Central banks

FEDS Paper: Do Households Substitute Intertemporally? 10 Structural Shocks That Suggest Not

03/25/2025 Federal Reserve Central banks

Edmund CrawleyI combine microdata on the intertemporal marginal propensity to consume with 10 structural macro shocks to identify the role of intertemporal substitution in consumption behavior. Although some of the structural shocks that I examine lead to large and persistent changes in real interest rates—which in many models would induce a large intertemporal substitution effect—I find no evidence that households shift the timing of their consumption in response to these interest rate changes.

FEDS Paper: A Model of Charles Ponzi

03/25/2025 Federal Reserve Central banks

Gadi Barlevy, Ines XavierWe develop a model of Ponzi schemes with asymmetric information to study Ponzi frauds. A long-lived agent offers to save on behalf of short-lived agents at a higher rate than they can earn themselves. The long-lived agent may genuinely have a superior savings technology, but may be an imposter trying to steal from short-lived agents. The model identifies when a Ponzi fraud can occur and what interventions can prevent it.

Creditworthy: do climate change risks matter for sovereign credit ratings?

03/25/2025 European Central Bank Central banks

Do sovereign credit ratings take into account physical and transition climate risks? This paper empirically addresses this question using a panel dataset that includes a large sample of countries over two decades. The analysis reveals that higher temperature anomalies and more frequent natural disasters—key indicators of physical risk—are associated with lower credit ratings. In contrast, transition risk factors do not appear to be systematically integrated into credit ratings throughout the entire sample period.

The expert’s edge? Bank lending specialization and informational advantages for credit risk assessment

03/24/2025 European Central Bank Central banks

We examine whether loan portfolio sectoral specialization provides informational advantages to banks, enabling better credit risk assessment. Using euro area credit register data, we compare probabilities of default assigned by specialized and non-specialized banks to the same borrowing firm several quarters before the borrower defaults. We find that banks specialized in the borrower’s sector are better in predicting future defaults. This is mostly driven by specialized banks actively raising probabilities of default earlier, not by higher probabilities of default when loans are issued.

FEDS Paper: Beyond the Streetlight: Economic Measurement in the Division of Research and Statistics at the Federal Reserve

03/21/2025 Federal Reserve Central banks

Carol Corrado, Arthur Kennickell, and Tomaz CajnerThis paper was written for the academic conference held in celebration of the 100th anniversary of the Division of Research and Statistics (R&S) of the Federal Reserve Board. The work of the Federal Reserve turns strongly on empirical efforts to understand the structure and state of the economy, and R&S can be thought of as operating a large factory for discovering and developing data and analytical methods to provide evidence relevant to the mission of the Board.

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