Central banks

FEDS Paper: Information Technology in Banking and Entrepreneurship

09/24/2024 Federal Reserve Central banks

Toni Ahnert, Sebastian Doerr, Nicola Pierri, and Yannick TimmerWe study the importance of information technology (IT) in banking for entrepreneurship. Guided by a parsimonious model, we establish that job creation by young firms is stronger in US counties more exposed to banks with greater IT adoption. We present evidence consistent with banks' IT adoption spurring entrepreneurship through a collateral channel: entrepreneurship increases by more in IT-exposed counties when house prices rise.

FEDS Paper: More Tax, Less Refi? The Mortgage Interest Deduction and Monetary Policy Pass-Through

09/24/2024 Federal Reserve Central banks

Tess Scharlemann and Eileen van StraelenWe study how the mortgage interest deduction (MID) affects refinancing. Households who deduct mortgage interest from their taxes face a lower post-tax mortgage rate, reducing the interest savings from refinancing net of taxes. We estimate the effect of the MID on refinancing using the Tax Cuts and Jobs Act (TCJA) of 2017 as a natural experiment.

Asymmetries in the transmission of monetary policy shocks over the business cycle: a Bayesian Quantile Factor Augmented VAR

09/24/2024 European Central Bank Central banks

This paper introduces a Bayesian Quantile Factor Augmented VAR (BQFAVAR) to examine the asymmetric effects of monetary policy throughout the business cycle. Monte Carlo experiments demonstrate that the model effectively captures non-linearities in impulse responses. Analysis of aggregate responses to a contractionary monetary policy shock reveals that financial variables and industrial production exhibit more pronounced impacts during recessions compared to expansions, aligning with predictions from the ’financial accelerator’ propagation mechanism literature.

IFDP Paper: Arepas are not Tacos: On the Labor Markets of Latin America

09/23/2024 Federal Reserve Central banks

Maria Aristizabal-Ramirez, Cezar Santos, and Alejandra TorresThis paper examines labor markets across Latin American countries, revealing substantial differences in unemployment, informality, and worker transitions. Using surveys from eight countries, we construct comparable statistics on employment stocks and mobility patterns. Notable cross-country differences emerge, with economies mostly clustered into high unemployment-low informality or low unemployment-high informality groups.

FEDS Paper: Nonlinear Effects of Loan-to-Value Constraints

09/20/2024 Federal Reserve Central banks

C. Bora Durdu and Sergio VillalvazoThis paper investigates the impact of loan-to-value (LtV) borrowing constraints in models with occasionally binding credit constraints. These constraints give rise to a Fisherian debt-deflation mechanism, where exogenous shocks can trigger cascading effects resulting in significant declines in consumption, asset prices, and borrowing reversals—characteristic of financial crises.

FEDS Paper: Who is Minding the Store? Order Routing and Competition in Retail Trade Execution

09/20/2024 Federal Reserve Central banks

Xing Huang, Philippe Jorion, Jeongmin Lee, and Christopher SchwarzUsing 150,000 actual trades, we study the U.S. equity retail broker-wholesaler market, focusing on brokers’ order routing and competition among wholesalers. We document substantial and persistent dispersion in execution costs across wholesalers within brokers. Despite this, many brokers hardly change their routing and even consistently send more orders to the more expensive wholesalers, although there is considerable variation among brokers.

FEDS Paper: Social Security and High-Frequency Labor Supply: Evidence from Uber Drivers

09/20/2024 Federal Reserve Central banks

Timothy K. M. Beatty, Joakim A. WeillWe estimate the impact of anticipated transfers on labor supply using confidential driver-level data from Uber. Leveraging the staggered timing of Social Security retirement benefits within each month and a novel identification strategy, we find that the labor supply of older drivers declines by 2%, on average, during the week of benefit receipt—a precisely estimated but economically small effect.

FEDS Paper: The Inflation Accelerator

09/20/2024 Federal Reserve Central banks

Andres Blanco, Corina Boar, Callum Jones, Virgiliu MidriganWe develop a tractable sticky price model in which the fraction of price changes evolves endogenously over time and, consistent with the evidence, increases with inflation. Because we assume that firms sell multiple products and choose how many, but not which, prices to adjust in any given period, our model admits exact aggregation and reduces to a one-equation extension of the Calvo model. This additional equation determines the fraction of price changes.

FEDS Paper: Mortgage Design, Repayment Schedules, and Household Borrowing

09/20/2024 Federal Reserve Central banks

Claes Bäckman, Patrick Moran, Peter van SantenHow does the design of debt repayment schedules affect household borrowing? To answer this question, we exploit a Swedish policy reform that eliminated interest-only mortgages for loan-to-value ratios above 50%. We document substantial bunching at the threshold, leading to 5% lower borrowing. Wealthy borrowers drive the results, challenging credit constraints as the primary explanation.

FEDS Paper: Nonlinear Dynamics in Menu Cost Economies? Evidence from U.S. Data

09/20/2024 Federal Reserve Central banks

Andres Blanco, Corina Boar, Callum Jones, Virgiliu MidriganWe show that standard menu cost models cannot simultaneously reproduce the dispersion in the size of micro-price changes and the extent to which the fraction of price changes increases with inflation in the U.S. time-series. Though the Golosov and Lucas (2007) model generates fluctuations in the fraction of price changes, it predicts too little dispersion in the size of price changes and therefore little monetary non-neutrality.

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