http://www.frbsf.org/publications/economics/papers/index.php FRBSF Working Paper Series http://www.frbsf.org/publications/economics/papers/2010/wp10-01bk.pdf During the past decade, much new research has combined elements of finance, monetary economics, and macroeconomics in order to study the relationship between the term structure of interest rates and the economy. In this survey, I describe three different strands of such interdisciplinary macro-finance term structure research. The first adds macroeconomic variables and structure to a canonical arbitrage-free finance representation of the yield curve. The second examines bond pricing and bond risk premiums in a canonical macroeconomic dynamic stochastic general equilibrium model. The third developsa new class of arbitrage-free term structure models that are empirically tractable and well suited to macro-finance investigations. FRBSF Working Paper Series Fri, 15 Jan 2010 08:00:00 GMT http://www.frbsf.org/publications/economics/papers/2010/wp10-01bk.pdf http://www.frbsf.org/publications/economics/papers/2009/wp09-28bk.pdf Previous studies on financial frictions have been unable to establish the empirical significance of credit constraints in macroeconomic fluctuations. This paper argues that the muted impact of credit constraints stems from the absence of a mechanism to explain the observed persistent comovements between housing prices and business investment. We develop such a mechanism by incorporating two key features into a DSGE model: we identify shocks that shift the demand for collateral assets and we allow productive agents to be credit-constrained. A combination of these two features enables our model to successfully generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through credit constraints. FRBSF Working Paper Series Tue, 15 Dec 2009 08:00:00 GMT http://www.frbsf.org/publications/economics/papers/2009/wp09-28bk.pdf http://www.frbsf.org/publications/economics/papers/2009/wp09-29bk.pdf The standard model of strategic tax competition – the non-cooperative tax-setting behavior of jurisdictions competing for a mobile capital tax base – assumes that government policymakers are perfectly benevolent, acting solely to maximize the utility of the representative resident in their jurisdiction. We depart from this assumption by allowing for the possibility that policymakers, given the political and electoral environments in which they operate, also may be influenced by the rent-seeking (lobbying) behavior of businesses. Firms recognize the factors affecting policymakers’ welfare and may make campaign contributions to influence tax policy. These changes to the standard strategic tax competition model imply that business contributions affect not only the levels of equilibrium tax rates but also the slope of the tax reaction function between jurisdictions. Thus, business campaign contributions may affect tax competition and enhance or retard the mobility of capital across jurisdictions. Based on a panel of 48 U.S. states and unique data on business campaign contributions, our empirical work uncovers four key results. First, we document a significant direct effect of business contributions on tax policy. Second, the economic value of a $1 business campaign contribution in terms of lower state corporate taxes is nearly $4. Third, the slope of the reaction function between tax policy in a given state and the tax policies of its competitive states is negative. Fourth, we highlight the sensitivity of the empirical results to state effects. FRBSF Working Paper Series Tue, 15 Dec 2009 08:00:00 GMT http://www.frbsf.org/publications/economics/papers/2009/wp09-29bk.pdf http://www.frbsf.org/publications/economics/papers/2009/wp09-27bk.pdf We join the new trade theory with a model of choice between bank and bond financing to show the differential effects of financial policy on the distribution of firm size, welfare, aggregate output, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs both increase welfare but have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing the degree of trade openness increases firms’ relative demand for bond versus bank financing. We identify a financial switching channel for gains from trade where increasing access to export markets allows firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital. FRBSF Working Paper Series Sun, 15 Nov 2009 08:00:00 GMT http://www.frbsf.org/publications/economics/papers/2009/wp09-27bk.pdf