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Boston Fed Research



Research papers and publications from the Federal Reserve Bank of Boston



Copyright: @2016 All rights reserved.
 






The 2016 Diary of Consumer Payment Choice

Fri, 12 Jan 2018 10:22:00 -0500

This report contains initial results for the 2016 Diary of Consumer Payment Choice (DCPC), the third in a series of diary surveys. It includes estimates of the number, value, and average value of payments that all U.S. adult consumers made using the various U.S. payment instruments. It also includes estimates of cash held on person by denomination of currency, and it discusses changes in payment choice and cash holdings from 2015 to 2016.




2016 Diary

Fri, 12 Jan 2018 10:19:00 -0500




2015 Diary

Fri, 12 Jan 2018 10:18:00 -0500




U.S. Consumers’ Awareness and Use of Marketplace Lending

Mon, 08 Jan 2018 12:19:00 -0500

Marketplace lending is a new model of lending that matches borrowers and investors through online platforms without the use of a financial institution as an intermediary. It is unclear what role marketplace lending ultimately will play in consumer finance, but certainly consumer demand will be a major factor in determining that role.

With the premise that examining consumer awareness is the first step toward understanding demand, this study uses data from two nationally representative surveys—the Survey of Consumer Payment Choice and the Diary of Consumer Payment Choice—to report on the awareness and use of marketplace lending in late 2016.




Financial Variables and Macroeconomic Forecast Errors

Mon, 08 Jan 2018 11:36:00 -0500

Following the Great Recession of 2007-09, much research focused on the measurement and predictive power for macroeconomic activity of financial variables meant to capture different aspects of the macro-financial landscape. Most of this work has centered on evaluating the importance of financial variables (primarily asset prices) in forecasting real economic activity.

The authors of this paper set out to assess the connection between finance and the macroeconomy by examining how a battery of financial variables fares in predicting macroeconomic forecast errors. The developed evidence sheds light on what types of financial linkages have been “missing” in many macro forecasting models to date. Such evidence could help inform policymakers’ and economists’ agendas for developing financial indicators and macroeconomic models that are better attuned to relevant financial developments.




Portfolio Choice with House Value Misperception

Mon, 08 Jan 2018 11:04:00 -0500

For the majority of households that own their primary residence, this home is their most important asset—it serves as a vehicle for savings and investment while also conferring shelter services. The house’s current value serves as a key determinant of the household’s other portfolio choices, as well as decisions related to consumption, savings, and retirement planning. By using data on self-reported (subjective) house values taken from individual households that participate in the Panel Study of Income Dynamics (PSID), and comparing this information to the zip code-level Core Logic Home Price Index, used as a proxy for the house’s market (objective) value, the authors show that over the 1984–2013 period, about half of the US households in this PSID sample systematically miscalculated the true current value of their home. Twenty-five percent of these households undervalued their house by 11 percent or more, while 25 percent overvalued their homes by at least 9 percent. Most studies on individual portfolio choice assume that households have accurate knowledge of their house’s market value, and thus do not consider how inaccurate beliefs about house values may skew other portfolio choices. By accounting for house value misperception and the role it may play in the household’s other financial decisions, the authors extend the portfolio choice model with transaction costs proposed in Grossman and Laroque (1990) and extend Alvarez, Guiso, and Lippi (2012) by incorporating uncertainty in the price of housing (a durable good) as it relates to choices for both housing and nonhousing consumption.




Monetary Policy Through Production Networks: Evidence from the Stock Market

Thu, 21 Dec 2017 09:33:00 -0500

A central endeavor in macroeconomic research seeks to understand how shocks are transmitted throughout the economy. Recent findings suggest that microeconomic shocks—those that affect a single firm, industry, or related group—spread through the larger economy and generate aggregate fluctuations via the production network (the economy’s input-output structure). However, there is little evidence about how much of the overall response to macroeconomic shocks can be attributed to network effects, since these effects are difficult to measure. By treating monetary policy changes as demand shocks, and tracing how stock prices are affected during a narrow time window centered around FOMC policy announcements, the authors quantify how a macroeconomic shock is disseminated throughout the real economy via input-output linkages. They employ spatial autoregressions to decompose the overall monetary shock into a direct effect and a network effect.




Credit Card Utilization and Consumption over the Life Cycle and Business Cycle

Thu, 21 Dec 2017 09:32:00 -0500

Nearly 80 percent of U.S. adults have a credit card, and more than half of them revolve their debt from month to month. Using a large sample of credit bureau data, this paper documents a tight link between available credit (the limit) and credit card debt, and then it offers a model-based interpretation of this linkage. Credit limits change frequently for individuals, increase rapidly on average as people age, and show large changes over the business cycle. Yet credit card debt changes nearly proportionately to credit and at about the same time, so the fraction of credit used is relatively stable over time. The authors build a life-cycle consumption model that includes the joint use of credit cards to pay directly for expenditures, to help smooth consumption against income shocks, and to borrow longer term (revolving indefinitely). The authors estimate the parameters of the model using several data sources, including a large credit bureau database and a new daily diary of consumer payment choices.




2012 Diary

Wed, 20 Dec 2017 10:51:00 -0500




U.S. Consumer Cash Use, 2012 and 2015: An Introduction to the Diary of Consumer Payment Choice

Thu, 30 Nov 2017 13:15:00 -0500

Given the proliferation of electronic payment networks and the commonly held theory that “cash is dying” in the United States, the authors of this paper set out to report estimates of cash use between 2012 and 2015. They also sought to explain methodological differences between two measures of consumer cash payment use and to offer an estimate of the difference that attempts to harmonize the data.

The authors analyzed estimates of the number and value of cash and noncash payments from the 2015 Diary of Consumer Payment Choice (DCPC), which was sponsored by the Federal Reserve Banks of Boston, Richmond, and San Francisco. They used both the DCPC and the Federal Reserve Bank of Boston’s Survey of Consumer Payment Choice (SCPC) to compare results for 2015 with results from 2012, focusing on consumer use of cash.




Mortgage-Default Research and the Recent Foreclosure Crisis

Wed, 29 Nov 2017 15:39:00 -0500

This paper reviews how previous and contemporary mortgage-default research informed—or, in some cases, should have informed–policy discussions during the foreclosure crisis. It also evaluates default behavior during the crisis in light of previous findings, and it discusses the new research questions and opportunities that the crisis has created.

The authors note that all theories of default imply that negative equity is a necessary condition for default, because borrowers with positive equity can avoid default by selling their homes and pocketing what’s left over after paying off their mortgages. But different theories of default are less concrete about what a homeowner should do once equity becomes negative. Arbitrage-based models grounded in formal theories of household optimization imply that default depends only on aggregate factors such as house prices and interest rates, not on the individual characteristics or circumstances of the borrower. Conversely, so-called double-trigger models allow adverse life events such as job loss and illness to precipitate defaults. Double-trigger models generate more-realistic empirical predictions, but they are less grounded in formal household optimization. This paper discusses how the foreclosure crisis has encouraged economists to blend these two extremes into a third alternative that provides an optimizing foundation for the default function and formalizes the previously ad hoc approach of double-trigger models.




FOMC Communication and Interest Rate Sensitivity to News

Mon, 20 Nov 2017 09:00:00 -0500

As central banks make an increasingly greater effort to inform the public about their objectives and operations, it’s important to gain a better understanding of how financial markets could glean information about policy reaction functions from the banks’ communications.

Central bank communications involving forward guidance have received the most attention, because, many studies have shown, they can stimulate demand when nominal interest rates are close to zero, as they have been recently for many advanced economies. Likewise, much of the empirical work on central bank communications has focused on their effect on the level of interest rate expectations.

Less attention has been paid to central bank communications’ ability to convey information about policy reaction functions. This paper takes a step in that direction by exploring the relationship between the language used in communications by the Federal Reserve Open Market Committee (FOMC) and financial market responses to different types of macroeconomic news. Specifically, the author looks at whether the emphasis on the topic of labor in FOMC meeting minutes and post-meeting statements is associated with stronger responses of interest rates to labor-related news. A positive relationship would suggest that FOMC communications could play a role in determining the types of macroeconomic news that the financial markets pay attention to.




The Equilibrium Real Policy Rate through the Lens of Standard Growth Models

Mon, 20 Nov 2017 09:00:00 -0500

This paper focuses on the roles that total factor productivity (TFP) and potential growth play in determining the equilibrium real policy rate, a concept generally defined as the real interest rate that prevails when the economy is at full employment and inflation is at the central bank’s target rate. It’s an important factor in monetary policy decision-making that has gained prominence lately as the Federal Reserve continues to normalize the stance of monetary policy by raising the policy rate.

The analysis uses single-sector models for a baseline, but it places more emphasis on the multi-sector neoclassical growth model, which better fits the data from the past three decades. Within the framework of these standard growth models, the authors assess the evolution, current level, and prospective values of the equilibrium real policy rate.




Sectoral Inflation and the Phillips Curve: What Has Changed since the Great Recession?

Wed, 15 Nov 2017 09:19:00 -0500

The aggregate Phillips curve, a pillar of inflation dynamics models, predicts that as the labor market tightens, prices eventually face an upward pressure, and inflation rises. Yet, while the unemployment rate decreased from a peak of 9.9 percent in the fourth quarter of 2009 to 4.3 percent in the third quarter of 2017, core inflation remained below the Federal Open Market Committee’s target of 2 percent.

This anomaly has led some economists to question the usefulness of the aggregate Phillips curve as a model for policy analysis. However, others continue to believe the Phillips curve remains informative, and that the recent changes in inflation dynamics can be reconciled with the models by allowing for a structural break in model parameters.

This policy brief looks at disaggregated inflation data to see whether a sectoral Phillips curve, which characterizes the relationship between sectoral inflation and aggregate unemployment, can explain changing inflation dynamics. Sectoral data provide rich variation in disaggregated inflation rates within and between sectors and allow us to identify the sectors that may have contributed the most to a possible break. With this approach, we also can more closely consider individual inflation series. For example, we can study inflation persistence at the sectoral level. Using disaggregated inflation data also enables us to investigate the role of transitory sectoral shocks, some of which, including price wars in the communications sector, have been the focus of recent inflation debates.




Inflation Expectations and Nonlinearities in the Phillips Curve

Tue, 14 Nov 2017 14:10:00 -0500

The Phillips curve, which shows the connection between inflation and unemployment, typically reflects an inverse relationship: as inflation increases, unemployment decreases, and vice versa. During the 1970s and ‘80s, much research focused on understanding the causes and costs of high inflation using this model. Since then, researchers have challenged the validity of the Phillips curve—particularly during the 2010s, when the unemployment rate skyrocketed but inflation did not decline as much as the curve predicted it would. The authors of this paper set out to explore the apparent lack of validity of the Phillips curve during the missing disinflation of the 2010s.




Transparency in State Debt Disclosure

Mon, 06 Nov 2017 15:26:00 -0500

Government transparency has become an increasingly popular and important issue in the United States and in many other countries in recent decades. It helps improve citizens' understanding of public policies, promote public trust in government, reduce corruption, and hold officials accountable for their performance. Transparency hinges critically on the accessibility and disclosure of information, which is widely regarded as a public good contributing to the functioning of markets.

Fiscal transparency is one important aspect of government transparency. One particularly concerning issue, which has been largely hidden from the public view until recently, is the ever-growing debt of public authorities. The public and the media tend to focus on the debt issuance of the primary government units and may give less scrutiny to the numerous public authorities. Ordinary citizens also often find it difficult to track changes in the public authorities' debt from one year to the next.

Despite strong public interest, to the authors' best knowledge, there has been little research on transparency in state and local debt disclosure. This is likely partly due to a lack of data and lack of a measure of debt transparency. To fill this need, the authors develop a new measure of relative debt transparency by comparing two datasets of state debt, one of which has recently become available.




U.S. Monetary Policy and Emerging Market Credit Cycles

Fri, 03 Nov 2017 14:25:00 -0400

Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated primarily in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles.

For emerging market economies (EMEs), foreign bank loans denominated primarily in U.S. dollars are by far the most important category of cross-border capital flows. As of 2015, International Monetary Fund (IMF) data indicate that loans represent about half of all external liabilities of emerging market countries. By comparison, foreign bond and equity portfolio investments combined represent only about 20 percent. Much of the foreign lending comes from banks headquartered in developed economies: Bank for International Settlements (BIS) data show that roughly a third of all external liabilities of the emerging markets countries are held by U.S., European, and Japanese banks. Moreover, the volume of these claims has nearly doubled since the onset of the global financial crisis, reaching about $7 trillion in 2016.

Given the economic significance of U.S. dollar lending by global banks to EME firms, this paper examines the extent to which U.S. monetary policy plays an important role as a "push factor" for the credit cycles in these economies.




Faster Payments: Market Structure and Policy Considerations

Fri, 03 Nov 2017 14:23:00 -0400

The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. Although a few private‐sector firms are currently implementing new faster payments platforms, it is still uncertain how the market for faster payments will evolve in the long run.

As they did for legacy payment markets, economic forces such as economies of scale and scope, network effects, switching costs, and product differentiation will help shape the market for faster payments. Emerging technologies, however, could alter these forces and lead to new organizational arrangements or market structures. Various other factors, including industry and public‐sector efforts, will also influence the structure of the faster payments market.

In light of this uncertainty, this paper examines three hypothetical market structures that may emerge: a dominant‐operator environment, a multi‐operator environment, and a decentralized environment. Each of these market structures has different implications for the public policy objectives of efficiency, safety, and ubiquity. In particular, outcomes in the faster payments market will depend on the degree and allocation of market power among participants, which in turn may depend on factors such as available substitutes or ease of market entry.




The 2012 Diary of Consumer Payment Choice: Technical Appendix

Fri, 03 Nov 2017 14:03:00 -0400

This report serves as the technical appendix to the 2012 Diary of Consumer Payment Choice (DCPC), administered by the RAND Corporation. The DCPC is a study designed primarily to collect data on financial transactions over a three-day period by consumers over the age of 18 in the United States. This data technical appendix data report details the technical aspects of the survey design, implementation, and analysis.







The Local Aggregate Effects of Minimum Wage Increases

Tue, 17 Oct 2017 13:07:00 -0400

As part of the Fair Labor Standards Act, the federal government initiated a national minimum wage in 1938, which has since been raised 22 times, the latest increase in 2009 going to $7.25 per hour. State-level minimum wage increases have occurred with much greater frequency, especially quite recently, with 17 states raising minimum wages in 2016 and 19 states doing so in 2017. In total, there have been 247 changes in the minimum wage on the federal and state level between 1999 and 2014, resulting in substantial variation in current minimum wages across the United States. The policy intent behind minimum wage laws is to raise the return to employment for low-wage workers; indeed, the idea of a $15 per hour "living wage" has been growing—in 2016 California and New York passed legislation to gradually raise their minimum wages to this level (Seattle enacted a similar gradual $15 per hour increase in 2014), while other states are enacting more modest multi-year raises.

A voluminous empirical literature has largely found that within the range of the increases historically experienced in the United States, higher minimum wages have minimal employment effects. However, this literature has largely overlooked the fact that through general equilibrium adjustments that go beyond the labor market, the level of the minimum wage should affect prices and consumer spending. Moreover, higher minimum wages may cause fluctuations as local economic conditions adjust to the changed regulations. This paper addresses these less-studied issues by exploiting the variation in minimum wages across the United States and the fact that labor markets are defined by commuting distances. The authors compile a dataset of state-level minimum wage changes for the 1999–2014 period and use city-level price data from metropolitan statistical areas to measure the dynamic effects that minimum wage increases have on annual changes in city-level prices (inflation) and consumer spending.




The 2015 Survey of Consumer Payment Choice: Technical Appendix

Fri, 29 Sep 2017 11:29:00 -0400

This report serves as the technical appendix to the 2015 Survey of Consumer Payment Choice (SCPC), administered by the Dornsife Center for Economic and Social Research (CESR). The SCPC is an annual study, created and sponsored by the Consumer Payments Research Center (CPRC) at the Federal Reserve Bank of Boston, designed primarily to collect data on attitudes to and use of various payment instruments by consumers over the age of 18 in the United States. The main report, which introduces the survey and discusses the principal economic results, can be found at http://www.bostonfed.org/economic/cprc/SCPC. This data report details the technical aspects of the survey design, implementation, and analysis.




2015 Survey

Fri, 29 Sep 2017 11:28:00 -0400




The 2015 Survey of Consumer Payment Choice: Summary Results

Thu, 28 Sep 2017 14:21:00 -0400

This report presents key findings from the 2015 Survey of Consumer Payment Choice (SCPC). Due to changes in sampling frame and sample size, this report describes the survey results for 2015 only.




Battery Order Effects on Relative Ratings in Likert Scales

Tue, 26 Sep 2017 15:16:00 -0400

Many fields of research, especially those in the social sciences, rely on surveys as a means of collecting data. Indeed, certain types of information, such as attitudes or self-assessments, can only be gathered in this manner. Experience has shown that response patterns are heavily influenced by the questionnaire design, with variations in the instrument often introducing systematic tendencies and introducing a "survey effect" in the distribution of sample statistics. Aspects as fundamental as the survey mode (Bowling 2005) to seemingly trivial details of question presentation are known to make a difference. As a result, an entire field of research, survey methodology, has emerged to better understand these aspects of data collection and to establish conventions for consistency. One of the prominent themes in the survey design literature is that order often matters.

In this work, the author focuses on order effects within a very narrow, but common, form of survey question: a battery of Likert-scale questions. A Likert-scale question asks a respondent to select a response from a set of categorical, ordered options. Likert-scale batteries allow respondents to efficiently provide ratings for a group of items in the context of one another. For this reason, analyses often center on the relative rating distributions of two items in the battery, or how often one is given a lower rating than the other. Unlike mean ratings or even the distribution of ratings themselves, relative rating distributions provide direct insight into how the population feels toward one item relative to another and avoid issues caused by heterogeneity of responses, in which certain individuals tend to give high ratings, while others tend to give low ratings. The author studies how different orderings of the items within a battery and, in particular, the relative location of items affect relative rating distributions.




Integrated Household Surveys: An Assessment of U.S. Methods and an Innovation

Tue, 26 Sep 2017 15:15:00 -0400

With the desirability of having better data on U.S. household decisionmaking thrown into relief by the global Financial Crisis of 2008–09, the authors of this paper draw upon the experience of nearly two decades of work in Thailand (developed and documented in Samphantharak and Townsend 2010, henceforth S&T) that reveals the advantages of integrating household surveys and household financial statements. Using methodology developed by ST, the authors assess the extent to which U.S. household surveys are integrated with elements of household financial statements and demonstrate how a diary of consumer payment choices can be used to construct a new statement of liquidity flows that advances the current state of the art in measuring stock-flow dynamics.

An overarching goal of this paper is to present a comprehensive vision for practical implementation of household surveys that are integrated with financial statements and payments data, leaving no gaps in measurement, and strengthening the theoretical and applied linkages among measures. The new statement of U.S. household liquidity flows takes a step closer toward realizing the overarching vision of the paper.




International Financial Integration, Crises, and Monetary Policy: Evidence from the Euro Area Interbank Crises

Wed, 16 Aug 2017 09:47:00 -0400

Since the mid-1980s, international capital flows have increased due to improved cross-border financial integration. However, the greater interconnection has exacerbated the effect that adverse liquidity shocks may have upon the world’s financial system. In September 2008, the failure of Lehman Brothers, a U.S. investment bank, marked the peak of the global financial crisis, which central banks combated using new and unprecedented policy measures. By early 2010, another crisis erupted in the euro area—due to concerns about sovereign default in Greece, Ireland, and Portugal and the health of Spain’s banking sector (collectively, the GIPS countries)—that prompted the European Central Bank (ECB) to engage in repeated rounds of intervention over a multi-year period. Despite the importance of understanding how financial crises affect cross-border lending channels, and whether the new and expansionary nonstandard monetary policy actions have helped repair financial markets, there is a dearth of empirical analysis on this topic due to a lack of micro-level data.

This paper uses a new and comprehensive micro-credit dataset on euro-denominated overnight loans in the interbank market, analyzed at the lender-borrower level, during the periods surrounding the Lehman Brothers’ failure and the European sovereign debt crisis. By comparing loans made to the same borrower on the same day that differ only by whether the lender is a foreign or a domestic bank, the authors identify the cross-border effects that are masked when data is aggregated at the bank or country level. This approach helps identify the factors that contribute to the reduction in cross-border lending and assess to what extent nonstandard expansionary monetary policies help to mitigate cross-border frictions that inhibit the supply of credit.




Uncovering Covered Interest Parity: The Role of Bank Regulation and Monetary Policy

Thu, 20 Jul 2017 15:17:00 -0400

Covered interest parity (CIP) is a concept holding that the interest rates paid on two similar assets that only differ in their denominated currencies should, after controlling for any foreign exchange rate risk, be the same. Fulfilling this condition depends on the idea that international capital mobility is largely frictionless. More specifically, the theory underpinning CIP predicts that converting the amount borrowed in a foreign currency using the foreign exchange (FX) spot market, while simultaneously hedging the resulting exchange rate risk using a foreign exchange forward contract, should result in a cross-currency basis equal to zero. (Such a simultaneous spot purchase and forward sale of foreign currency is called an FX swap, a contract in which investors essentially borrow in one currency and lend in another currency.) Because the U.S. dollar is the dominant global currency used in international trade and finance, trades against the dollar account for about 90 percent of the activity that occurs in the FX swap market. The ten largest global banking institutions account for two-thirds of the trades in the FX swap market, with nonfinancial corporations and other investors also using the FX swap market to hedge foreign currency risk or engage in arbitrage activity.

Historically, the CIP relationship was so stable across countries that it came to be regarded as one of the few binding laws in economics. Prior to the 2007–2008 financial crisis, the cross-currency basis was close to zero for all pairs, but after the crisis began, large violations of CIP were present, especially with respect to the U.S. dollar. When the European sovereign debt crisis arose in early 2010, the cross-currency basis also widened, but then flattened out by late 2012. While credit risk and liquidity risk have subsequently remained low, since mid-2014 large and persistent violations of CIP have been observed, resulting in substantial increases in the cost of borrowing U.S. dollars in the FX swap market. This paper analyzes the driving factors behind these most recent deviations in the CIP condition.




Monetary Policy and Global Banking

Mon, 17 Jul 2017 10:22:00 -0400

Foreign ("global") banks play an important role in many countries and use their global balance sheets to respond to local monetary policy. According to the Bank for International Settlements, European and Japanese banks' claims on U.S. nonbank firms as of June 2015 were USD 1.61 and 0.72 trillion, respectively. Foreign banks help originate close to a quarter of all syndicated corporate loans in the United States (DealScan data). Similarly, U.S. banks are important lenders abroad. However, sources and uses of funds are often denominated in different currencies, leading to a foreign exchange (FX) exposure that banks need to hedge. If cross-currency flows are large, the hedging cost increases, diminishing the return on lending in foreign currency.

Given the economic significance of global banks, questions have been raised about their role in the propagation of economic shocks across countries. This paper studies the effect of monetary policy actions in one country on the lending decisions of global banks abroad, in the context of changes in the interest on excess reserves (IOER) rate in six major currency areas between 2000:Q1 and 2015:Q2.







How Do Consumers Make Their Payment Choices?

Tue, 27 Jun 2017 13:39:00 -0400

Payment transformation has generated a shift from paper to cards and electronic payments in the United States, but there is also a large degree of heterogeneity among consumers in how they pay. Data on the number of consumer payments by payment method were scarce until the year 2000. We now have much better data on the aggregate number of payments by payment instrument in the United States and more recent, detailed data on payments by consumers separate from payments by the business and government sectors. This paper presents factors affecting consumer payment behavior, shows data on how consumers pay in the United States, and summarizes existing literature on consumer payment choice.




Payment Discounts and Surcharges: The Role of Consumer Preferences

Tue, 27 Jun 2017 09:56:00 -0400

Shy and Stavins (2015) showed that in 2012 U.S. merchants rarely took advantage of their recent freedom to differentiate prices based on the method of payment use. The authors of this paper use new data from the 2015 Diary of Consumer Payment Choice to analyze price discounts and surcharges based on the payment method used for transactions. They examine consumer preferences for specific payment instruments and test whether consumer demand for payment instruments is price elastic—specifically, whether consumers are likely to deviate from their preferred methods in order to obtain a discount or avoid a surcharge.




Relative Pay, Productivity, and Labor Supply

Thu, 22 Jun 2017 08:41:00 -0400

Concerns regarding relative pay—earnings compared with the earnings of others doing a similar job or compared with one's earnings in the past—affect labor supply and productivity. Specifically, changes in pay, transparency of differential pay across workers, and the ability to explain these differences seem to be important for the decision of how much to work and how much effort to exert on the job. This implies, in turn, that relative pay concerns may contribute to unemployment and help determine the success or failure of using differential pay to incentivize employees. This brief summarizes a collection of studies showing the effect of relative pay information, even if irrelevant, on labor supply and effort.




Community Education Circles in the Lawrence Public Schools: Evaluation Design and Baseline Survey

Tue, 20 Jun 2017 10:47:00 -0400

The Boston Fed launched its Working Cities Challenge as an effort to promote economic growth and development in the region's smaller "Gateway Cities," midsized urban centers that historically were strong industrial hubs, but that today face many economic and social challenges. The inaugural 2013 Challenge focused on smaller Massachusetts cities; Lawrence, one of the cities that received a multiyear grant, has suffered from prolonged economic stagnation since the 1950s. The city's median household income is well below the national median and (as of 2014) 26 percent of its families were living in poverty, more than double the national poverty rate of 11 percent. Besides these economic challenges, Lawrence has had a chronically underperforming public school system, though in 2011 a turnaround plan began to address this problem.

The city's winning proposal, the "Lawrence Working Families Initiative," seeks to improve the employment opportunities and overall economic outcomes for low-income families, and coordinates outreach efforts with a number of different organizations, including the Lawrence Public Schools. The program known as Community Education Circles (CECs) aims to improve educational outcomes for students, to give their parents—many of whom are immigrants--a greater sense of belonging and engagement with their children's school, and to enhance the cultural competency of teachers dealing with students and parents from diverse backgrounds. While there is anecdotal evidence that the CECs are fostering better family-school engagement, this paper describes the Boston Fed's research strategy for evaluating the success of the CECs (the results of which will be discussed in a forthcoming paper), involving an intent-to-treat approach that compares the outcomes for those invited to participate in the CECs with members of a demographically similar control group who were not invited to participate in the program. This preliminary paper provides extensive information, garnered by baseline survey data supplied by the families and data provided by the Lawrence public school system, on the socioeconomic and demographic characteristics of the families in our study—including control group families as well as treatment group families, and identifies relationships among these characteristics that may pose barriers to achieving the goals of the CECs.




Banks' Search for Yield in the Low Interest Rate Environment: A Tale of Regulatory Adaptation

Tue, 20 Jun 2017 10:30:00 -0400

Banks are compensated primarily through the net interest margin (NIM), which is the difference between the interest earned on their investments and the interest paid to their depositors and other creditors. In the low interest rate environment that has persisted since the Great Recession, banks can no longer lower the short-term rates paid to their depositors to below the market rate, so to obtain a higher NIM they must search for higher current yields on assets by taking on more credit risk or non-credit risks (such as interest rate risk). For any given gain in current yield, some types of potential future losses associated with non-credit risks, such as mark-to-market losses due to yield increases, can be avoided with accounting treatments. A simple model shows that a bank's incentive to take on risks for which potential future losses can be managed is countercyclical, especially if a bank is capital constrained or used to have a wider NIM in the past. The loan losses suffered by many banks due to the financial crisis, coupled with the low interest rate environment during the slow recovery, renders it particularly attractive for banks to reach for yield by taking on non-credit risks. This study thus focuses on banks' exposure to interest rate risk through a maturity mismatch between assets and liabilities since the Great Recession. In the United States, a key feature of the post-crisis period has been the wide-ranging regulatory and supervisory reforms enacted to make the nation's banking system safer. Those banking institutions deemed to pose a systemic risk, which are generally the largest (with total assets of $250 billion or more) are now subject to more stringent and extra regulatory requirements, such as the advanced approaches capital rule. In particular, the removal of the so-called accumulated-other-comprehensive-income (AOCI) filter, which used to prevent unrealized gains/losses on the fair value of available-for-sale (AFS) securities from changing the amount of regulatory capital, likely has had the most pronounced disparate impact on incentives to take on more interest rate risk in order to earn a higher NIM. Since this filter was removed only for banks subject to the advanced approaches capital rule, smaller banks presumably have had greater latitude to reach for yield through greater exposure to interest rate risk over the post-crisis years. This study uses Call Report data and difference-in-differences analysis to examine whether, in the post-crisis environment, banks have reached for yield by taking on more interest rate risk, subject to the size-dependent enhancement of regulatory restraints after the crisis. The analysis thus places bank holding companies (BHCs) into one of four groups, depending on the post-crisis regulatory treatment: 1) the largest BHCs (those subject to the advanced approaches capital rule), mostly those with more than $250 billion in assets, 2) those BHCs with assets between $50 and $250 billion, 3) those BHCs with assets above $10 billion but less than $50 billion, and 4) those BHCs with assets under $10 billion.  The sample period runs[...]



Measuring Consumer Expenditures with Payment Diaries

Mon, 19 Jun 2017 11:25:00 -0400

Obtaining the best possible estimates of consumer expenditures is crucial to proper construction of consumption data and applied economic research on consumer behavior. Measuring consumer expenditures well is complex and difficult. The challenges, which are manifest in discrepancies between microeconomic and aggregate estimates of consumption and related data, confound efforts to understand households' responses to the recent financial crisis. One basic problem is that the leading U.S. data source, the Consumer Expenditure Survey, covers only about three-fifths of personal consumption expenditures. However, in a potentially promising development, Bagnall et al. (2016) report that aggregate payment values from individual consumer diaries conducted during the 2009–2012 period in seven industrial countries amounted to between 72 and 111 percent of national income estimates of consumption, suggesting that payments data might contribute to a solution. Though imperfect, these relatively high estimates merit further investigation.

This paper uses the Boston Fed's 2012 Diary of Consumer Payment Choice (DCPC) to describe and quantify the advantages of collecting consumer expenditure data using payment diaries that record daily authorizations by the type of payment instrument (cash, check, money order, debit or credit card, online banking, etc.) at the point-of-sale (POS), for bill payment (BP), and for all other payments.




Population Aging, Labor Demand, and the Structure of Wages

Thu, 15 Jun 2017 10:45:00 -0400

One consequence of demographic change is substantial shifts in the age distribution of the working-age population. As the baby boom generation ages, the usual historical pattern of a high ratio of younger workers relative to older workers has been replaced by a pattern of roughly equal percentages of workers of different ages. One might expect that the increasing relative supply of older workers would lower the wage premium paid for older, more experienced workers.

What happens to the wages of older workers and the structure of wages more generally as the population ages has potentially important implications for public policy. Many analysts are convinced that longer working lives must be a key component of any solution to providing for the consumption needs of the old as the traditionally defined dependency ratio increases. The efficacy of this solution depends, in part, on the wage rates that older workers command in labor markets. If the wages of older workers fall as their ranks become crowded with the baby boomers, then continued work may seem a less desirable option to those contemplating retirement, and the earnings of those who do continue working will not go as far in financing their consumption.




Consumer Perspectives: Payment Speed & Security

Thu, 25 May 2017 00:00:00 -0400

Presented at NEACH Payments Management Conference on May 10, 2017




Consumer Reactions to Data Breaches

Thu, 25 May 2017 00:00:00 -0400

Presented at the NACHA Payments 2017 on April 24, 2017




Consumers’ Role in the Payments Transformation

Thu, 25 May 2017 00:00:00 -0400

Presented at the Atlanta-Israel FinTech Innovation Conference on May 23, 2017







Does Changing Employers’ Access to Criminal Histories Affect Ex-Offenders’ Recidivism? Evidence from the 2010–2012 Massachusetts CORI Reform

Tue, 21 Mar 2017 08:26:00 -0400

In 2006, the U.S. Justice Department estimated that about 30 percent of all adults living in the United States had a criminal record. A 2014 report from the U.S. Bureau of Justice Statistics found that of all the ex-offenders released from state prisons in 2005, 67.8 percent were arrested for a new offense within three years, and 76.6 percent were arrested again within five years. Even in Massachusetts, a state that has a relatively low incarceration rate, about 60 percent of all individuals released from county jails or state prisons are convicted of new charges within six years. These high recidivism rates may be partly explained by the difficulties ex-offenders, particularly those who served time behind bars for more serious crimes, may face when seeking legal employment. Employers reject many job applicants who have criminal records, so if no viable employment opportunities exist, ex-offenders may revert to criminal activity. Public policy initiatives aimed at improving employment outcomes for ex-offenders, such as the 2010–2012 Massachusetts Criminal Offender Record Information (CORI) Reform, may have a positive effect on reducing recidivism rates. In November 2010, as the first step of the Massachusetts CORI Reform, employers were prohibited from asking about an individual's criminal history on an initial job application (a reform known as "ban the box"). The second step of the reform in May 2012 changed who can access the state's CORI database, enacted limits on the information that can be obtained, and imposed a time limit regarding how long misdemeanor and felony convictions will be reported on standard employer requests (a reform we call the "record-access" reform). This paper examines whether the Massachusetts CORI Reform helped to lower recidivism rates for affected ex-offenders.




The Effect of Changing Employers' Access to Criminal Histories on Ex-Offenders' Labor Market Outcomes: Evidence from the 2010–2012 Massachusetts CORI Reform

Tue, 21 Mar 2017 08:25:00 -0400

How to best reintegrate large numbers of ex-offenders into civil society is an important challenge for U.S. public policy. In 2006, the Department of Justice estimated that over 30 percent of the U.S. adult population has some type of criminal record; the percentages are even higher for some minority groups. Having a criminal record can impose lasting costs, particularly for anyone seeking job, as gaining legal employment is usually the best chance an ex-offender has to effect a positive change in his or her life. In an effort to reduce some of barriers to employment that may arise from having a criminal record, some states and localities have adopted a policy widely known as ban the box, which prohibits employers from asking about an individual's criminal history on an initial job application. In November 2010, Massachusetts implemented a version of ban the box as the first step in reforming its laws governing Criminal Offender Record Information (CORI). The second step, effective in May 2012, changed who can access the state's CORI database, enacted limits on the information that can be obtained, and imposed a time limit regarding how long misdemeanor and felony convictions will be reported on standard employer requests. On the whole, the Massachusetts CORI Reform is widely regarded as a national model to help improve ex-offenders' labor market outcomes. This study uses a unique and confidential large dataset and rigorous econometric techniques to test how well the intended reforms have worked in practice. The results may help guide and improve upon similar reform efforts in other states.




The Criminal Population in New England: Records, Convictions, and Barriers to Employment

Tue, 21 Mar 2017 08:25:00 -0400

The portion of the U.S. population with a criminal record has been receiving mounting attention in recent years. While there is a significant amount of data about the criminal population under supervision, there is very limited linked data identifying how most individuals move through the criminal justice system. By analyzing multiple national and state data sources, this report aims to identify the size of the New England population with a criminal record and to describe the broad demographic characteristics of this population.

The report illustrates that the size of the population in the region with a criminal record is significant: in 2014 there are 5.3 million individuals in criminal record databases in New England. Young men between 20 and 24 years of age account for a disproportionate number of arrests and convictions in New England, and most individuals with a criminal record committed a misdemeanor, not a felony. The report illustrates that the region's mid-sized cities often host a disproportionately larger share of ex-offenders. The report discusses the need for more complete and coordinated data systems that can accurately examine flows through the criminal justice system and the outcomes of all ex-offenders.




Reintegrating the Ex-Offender Population in the U.S. Labor Market: Lessons from the CORI Reform in Massachusetts

Tue, 21 Mar 2017 08:25:00 -0400

Policymakers have proposed and enacted policies that seek to limit the negative consequences that a criminal record imposes on ex-offenders, their families, and society at large. Some states have changed how criminal records are accessed and governed in the interest of removing unduly burdensome barriers to employment for some ex-offenders. Between 2010 and 2012, Massachusetts enacted the Criminal Offender Record Information (CORI) Reform, changing access guidelines for criminal records and preventing employers from inquiring about criminal history on an initial application for employment.

This report empirically analyzes the impact of the two components of Massachusetts CORI Reform and finds that, contrary to expectations, the CORI Reform caused a small reduction in average employment for ex-offenders. Another finding of the report is that the reform also caused a small reduction in ex-offender recidivism, seemingly indicating a modest increase in ex-offender reintegration. The report concludes by noting that further policy measures and programs are needed to better support the reintegration of ex-offenders into civil society.




Who Counts as Employed? Informal Work, Employment Status, and Labor Market Slack

Thu, 16 Mar 2017 13:25:00 -0400

According to the Bureau of Labor Statistics (BLS), an individual is employed if she reported having worked for pay or profit in the week prior to the survey. The rise of informal or nonstandard work arrangements in recent years raises the question of whether the BLS estimates of employment capture informal work, because such work may be intermittent and may go unreported for a number of reasons. For related reasons, estimates of labor market slack based on BLS data—such as slack hours among those employed part-time for economic reasons—might not take into account the fact that some individuals engage in informal work in their spare time. Such adjustments could have important implications for forecasts of wage and price inflation because these forecasts depend in part on estimates of labor market slack. Using original survey data, this paper investigates the implications of informal work for the measurement of employment status and labor market slack and considers whether the official BLS estimates may underestimate the U.S. labor force participation rate.




The Time-Varying Price of Financial Intermediation in the Mortgage Market

Wed, 15 Mar 2017 14:56:00 -0400

Financial intermediaries in the U.S. mortgage market link household borrowers in the primary mortgage market with global investors through the secondary market for mortgage-backed securities (MBS).Mortgage market intermediation is a significant source of income for banks and a major cost to households when they buy or refinance a home. Spending on mortgage intermediation has taken on monetary policy relevance in recent years as household refinancing was a key tool of the FOMC. The authors use a new dataset and develop a new methodology to measure the price of intermediation in the U.S. mortgage market. They analyze how the price of intermediation varies, what factors drive this variation, and how it may affect the pass-through of monetary policy. The authors concentrate on the 2008–2014 period during which the Federal Reserve engaged in quantitative easing (QE) in order to drive down the cost of mortgages for U.S. consumers.




Heterogeneous Exporters: Qualitative Differences and Qualitative Similarities

Tue, 14 Mar 2017 12:55:00 -0400

Firm heterogeneity has been at the center of recent research in the international trade literature. Both theoretical and empirical work has shown the importance of firm productivity differences in shaping aggregate trade flows (Melitz and Redding 2014). Typically, the analysis centers on the distinction between exporters and nonexporters (Bernard and Jensen 1999, Roberts and Tybout 1997). A strand of the literature also studies how firms choose their set of export destinations and/or exported products (Eaton, Kortum, and Kramarz 2011, Bernard et al. 2016, Hottman, Redding, and Weinstein 2016). This paper extends the literature and, using detailed data on Colombian manufactures, studies the relationship between a firm's productivity and the various aspects that characterize its exporting decisions—the combined quantitative and qualitative features that encompass the firm's engagement in international markets.




Labor Force Participation in New England vs. the United States, 2007–2015: Why Was the Regional Decline More Moderate?

Tue, 14 Mar 2017 11:46:00 -0400

A number of papers have tried to make sense of the declines in U.S. labor force participation in recent years and to estimate the extent to which the currently depressed participation rate reflects cyclical rather than structural factors. Different methods yield different conclusions, but the most recent evidence (Aaronson et al. 2014) suggests that structural factors—the most important among these being population aging—explain a significant or even a dominant share of the net declines in participation since 2007.

In the New England region, the labor force participation rate has also fallen significantly since before the Great Recession. New England's August 2016 participation rate fell short of its own pre-recession peak value (from November 2006) by 2.4 percentage points, and the peak-to-trough decline for the region was a full 3 percentage points. (New England's trough occurred in October 2015.) These data indicate that the region's participation rate declined by a smaller margin than the nation's since 2007. As a result, the positive gap between New England's participation rate and the U.S. rate, a gap observed at least as far back as the mid-1970s, increased from an average of 1.8 percentage points in 2007 to an average of 2.6 percentage points in 2015. This paper seeks to identify the main forces that contributed to the recent declines in labor force participation in New England and the forces that moderated recent declines relative to the national trend. This exercise contributes to an assessment of the outlook for participation in the region moving forward.