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Discussion Paper
Who gains and who loses from credit card payments?: theory and calibrations
Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or ?cash?) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. ...
Discussion Paper
Educational opportunity and income inequality
Affordable higher education is, and has been, a key element of social policy in the United States with broad bipartisan support. Financial aid has substantially increased the number of people who complete university?generally thought to be a good thing. We show, however, that making education more affordable can increase income inequality. The mechanism that drives our results is a combination of credit constraints and the ?signaling? role of education first explored by Spence (1973). When borrowing for education is difficult, lack of a college education could mean that one is either of low ...
Discussion Paper
Changes in U.S. household balance sheet behavior after the housing bust and Great Recession: evidence from panel data
This paper uses panel data through 2011 to examine evidence of shifts in household balance sheet behavior following the financial crisis and Great Recession. The paper considers evidence of balance sheet repair through debt repayment as well as changes in the composition of households? balance sheets and/or saving decisions to determine whether households? desire for holding or investing in riskier versus safer assets has changed. The data show relatively small and limited balance sheet adjustment?especially for those households considered the most likely to have been impacted by the economic ...
Discussion Paper
TIPS scorecard: are TIPS accomplishing what they were supposed to accomplish?: can they be improved?
In September 1997, the U.S. Treasury developed the TIPS market in order to achieve three important policy objectives: (1) to provide consumers with a class of assets that allows for hedging against real interest rate risk, (2) to provide holders of nominal contracts a means of hedging against inflation risk, and (3) to provide everyone with a reliable indicator of the term structure of expected inflation. This paper evaluates progress toward the achievement of these objectives and analyzes prospective ways to better meet these objectives in the future, by, for example, extending the maturity ...
Discussion Paper
Optimal retirement asset decumulation strategies: the impact of housing wealth
A considerable literature examines the optimal decumulation of financial wealth in retirement. We extend this line of research to incorporate housing, which comprises the majority of most households? non-pension wealth. ; We estimate the relationship between the returns on housing, stocks, and bonds, and simulate a variety of decumulation strategies incorporating reverse mortgages. We show that homeowner?s reversionary interest, the amount that can be borrowed through a reverse mortgage, is a surprisingly risky asset. Under our baseline assumptions we find that the average household would be ...
Discussion Paper
Consumer behavior and payment choice : 2006 conference summary
This paper summarizes the proceedings of the second Consumer Behavior and Payment Choice conference, held at the Federal Reserve Bank of Boston on July 25?27, 2006. These conferences are unique in featuring the collaboration of two groups of payments experts ? the private-sector payments industry on the one hand, and the academic, research, and policymaking communities on the other ? to stimulate more research and understanding of consumer payment behavior. The central focus of this second conference was learning more about the numerous consumer payments data sources that are available ? but ...
Discussion Paper
Payment size, negative equity, and mortgage default
Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced large rate reductions over the past years and are largely immune to these selection concerns. We show that interest rate changes dramatically affect repayment behavior. Our estimates imply that cutting a borrower?s payment in half reduces his hazard of becoming delinquent by about two-thirds, an effect that is ...
Discussion Paper
Why don't lenders renegotiate more home mortgages?: redefaults, self-cures, and securitization
We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment-reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securitization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in ...
Discussion Paper
Financial development, financial constraints, and the volatility of industrial output
More financially developed countries show lower volatility of industrial output. Volatility is particularly reduced in industries that are more financially dependent. Most of the reduction is in idiosyncratic volatility. Systematic volatility is reduced less strongly, implying that industries are more closely correlated with GDP in more financially developed countries. At the firm level, short-term debt is negatively correlated with output as financial development increases, suggesting that debt is used in a countercyclical way to stabilize production. The results indicate that financial ...
Discussion Paper
Economic policy and prospects in Iraq
This paper describes the Coalition Provisional Authority?s attempts to stabilize and reform Iraq?s economy along market lines. It argues that while security concerns remain serious, Iraq?s economy has not been crippled by violence. However, sustained economic growth will depend on whether Iraq?s future leaders pursue the pro-market approaches the Coalition has advocated. If the Iraqi economy is to reach its potential, it will need to go even farther than the Coalition did, implementing reforms the Coalition did not pursue because of security concerns.