Debits and Credits
Monetary Policy and Inequality
Alisdair McKay & Christian Wolf
Journal of Economic Perspectives, Winter 2023, Pages 121-144
Abstract:
We ask three questions about the connection between monetary policy and inequality. First, does monetary policy affect inequality? While different households respond to changes in monetary policy for different reasons, we argue that the overall consumption effects are relatively evenly distributed across households. Second, does household heterogeneity change our understanding of monetary policy transmission? A more careful account of microeconomic consumption behavior materially alters our understanding of transmission channels, but has rather limited effect on our general view of the aggregate effects of monetary policy. Third, does inequality affect the optimal conduct of monetary policy? Since monetary policy is a rather blunt distributional tool, we argue that even a central bank with an explicit distributional mandate would not deviate much from conventional policy prescriptions.
The redistributive politics of monetary policy
Louis Rouanet & Peter Hazlett
Public Choice, January 2023, Pages 1-26
Abstract:
Monetary policy and institutions are far from exempt from political influences. In this paper, we analyze monetary institutions not as being run by either benevolent technocrats or a wealth-maximizing Leviathan, but as the outcome of competition between interest groups trying to capture wealth transfers. We argue that while interest groups gaining from specific monetary policies and institutions can easily identify themselves, losers often cannot. As a result, losers have a more difficult time fighting back, and both the organization of money production and monetary policy are shaped by political competition between rent-seekers. We use our framework to analyze modern developments in monetary policies and institutions, namely (1) the Fed’s reaction to the 2007 financial crisis, (2) the Fed’s reaction to the COVID crisis, and (3) the establishment and development of the euro.
Loose Monetary Policy and Financial Instability
Maximilian Grimm et al.
NBER Working Paper, February 2023
Abstract:
Do periods of persistently loose monetary policy increase financial fragility and the likelihood of a financial crisis? This is a central question for policymakers, yet the literature does not provide systematic empirical evidence about this link at the aggregate level. In this paper we fill this gap by analyzing long-run historical data. We find that when the stance of monetary policy is accommodative over an extended period, the likelihood of financial turmoil down the road increases considerably. We investigate the causal pathways that lead to this result and argue that credit creation and asset price overheating are important intermediating channels.
Let the Worst One Fail: A Credible Solution to the Too-Big-To-Fail Conundrum
Thomas Philippon & Olivier Wang
Quarterly Journal of Economics, forthcoming
Abstract:
We study time-consistent bank resolution mechanisms. The key constraint is that governments cannot avoid bailouts that are ex post efficient. Contrary to common wisdom, we show that the government may still avoid moral hazard and implement the first-best allocation by using the distribution of bailouts across banks to provide incentives. We analyze properties of credible tournament mechanisms that provide support to the best-performing banks and resolve the worst-performing ones. We extend our mechanism and show that it continues to perform well when banks are imperfect substitutes, when they are differentially interconnected as long as bailout funds can be earmarked, and when banks’ risk-taking is driven by overoptimism instead of moral hazard.
Institutional earmarks: The earmark moratorium and federal highway spending
Peter McLaughlin
Journal of Public Policy, forthcoming
Abstract:
In 2010, the United States Congress placed a moratorium on earmarks – congressionally mandated spending projects. But did the earmark moratorium actually rid public policy of earmarks? I use earmark data and 2010–2020 state-level highway funding metrics to examine the relationship between previously expired transportation earmarks and federal highway funding during the earmark moratorium. Earmarks in the 2005 surface transportation law (SAFETEA-LU) continued to benefit certain states in 2020, even though the projects technically expired in 2009. This is because the funding “formulas” established by all post-2009 surface transportation laws were fully determined by the highway allocation percentage each state received in the preceding year, inclusive of earmarks. Further, I find the relationship between SAFETEA-LU earmarks and state funding disparities strengthened from 2010 to 2020, meaning the expired earmarks increased in policy significance during the moratorium. Highly earmarked states became even more advantaged after the earmarks were institutionalised into the highway funding formula.
State political uncertainty and local housing markets -- Evidence from U.S. mid-term gubernatorial elections
Chi-Young Choi
Applied Economics, forthcoming
Abstract:
Using U.S. county-level data, this paper finds a significant negative impact of state political uncertainty on local house price growth. A unit increase in state political uncertainty is associated with about 3.4% point decrease in county-level house price growth. The impact is asymmetric and varies widely across localities, with a weaker impact found in areas with a higher fraction of homeowners. The results are robust to endogeneity, sample selection, model specifications, and alternative measures of uncertainty. The main findings are further confirmed by a case study based on a difference-in-difference analysis.
Does the Tax System Favor Superstar Firms?
John Gallemore & Edward Maydew
University of North Carolina Working Paper, January 2023
Abstract:
Influential recent research finds that economic activity is increasingly concentrated in large, highly profitable "superstar firms." The causes and consequences of the rise of superstar firms are the subjects of intense debate among academics, policymakers, and others. Acting on concerns that superstar firms have tax advantages relative to other firms, policymakers are increasingly designing and enacting additional taxes that target superstar firms. We examine the validity of the underlying assumption that the tax system favors superstar firms, using both forward-looking and backward-looking measures of firms’ tax burdens. Across multiple specifications, we find little empirical support for the idea that superstar firms are tax advantaged. Overall, the evidence suggests that tax advantages generally are not an important factor in explaining which firms rise to superstar status, nor do they appear to be an important factor in sustaining their dominance.
Effects of per capita payments on governance: Evidence from tribal casinos
Adam Crepelle, Paasha Mahdavi & Dominic Parker
Public Choice, forthcoming
Abstract:
Some governments distribute profits from state-owned enterprises to citizens on a per capita basis while others do not. Does the use of per capita payments affect how governments trade off pro-economy policies with other constituent interests such as environmental quality and public health? We study that question in the context of tribal government decisions to close or keep open casinos on American Indian reservations during the COVID-19 pandemic. Relying on per capita payment data and administrative information on the operational status of over 200 tribal casinos, we investigate how the distribution of per capita payments relates to the number of days casinos were closed from February 2020 through February 2022. After controlling for casino size at the onset of COVID-19, as well as demographic, economic, and geographic characteristics of the reservations on which the casinos operate, we find that casinos governed by per capita payments remained open about 17–29% longer than other reservation-based casinos. That finding suggests that per capita payments create a pro-economy constituency and implies that the decision to pay dividends directly to citizens affects the sizes of revenues from state-owned enterprises, such as tribal-government-owned casinos, rather than merely determining how they are distributed.
Do minority banks perform better or worse than non-minority banks?
James Barth, Richard Cebula & Jiayi Xu
Applied Economics, forthcoming
Abstract:
We investigate whether Minority Owned/Controlled Banks (MDIs) perform better or worse than Non-Minority Banks (NMDIs) in terms of lower profit rates and higher risk. MDIs and NMDIs are compared using a propensity score matching (PSM) methodology. We also compare the performance when their headquarters are in the same census tract. In contrast to previous and earlier studies, the empirical results indicate that MDIs exhibit no signs of under- or over-performance vis-à-vis NMDIs. Moreover, we find no statistically significant difference between the four sub-categories of MDIs (Black, Asian, Hispanic, and Native American) and NMDIs regarding either profitability or riskiness. Robustness checks using zip code and city-level data effectively confirm these results.
Florida (Un)Chained
Charles Calomiris & Matthew Jaremski
NBER Working Paper, February 2023
Abstract:
To understand a price boom, it is helpful to take account of: (1) observable indicators of changes in ex ante risk tolerance, (2) what information exists and when, and (3) the incentives lenders face. This paper takes such an approach to the Florida land boom of the mid-1920s, the U.S.’ first housing boom in which buyers from around the nation participated. Estimates suggest that an astounding 20 million lots were offered for sale in Florida at that time. Our detailed narrative and empirical evidence suggest that the facts do not require the assumption of irrational behavior, but rather can be explained with all actors behaving with “bounded rationality.” We find that most Florida banks that failed were associated with the Manley-Anthony chain and did not exhibit increases in observable indicators of risk during the boom. Instead, their increases in risk mainly reflected hidden choices either to lend to bank insiders on a preferential basis or to fund other banks that were engaged in such risky and often fraudulent activities. Given bank regulators seem complicit in the risk-taking, even informed investors would have been left in the dark as to the amount of risk that was growing Florida.
Taxation and citizen choice: The effect of a county charter on property taxes
Sarah Larson & Bruce McDonald
Public Budgeting & Finance, forthcoming
Abstract:
As saliency of the tax burden increases, the preference for a lower burden increases, but most counties are restricted by the state from adopting new taxes or changing the existing rates. Some states allow counties to adopt a charter, freeing them from state control. Using a panel of Florida counties from 1980 to 2017, we explore whether citizens act to reduce their property tax once a charter is passed. Citizens act against their preferences not by lowering burden but rather by increasing it in the case of debt service, suggesting citizens are maximizing their optimal tax burden in exchange for services.
The riskiness of outstanding mortgages in the United States, 1999–2019
William Larson
Real Estate Economics, forthcoming
Abstract:
This article introduces measures of credit risk for all outstanding mortgages in the United States between 1999 and 2019. Terminations play a fundamental role in offsetting risk introduced by new originations because of refinance activity and the often dual nature of home buyers as concurrent sellers. To illustrate these concepts in a policy setting, I show that the Home Affordable Refinance Program increased origination risk metrics but reduced overall risk due to associated terminations of even riskier loans. In addition to these flow dynamics, amortization, loan age, collateral appreciation, and prior selection drive changes to portfolio-level risk.