26 September 2012

Is U.S. Economic Growth Over?

Robert Gordon asks whether it is reasonable to assume that economic growth will continue, especially for the United States, at a pace similar to that of the past 250 years, which encompassed the Industrial Revolution, various advances in transportation, and the rise of the computer and related inventions. He concludes that even if innovation were to continue at the rate of the two decades before 2007, six "headwinds" -- demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt -- would reduce long-term growth to half or less of its 1860-2007 annual rate of 1.9 percent. His estimates suggest that for all but the top one percent of the income distribution, future growth in consumption per capita could fall below 0.5 percent per year for decades to come.

25 September 2012

Local Ethnic Communities Provide Channels of Influence

By analyzing customs and port authority data on the international shipments of all U.S. publicly-traded firms over the past 17 years, Lauren Cohen, Umit Gurun, and Christopher Malloy find a causal link between local networks of ethnic residents and a firm's trade links. For example, a firm in a largely Indian area of New Jersey is more likely to trade with India. They also find that firms that exploit such networks experience stronger future sales growth and profitability, and their risk-adjusted stock returns outperform other importers and exporters by 5 to 7 percent per year. They conclude that immigrants play a surprisingly large economic role as conduits of information for firms in their new countries.

24 September 2012

Evidence from the Home Affordable Modification Program

The 2009 Home Affordable Modification Program (HAMP), which was one of the federal government's responses to the foreclosure crisis, provided financial incentives to mortgage servicers to renegotiate mortgage loans. Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, Tomasz Piskorski, and Amit Seru estimate that the HAMP program will reach only about one-third of its targeted households. The reason for this shortfall is that a few large servicers have been renegotiating mortgages at half the rate of other mortgage lenders, possibly because of limited organizational capacity. Experience with this program suggests that it is not possible for the government to quickly influence firm behavior with financial incentives.

21 September 2012

Medicaid Eligibility and Teenage Mortality

Several early expansions of Medicaid extended eligibility for this publicly provided health insurance only to children born after September 30, 1983. If their family incomes were at or just below the poverty line, children had nearly five more years of Medicaid eligibility if they were born just after the cutoff date than if they were born just before it. Bruce Meyer and Laura Wherry find that these program expansions had a particularly large effect on Medicaid eligibility for black children, and that these expansions were associated with a a 13-18 percent decrease in the mortality rate of black teens born after September 30, 1983.

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.
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