the pandemic period (treatment group) to similar parents from a recent pre-pandemic period (control group). For mothers whose youngest child is aged between one and 12, we find a 1-2-percentage point decline in the likelihood of being employed in the first six months of the pandemic; for fathers, we hardly see any significant changes in employment. Additionally, the decline in mothers’ employment rates is mainly driven by those not employed in the month before the lockdown. We also find similar employment patterns for future parents who had no children during the evaluation period. This indicates that the adverse labour market impacts are not uniquely experienced by mothers, but by women in general.

Keywords: Pandemic, Employment. Parental gap, Administrative data

DOI: https://doi.org/10.17016/FEDS.2024.012

Abstract:

Different series of high-frequency monetary shocks can have a correlation coefficient as low as 0.5 and the same sign in only two-thirds of observations. Both data and methods drive these differences, which are starkest when the federal funds rate is at its effective lower bound. Methods that exploit the differential responsiveness of short- and long-term asset prices can incorporate additional information. After documenting differences in monetary shocks, we explore their consequence for inference. We find that empirical estimates of monetary policy transmission from local projections and VARs are less affected by shock choice than forecast revision specifications.

Keywords: High-frequency monetary policy shocks, Monetary policy transmission, Empirical monetary economics.

DOI: https://doi.org/10.17016/FEDS.2024.011

Abstract:

Using a novel data set of U.S. residential land developments, we document that the average time to develop residential properties—which includes both the time spent preparing land infrastructures and construction—is about three years, consistent with sizable lags in housing investment projects. We show that the time to develop is highly dispersed across locations, a finding that helps quantify the housing supply elasticity that is relevant for assessing local housing variations over the business cycle. We also show that incorporating long and dispersed time to develop into an otherwise standard housing investment model helps rationalize some empirical facts on the housing market. Our model implies that policies to boost housing supply are less effective in immediately stabilizing house prices for regions where land development takes a long time.

Keywords: house price dynamics, housing supply, residential investment

DOI: https://doi.org/10.17016/FEDS.2024.010

Abstract:

Concerns have lingered since the 2007 subprime crisis that government housing policies promote risky mortgage lending. The first peer-reviewed evidence of a causal effect was published by the Review of Financial Studies in a paper (Saadi, 2020) linking the crisis to changes in the Community Reinvestment Act (CRA) in 1995. A review of that paper, however, shows that it misrepresents the policy changes as having taken effect in mid-1998, 2.5 years after they were implemented. When the correct timing is used, a similar analysis yields no evidence of a relationship between CRA and riskier mortgage lending. Instead, the results are shown to reflect an unrelated confounding event, the first collapse of the U.S. subprime mortgage market following Russia’s debt default in August 1998.

Keywords: Community Reinvestment Act (CRA), house prices, mortgage lending, subprime crisis

DOI: https://doi.org/10.17016/FEDS.2024.009

Abstract:

Price theory says that the most important effects of policy and technological change are often found beyond their first point of contact. This appears opposed to econometric methods that rule out spillovers of one person's treatment on another's outcomes. This paper uses the industry model from price theory to represent the statistical concepts of treatments and controls. When treated and control observations are in the same market, the controls are indirectly affected by the treatment. Moreover, even the effect of the treatment on the treated reveals only part of the consequence for the treated of treating the entire market, which is often the parameter of interest. Marshall's Laws of Derived Demand provide a guide for empirical work: precise price-theoretic interpretations of the direct and spillover effects of a treatment, the quantitative relationships between them, and how they correspond to the scale and substitution effects emphasized in price theory.

DOI: https://doi.org/10.17016/FEDS.2024.008

Abstract:

We find that each of the past four generations of Americans was better off than the previous one, using a post-tax, post-transfer income measure constructed annually from 1963-2022 based on the Current Population Survey Annual Social and Economic Supplement. At age 36–40, Millennials had a real median household income that was 18 percent higher than that of the previous generation at the same age. This rate of intergenerational progress was slower than that experienced by the Silent Generation (34 percent) and Baby Boomers (27 percent), but similar to that experienced by Generation X (16 percent). Slower progress for Generation X and Millennials is due to their stalled growth in work hours—holding work hours constant, they experienced a greater intergenerational increase in real market income than Baby Boomers. Intergenerational progress for Millennials under age 30 has remained robust as well, although their income growth largely results from higher reliance on their parents. We also find that the higher educational costs incurred by younger generations is far outweighed by their lifetime income gains.

Keywords: Full income, Growth, Generations, Mobility, Millennials

DOI: https://doi.org/10.17016/FEDS.2024.007

Abstract:

The equity and debt prices of large nonbank firms contain information about the future state of the banking system. In this sense, banks are informationally central. The amount of this information varies over time and over equity and debt. During a financial crisis banks are, by definition of a crisis, at risk of failure. Debt prices became about 50 percent more informative than equity prices about the future state of the banking system during the financial crisis of 2007-2009. This was partly due to investors' fears that banks might not be able to refinance the firms' debt.

Keywords: Price informativeness, Asset pricing, Banking system, Financial crises

DOI: https://doi.org/10.17016/FEDS.2024.006

Abstract:

Canonical menu cost models, when parameterized to match the micro-price data, cannot reproduce the extent to which the fraction of price changes increases with inflation. They also predict implausibly large menu costs and misallocation in the presence of strategic complementarities. We resolve these shortcomings by extending the multiproduct menu cost model along two dimensions. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to standard models, the fraction of price changes increases rapidly with the size of monetary shocks, so our model implies a non-linear Phillips curve.

Keywords: Menu costs, Inflation, Phillips curve

DOI: https://doi.org/10.17016/FEDS.2024.005

Abstract:

Changes in pay and benefits alone incorrectly predict self-assessed changes in overall job quality 30 percent of the time, according to survey evidence from job changers. Job changers also place more emphasis on their interest in their work than they do on pay and benefits in evaluating whether their new job is better. Parents particularly emphasize work-life balance, and we find some indications that mothers value it more than fathers. Improvements in pay are highly correlated with improvements in other amenities for workers with less education but not for workers with a bachelor's degree or more. The higher positive correlation implies that differences in pay and benefits understate differences in total job quality to a greater degree among workers with less education.

Keywords: Job quality, Amenities, Surveys, Employment

DOI: https://doi.org/10.17016/FEDS.2024.004

Abstract:

We analyze the content of the Organization of the Petroleum Exporting Countries (OPEC) communications and whether it provides information to the crude oil market. To this end, we derive an empirical strategy which allows us to measure OPEC's public signal and test whether market participants find it credible. Using Structural Topic Models, we analyze OPEC narratives and identify several topics related to fundamental factors, such as demand, supply, and speculative activity in the crude oil market. Importantly, we find that OPEC communication reduces oil price volatility and prompts market participants to rebalance their positions. Our analysis indicates that market participants assess OPEC communications as providing an important signal to the crude oil market.

Keywords: OPEC Announcements, Structural Topic Models, Volatility, Traders' Positions

DOI: https://doi.org/10.17016/FEDS.2024.003

Abstract:

This paper analyzes a model of the mortgage market, considering scenarios with and without government-sponsored mortgage securitization. Conventional wisdom says that securitization, by fostering diversification and creating a “safe” asset in the form of mortgage-backed security (MBS), will reduce risk and enhance liquidity, thereby mitigating financial crises. We construct a strategic-game framework to model the interaction between the securitizer and banks. In this framework, the securitizer initiates the process by setting the MBS contract terms, which includes the guaranteed rate and the criterion that qualifies a mortgage for securitization. The bank then selects which qualifying mortgages to exchange for the MBS. Our investigation leads to a key result: government-sponsored securitization, somewhat counterintuitively, is more likely to exacerbate the severity and frequency of financial crises.

Keywords: Financial Crises, Government Sponsored, Mortgage Market, Mortgage-backed securities (MBS), Securitization

DOI: https://doi.org/10.17016/FEDS.2024.002

Abstract:

This paper develops an analytical framework aimed at shedding light on the implications of the evolution of financial market structure for monetary policy implementation and transmission. The basic model builds on that developed in Chen et. al. (2014) which, in turn, draws inspiration from the pioneering work of Tobin (1969) and Gurley and Shaw (1960). The paper focuses, in particular, on the implications of introducing new types of fixed-rate financial assets in the financial system including retail and wholesale central bank digital currency (CBDC), stablecoins issued by narrow nonbanks, and deposits issued by narrow banks. The analysis also provides a crude way of capturing some of the effects of bank capital and liquidity regulation on financial intermediation and monetary policy implementation. Perhaps the most important conclusion is that the introduction of new fixed-rate assets by the Federal Reserve or by other financial intermediaries can have significant effects on equilibrium interest rates and patterns of financial intermediation and may also affect the potency of monetary policy tools. These effects are most pronounced when new financial assets are close substitutes for existing financial assets.

Keywords: Bank Regulation, Financial Innovation, Monetary Policy Implementation, Monetary policy

DOI: https://doi.org/10.17016/FEDS.2024.001