beyond the fed: incorporating government financial
TRANSCRIPT
BeyondtheFed:IncorporatingGovernmentFinancialInstitutionsandPoliciesintoMacroModels
DeborahLucasMITGolubCenterforFinanceandPolicy
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Prepared for MFM Summer CampCape Cod
June 12, 2016
1. Needforanewpolicyparadigm
2. Importanceofgovernmentfinancialinstitutions
3. Application:thefiscaleffectsofcreditpolicies
4. Application:governmentasasourceofsystemicrisk
5. Relatedresearchtopics
Overview
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PolicyanalysisintraditionalmacromodelsFiscalpolicy
• Taxesandaggregategovernment spending• Deficitsprovidestimulus
Monetarypolicy• e.g.,Taylorruletradesoff inflationandoutput
Regulationofprivatefinancialinstitutions(sometimes)
Twopolarviewsofgovernmentpolicy• Benevolent:Actsoptimally tomaximizeawell-specifiedobjectivefunction• Incompetent:Fiscalpolicydestroysvaluethroughdistortionary taxesandwastefulspending (thatdoesnotappearintheutilityfunction)
Theneedforanewpolicyparadigm
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Whatismissing?Abehavioral approachtopolicy
• Observedgov’tactionsareatoddswitheitherbenevolentor incompetentframeworks
• Theinsightsofbehavioralfinanceapplytopolicymakerstoo:– rulesofthumbandlong-standingpolicies– inconsistent andtime-varyingobjectives– Hencethepotentialforeducationtoimprovepoliciesandoutcomes
Recognitionofthemanywaysthatgovernmentpoliciesaffectmarketsandtheeconomybeyondconventionalmonetaryandfiscalpolicy
• Government-run financialinstitutions• Governmentcontrolofmajorinvestmentdecisions• Regulatorypolicy
Theneedforanewpolicyparadigm
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Monetary policy Investment and consumption
Regulation
SEC
Federal Reserve
FASB
FDIC
IRS
CFTC
OTC
Academics often focus on the government as just a regulator of private financial institutions
OutstandingGovernment-GuaranteedBondsandDebtofGovernment-RelatedEnterprises,OECDCountries
(percentofGDP)
9Source: IMF 2012 Fiscal Monitor
(Excludes contingent guarantees and national credit programs)
• Astheworld’slargestfinancialinstitutions,governments haveafirst-ordereffectonthedistributionofriskandallocationofcapitalintheworldeconomythroughtheirrealandfinancialinvestments
• Thesamefundamentalissuesariseasforprivatefinancialinstitutions…
Whatarethesystemic/macroeconomiceffectsofgov’tfinancialactivities?
Howshouldagov’tassessitscostofcapital?
Howshould itsfinancialactivitiesbeaccountedfor?
Aretheinstitutionswell-managed?
Governmentsasfinancialinstitutions
• Thesamefundamentalissuesariseasforprivatefinancialinstitutions…
Areitsfinancialproductswell-designed(e.g.,conformingmortgages,studentloans,reversemortgages)?
• Consumerprotectionandbehavioralfinance• Systemicrisk• Pricing
Governmentsasafinancialinstitutions
TheamountofrecentstimulustotheU.S.economyhasbeenseriouslyunderestimatedbecausethefiscaleffectsoffederalcreditpolicieshavebeenoverlooked
ExceptionisWilliamGale(1991)DiscussionherebasedonLucas(2016),“CreditPolicyasFiscalPolicy,”BrookingsPapersonEconomicActivity
In2010,U.S.citizensborrowed$1.6trillion throughfederalcreditprograms
Thespendingresultingfromthatincrementalborrowingprovidedroughly$344billionofstimulus in2010
SimilaramounttotheAmericanRecoveryandReinvestmentActAfractionofthe$1.6trillionReportedbudgetarycostclosetozero
Application:Fiscaleffectsofcreditpolicies
TheoryHowcreditsupportincreasesborrowingvolume
• Creditsubsidies induce incrementalvolumealongintensiveandextensivemargins
Fromincrementalloanvolumetoaggregateoutput
CalibrationSubsidycostsElasticitiesFiscalmultipliersBorrowingincreasesonextensive&intensivemarginsResultsandsensitivityanalysis
Discussion
Application:Fiscaleffectsofcreditpolicies
Asimplemodelofcreditrationingthathighlightsroleofgov’tInspiritofRothschild&JosephStiglitz(1976)
2types:safeandriskyborrowers;lenderscan’ttellthemapart
Safeborrowersmaynotparticipateatcompetitiveequilibriumpoolinginterestrate
Subsidizedloanguaranteescanrestoreapoolingequilibrium,whichincreasesborrowingattheextensivemargin
Subsidyalsolowersborrowingcost,whichthroughademandelasticityeffectincreasesborrowingattheintensivemargin
• Trickytointerpretbecausesubsidy isthecapitalizedinterestrateadvantage,andithasawealtheffectratherthananincomeeffect
Howcreditsupportincreasesborrowing
Herewegetamodestintensivemargineffect;largerextensivemargineffectsModelalsosuggestsimportanceofimposingquantitylimitstopreventexcessiveloanstoriskyborrowers
Howcreditsupportincreasesborrowing
ΔB = dA + S(dB/dS) – C • ΔB =incrementalaggregateborrowing• dA =incrementalborrowingonextensivemargin• S(dB/dS) =incrementalborrowingonintensivemargin• C =crowdingoutofotherprivatelending
AfiscalmultiplierapproachisusedtotranslateΔB into ΔY• ΔY isthechangeinaggregateoutput• Δbi istotalincrementalloanvolumeinprogrami• μi isthecorrespondingoutputmultiplier
Fromborrowingtoaggregateoutputeffects
∑ −Δ=Δ i Cii CbY µµ
Separateestimatesforeachmajorcreditprogram+FannieandFreddieasinputintoextensivemargincalculations
Subsidiesestimatedona“fairvalue”basisWhatthegov’twouldhavetopayaprivatelenderupfronttomaketheloanonthesametermsasunderthegov’tprogramEstimatesbasedonlargebodyofCBOstudiesandacademicpapers(&roughlyadjustinggov’testimatesforotherprograms).
• Totalsubsidyusedhereis$71billionin2010• “Subsidy rate”ispresentvaluesubsidyperdollarofloanprincipal
Contrasttoofficialbudgetarycosts• UnderstatessubsidiesbecauseusesTreasuryratesasthecostofcapitalandneglectsofessentialadmincosts
• Totalis-21billion in2010fortraditionalprograms
Subsidycosts
Supplyelasticityin2010isassumedtobelarge,hencenocrowdingoutofotherprivatelendingbygov’t
Highlevelofbankreservesandloosemonetarypolicy
CreditdemandelasticitiesAnswerquestionofincrementalamountborrowedasfunctionofdollarsubsidy
TakenfromGale(1991);literatureisinconclusive
• Housing 1.8
• Student loans.65
• Businessandother.8
Elasticities
LiteratureCBO’sdefinition:changeineconomicoutputperdollarofbudgetarycostAuerbachandGorodnichenko (2012)emphasizevariationoverthebusinesscycle
MostbudgetarycostsarecashspentinthatyearForcredit,incrementalborrowingisadditionalcashavailabletohouseholdsorbusinessesHencemultipliersfromliteratureappliedtoincrementalborrowingratherthantosubsidycostHowever,“bang-for-the-buck”isthemultipleofoutputoversubsidycost
Fiscalmultipliers
DifferentprogramsassumedtohavedifferentmultipliersStudentandbusinessloanslike“transferpaymentstoindividuals”MortgageshavemuchsmallermultiplierbecauseofrefinancingsandpurchaseofexistingstructuresIassumehighermultipliersinscenariowithfinancialdistress
CBOsuggestsverywiderangeforARRAmultipliers
Fiscalmultipliers
Table 1. Ranges for U.S. Fiscal Multipliers
Estimated Multipliers
Type of Activity Low Estimate High Estimate
Purchases of Goods and Services by the Federal Government 0.5 2.5 Transfer Payments to State and Local Governments for Infrastructure 0.4 2.2
Transfer Payments to State and Local Governments for Other Purposes 0.4 1.8 Transfer Payments to Individuals 0.4 2.1 One-Time Payments to Retirees 0.2 1.0 Two-Year Tax Cuts for Lower- and Middle-Income People 0.3 1.5 One-Year Tax Cut for Higher-Income People 0.1 0.6 Extension of First-Time Homebuyer Credit 0.2 0.8
Bynecessitylargelyjudgmental,butinformedbyobservationsofmarketsandprograms
Astheoryshowed,nosimplerelationtosubsidies
Twoscenariosconsidered:normaltimesandfinancialmarketdistress
2010takentobeinthemiddle
Incrementalborrowingonextensivemargin
Category Agency
2010loanvolume($billions)
Constrainedshare
Incrementalloanvolumeextensivemargin
Incrementalloanvolumeintensivemargin Multiplier
IncrementalOutput
Housing FHA 319 0.10 31.9 14.3 0.3 13.9Housing VAandRHS 80 0.10 8.0 5.0 0.3 3.9StudentLoans ED 105 0.75 78.8 9.6 0.5 44.2Business SBA 17 0.75 12.5 0.8 0.5 6.6OtherTraditional Various 64 0.50 31.9 3.1 0.5 17.5
Subtotal 584 163 33 86Housing Fannie&Freddie 1,011 0.00 0.0 74.6 0.2 15
Total 1,595 163 107 101
Table4PanelA:IncrementalOutputinaNormalPeriod
Puttingitalltogether:aggregatestimulus
∑ −Δ=Δ i Cii CbY µµ
Category Agency
2010loanvolume($billions)
Constrainedshare
Incrementalloanvolumeextensivemargin
Incrementalloanvolumeintensivemargin Multiplier
IncrementalOutput
Housing FHA 319 0.90 286.8 14.3 0.4 120.5Housing VAandRHS 80 0.50 40.0 5.0 0.4 18.0StudentLoans ED 105 0.95 99.8 9.6 2.0 218.6Business SBA 17 0.85 14.1 0.8 2.0 29.9OtherTraditional Various 64 0.75 47.8 3.1 2.0 101.7
Subtotal 584 488 33 488.6Housing Fannie&Freddie 1,011 0.25 252.8 74.6 0.3 98
Total 1,595 741 107 587
Table4PanelB:IncrementalOutputinaDistressedPeriod
Puttingitalltogether:aggregatestimulus
∑ −Δ=Δ i Cii CbY µµ
$344billionofstimulus,atcostof$71billionMidpointestimateofnormalandfinancialdistressscenarios
• $587billion indistressscenario• $101billion innormalscenario
Bang-for-the-buckof$5per$1oftaxpayercost
SensitivityanalysisMighttakenormalanddistressestimatesaslowerandupperboundsonplausiblerangeStudentloansandmortgagesarethebigdrivers
• $219billion fromdistressedstudent loanmarketistighterlowerboundConsideringsupporttotaxexemptbondsandothercreditactivitieswouldraiseestimateofstimulus
Resultsandsensitivityanalysis
Howdoresultschangeinterpretationofdepthofrecessionandeffectsofotherpolicies?
Notmuchondepth:AddedstimuluswithinuncertaintyboundsofstimuluseffectsofotherpoliciesCreditpolicymayhavebeenmoreimportantthanmonetarypolicyinrevivingthemortgageandhousingmarkets
Isthisfiscalpolicyormonetarypolicyorsomethingelse?Caseforfiscalpolicyisthatrootcauseofincrementalborrowingisgov’tsubsidiesalthoughchanneldifferentthanmostspendingContrasttospecialmonetarypoliciesthatprovidedliquiditybutminimalsubsidies
Discussion
Howmuchdotheseeffectsplayoutinothercountries?E.g.,Europereliesmuchlessoncreditprograms
Thisisnotawelfareanalysis!Creditpolicieslikelytohaveabigbang-for-the-buckasfiscalstimulusduringrecessionsaccompaniedbyfinancialupheavalsButbenefitshavetobecomparedwiththe(verylarge)costs:
• Target-inefficient• Opaque• Distortcapitalallocationandcrowdoutprivatecapital• Encourageexcessiveindebtedness• Incentivesforexcessiverisk-takingwithsystemicconsequences• Gov’tcreditpoliciesmayhavehelpedcausethe2007financialcrisis
Discussion
Governmentasasourceofsystemicrisk
Asimpleidea:Afterthefinancialcrisis,lawspassedtoaddressconcernthatpolicymakersandinvestorslackedsufficientdatatoanticipateemergingthreatstofinancialstabilityorassesshowshockstoonefinancialfirmcouldimpactthesystemasawhole
• (e.g.,aspartoftheDodd-FrankAct,CongresscreatedFSOC/OFR
Mostdiscussionsoftheneedformoreinformationaboutsystemicriskfocusonprivatesectorinstitutions.
Yetgovernmentsfunctionastheworld’slargestandmostinterconnectedfinancialinstitutions,andrepresentamajorsourceofsystemicrisk.
Hencemoreresearchisneededongovernmentsasasourceofrisk• anditarguablyfallsunder themandateofinstitutions liketheFSOCandOFRtodevoteresourcestomonitoring andstudying it
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Governmentasasourceofsystemicrisk
OverviewMakethecasethatgovernmentisasourceofsystemicrisk.Identifyanddiscussthemajorreasonswhy:
• Sizeandinfluenceasafinancialinstitution• Incentivescreatedbyitsrulesandregulations• Lackoftransparency• Otherobjectivesmayconflictwithgoalofpromotingfinancialstability
PresentexamplesSuggestspecificareaswhereinstitutionsliketheU.S.OfficeofFinancialResearch(OFR)couldhelptomitigatethoserisks.
Discussiontodaydrawsonongoingworkandtwopapers:• “GovernmentasaSourceofSystemicRisk”JournalofFinancialPolicy• “EvaluatingtheCostofGovernmentCreditSupport:TheOECDContext,”EconomicPolicy
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Governmentasasourceofsystemicrisk
Caveats:Governmentcanalsoactasanimportantcounterweighttosystemicrisk
Theworksummarizedhereisnotcomprehensive:
• Neglectsmostregulatoryactivities,andtheriskfromfiscalimbalances
• Doesnotrankthesourcesofriskbyimportance
• Doesnotcomparethemagnitudeswithrisksarising fromprivate-sectoractivities
• Aresearchagenda,notacompletedproject
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Governmentasasourceofsystemicrisk
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Attributesthatgiverisetosystemicriskaresimilarforprivate-sectorandgovernmentfinancialinstitutions
Size(absoluteandrelativetoimportantsectors)
Interconnectednessthroughthefinancialinfrastructure
Lackoftransparency
Inadequatesupervision
Governmentasasourceofsystemicrisk
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Buttheresultingrisksandtheircausesaredifferentthanforprivate-sectorinstitutionsforanumberofreasons:
Thegovernmentmakestherules(andexemptsitselffrommanyofthem,itcannottieitsownhands)ThegovernmentrespondstopoliticalratherthanfinancialincentivesThegovernmentisslowinitsabilitytoreactandmakechangesThegovernmentdoesn’tengageinhighfrequencytradingThegovernmentisgenerallynotasourceofcounterpartyrisk
Size
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Alreadyestablishedthatitisenormous.Butthatonlymattersifitaffectsprices,allocations,orincentives.Itdoes(e.g.,previousanalysisoffiscalpolicyeffectsandreferencestherein)
Interconnectionsviathefinancialinfrastructure
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Financialinfrastructureisthe“legalandaccountingprocedures,theorganizationoftradingandclearingfacilities,andtheregulatorystructuresthatgoverntherelationsamongtheusersofthefinancialsystem”(MertonandBodie,1995)Clearlythegovernmenthasafirstordereffectonincentivesthroughthefinancialinfrastructure
Exampleistheinteractionofbankcapitalrequirementsandrulesrequiringfairvalueaccounting
• Couldexacerbatedownwardliquidityspirals• Couldcausecapitalrequirementstobetoolowinboomsandtoohighinbusts
• Problemscouldbemitigatedbybetterregulation(Heaton,LucasandMcDonald,2010)
Transparency
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GovernmentfinancialinstitutionslacktransparencyTherearemanyshortcomingsrelatedtofinancialdisclosure:
Thequalityandscopeoffinancialdisclosuresvarymarkedlyacrossgovernmentagencies.Accountingstandardsdifferacrossgovernmententities,andbetweenthepublicandprivatesectors.ThereisnocentraldatarepositoryliketheSEC’sEdgarforprivatefirmsMarketpriceorfairvalueinformationisgenerallynotavailableGovernmentaccounting
• Cashbasisaccountingusedforbudgeting(exceptforlimitednaïveaccrualinU.S.)
• Governmentwronglytreatsitscostofcapitalasitsownborrowingcost• Createsincentivesforrisk-takingbygovernmentfinancialinstitutions
Robustprinciplesfromfinancetheorypointtoimportanceoffairvaluecostrecognitionforgov’ts
Thecostofcapitalisrelated totheundiversifiablemarketrisk(β)oftheprojectfinancedThecostofcapitalisnotrelated totheproportionofdebtandequityusedtofinancetheproject
Thisisafirstapproximation—taxes,etc.alsoaffectcost
Keyrelations:
𝐸(𝑟$) = 𝑟' + 𝛽$(𝑟' − 𝐸(𝑟+))
= ,-𝐸(𝑟,) +
.-𝐸(𝑟.)
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Thegovernmentmakesadirectloanfor$100million,dueinoneyear,notionallyfundedwithTreasurydebt.Loaninterestrate=Treasuryrate=3%
Assets LiabilitiesRiskyloan$100m TreasuryDebt$100m
Whya government’scostofcapitalexceedsitsborrowingrate
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Notionalbalancesheetatendoftheyeariftheloanpaysoffinfull:
Assets Liabilities
Cash$103m TreasuryDebt$103m
Whya government’scostofcapitalexceedsitsborrowingrate
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• Notionalbalancesheetatendoftheyeariftheloandefaultsandrecoveryisonly$73:
Assets Liabilities
Cash$73m TreasuryDebt$103mTaxpayers-$30m
• Treasuryborrowingcostsarelowbecauseoftaxpayerbackstop.• Taxpayersareequitypartnersingovernmentcreditobligations.• Thegovernment’scostofcapitalisaweightedaverageofthecostofdebt
andequity(asforaprivatesectorfirm).• “Fairvalue”estimatescalculatedusingrisk-adjusteddiscountratesprovide
themostaccuratepictureofcosts.
Whya government’scostofcapitalexceedsitsborrowingrate
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Inadequatesupervision
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Althoughgovernmentinstitutionsaretaskedwithachievingpublicpurposes,theymaystillneedspecialoversighttocontrolsystemicrisk.
Asforprivatefirms,governmentinstitutionshaveobjectivesthatarenarrowlymission-focusedandnotdirectedatfinancialstability.
Thereasonsforcreatinganewsystemicriskregulatortooverseealready-regulatedprivatefinancialinstitutionsalsoapplytogovernmentinstitutions.
Example:SystemicriskfromgovernmentactivitiesintheU.S.mortgagemarket
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Through Fannie, Freddie, FHA, VA, etc. backed 86% of new originations in 2010.
The federal share grew to over 98% in 2013.
Systemicriskfromgov’tmortgagepolicies
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Clearlythegovernmentisinapositiontoinfluenceallocationofmortgagecreditanditsriskiness.
Setsrulesforeligibility, underwriting, guaranteepricing,productsoffered (e.g.,toxic30-yearmortgages)Incentivesforrisk-takingcreatedbyunderpricedguarantees
Butthereisdisagreementabouthowmuchthegovernmentcontributedtothehousingbubbleandsubsequentcrisis.
Alsoaboutwhether itissupplying toomuchortoolittlemortgagecreditnow.
Whatisclearisthatthoseactivitiesturnedouttobecostlytotaxpayers.(Net)paymentsfromTreasurytoFannieandFreddieof$130billion throughMarch2011UpwardreestimatesofbudgetarycostofFHAguaranteesof$40billionbetween1999to2011
Example2:
CallableCapitalfortheEFSF/ESM
TheEFSFwascreatedinMay2010torespondtoEurozonecrisisA rescuemechanismwiththemandateofsafeguardingfinancialstabilitybyprovidingfinancialassistancetoeuroareaMemberStates
ESMisthepermanentversionAuthoritytoissuebondsbackedbymembercapitalandcallablecapital
BondsareratedAA+becauseoftheEUR620billioncallablecapitalGovernments recognizenocostofthecallexposureuntillossesarerealizedCallablecapitalcanbevaluedusingageneralizedoptions-pricingapproachwithjumps(followingLucas&McDonald,2010)
Costofcommittedcallablecapitaltomembersover20yearsforEFSF/ESMestimatedtobe EUR20to80billion
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CostofCallableCapitalfortheEFSF/ESMMethodology(inbrief)
“Risk-neutral”MonteCarlovaluationmodel• Parallelmodelunderactualmeasuretocomputephysicalprobabilityoflossevents
RiskyassetsofESMevolvestochastically• Ajumpprocessindicatesoccurrenceofinfrequent crisisstate• Assetvolatilityprocesscanbetime- andstatevarying;trickytocalibrate
LiabilitiesincreasebytheamountofnewloansmadeinacrisisCapitaliscalledwhentheratioofliabilities-to-equityexceedsatriggerthreshold
• Theamountcalledissettorestoretargetliability-to-equityratio• Newcapitalisinvestedinsafeliquidassets
Costofcallablecapitalispresentvalueofmodel-predictedcallamounts,averagedover20,000MonteCarlorunsover20years
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Table 4.6: Prospective Cost and Call Probability for EFSF/ESM Callable Capital Sensitivity to Key Parameters
(EUR billions) Annual crisis probability 0 .03 .06 .09
Cost 1 13 36 71 Annual call probability 0.0% 1.3% 3.1% 5.3%
Risky asset multiplier in crisis 1.25x 1.5x 1.75x 2x
Cost 8 36 80 139 Annual call probability 1.0% 3.1% 4.4% 5.3%
Asset jump frequency, annual, no crisis
0 .05 .1 .2
Cost 35 36 36 37 Annual call probability 2.9% 3.0% 3.1% 3.2%
Risky asset volatility (non-jump component), annual
.05 .1 .15 .2
Cost 35 35 36 37 Annual call probability 2.7% 2.8% 3.1% 3.4%
Trigger liabilities-to-assets (relative to target ratio)
1.05x 1.1x 1.2x 1.3x
Cost 39 38 36 34 Annual call probability 6.4% 4.5% 3.1% 2.4%
Note: Each row varies only the listed parameter from its base case value.
MitigatingtheRisks:DataInitiativesandAnalyses
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Watchdoginstitutionsforsystemicrisk(liketheOFR)couldundertakeavarietyofinitiativesandanalysesthatcouldhelptomitigatetherisksthathavebeenidentified.Regulatoryaudit.
Undertakeacomprehensiveevaluationoffederalfinancialregulationstoidentifyunintendedsystemicconsequences.
Commenceastudythatcomparesgovernmentandprivatesectoraccountingstandardsandassessesbestpractices.
Studycouldserveasaninputandimpetustomorerapidharmonizationofaccountingstandardsandpractices.
MitigatingtheRisks:DataInitiativesandAnalyses
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Undertakeinitiativestoimproveandstandardizefinancialdisclosures.
Workwithgovernmentfinancialinstitutions,andwithacademicandprivateaccountingexperts,todevelopmoreuniformandinformativereportingstandards.Houseawebsitethatwouldmakethosedisclosuresreadilyavailabletothepublic.
Encouragetheprovisionoffairvaluedisclosures.Tohelpaddressthelackofmarketpriceinformationthatwouldmakemoretransparentthecostandrisksofgovernmentfinancialactivities
MitigatingtheRisks:DataInitiativesandAnalyses
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Evaluateunmetdataneeds forassessingsystemicriskfromcreditandinsuranceprograms.
Informationcollectedisprimarilytodetermineeligibility.Itmaybeinsufficienttoassesssystemicrisk.Exampleislackofcreditscoredataforstudentloansthatmakeitmoredifficulttoassesswhetherdebtlevelsaresustainable,andlackoftimelydefaultstatistics.
Createdatasetsthatcombineinformationonfederalandprivatecreditatthehouseholdlevel.
Forexample,gettingcombineddataonfirstandsecondmortgageswouldgreatlyimproveunderstandingofstressesonhouseholds.
MitigatingtheRisks:DataInitiativesandAnalyses
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Disseminate dataongovernmentcreditprograms.Loanleveldatafromthoseprogramsisgenerallyunavailable.
• Exception isformortgagesinU.S.,butthatdataisveryexpensive• AlsoFOIA
WouldencouragemoreresearchongovernmentfinanceCouldhelpprivatefinancialinstitutionsbetterunderstandtheirownandaggregaterisksFewerconcernsaboutproprietaryvaluethanforprivatefinancialinstitutions;borrowerprivacycouldbeprotectedCostlyforagenciestoundertakesuchinitiativesontheirown.WatchdogentitylikeOFRcouldmakethedatamoreusefulthroughcoordinationandstandardization.
IncorporategovernmentfinancialinstitutionsintosystemicriskmodelsEstimatingthegovernment’scostofcapital
EssentialinputforvaluationofcomplexinvestmentpoliciesEssentialforcost-benefitanalysisoflong-datedpoliciessuchasthoseaimedatabatingclimatechangeManyunexploredapplicationsSee“Lucas,Deborah(2014),“EvaluatingtheCostofGovernmentCreditSupport:TheOECDContext,”EconomicPolicy,Vol.29,Issue79,pp.553-597.“andcitedpapersfordiscussionandexamples
Understandingthedebtcapacityofdevelopedcountries
Additionalandrelatedresearchtopics
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Governmentfinancialpolicieshaveafirst-ordereffectsthatmacro-financialanalysestraditionallyhaveignoredA fertileareafornewresearch
ParticularlyaneedfornewmodelsexploringtheoreticalchannelsAlsoadearthofempiricalwork
BarrierstoentryHardtochangemindsetNeedtostudyinstitutionaldetailsandtakethemseriouslyRiskthattherearenotrefereesconversantinthisarea
ButhighpotentialreturnsUncrowdedresearchspaceFirstorderimportanceforunderstandingtheworldandofferingsensiblepolicyadvice—peoplewillcareaboutwhatyouhavetosay
Takeaways
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