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Economic Research

The New York Fed DSGE Model Forecast—September 2022
The authors present an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. They describe their forecast and its change since June 2022.
By Marco Del Negro, Keshav Dogra, Aidan Gleich, Donggyu Lee, Ramya Nallamotu, and Sikata Sengupta
Small Business Recovery after Natural Disasters
In this second post on small businesses’ experiences with natural disasters and how they differ based on the race and ethnicity of business owners, the authors explore the ability of small firms to reopen and to obtain disaster relief funding in the aftermath of climate events. They find that Black-owned firms are more likely to remain closed for longer periods and face greater difficulties in obtaining the immediate relief needed to cope with a natural disaster.
By Martin Hiti, Claire Kramer Mills, and Asani Sarkar
How Do Natural Disasters Affect U.S. Small Business Owners?
What are the effects of climate change on small businesses, particularly those owned by people of color? The authors examine small businesses’ experiences with natural disasters and how these experiences differ based on the race and ethnicity of business owners. In this first of two posts, the authors show that small firms owned by people of color sustain losses from natural disasters at a disproportionately higher rate than other small businesses, and that these losses make up a larger portion of their total revenues.
By Martin Hiti, Claire Kramer Mills, and Asani Sarkar
Pass-Through of Wages and Import Prices Has Increased in the Post-COVID Period
Recent inflation readings have increased concerns that inflation may run above the Federal Reserve’s target for a longer period than anticipated. The authors examine two prominent cost-push-based explanations for high inflation: rising import prices and higher labor costs. Their results indicate that imported input prices and wages have had a significant effect on U.S. domestic prices in recent months. In addition, prices in the traded sector have become more correlated with foreign competitors’ prices.
By Mary Amiti, Sebastian Heise, Fatih Karahan, and Ayşegül Şahin
Remote Work Is Sticking
When the pandemic hit in early 2020, many businesses quickly and significantly expanded opportunities for their employees to work from home, resulting in a large increase in the share of work being done remotely. Now, more than two years later, how much work is being done from home? According to firms responding to our August regional business surveys, about 20 percent of all service work and 7 percent of manufacturing work is now being conducted remotely.
By Jaison R. Abel, Jason Bram, and Richard Deitz
The Disconnect between Productivity and Profits in U.S. Oil and Gas Extraction
Despite lackluster investment and hiring, U.S. oil and gas production boomed during the years leading up to the pandemic, largely due to productivity gains via wider adoption of fracking technologies. However, more recently, production has recovered sluggishly from the pandemic downturn despite a quick recovery in prices. The authors suggest that slower productivity growth and investors' demand for higher returns have made U.S. firms willing to boost output only at a higher threshold oil price.
By Matthew Higgins and Thomas Klitgaard
Recruiting Opportunities
The Financial Stability Implications of Digital Assets
The value of assets in the digital ecosystem has grown rapidly, amid periods of high volatility. Does the digital financial system create new potential challenges to financial stability? This paper explores this question using the Federal Reserve’s framework for analyzing vulnerabilities in the traditional financial system. It describes emerging vulnerabilities that could present risks to financial stability in the future if the digital asset ecosystem becomes more systemic, including: run risks among large stablecoins, valuation pressures in crypto-assets, fragilities of DeFi platforms, growing interconnectedness, and a general lack of regulation.
Pablo D. Azar, Garth Baughman, Francesca Carapella, Jacob Gerszten, Arazi Lubis, JP Perez-Sangimino, David E. Rappoport, Chiara Scotti, Nathan Swem, Alexandros Vardoulakis, and Aurite Werman, Staff Report 1034, September 2022
Approximating Grouped Fixed Effects Estimation via Fuzzy Clustering Regression
The authors propose a new, computationally efficient way to approximate the “grouped fixed-effects” (GFE) estimator of Bonhomme and Manresa (2015), which estimates grouped patterns of unobserved heterogeneity. To do so, they generalize the fuzzy C-means objective to regression settings. They replicate the empirical results of Bonhomme and Manresa and show that their estimator delivers almost identical estimates. In simulations, they show that their approach delivers improvements in terms of bias, classification accuracy, and computational speed.
Daniel Lewis, Davide Melcangi, Laura Pilossoph, and Aidan Toner-Rodgers, Staff Report 1033, September 2022
Risk-Free Rates and Convenience Yields Around the World
Because U.S. government debt is a uniquely safe and liquid financial asset, holders of the debt earn a so-called “convenience yield,” a nonpecuniary value that raises its price above the present value of the future cash flows it pays. The authors construct risk-free interest rates implicit in index option prices for ten of the major G11 currencies. They conclude that risk-free discount rates in the U.S. are especially low due to the central position of the U.S. in the global financial system, particularly during financial crises, but that U.S. safe assets do not earn an unusually large convenience yield in addition.
William Diamond and Peter Van Tassel, Staff Report 1032, September 2022
800,000 Years of Climate Risk
The authors use a long history of global temperature and atmospheric carbon dioxide (CO2) concentration to estimate the conditional joint evolution of temperature and CO2 at a millennial frequency. They document several basic facts, including that when evaluating the future evolution of temperature and CO2 concentration conditional on alternative scenarios, even conditional on the net-zero 2050 scenario, there remains a significant risk of elevated temperatures for at least a further five millennia.
Tobias Adrian, Nina Boyarchenko, Domenico Giannone, Ananthakrishnan Prasad, Dulani Seneviratne, and Yanzhe Xiao, Staff Report 1031, September 2022
Activist Manipulation Dynamics
Blockholder activists—shareholders who influence how firms are run—play a central role in modern corporations. The authors examine a market-based mechanism through which forward-looking activists attempt to steer other activists to add value to firms. They look at a scenario in which two activists with correlated private positions in a firm’s stock trade sequentially before simultaneously exerting effort that determines the firm’s value. They document the existence of a novel linear equilibrium in which an activist’s trades have positive sensitivity to block size, but such orders are not zero on average: the leader activist manipulates the price to induce the follower to acquire a larger position and thus add more value.
Doruk Cetemen, Gonzalo Cisternas, Aaron Kolb, and S. Viswanathan, Staff Report 1030, September 2022
Nonconforming Preferences: Jumbo Mortgage Lending and Large Bank Stress Tests
The 2010s saw a profound shift toward jumbo mortgage lending by large banks regulated under the Dodd-Frank Act. Using data from the Home Mortgage Disclosure Act, the authors show that the ”jumbo shift” is correlated with being subject to the comprehensive capital analysis and review (CCAR) stress tests, and that financial regulation caused CCAR-regulated banks to change preference for nonconforming relative to conforming loans of similar size. They discuss potential mechanisms through which regulation could have affected bank incentives.
Andrew Haughwout, Donald Morgan, Michael Neubauer, Maxim Pinkovskiy, and Wilbert van der Klaauw, Staff Report 1029, August 2022
Misinformation in Social Media: The Role of Verification Incentives
The authors develop a model of fake news creation and diffusion intended to examine the efficacy of real-world policies deployed to combat misinformation, while stressing how these may interact with users’ incentives to verify news. Their analysis emphasizes the importance of examining users’ and producers’ decisions jointly, as well as of evaluating how policies interact with one another. It also provides sensitivity measures that are key for policy evaluation.
Gonzalo Cisternas and Jorge Vásquez, Staff Report 1028, August 2022
GDP Solera: The Ideal Vintage Mix
The authors exploit the information in the different vintages of gross domestic expenditure and gross domestic income from the current comprehensive revision to obtain an improved, timely measure of U.S. aggregate output by imposing cointegration between the different measures and taking into account their monthly release calendar. The estimated parameters of their dynamic state-space model suggest that comprehensive revisions have not changed the long-run growth rate of U.S. GDP.
Martín Almuzara, Dante Amengual, Gabriele Fiorentini, and Enrique Sentana, Staff Report 1027, August 2022
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