On Credit
What do price equations say about future inflation?
Ray Fair
Business Economics, July 2021, Pages 118-128
Abstract:
This paper uses an econometric approach to examine the inflation consequences of the American Rescue Plan Act of 2021. Price equations are estimated and used to forecast future inflation. The main results are: (1) The data suggest that price equations should be specified in level form rather than in first or second difference form. (2) There is some slight evidence of nonlinear demand effects on prices. (3) There is no evidence that demand effects have gotten smaller over time. 4) The stimulus from the act combined with large wealth effects from past household saving, rising stock prices, and rising housing prices is large and is forecast to drive the unemployment rate down to below 3.5 percent by the middle of 2022. 5) Given this stimulus, the inflation rate is forecast to rise to slightly under 5 percent by the middle of 2022 and then comes down slowly. 6) There is considerable uncertainty in the point forecasts, especially two years out. The probability that inflation will be larger than 6 percent next year is estimated to be 31.6 percent. 7) If the Fed were behaving as historically estimated, it would raise the interest rate to about 3 percent by the end of 2021 and 3.5 percent by the end of 2022 according to the forecast. This would lower inflation, although slowly. By the middle of 2022 inflation would be about 1 percentage point lower. The unemployment rate would be 0.5 percentage points higher.
Deficit Follies
Johannes Brumm et al.
NBER Working Paper, June 2021
Abstract:
Deficit finance is free when the growth rate routinely exceeds the government's borrowing rate. Or so many people say. This note presents three counterexamples. Each features a simple OLG economy with a zero growth rate and a negative government borrowing rate. None provides a basis for taking from the young and giving to the old. One example features idiosyncratic risk, one features policy uncertainty, and one features a safe borrowing rate that exceeds the safe lending rate. Progressive taxation cures the first problem. Policy resolution cures the second. And improved intermediation, perhaps organized by the government, cures the third. The three models are parables. Each conveys an inconvenient truth. Seemingly free deficits may, on careful inspection, be far more costly than they appear. Indeed, government intergenerational redistribution can lower the government borrowing rate, encouraging yet more inefficient deficit finance.
Deposit-Lending Synergies: Evidence from Chinese Students at US Universities
Jun Yang
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
This paper exploits an influx of Chinese students to US universities from 2000 through 2018 to study synergies between banks' deposit-taking and lending activities. Banks that are more recognizable by Chinese students experience higher deposit inflows and increase their local credit supply. This credit supply expansion only occurs in information sensitive credit markets: small business loans and second lien mortgages. Such increase concentrates in non-tradable sectors and is more pronounced at locations where managers have more autonomy. The results indicate that deposits from local consumers convey private information about the local credit market, which helps banks in information-sensitive lending.
Is there a zero lower bound? The effects of negative policy rates on banks and firms
Carlo Altavilla et al.
Journal of Financial Economics, forthcoming
Abstract:
Exploiting confidential data from the euro area, we show that sound banks pass negative rates on to their corporate depositors and that pass-through is not impaired when policy rates move into negative territory. We do not observe a contraction in deposits, reflecting a general increase in corporate liquidity during the sample period. When their banks charge negative rates on deposits, firms with ex ante high liquidity invest more than comparable firms that are not charged negative rates and increase their liquid holdings less. These results challenge the common view that conventional monetary policy becomes ineffective at the zero lower bound.
A Note on the Level of Customer Support by State Governments: A Mystery-Shopping Approach
Oeindrila Dube, Sendhil Mullainathan & Devin Pope
NBER Working Paper, July 2021
Abstract:
Many government services are provided at the state level such as unemployment insurance, Medicaid, and SNAP. Given the lack of competition, a natural worry is that customer support provided by states for these services is less than adequate. While there are many different measures of how a state can support beneficiaries, we focus on just one in this short and applied report: the ability to get a live representative on the phone to help with an application question. To do this, we take a "mystery shopping" approach and make 2,000 phone calls to state government offices. We find substantial heterogeneity in the availability of live phone representatives across states and types of service (UI, Medicaid, etc.). For example, live representatives in New Jersey and Georgia were reached less than 20% of the time while representatives in New Hampshire and Wisconsin were reached more than 80% of the time. We hope that this report provides a simple example for how academics, investigative reporters, and watch groups can help states be more accountable for their customer support systems.
Subcontracting and the incidence of change orders in procurement contracts
Hojin Jung et al.
Economic Inquiry, forthcoming
Abstract:
In public procurement, most contracts are renegotiated ex post and involve subcontractors. We examine whether there is a causal link between subcontractor use and the incidence of change orders to amend the original scope of a project. Since subcontracting is likely related to unobserved project complexity, we use a novel IV, the predicted level of subcontracting from a method modeled after Christakis et al. (2010), to estimate the likelihood of renegotiation. The results establish that subcontractors are associated with an increased likelihood of change orders as well as a higher dollar amount renegotiated.
Macro Outsourcing: Evaluating Government Reliance on the Private Sector
Rachel Augustine Potter
Journal of Politics, forthcoming
Abstract:
Government outsourcing of services to private sector entities is increasingly common. The conventional wisdom ties governments' outsourcing decisions to either an ideological preference for market-based solutions or to fiscal pressures; however, these conjectures have not been systematically subjected to empirical scrutiny. I develop an aggregate annual measure of U.S. state level outsourcing decisions - macro outsourcing - and explore whether the evidence supports these pathways. I also point to an under-appreciated political pathway by which potential losers - bureaucrats organized into public sector unions - affect the decision to outsource. The results offer little support for the received wisdom and instead demonstrate that states with strong unions are less likely to rely on private actors. I bolster this finding with preliminary analyses showing that states with laws that sap union power exhibit higher levels of outsourcing. Overall, these results show that outsourcing is a decidedly political phenomenon, albeit via an unexpected route.
The Effects of State Business Taxes on Plant Closures: Evidence from Unemployment Insurance Taxation and Multi-Establishment Firms
Audrey Guo
Review of Economics and Statistics, forthcoming
Abstract:
This paper investigates the extent to which state-level differences in business taxes influence the location decisions of multi-establishment firms. Each state in the United States administers their own unemployment insurance (UI) program, and cross-state variation leads to significant tax differences across state lines. This decentralized administration creates opposing employment incentives on the intensive and extensive margins depending on the economic conditions. Studying the locations of multi-state manufacturing firms, I find that firms are more likely to exit from high-tax states during economic downturns, but high-tax plants experience more stable employment during non-recession years.
Shadow Banking in a Crisis: Evidence from FinTech During COVID-19
Zhengyang Bao & Difang Huang
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We analyze lending by traditional as well as FinTech lenders during COVID-19. Comparing samples of FinTech and bank loan records across the outbreak, we find that FinTech companies are more likely to expand credit access to new and financially constrained borrowers after the start of the pandemic. However, this increased credit provision may not be sustainable; the delinquency rate of FinTech loans triples after the outbreak, but there is no significant change in the delinquency of bank loans. Borrowers holding both loan types prioritize the payment of bank loans. These results shed light on the benefits provided by shadow banking in a crisis and hint at the potential fragility of such institutions when delinquency rates spike.
Does Subsidized Crop Insurance Affect Farm Industry Structure? Lessons from the US
Azzeddine Azzam, Cory Walters & Taylor Kaus
Journal of Policy Modeling, forthcoming
Abstract:
Farm policies have unintended consequences and subsidized crop insurance is no different. We draw on the theory of long-run competitive equilibrium to estimate the effect of subsidized crop insurance on farm output and number of farms in the U.S. Results show that the subsidy led to fewer and larger farms. To the extent that larger farms benefit disproportionately from other farm subsidies, known to increase farm size, subsidized crop insurance can only contribute to further farm consolidation, with consequences for sustainability and depopulation of rural communities. These unintended effects could make the case for reverting to ad-hoc disaster payment programs.
On the welfare effects of phasing out paper currency
Julio Garín, William Lastrapes & Robert Lester
European Economic Review, forthcoming
Abstract:
We quantify the welfare effects of cash suppression policies within a general equilibrium model where cash reduces transactions costs and aids tax evasion in underground markets. In the model, currency suppression increases transactions costs and raises effective tax rates, but shifts resources out of costly underground markets and relaxes the government budget. When coupled with a reduction in distortionary taxes on consumption or factor inputs to ensure budget neutrality, cash suppression policies increase welfare in our baseline representative agent model. In a model with individual heterogeneity in cash use, suppression increases welfare for all, but by less for cash-intensive users.
Does banking deregulation affect accounting conservatism?
Wei Huang
Journal of Accounting and Public Policy, forthcoming
Abstract:
This study examines the effect of banking competition on borrowing firms' conditional accounting conservatism (i.e., asymmetric timely loss recognition). The context of the study is the staggered passage of the Interstate Banking and Branching Efficiency Act (IBBEA), the deregulation that permits banks to establish branches across state lines and increases bank competition. I find that firms report less conservatively after the passage of the IBBEA in their headquarter states. The effect on conditional conservatism is stronger for firms in states with a greater increase in competition among banks, firms that are more likely to borrow from in-state banks, firms with greater financial constraint, and firms subject to less external monitoring. Additional tests confirm that the decline in conditional conservatism is observed only after the adoption of IBBEA and lasts for two years. The findings indicate that banks tend to "lowball" borrowers when competition arises by relaxing their demand for conservative reporting. Overall, this study highlights the unintended impacts of banking competition on borrowing firms' financial reporting.
The Optimal Design of State-Run Lotteries
Benjamin Lockwood et al.
NBER Working Paper, June 2021
Abstract:
People have long debated whether state-run lotteries exploit the poor or are a win-win that generates enjoyment and government revenues. We study socially optimal lottery design in an optimal taxation framework with biased consumers and estimate sufficient statistics for optimal policy. Lottery sales respond more to changes in jackpot expected values than to changes in price or lower prizes, consistent with a specific type of probability weighting. In our survey, bias proxies such as innumeracy decline with income and explain 43 percent of lottery spending. In our model, current multi-state lottery designs increase welfare but may harm heavy-spending low-income people.