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Begin New Search Topic Finance Publishing Institution Board of Governors of the Federal Reserve System

11. Firm Default and Aggregate Fluctuations

Author:
Tor Jacobson, Jesper Linde, and Kasper Roszbach
Publication Date:
08-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990-2009, a period which includes a full-scale banking crisis, we find strong evidence for a substantial and stable impact from aggregate fluctuations on business defaults. A standard logit model with financial ratios augmented with macroeconomic factors can account surprisingly well for the outburst in business defaults during the banking crisis, as well as the subsequent fluctuations in default frequencies. Moreover, the effects of macroeconomic variables differ across industries in an economically intuitive way. Out-of-sample evaluations show that our approach is superior to models that exclude macro information and standard well-fitting time-series models. Our analysis shows that firm-specific factors are useful in ranking firms' relative riskiness, but that macroeconomic factors are necessary to understand fluctuations in the absolute risk level.
Topic:
Economics, Finance, Macroeconomics, and Banking
Political Geography:
Global Focus

12. Are Recoveries from Banking and Financial Crises Really So Different?

Author:
Greg Howard, Robert Martin, and Beth Anne Wilson
Publication Date:
11-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper studies the behavior of recoveries from recessions across 59 advanced and emerging market economies over the past 40 years. Focusing specifically on the performance of output after the recession trough, we find little or no difference in the pace of output growth across types of recessions. In particular, banking and financial crisis do not affect the strength of the economic rebound, although these recessions are more severe, implying a sizable output loss. However, recovery does change with some characteristics of recession. Recoveries tend to be faster following deeper recessions, especially in emerging markets, and tend to be slower following long recessions. Most recessions are associated with a slowing, if not outright decline in house prices, but recessions with large declines in house prices also tend to have slower recoveries. Long recessions and those associated with poor housing-market outcomes can lead to sustained output losses relative to pre-crisis trends. Consistent with microeconomic studies showing permanent income loss to job-losing workers during recessions, we find that the sustained deviation in output from trend is associated with a reduction in labor input, especially linked to declines in employment and labor-force participation following recessions. On net, our results imply that the output/employment gap following a severe, long recessions is considerably smaller than is typically assumed by standard macro models, which in turn may have substantial implications for macroeconomic policy during recoveries.
Topic:
Economics, Financial Crisis, Finance, Banking, and Banking Crisis
Political Geography:
Global Focus

13. Constructive Data Mining: Modeling Argentine Broad Money Demand

Author:
Neil R. Ericsson and Steven B. Kamin
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
his paper assesses the empirical merits of PcGets and Autometrics–two recent algorithms for computer-automated model selection–using them to improve upon Kamin and Ericsson’s (1993) model of Argentine broad money demand. The selected model is an economically sensible and statistically satisfactory error correc- tion model, in which cointegration between money, inflation, the interest rate, and exchange rate depreciation depends on the inclusion of a “ratchet” variable that cap- tures irreversible effects of inflation. Short-run dynamics differ markedly from the long run. Algorithmically based model selection complements opportunities for the researcher to contribute value added in the empirical analysis.
Topic:
Economics, Markets, Finance, and Inflation
Political Geography:
Argentina and South America

14. The Macroeconomic Effects of External Pressures on Monetary Policy

Author:
Davide Debortoli and Ricardo Nunes
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Central banks, whether independent or not, may occasionally be subject to external pressures to change policy objectives. We analyze the optimal response of central banks to such pressures and the resulting macroeconomic consequences. We consider several alternative scenarios regarding policy ob- jectives, the degree of commitment and the timing of external pressures. The possibility to adopt “more liberal” objectives in the future increases current inflation through an accommodation effect. Simultaneously, the central bank tries to anchor inflation by promising to be even “more conservative” in the future. The immediate effect is an output contraction, the opposite of what the pressures to adopt “more liberal” objectives may be aiming. We also discuss the opposite case, where objectives may become “more conservative” in the future, which may be the relevant case for countries considering the adoption of inflation targeting.
Topic:
Finance, Banks, Inflation, and Central Bank
Political Geography:
Global Focus

15. Exchange Rates and Fundamentals: A Generalization

Author:
James M. Nason and John H. Rogers
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Exchange rates have raised the ire of economists for more than 20 years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out of sample forecasts. Engel and West (2005) show that these failures can be explained by the standard-present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper generalizes the Engel and West (EW) hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models. The EW hypothesis is shown to hold for a canonical open economy DSGE model. We show that all the predictions of the standard-PVM carry over to the DSGE-PVM. The DSGE-PVM also yields an unobserved components (UC) models that we estimate using Bayesian methods and a quarterly Canadian--U.S. sample. Bayesian model evaluation reveals that the data support a UC model that calibrates the discount factor to one implying the Canadian dollar--U.S. dollar exchange rate is a random walk dominated by permanent cross-country monetary and productivity shocks.
Topic:
Economics, Finance, and Exchange Rate Policy
Political Geography:
Global Focus

16. Expected Consumption Growth from Cross-Country Surveys: Implications for Assessing International Capital Markets

Author:
Charles Engel and John H. Rogers
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Survey data show that the expected growth rates of consumption across countries vary widely and are not highly correlated. This data contradicts the simplest of open-economy models in which there is a freely traded non- state-contingent bond and purchasing power parity holds. We explore two alternative explanations for the finding: that households in each country in effect face different ex ante real interest rates or that there are significant credit constraints, so that expected consumption growth rates are driven largely by expected income growth. The empirical evidence strongly supports the latter hypothesis. These findings challenge the modeling of consumption that is at the heart of many, if not most, macroeconomic models.
Topic:
Economics, Finance, Interest Rates, and Credit
Political Geography:
Global Focus

17. Soft Information in Earnings Announcements: News or Noise?

Author:
Elizabeth Demers and Clara Vega
Publication Date:
10-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines whether the “soft” information contained in the text of management’s quarterly earnings press releases is incrementally informative over the company’s reported “hard” earnings news. We use Diction, a textual-analysis program, to extract various dimensions of managerial net optimism from more than 20,000 corporate earnings announcements over the period 1998 to 2006 and document that unanticipated net optimism in managers’ language affects announcement period abnormal returns and predicts post- earnings announcement drift. We find that it takes longer for the market to understand the implications of soft information than those of hard information. We also find that the market response varies by firm size, turnover, media and analyst coverage, and the extent to which the standard accounting model captures the underlying economics of the firm. We also show that the second moment of soft information, the level of certainty in the text, is an important determinant of contemporaneous idiosyncratic volatility, and it predicts future idiosyncratic volatility.
Topic:
Economics and Finance
Political Geography:
Global Focus