Virtually Cash

Kevin Lewis

May 03, 2023

The Scars of Supply Shocks: Implications for Monetary Policy
Luca Fornaro & Martin Wolf
Journal of Monetary Economics, forthcoming 


We study the effects of supply disruptions -- for instance due to energy price shocks or the emergence of a pandemic -- in an economy with Keynesian unemployment and endogenous productivity growth. By temporarily disrupting investment, negative supply shocks generate permanent output losses -- or scarring effects. By inducing a negative wealth effect, scarring effects depress aggregate demand, which may even fall below the exogenous fall in supply. However, that scarring effects depress aggregate demand does not necessarily translate into low rates of inflation. On the contrary, scarring effects may reinforce and prolong the inflationary impact of supply disruptions. A contractionary monetary policy response may end up deepening scarring effects and increasing inflation in the medium run. A successful disinflation may require a policy mix of monetary tightening and fiscal interventions aiming at supporting business investment and the economy's productive capacity.

Does Monetary Policy Matter? The Narrative Approach after 35 Years
Christina Romer & David Romer
NBER Working Paper, April 2023


The narrative approach to macroeconomic identification uses qualitative sources, such as newspapers or government records, to provide information that can help establish causal relationships. This paper discusses the requirements for rigorous narrative analysis using fresh research on the impact of monetary policy as the focal application. We read the historical minutes and transcripts of Federal Reserve policymaking meetings to identify significant contractionary and expansionary changes in monetary policy not taken in response to current or prospective developments in real activity for the period 1946 to 2016. We find that such monetary shocks have large and significant effects on unemployment, output, and inflation in the expected directions. Analysis of available policy records suggests that a contractionary monetary shock likely occurred in 2022. Based on the empirical estimates of the effect of previous shocks, one would expect substantial negative impacts on real GDP and inflation in 2023 and 2024.

Social Media as a Bank Run Catalyst
Anthony Cookson et al.
University of Colorado Working Paper, April 2023 


Social media fueled a bank run on Silicon Valley Bank (SVB), and the effects were felt broadly in the U.S. banking industry. We employ comprehensive Twitter data to show that preexisting exposure to social media predicts bank stock market losses in the run period even after controlling for bank characteristics related to run risk (i.e., mark-to-market losses and uninsured deposits). Moreover, we show that social media amplifies these bank run risk factors. During the run period, we find the intensity of Twitter conversation about a bank predicts stock market losses at the hourly frequency. This effect is stronger for banks with bank run risk factors. At even higher frequency, tweets in the run period with negative sentiment translate into immediate stock market losses. These high frequency effects are stronger when tweets are authored by members of the Twitter startup community (who are likely depositors) and contain keywords related to contagion. These results are consistent with depositors using Twitter to communicate in real time during the bank run.

Can ChatGPT Decipher Fedspeak?
Anne Lundgaard Hansen & Sophia Kazinnik
Federal Reserve Working Paper, April 2023 


Yes! This paper investigates the ability of Generative Pre-training Transformer (GPT) models to decipher Fedspeak, a term used to describe the technical language used by the Federal Reserve to communicate on monetary policy decisions. We evaluate the ability of GPT models to classify the policy stance of Federal Open Market Committee (FOMC) announcements relative to a human classified benchmark. The performance of GPT models surpasses that of other popular classification methods.

Can Deficits Finance Themselves?
George-Marios Angeletos, Chen Lian & Christian Wolf
NBER Working Paper, April 2023 


We study how fiscal deficits are financed in environments with two key features: (i) nominal rigidity and (ii) a violation of Ricardian equivalence due to finite lives or liquidity constraints. In such environments, deficits contribute to their own financing via two channels: a boom in real economic activity, which expands the tax base, and a surge in inflation, which erodes the real value of nominal government debt. Our main theoretical result relates the potency of such self-financing to the timing of fiscal adjustment. Pushing the fiscal adjustment further into the future helps generate a larger and more persistent boom, leading to more self-financing. Full self-financing is possible in the limit as fiscal adjustment is delayed more and more: the government can run a deficit today, refrain from tax hikes or spending cuts in the future, and nevertheless see its debt converge back to its initial level. We conclude by arguing that a large degree of self-financing is not only theoretically possible but also quantitatively relevant.

Do Banks Hedge Using Interest Rate Swaps?
Lihong McPhail, Philipp Schnabl & Bruce Tuckman
NBER Working Paper, April 2023 


We ask whether banks use interest rate swaps to hedge the interest rate risk of their assets, primarily loans and securities. To this end, we use regulatory data on individual swap positions for the largest 250 U.S. banks. We find that the average bank has a large notional amount of swaps-- $434 billion, or more than 10 times assets. But after accounting for the significant extent to which swap positions offset each other, the average bank has essentially no net interest rate risk from swaps: a 100-basis-point increase in rates increases the value of its swaps by 0.1% of equity. There is variation across banks, with some bank swap positions decreasing and some increasing with rates, but aggregating swap positions at the level of the banking system reveals that most swap exposures are offsetting. Therefore, as a description of prevailing practice, we conclude that swap positions are not economically significant in hedging the interest rate risk of bank assets.

Infrastructure Costs
Leah Brooks & Zachary Liscow
American Economic Journal: Applied Economics, April 2023, Pages 1-30 


Despite infrastructure's importance to the US economy, evidence on its cost trajectory over time is sparse. We document real spending per new mile over the history of the Interstate Highway System. We find that spending per mile increased more than threefold from the 1960s to the 1980s. This increase persists even conditional on pre-existing observable geographic cost determinants. We then provide suggestive evidence on why. Input prices explain little of the increase. Statistically, changes in income and housing prices explain about half of the increase. We find suggestive evidence that the rise of "citizen voice" in government decision-making increased spending per mile.

The Offshore World According to FATCA: New Evidence on the Foreign Wealth of U.S. Households
Niels Johannesen et al.
NBER Working Paper, March 2023 


This paper uses account-level information, reported to the IRS by foreign financial institutions under the Foreign Account Tax Compliance Act (FATCA), to produce new evidence on the foreign financial wealth of U.S. households. We find that U.S. taxpayers hold around $4 trillion in foreign accounts, almost half in jurisdictions usually considered tax havens. Combining the FATCA reports with other administrative tax data and tracing account ownership through partnerships, we document a steep income gradient in the propensity to hold assets in foreign financial institutions. Specifically, more than 60% of the individuals in the top 0.01% of the income distribution own foreign accounts, the vast majority in tax havens and more than half through a partnership. We discuss the likely implications of these findings for the overall impact of FATCA on tax compliance and government revenue.

Art in the Age of Tax Avoidance
Matthew Pierson
University of Pennsylvania Working Paper, March 2023 


Utilizing the near universe of tax filings, we document both the extent of donations of art to non-profit organizations in the U.S. and their use as a method of tax avoidance. Non-profit organizations hold sizable assets, worth $12.4 trillion in 2019, with 2.65% identified as holding art, valued at $5.5 billion. While only 20% of organizations required to disclose the value of their collections and donations do so, these organizations consistently write down the value of artwork donations by 13%. This effect is amplified by donation valuation methods more likely to be influenced by the donor, but driven primarily by donations to private foundations, which write down by an average of 98.7% and avoid substantial amounts in taxes. Private foundations are associated with poor internal controls, with higher pay and benefits, more related executives, and a greater likelihood of being operated out of a tax haven. Tax losses due to avoidance is great, as back of the envelope calculations estimate between $1.4 billion and $3.9 billion in income tax losses over our 9 year sample.

FinTech Lending with LowTech Pricing
Mark Johnson et al.
NBER Working Paper, April 2023 


FinTech lending -- known for using big data and advanced technologies -- promised to break away from the traditional credit scoring and pricing models. Using a comprehensive dataset of FinTech personal loans, our study shows that loan rates continue to rely heavily on conventional credit scores, including 45% higher rates for nonprime borrowers. Other known default predictors are often neglected. Within each segment (prime/nonprime) loan rates are not very responsive to default risk, resulting in realized loan-level returns decreasing with risk. The pricing distortions result in substantial transfers from nonprime to prime borrowers and from low- to high-risk borrowers within segment.

The Need for Speed: Demand, Regulation, and Welfare on the Margin of Alternative Financial Services
Ryan McDevitt & Aaron Sojourner
Review of Economics and Statistics, forthcoming 


We use a nonlinear reduction in a bank's check-cashing fees and variation in regulated check-clearing times to identify the elasticity of demand for cashing checks rather than depositing them. We find that an extra day of check-clearing time makes account holders 65.5% more likely to cash a check than deposit it, which implies they are willing to pay $11.17 per day for faster access to their funds - an effective annualized discount rate of 11,054% for the average check. We use this elasticity to evaluate recent proposals that mandate faster check-clearing times.

Wayfair: A Step Towards the Destination, But Sales Tax Competition Remains
Donald Bruce, William Fox & Alannah Shute
NBER Working Paper, March 2023 


The U.S. Supreme Court decision in the landmark 2018 Wayfair case greatly improved state governments' ability to enforce collection of sales taxes on a destination basis. This has reduced state tax competition with an essentially-untaxed internet, but has brought traditional cross-border shopping, which is often subject to origin taxation, back to prominence among policy makers and researchers. We provide a detailed discussion of state and local sales tax features and the extent to which they have fostered sales tax competition in recent decades. We then explore the extent to which greater destination taxation has influenced the location of (a) consumer purchases and (b) business locations using two different empirical approaches. First, we analyze county-level data for Tennessee and select surrounding states to provide suggestive evidence that sales tax collections have grown more in rural Tennessee counties and less in Tennessee border counties since Wayfair. Additionally, we show that collections have grown more since Wayfair in North Carolina counties along the Tennessee border, where the tax rate differential is on the order of 3.3 percentage points. Second, we examine state-level data to show that business applications have grown at much faster rates after Wayfair in states with the highest sales tax rates. We attribute this to the removal of the significant disincentive to establish sales tax nexus that dominated the pre-Wayfair environment.


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