What Accounts for the Changes in U.S. Fiscal Policy Transmission?

Using vector autoregressions on U.S. time series for 1957–79 and 1983–2004, we find government spending shocks to have stronger effects on output, consumption, and wages in the earlier period. We try to account for this observation within a DSGE model featuring price rigidities and limited asset market participation. Specifically, we estimate the structural parameters of the model for both periods by matching impulse responses. Model‐based counterfactual experiments suggest that most of the changes in fiscal policy transmission are accounted for by increased asset market participation and the more active monetary policy of the Volcker–Greenspan period.     

U.S. stock market crash risk, 1926–2010

This paper examines how well alternate time-changed Lévy processes capture stochastic volatility and the substantial outliers observed in U.S. stock market returns over the past 85 years. The autocorrelation of daily stock market returns varies substantially over time, necessitating an additional state variable when analyzing historical data. I estimate various one- and two-factor stochastic volatility/Lévy models with time-varying autocorrelation via extensions of the Bates (2006) methodology that provide filtered daily estimates of volatility and autocorrelation. The paper explores option pricing implications, including for the Volatility Index (VIX) during the recent financial crisis.     

Public Pensions and U.S. Infrastructure Investment: The Perfect Partnership?

Public pension funds have been passive investors in U.S. infrastructure projects for years, serving primarily as limited partners in designated infrastructure funds. However, the continued maturation of U.S. public‐private partnerships, combined with pension funds' need for yield to match future liabilities, has prompted the funds to take a more active role in infrastructure investment. In recent years, many pension funds have built internal teams to make direct (as opposed to indirect and for the most part passive) investments in infrastructure projects. Governments in particular should pay close attention to the emergence of pension funds as direct infrastructure investors. With OECD pension assets totaling $10.6 trillion at the end of 2010, the world's pension funds offer governments a strong value proposition. Given the fixed nature of their pension liabilities, pension funds emphasize yield and long‐term appreciation, and are likely to accept rate of returns in the neighborhood of CPI + 5%. Infrastructure investments, which generate highly stable cashflow and enjoy high barriers to entry, are ideally suited to meet these criteria. Also of particular significance to governments, pension funds have two bottom lines. First is expected yield and returns; second is their desire to invest in projects that meet a mission of social responsibility. Pension investors prefer, when possible, to invest in projects that promote government objectives such as reduced congestion and clean air. Taking account of pension funds' double mission can help governments capture opportunities to develop infrastructure through meaningful partnerships with like‐minded investors.     

The U.S. small business bankruptcy amendments: A global model for reform?

On February 19, 2020, the Small Business Reorganization Act of 2019 went into effect in the United States. This statute was intended to make the rescue regime of Chapter 11 of the United States Bankruptcy Code more effective for smaller businesses that would not otherwise have the financial wherewithal to complete a traditional Chapter 11 reorganization. This article describes the central innovations of the new statute, and considers whether they might be adaptable by other countries.     

The U.S. left behind? Financial globalization and the rise of IPOs outside the U.S.

From 1990 to 2011, the share of world IPO activity by non-U.S. firms increased because of financial globalization and because of a decrease in U.S. IPO activity. Financial globalization reduces the impact of national institutions on domestic IPO activity and enables more non-U.S. firms from countries with weak institutions to go public with a global IPO. U.S. IPO activity does not benefit from financial globalization. Compared to other countries, the rate of small-firm IPO activity in the U.S. is abnormally low in the 2000s. This abnormally low rate cannot be explained by the regulatory changes of the early 2000s.     

The Structural Dynamics of U.S. Output and Inflation: What Explains the Changes?

We examine the dynamics of U.S. output and inflation using a structural time-varying coefficients vector autoregression. There are changes in the volatility of both variables and in the persistence of inflation, but variations are statistically insignificant. Technology shocks explain changes in output volatility; real demand disturbances variations in the persistence and volatility of inflation. We detect important time variations in the transmission of technology shocks to output and demand shocks to inflation and significant changes in the variance of technology and of monetary policy shocks.     

Financial development and household portfolios – Evidence from Spain,the U.K. and the U.S.

We examine the impact of financial development on the composition of household portfolios in Spain, the U.K. and the U.S., three countries whose financial systems underwent profound changes over the past two decades and for which relevant data exist for sufficiently long time periods. We find a ‘division of labour’ between the indices measuring financial development and asset returns, the first affecting mainly the long-run dynamics of household portfolios and the second the short-run dynamics; both, however, in an economically reasonable way. Among the notable results pertaining to long-run dynamics, more competitive financial intermediaries are associated with a higher share of currency and deposits and a lower share of equity. For the short-run dynamics, the most important driver is stock market returns.     

One Size Fits All? Monetary Policy and Asymmetric Household Debt Cycles in U.S. States

I investigate the nonlinear effects of monetary policy through differences in household debt across U.S. states. After constructing a novel indicator of inflation for the states, I compute state‐specific monetary policy stances as deviations from an aggregate Taylor rule. I find that the effectiveness of monetary policy is curtailed during periods of large household debt imbalances. Moreover, a common U.S. monetary policy does not fit all; it may have asymmetric effects on the economic performance across states, particularly at times of high dispersion in the household debt imbalances, as it may have been the case around the Great Recession.     

The meta‐governance of risk and new technologies: GM crops and mobile telephones

The stylistic shift from government to governance in the regulation of risks associated with new technologies is often portrayed as an attempt to reach a deeper consensus over public controversies and to avoid future risk management failures. Stakeholder involvement in decision‐making through more inclusive and learning styles is seen as increasingly necessary in order to correct the steering deficit of the state, to rebuild trust in state institutions, and to obviate problems caused by uncertainty and different value perspectives in risk assessments. In this paper we scrutinise this model of risk and governance in the light of recent developments in the UK, focusing in particular on the regulation of genetically modified crops and mobile telecommunications technology. We conclude that the shift to governance is best understood in terms of the accommodative response of the state to a number of new challenges: primarily posed by the changing role of the private sector; by pressures on government to engender public trust in the face of shifting social values; and by the related difficulty in taking decisions with confidence and legitimacy. There is a perceived need within government for a more deliberative approach to regulation and standard‐setting, achieved by a creative combination of managed scientific order and the establishment of deliberative cooperative institutions. However the creation of deliberative mechanisms and institutions is not an easy passage, especially if it is accelerated by uncontrollable political events. Indeed, we caution against romantic interpretations of governance as indicating a uniform popular trend towards the democratisation of state decision‐making, despite the very real opportunities for reform that it affords. Rather, we suggest that a more plausible account is provided by seeing governance as a form of adaptive management necessitated by a series of interlocking economic and social changes, and responses to successive risk management crises.     

The 1994–1995 Mexican Currency Crisis and U.S. Bank Stock Returns

We investigate the impact of the 1994–1995 Mexican currency crisis on U.S. bank stock returns. We use a jump-diffusion model rather than a pure diffusion model to describe daily stock returns, because the public release of unexpected information generally is associated with discrete jumps in prices. Traditional event study models pool both announcement effects and trading effects and may lead to inefficient estimators. The jump-diffusion model can separate the impact of informed trading from unanticipated public announcements. Our results indicate that the variance of the jumps is large and increases with bank size and portion of loans to Mexico.     

Climate transition risk in U.S. loan portfolios: Are all banks the same?

We examine banks' exposure to climate transition risk using a bottom-up, loan-level methodology incorporating climate stress test based on the Merton probability of default model and transition pathways from the Intergovernmental Panel on Climate Change (IPCC). Specifically, we match machine learning predictions of corporate carbon footprints to syndicated loans initiated in 2010–2018 and aggregate these to loan portfolios of the twenty largest banks in the United States. Banks vary in their climate transition risk not only due to their exposure to the energy sectors but also due to borrowers' carbon emission profiles from other sectors. Banks generally lend a minimal amount to coal (0.4%) but hold a considerable exposure in oil and gas (8.6%) and electricity firms (4.6%) and thus have a large exposure to the energy sectors (13.5%). We observe that climate transition risk profile was stable over time, save for a temporary (in some cases) and permanent (in others), reduction in their fossil-fuel exposure after the Paris Agreement. From the stress testing, the median loss is 0.5% of US syndicated loans, representing a decrease in CET1 capital of 4.1% when extrapolated to the whole balance sheet. The loss is twice as large in the 1.5°C scenarios (1.4%–2.1% of loan value, 12%–16% of CET1 capital) compared to the 2°C target (0.6%–1.1% of loan value, 5%–9% of CET1 capital) with significant tail-end risk (7.7% of loan value, 62% of CET1 capital). Banks' vulnerabilities are also driven by the ex-ante financial risk of their borrowers more generally, highlighting that climate risk is not independent from conventional risks.     

The Declining Credit Quality of U.S. Corporate Debt: Myth or Reality?

In recent years, the number of downgrades in corporate bond ratings has exceeded the number of upgrades, leading some to conclude that the credit quality of U.S. corporate debt has declined. However, an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings. An ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent, implying that at least part of the downward trend in ratings is the result of changing standards.