Housing, consumption and monetary policy: How different are the US and the euro area?

This paper provides a systematic empirical analysis of the role of the housing market in the macroeconomy in the US and the euro area. First, it establishes some stylised facts concerning key variables in the housing market on the two sides of the Atlantic, such as real house prices, residential investment and mortgage debt. It then presents evidence from Structural Vector Autoregressions (SVAR) by focusing on the effects of monetary policy, credit supply and housing demand shocks on the housing market and the broader economy. The analysis shows that similarities outweigh differences as far as the housing market is concerned. The empirical evidence suggests a stronger role for housing in the transmission of monetary policy shocks in the US. The evidence is less clear-cut for housing demand shocks. Finally, credit supply shocks seem to matter more in the euro area.     

Credit conditions and recoveries from financial crises

Recoveries from recessions associated with a financial crisis tend to be sluggish. In this paper, we present evidence that stressed credit conditions are an important factor constraining the pace of recovery. In particular, using industry-level data, we find that industries relying more on external finance grow more slowly than other industries during recoveries from recessions associated with financial crises. Additional tests, based on establishment size, on alternative definitions of financial crises, and on corporate-government interest rate spreads, support the findings. Moreover, for subsets of industries where financial frictions are more severe, we find much stronger differential growth effects.     

Financial shocks and the US business cycle

Employing the financial accelerator (FA) model of Bernanke et al. [1999. The Financial accelerator in a quantitative business cycle framework. In: Taylor, J.B., Woodford, M. (Eds.), Handbook of Macroeconomics, vol. 1C. Handbooks in Economics, vol. 15. Elsevier, Amsterdam, pp. 1341-1393] enhanced to include a shock to the FA mechanism, we construct and study shocks to the efficiency of the financial sector during post-war US business cycles. These shocks are found to (i) be very tightly linked with the onset of recessions, more so than TFP or monetary shocks; (ii) remain contractionary after recessions have ended; (iii) account for a large part of the variance of GDP; (iv) be generally much more important than money shocks and (v) be strongly negatively correlated with the external finance premium.     

Pricing Behavior and the Response of Hours to Productivity Shocks

Recent contributions have suggested that technology shocks have a negative impact on hours, contrary to the prediction of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favor of sticky-price models, while others have either extended flexible-price models or disputed the empirical finding itself. In this paper, we estimate a variety of alternative total factor productivity measures for a representative sample of Italian manufacturing firms and on average find a negative effect of productivity shocks on hours growth. More interestingly, using the reported frequency of price reviews, we show that the contractionary effect is stronger for firms with stickier prices and weaker or not significant for firms with more flexible prices. Price stickiness remains a crucial factor in shaping the response of hours after controlling for product storability or market power.     

Demand and productivity components of business cycles: Estimates and implications

Standard stochastic growth models provide theoretical restrictions on output decomposition which can be used to investigate whether productivity shocks played a major role in observed business cycles. Applying these restrictions to US data leads to the following findings: (i) Business cycles implied by productivity shocks are mildly correlated to overall fluctuations and help account for a few episodes of US postwar recessions. However, only 20% of US fluctuations can be explained by these shocks. (ii) Most fluctuations seem instead to be due to “nominal demand” shocks, i.e. shocks which move output and prices in the same direction, but whose effects on output are ultimately transitory. (iii) Canonical sticky price models in the new-neoclassical synthesis tradition can account for the cyclical comovements of output and prices, but canonical, frictionless, RBC models cannot.     

Evidence on the Relationship between Housing and Consumption in the United States: A State‐Level Analysis

We estimate the dynamic effects of U.S. housing market shocks on state‐level spending and home prices from a dynamic common factor model, and identify housing demand and supply shocks using a sign‐restrictions approach. While state‐level spending and house prices gradually respond positively and persistently to aggregate housing demand shocks, there is significant variation across states in the magnitude of these responses. Cross‐state regressions of the estimated responses on an index of mortgage market development suggest that spending in states with greater opportunities for home equity borrowing is more sensitive to housing demand shocks than in states with fewer opportunities, which is consistent with the prominence of a “collateral” channel over a “wealth” channel in explaining the link between housing and the overall economy.     

Time‐Varying Fund Manager Skill

We propose a new definition of skill as general cognitive ability to pick stocks or time the market. We find evidence for stock picking in booms and market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new measure of managerial ability that weighs a fund's market timing more in recessions and stock picking more in booms. The measure displays more persistence than either market timing or stock picking alone and predicts fund performance.     

Credit market shocks and economic fluctuations: Evidence from corporate bond and stock markets

To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage of our “ground-up” approach is that we are able to construct matched portfolios of equity returns, which allows us to examine the information content of bond spreads that is orthogonal to the information contained in stock prices of the same set of firms, as well as in macroeconomic variables measuring economic activity, inflation, interest rates, and other financial indicators. Our portfolio-based bond spreads contain substantial predictive power for economic activity and outperform—especially at longer horizons—standard default-risk indicators. Much of the predictive power of bond spreads for economic activity is embedded in securities issued by intermediate-risk rather than high-risk firms. According to impulse responses from a structural factor-augmented vector autoregression, unexpected increases in bond spreads cause large and persistent contractions in economic activity. Indeed, shocks emanating from the corporate bond market account for more than 30 percent of the forecast error variance in economic activity at the two- to four-year horizon. Overall, our results imply that credit market shocks have contributed significantly to US economic fluctuations during the 1990-2008 period.     

Investment‐Specific News Shocks and U.S. Business Cycles

We provide robust evidence that news shocks about future investment‐specific technology (IST) constitute a significant force behind U.S. business cycles. Positive IST news shocks induce comovement, that is, raise output, consumption, investment, and hours. These shocks account for 70% of the business cycle variation in output, hours, and consumption, and 60% of the variation in investment, and have played an important role in 9 of the last 10 U.S. recessions. Our findings provide strong support for shifting focus to IST news shocks when investigating the role of news in driving U.S. business cycles.     

“Black Swans” before the “Black Swan” evidence from international LIBOR–OIS spreads

The LIBOR–OIS spread is a closely monitored indicator of the financial health of economy. Previous research has used this spread to identify and anticipate abrupt changes in financial markets. Taylor and Williams (2009) refer to the drastic increase in the US LIBOR–OIS spread on August 7th, 2007 as a “Black Swan” in the money market. In this paper, rather than rely on visual observations of “Black Swans” we estimate them using Bai and Perron’s (1998) procedure. We estimate structural breaks, Granger causality tests, and innovation accounting in international LIBOR–OIS spreads and a CDS index to better understand their dynamics during the recent crisis. Our results reveal that “Black Swans” appeared in smaller economies prior to that in large ones during the financial crisis. In addition, we find that only shocks to the US LIBOR–OIS spread has any statistically significant effects after 30 days.     

The Role of Oil Price Shocks in Causing U.S. Recessions

Although oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide a formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid‐1970s, analyze its determinants, and show that the linear model fits the data better.     

When Credit Bites Back

Using data on 14 advanced countries between 1870 and 2008 we document two key facts of the modern business cycle: relative to typical recessions, financial crisis recessions are costlier, and more credit‐intensive expansions tend to be followed by deeper recessions (in financial crises or otherwise) and slower recoveries. We use local projection methods to condition on a broad set of macro‐economic controls to study how past credit accumulation impacts key macro‐economic variables such as output, investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle.     

Business cycle implications of mortgage spreads

How do aggregate quantities at the business cycle frequency respond to shocks to the spread between residential mortgage rates and government bonds? Using a structural VAR approach, we find that mortgage spread shocks impact the real economy by both economically and statistically significant magnitudes: a 100 basis point decline in the spread causes a peak increase in consumption, residential investment and GDP by 1.6 percent, 6.2 percent and 1.9 percent, respectively. Presumably, these effects are magnified when the policy rate is held fixed, as was the case in the US during the recent implementation of unconventional monetary policy.     

International spillovers of monetary policy: Lessons from Chile,Korea, and Poland

In this paper, we assess evidence on international monetary policy spillovers to domestic bank lending in Chile, Korea, and Poland, using confidential bank-level data and different measures of monetary policy shocks in relevant currency areas. These three emerging market economies are small and open, their banking systems do not have significant presence overseas, and they can be considered as price takers in the world economy. Such features allow for better identification of binding financial constraints and foreign monetary policy shocks. We find that the monetary policy shocks spill over into domestic bank lending, modifying the degree to which financial frictions tighten or relax, and this evidence is consistent with international bank lending and portfolio channels.     

Monetary policy shocks: : Testing identification conditions under time-varying conditional volatility

We propose an empirical procedure, which exploits the conditional heteroscedasticity of fundamental disturbances, to test the targeting and orthogonality restrictions imposed in the recent VAR literature to identify monetary policy shocks. Based on U.S. monthly data for the post-1982 period, we reject the non-borrowed-reserve and interest-rate targeting procedures. In contrast, we present evidence supporting targeting procedures implying more than one policy variable. We also always reject the orthogonality conditions between policy shocks and macroeconomic variables. We show that using invalid restrictions often produces misleading policy measures and dynamic responses. These results have important implications for the measurement of policy shocks and their temporal effects as well as for the estimation of the monetary authority's reaction function.     

The Cross‐Market Spillover of Economic Shocks through Multimarket Banks

This study investigates the mortgage lending of banks operating in multiple U.S. metropolitan areas during the housing market collapse of 2007–09. We show that multimarket banks reduced local portfolio lending in response to high overall mortgage delinquencies in their other markets, consistent with the view that local economic shocks can be transmitted to other regions through banks’ internal capital markets. This spillover was greatest when the bank lacked a branch presence and when the market was highly peripheral to the bank in terms of its total mortgage lending. These effects were not fully offset by securitization or other portfolio lenders.     

Employment in the Great Recession: How Important Were Household Credit Supply Shocks?

I pool data from all large multimarket lenders in the United States to estimate how many of the over 7 million jobs lost in the Great Recession can be explained by reductions in the supply of mortgage credit. I construct a mortgage credit supply instrument at the county level, the weighted average (by prerecession mortgage market shares) of liquidity-driven lender shocks during the recession. The reduction in mortgage supply explains about 15% of the employment decline. The job losses are concentrated in construction and finance.     

The Dynamic Relations between Market Returns and Two Types of Risk with Business Cycles

We examine the dynamic relations among market returns, market (MV), and idiosyncratic (IV) around business cycles. Compared to the conventional view, which treats MV and IV separately, we first find that excess return on the market anticipates negative MV and IV, suggesting market return's role as an economic indicator, with the relation stronger in recessions. Second, IV helps predict positive MV, mainly in early part of recessions, suggesting a dynamic evolution from IV to MV. Third, MV helps predict negative IV, suggesting MV may substitute IV to some extent.     

The effect of Fed monetary policy regimes on the US interest rate swap spreads

This paper analyzes the asymmetric impacts of various economic shocks on swap spreads under distinct Fed monetary policy regimes. The results indicate that (a) during periods of aggressive interest rate reductions, slope of the Treasury term structure accounts for a sizeable share of the swap spread variance although default shock is also a major player. (b) On the other hand, liquidity premium is the only contributor to the 2-year swap spread variance in monetary tightening cycles. (c) The impact of default risk varies across both monetary cycles and swap maturities. (d) The effect of interest rate volatility is generally more evident in loosening monetary regimes.     

Cycles in the IPO market

We develop a model in which time-varying real investment opportunities lead to time-varying adverse selection in the market for IPOs. The model is consistent with several stylized facts known about the IPO market: economic expansions are associated with a dramatic increase in the number of firms going public, which is in turn positively correlated with underpricing. Adverse selection is procyclical in the sense that dispersion in unobservable quality across firms should be more pronounced during booms. Taking the premise that uncertainty is resolved (and thus private information revealed) over time, we test this hypothesis by looking at long-run abnormal returns and delisting rates. Consistent with the model, we find (a) greater cross-sectional return variance, and (b) higher incidence of delisting for hot-market IPOs.