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FRB Atlanta — Econ South – First Quarter 2014

April 8, 2014 Comments off

Econ South – First Quarter 2014
Source: Federal Reserve Bank of Atlanta

The Economic Plight of Millennials
The millennial generation is entering the labor force with one trait in common: they watched as the Great Recession dramatically reshaped the landscape of employment, housing, and their overall expectations. How profoundly will the economic downturn and its associated effects mark this generation?

How We Pay: Results from the Federal Reserve’s Latest Payments Study
Changes in technology have affected not only how people live and work, they have also affected how individuals and businesses pay for goods and services. The Federal Reserve’s most recent triennial study of the payments system highlights a number of shifts in this dynamic arena.

Changing Channels: The Evolving Face of Media in the Southeast
New digital devices and enhanced technology have given consumers a feast of content to consume. Although consumers are the clear winners in this new media landscape, regional players in the communications field are scrambling to remain in the game.

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The Effect of Large Investors on Asset Quality: Evidence from Subprime Mortgage Securities

April 4, 2014 Comments off

The Effect of Large Investors on Asset Quality: Evidence from Subprime Mortgage Securities
Source: Federal Reserve Bank of Atlanta

This paper examines how the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the largest investors in subprime private-label mortgage-backed securities (PLS), influenced the risk characteristics and prices of the deals in which they participated. To identify the causal effect of the GSEs, we use the fact that PLS deals in which Fannie Mae and Freddie Mac purchased securities included separate mortgage pools: one specifically created for the GSEs and one or more others directed at other triple-A investors. Using within-deal variation, we find that the pools bought by Fannie Mae and Freddie Mac had similar ex-ante risk characteristics but performed much better ex-post relative to other mortgage pools in the same deals. These effects were concentrated in low-documentation loans and in issuers that were highly dependent on Fannie Mae and Freddie Mac. Our results extend the importance of disciplining effects of large claimholders beyond information-sensitive securities, such as equities and bank debt, to information-insensitive arm’s-length debt.

Atlanta Fed — Annual Report Asks: Where Are the Jobs?

March 21, 2014 Comments off

Annual Report Asks: Where Are the Jobs?
Source: Federal Reserve Bank of Atlanta

The Atlanta Fed in its 2013 Annual Report explores a timely and important economic question: where are the jobs?

“For most Americans the critical element of our ongoing economic recovery is employment,” says Atlanta Fed President Dennis Lockhart in a video introduction to the report. “Since the end of the worst recession in the post–World War II era, jobs in the nation and the Southeast have been growing more slowly than in earlier recoveries.”

Combining rich text and videos, sleek infographics, and interactive charts, the annual report guides readers through the complex issues at work in the nation’s labor market. Want more information about something you just read? Related links throughout the report lead to more research and data.

The report also highlights the Atlanta Fed’s major accomplishments in 2013 and introduces readers to the Bank’s management, boards of directors, and advisory councils.

Government Involvement in Residential Mortgage Markets

March 20, 2014 Comments off

Government Involvement in Residential Mortgage Markets
Source: Federal Reserve Bank of Atlanta

With the federal funds rate effectively at the zero lower bound, the Federal Reserve has used unconventional forms of monetary policy. Specifically, the central bank has issued forward guidance about the policy path and purchased large amounts of U.S. Treasury bonds and agency mortgage-backed securities (MBS) in an effort to lower long-term interest rates. In the case of agency MBS purchases, a goal was to stimulate the housing market by lowering mortgage rates. Two papers presented at the recent Atlanta Fed/University of North Carolina—Charlotte conference, “Government Involvement in Residential Mortgage Markets,” examine the extent to which the Federal Reserve has been successful.

Fed Survey Reports Easier Lending Policies in Late 2013

March 18, 2014 Comments off

Fed Survey Reports Easier Lending Policies in Late 2013
Source: Federal Reserve Bank of Atlanta

Banks eased their lending policies and saw stronger demands for most types of business and consumer loans in the fourth quarter of 2013, according to the Federal Reserve’s January Senior Loan Officer Opinion Survey.

The survey included responses from 75 domestic banks and 21 foreign banks with U.S. operations. Respondents answered questions about changes in the standards and terms on their loans to businesses and households and demand for such loans. The latest survey also included special questions about banks’ reaction to supervisory guidance on leveraged lending and the outlook for loan performance.

Intergenerational Redistribution in the Great Recession

March 14, 2014 Comments off

Intergenerational Redistribution in the Great Recession
Source: Federal Reserve Bank of Atlanta

In this paper we construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across different household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages, as observed in the data. Asset price declines hurt the old, who rely on asset sales to finance consumption, but they benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline close to three times as much as wages, consistent with the experience of the U.S. economy in the Great Recession. A model recession is almost welfare-neutral for households in the 20–29 age group, but translates into a large welfare loss of around 10 percent of lifetime consumption for households aged 70 and over.

Do Homeowners Associations Mitigate or Aggravate Negative Spillovers from Neighboring Homeowner Distress?

January 23, 2014 Comments off

Do Homeowners Associations Mitigate or Aggravate Negative Spillovers from Neighboring Homeowner Distress?
Source: Federal Reserve Bank of Atlanta

Experiences reveal that the monitoring costs of the foreclosure crisis may be nontrivial, and smaller governments may have more success at addressing potential negative externalities. One highly localized form of government is a homeowners association (HOA). HOAs could be well-suited for triaging foreclosures, as they may detect delinquencies and looming defaults through direct observation or missed dues. On the other hand, the reliance on dues may leave HOAs particularly vulnerable to members’ foreclosure. We examine how property prices respond to homeowner distress and foreclosure within HOA communities in Florida. We combine data sets of HOAs, sales and aggregate loan delinquency, and foreclosures from 2000 through 2008. We find properties in HOAs are relatively less affected by more distressed neighbor homes compared with non-HOA properties, but only when considering less severe delinquency rates. We also find that negative price effects from higher delinquency exposure rates are ameliorated for properties in larger and newer HOAs.

Entry, Exit, and the Determinants of Market Structure

November 8, 2013 Comments off

Entry, Exit, and the Determinants of Market Structure
Source: Federal Reserve Bank of Atlanta

This paper estimates a dynamic, structural model of entry and exit in an oligopolistic industry and uses it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. Entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all found to be important determinants of long-run firm values, firm turnover, and market structure. Estimates for the dentist industry allow the entry cost to differ for geographic markets that were designated as Health Professional Shortage Areas and in which entry was subsidized. The estimated mean entry cost is 11 percent lower in these markets. Using simulations, we compare entry-cost versus fixed-cost subsidies and find that entry-cost subsidies are less expensive per additional firm.

Social Ties, Space, and Resilience: Literature Review of Community Resilience to Disasters and Constituent Social and Built Environment Factors

September 30, 2013 Comments off

Social Ties, Space, and Resilience: Literature Review of Community Resilience to Disasters and Constituent Social and Built Environment Factors
Source: Federal Reserve Bank of Atlanta

Communities have faced a variety of crises in recent decades, including more frequent and severe natural disasters. As applied to disasters, resilience entails the ability of a community to rebound following a hurricane, earthquake, or other disturbance. Given the importance of resilience in promoting an effective recovery, the factors that contribute to community resilience are of great interest to scholars and practitioners in many fields. Recent work has examined, for example, socioeconomic indicators that contribute to greater social vulnerability and organizational structures that contribute to a more effective recovery. The importance of strong social networks in resilience is among the most oft-repeated lessons learned in recent scholarship. This paper examines the intersection of three connected threads in the literature to understand one particular aspect of resilience: how the built environment contributes to greater resilience by supporting and encouraging strong social networks. Given that social networks positively influence resilience and that the built environment exerts influence on social networks, this literature review examines evidence linking strong social networks, a varied and integrated built environment, and greater resilience.

Atlanta Fed Research Examines Drivers of Default

August 22, 2013 Comments off

Atlanta Fed Research Examines Drivers of Default
Source: Federal Reserve Bank of Atlanta

As policymakers continue to grapple with the consequences of the foreclosure crisis, one critical question remains—what drives homeowners to default on their mortgages?

In “Unemployment, Negative Equity, and Strategic Default,” Atlanta Fed financial economist and associate policy advisor Kristopher Gerardi seeks to answer this question. He coauthored the working paper with Kyle F. Herkenhoff and Lee Ohanian, both of the University of California–Los Angeles, and Paul S. Willen of the Boston Fed.

In contrast to virtually all prior studies, this one used direct data on individual employment. It found job loss to be one of the most important drivers of defaults. Indeed, holding all other factors constant, unemployment increases the probability of default by 8 to 13 percentage points, the authors write.

In addition, negative equity of 20 percent or more increases the probability of default by 5 to 18 percentage points. However, underwater borrowers are less likely to default if they also have more liquid assets on hand, such as money in a checking or savings account.

If factors such as job loss and negative equity alone can cause a homeowner to default, what happens when an individual is both jobless and underwater on their mortgage? When those two factors collide, the so-called “double trigger” effect raises the unconditional rate of default by about 11.5 percent “over and above either trigger on its own,” the study found.

Locally Owned: Do Local Business Ownership and Size Matter for Local Economic Well-being?

August 21, 2013 Comments off

Locally Owned: Do Local Business Ownership and Size Matter for Local Economic Well-being?
Source: Federal Reserve Bank of Atlanta

The concept of “economic gardening”—supporting locally owned businesses over nonlocally owned businesses and small businesses over large ones—has gained traction as a means of economic development since the 1980s. However, there is no definitive evidence for or against this pro-local business view. Therefore, I am using a rich U.S. county-level data set to obtain a statistical characterization of the relationship between local-based entrepreneurship and county economic performance for the period 2000–2009. I investigate the importance of the size of locally based businesses relative to all businesses in a county measured by the share of employment by local businesses in total employment. I also disaggregate employment by local businesses based on the establishment size. My results provide evidence that local entrepreneurship matters for local economic performance and smaller local businesses are more important than larger local businesses for local economic performance.

Unemployment, Negative Equity, and Strategic Default

August 9, 2013 Comments off

Unemployment, Negative Equity, and Strategic Default
Source: Federal Reserve Bank of Atlanta

Using new household-level data, we quantitatively assess the roles that job loss, negative equity, and wealth (including unsecured debt, liquid assets, and illiquid assets) play in default decisions. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We find that individual unemployment increases the probability of default by 5–13 percentage points, ceteris paribus, compared with the sample average default rate of 3.9 percent. We also find that only 13.9 percent of defaulters have both negative equity and enough liquid or illiquid assets to make one month’s mortgage payment. This finding suggests that “ruthless” or “strategic” default during the 2007–09 recession was relatively rare and that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages.

Even One Is Too Much: The Economic Consequences of Being a Smoker

July 12, 2013 Comments off

Even One Is Too Much: The Economic Consequences of Being a Smoker
Source: Federal Reserve Bank of Atlanta

It is well known that smoking leads to lower wages. However, the mechanism of this negative relationship is not well understood. This analysis includes a decomposition of the wage gap between smokers and nonsmokers, with a variety of definitions of smoking status designed to reflect differences in smoking intensity. This paper finds that nearly two-thirds of the 24 percent selectivity-corrected smoking/nonsmoking wage differential derives from differences in characteristics between smokers and nonsmokers. These results suggest that it is not differences in productivity that drive the smoking wage gap. Rather, it is differences in the endowments smokers bring to the market along with unmeasured factors, such as baseline employer tolerance. In addition, we also determine that even one cigarette per day is enough to trigger the smoking wage gap and that this gap does not vary by smoking intensity.

Old, Sick, Alone, and Poor: A Welfare Analysis of Old-Age Social Insurance Programs

July 8, 2013 Comments off

Old, Sick, Alone, and Poor: A Welfare Analysis of Old-Age Social Insurance Programs
Source: Federal Reserve Bank of Atlanta

Poor heath, large acute and long-term care medical expenses, and spousal death are significant drivers of impoverishment among retirees. We document these facts and build a rich, overlapping generations model that reproduces them. We use the model to assess the incentive and welfare effects of Social Security and means-tested social insurance programs such as Medicaid and food stamp programs, for the aged. We find that U.S. means-tested social insurance programs for retirees provide significant welfare benefits for all newborn. Moreover, when means-tested social insurance benefits are of the scale in the United States, all individuals would prefer to be born into an economy with no Social Security. Finally, we find that the benefits of increasing means-tested social insurance are small or negative, if we hold fixed Social Security contributions and benefits at their current levels.

Atlanta Fed 2012 Annual Report Explores Intersections between Monetary Policy and the Economy

June 17, 2013 Comments off

Atlanta Fed 2012 Annual Report Explores Intersections between Monetary Policy and the Economy

Source: Federal Reserve Bank of Atlanta

The Atlanta Fed’s 2012 annual report takes a retrospective look at the interaction between monetary policy and the economy last year. The online-only report, titled Turning Points: 7 Critical Conversations about the Economy in 2012, is fully interactive, packed with embedded videos, customizable charts and graphs, and a pop-up definitions of key information.

Through the lens of seven conversations, the main feature taps into a few of the most important ways in which monetary policy interacts with the economy. The conversation topics shown below are "a starting point from which readers can explore in greater depth key turning points that occurred in 2012 and the ways in which monetary policy worked to address the challenges that remain," said Atlanta Fed President Dennis Lockhart.

The seven critical conversations the Atlanta Fed identified are:

  • Housing
  • Labor markets
  • Small business
  • Inflation
  • European sovereign debt
  • Fiscal policy
  • Monetary policy

Housing Wealth and Wage Bargaining

January 8, 2013 Comments off

Housing Wealth and Wage Bargaining
Source: Federal Reserve Bank of Atlanta

We examine the relationship between housing equity and wage earnings. We first provide a simple model of wage bargaining where failure leads to both job loss and mortgage default. Moreover, foreclosure generates disutility beyond selling a home. We test this prediction using nine waves of the national American Housing Survey. Employing a rich set of time and place controls, individual fixed effects, and an instrumental variable strategy, we find that people with an underwater mortgage command a significantly lower wage than other homeowners. This finding survives a number of robustness checks. We also include other determinants of “house lock” such as a favorable mortgage interest rate relative to the current rate and a capped property tax assessment, but we do not find these factors lower earnings. We conclude that negative equity matters because default is unpleasant or costly, not because it precludes an out-of-state job search.

EconSouth Looks Back at Evolution of Economic Indicators

November 1, 2012 Comments off

EconSouth Looks Back at Evolution of Economic Indicators
Source: Federal Reserve Bank of Atlanta

Economic policymakers today have massive amounts of data at their disposal. Their circumstances are drastically different from those faced by their counterparts during the Great Depression. Indeed, armed with little more than stock indices, freight car loadings, and industrial production figures, policymakers struggled to monitor the economy’s pulse during the worst economic contraction in modern history.

The lack of data spawned a push for more and better data collection on the U.S. economy, explains staff writer Lela Somoza in “Part Chart, Part Science: The Evolution of Economic Indicators.” As a matter of fact, gross domestic product (GDP), one of the most closely followed indicators, has its roots in the Great Depression. Over time, however, it and other indicators have evolved to keep pace with the changing U.S. economy, which has grown in size and complexity.

Just as indicators have evolved over time to reflect the increasingly complex U.S. economy, their relative importance has waxed and waned also, Somoza notes, pointing to monetary aggregates as a prominent example.

To read more about the evolution of economic indicators since the Great Depression, see the full article in the third-quarter issue of EconSouth. The article also includes a survey of some of the more offbeat indicators economists and others turn to for a more nuanced view of the U.S. economy.

Foreclosure Externalities: Some New Evidence

September 11, 2012 Comments off

Foreclosure Externalities: Some New Evidence

Source: Federal Reserve Bank of Atlanta

In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in "above average" condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices.

The Devil’s in the Tail: Residential Mortgage Finance and the U.S. Treasury

September 3, 2012 Comments off

The Devil’s in the Tail: Residential Mortgage Finance and the U.S. Treasury
Source: Federal Reserve Bank of Atlanta

This paper seeks to contribute to the U.S. housing finance reform conversation by providing a critical assessment of the various types of policy proposals that have been offered. There appears to be a broad consensus to maintain explicit government guarantees for certain narrowly defined borrower populations, such as Federal Housing Administration insurance guarantees for low- and moderate-income and first-time homebuyers. However, the expected role of the federal government in the broader housing finance system is in dispute. The expected role ranges from no role to insuring against only extreme or tail events to insuring against all losses. However, most proposals agree that any public insurance be priced and available only for loans meeting specified criteria to limit taxpayer exposure.

A Closer Look at Nonparticipants During and After the Great Recession

August 10, 2012 Comments off

A Closer Look at Nonparticipants During and After the Great Recession
Source: Federal Reserve Bank of Atlanta

This paper uses matched individual-level data from the Current Population Survey to determine that around the 2008 recession, there was a significant upward shift in trend of the share of labor force leavers giving “Schooling” and “Other” as the reason for absence from the labor market. This trend shift is observed primarily among workers between the ages of 25 and 54 and is widespread across all educational groups with at least a high school degree. In addition, the upward shift in the trend of the schooling reason share occurred among workers previously employed in occupations and industries with varying degrees of job losses during the recession. This shift suggests it was a widespread phenomenon and not isolated among sectors or occupations that suffered the most during the recession. The implication is that the upward shift in the schooling reason share has more likely been a response to lower opportunity costs of schooling during economic downturns rather than the result of workers trying to overcome skill mismatch in the labor market. In addition, since transition rates to the labor force are highest among those giving “Schooling” and “Other” as reasons for absence, the decline in labor force participation since 2008 is likely more transitory than permanent.

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