20 September 2012

An Analysis of the Fed's Term Auction Facility

From December 2007 to March 2010, the U.S. Federal Reserve System used the Term Auction Facility (TAF) to inject funds into the banking system. Effi Benmelech finds that foreign banks accounted for 58 percent of the TAF lending, with a total amount of $2.2 trillion as compared to $1.6 trillion for U.S. banks. Most of the banks and financial institutions that pledged asset-backed securities as collateral were foreign – primarily European – banks. These European banks were more likely to bid for TAF money because they were more severely affected by the financial crisis, given the mismatch between their assets and liabilities: the data suggest that foreign banks had to borrow from the Federal Reserve Bank to meet their dollar-denominated liabilities.

19 September 2012

Grading Government Efficiency

As one way of measuring government efficiency in various nations, Alberto Chong, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer mailed letters to non-existent business addresses in 159 countries (10 per country). All of the countries are signatories of the International Postal Convention, which requires that undeliverable letters be returned to sender. The researchers found that about 60 percent of the letters were returned to the return address in the United States, but that there were large differences across nations in the percentage returned. For example, all of the letters that were mailed to Canada, Norway, and Germany were returned, while none of the letters sent to Tajikistan, Cambodia, and Russia were returned. They conclude that this “return rate” provides a simple measure of one aspect of government efficiency, and that it is influenced both by technology and management quality.

18 September 2012

Optimism in Budget Forecasts

Jeff Frankel and Jesse Schreger find that government budget forecasts tend to be overly optimistic, especially among the Eurozone countries. Particularly during booms, and when they have large contemporaneous budget deficits, governments’ real GDP forecasts are similarly over-optimistic. Eurozone members often exceed the 3 percent cap on budget deficits, but almost never forecast that they will do so in the future. National fiscal rules help to counteract the wishful thinking that seems to come with euro membership, because when governments violate the 3 percent cap, these rules apparently constrain them from making unrealistic forecasts. The existence of an independent fiscal institution producing budget forecasts at the national level reduces the over-optimism bias of forecasts made when the countries are in violation of the 3 percent cap.

17 September 2012

Cyclical Patterns in Effective vs. Posted Prices

Olivier Coibion, Yuriy Gorodnichenko, and Gee Hee Hong analyze data on prices and quantities sold at the universal product code-level at stores in 50 metropolitan areas and 31 product categories between January 2001 and December 2007. Consistent with the notion that consumers reallocate their expenditures in response to economic conditions, the researchers find that inflation in "effective prices" (that is, the average prices paid by consumers) is more cyclically sensitive than inflation in posted prices. Furthermore, the difference is significant: a 2 percentage point increase in the local unemployment rate lowers the local inflation rate in effective prices by one half of one percent relative to the inflation rate in posted prices for a given product. The authors suggest that there is more flexibility in the prices paid by households than the prices charged by firms, but this flexibility appears to be driven by the reallocation of household expenditures across retailers rather than by sales.

14 September 2012

What Sparked Fire Sales in Distressed Mortgage-Backed Securities?

Craig Merrill, Taylor Nadauld, René Stulz, and Shane Sherlund investigate whether capital requirements and accounting rules at financial institutions contributed to the selling of residential mortgage-backed securities (RMBS) at "fire sale" prices. They analyze a sample of more than 5,000 repeat transactions of non-agency RMBS by insurance companies from 2006 to 2009. They conclude that during the financial crisis, companies that became more capital constrained because of operating losses (not related to RMBS credit quality) and companies that recognized fair-value losses sold comparable RMBS at much lower prices than other insurance companies.

13 September 2012

A New Look at Second Liens

Nearly half of the home purchases in coastal markets and locations where housing bubbles occurred during the recent economic downturn involved a second lien on top of the original mortgage. Donghoon Lee, Christopher Mayer, and Joe Tracy find that only 20 to 30 percent of borrowers continue to pay their second lien for more than a year while remaining seriously delinquent on their first mortgage. In contrast, about 40 percent of credit card borrowers and 70 percent of auto loan borrowers continue to pay off those loans after defaulting on their mortgages.

12 September 2012

Air Pollution and Mortality Rates

Since its initiation in 2003, the U.S. emissions cap-and-trade market – the NOx Budget Trading Program (NBP) –has greatly reduced NOx emissions. Michael Greenstone, Olivier Deschenes, and Joseph Shapiro find that the reductions in NOx emissions decreased the number of summer days with high ozone levels by about 25 percent. They estimate that NBP also led to reductions in expenditures on prescription pharmaceuticals of almost 2 percent, while the summer mortality rate declined by approximately one half of one percent. That translates into 2,200 fewer premature deaths per summer, mainly among individuals 75 and older.

11 September 2012

How Much Unemployment Does Mismatch Explain?

Analyzing data on job vacancies from two sources, one of which covers all online advertisements of U.S. jobs, Ayşegül Şahin, Joseph Song, Giorgio Topa, and Giovanni Violante find that a mismatch between unemployed workers and available jobs in various industries and occupations explains at most one third of the total observed increase in the unemployment rate since 2006. They further find that a geographical mismatch between jobs and workers does not appear to play any role in increasing unemployment.

10 September 2012

Corporate Taxes and Corporate Leverage

Over the period 1990-2011, corporate income tax rates changed at different times across a number of U.S. states. Florian Heider and Alexander Ljungqvist show that firms increased their leverage by 114 basis points on average (equivalent to $62.1 million in extra debt) when their home state raised tax rates, but did not reduce their leverage in response to tax cuts. Even within firms, tax increases that were later reversed nonetheless led to permanent increases in a firm’s leverage. The researchers find that tax sensitivity is greater among profitable and investment-grade firms which have a greater marginal tax benefit and lower marginal cost of issuing debt, respectively.

7 September 2012

Responses to Reductions in Dutch Disability Insurance Benefits

The 1993 reforms of the disability insurance (DI) system In the Netherlands affected different groups of individuals in different ways, and had varied effects even within age cohorts. Lex Borghans, Anne Gielen, and Erzo Luttmer find that individuals who faced benefit reductions offset one euro of lost DI benefits by collecting 31 cents more from other social assistance programs. This benefit-substitution effect declines somewhat over time, but is still 20 percent after eight years. These researchers also find that on average, labor earnings increased by 62 percent of the value of lost DI benefits.
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