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Research Publications

Working papers

Working papers from the Federal Reserve Bank of Dallas are preliminary drafts circulated for professional comment.
2025

No. 2520

What Drives Cyber Losses at U.S. Banks? Potential Statistical Markers

Anthony Murphy, Michael L. Tindall, Kelly Klemme, Joseph I. Suek and Seth J. Dunbar

Abstract: Bank supervisors and regulators are keen to understand and mitigate bank cyber risks. We model average annual loss (AAL) rates from “attritional” cyber-attacks and other cyber events using new, individual bank level data from the CyberCube “analytics platform” combined with standard bank performance measures. We estimate a variety of regression models to robustly identify the systematic drivers of these loss rates. We find that cyber risk AAL loss rates are significantly U-shaped in bank size, contrary to the view these risks are declining in bank size. Bank cyber risk contains a large idiosyncratic component, so apart from bank size, the explanatory power of standard bank performance measures is limited. Controlling for bank size, more profitable and efficient banks have lower cyber related loss rates.

DOI: https://doi.org/10.24149/wp2520

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No. 2519

The Social Returns to Public R&D

Andrew J. Fieldhouse and Karel Mertens

Abstract: Recent empirical evidence by Fieldhouse and Mertens (2024) points to a strong causal link between federal nondefense R&D funding and private-sector productivity growth, and large implied social returns to public R&D investment. We show that these high social return estimates broadly align with existing evidence on the social returns to private or total R&D spending. If the R&D increases authorized under the CHIPS and Science Act were fully appropriated, our modeling indicates a boost in U.S. productivity within a few years, reaching gains of 0.2–0.4% after seven years or more. At their peak, the direct productivity effects of the implied expansion in nondefense R&D alone would raise output by over $40 billion in a single year—exceeding total outlays from the CHIPS Act R&D provisions over a decade. The potential productivity impact of fiscal consolidations changing R&D spending is not clear ex ante. We show that in recent fiscal consolidations, cuts to federal R&D funding were largely borne by defense R&D, whereas funding for nondefense R&D was largely spared or was increased. Our evidence suggests that future deficit reduction efforts that instead emphasize cuts to nondefense R&D funding could have a larger adverse impact on productivity and economic growth than previous fiscal consolidations.

DOI: https://doi.org/10.24149/wp2519

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No. 2518

An Information-Based Theory of Monopsony Power

Anton Cheremukhin and Paulina Restrepo-Echavarria

Abstract: We develop a tractable model of monopsony power based on information frictions in job search. Workers and firms choose probabilistic search strategies, with information costs limiting how precisely they can target matches. Firms post wages strategically, anticipating application behavior and exploiting a first-mover advantage. The model nests both directed and random search as limiting cases and yields a closed-form wage equation that shows the effects on wage-setting power of search frictions, labor market tightness and sorting. Wage markdowns in equilibrium arise not only from limited labor supply elasticity but also from sorting patterns and demand-side frictions. In highly assortative environments, the absence of wage competition allows firms to capture nearly the full surplus, even when labor supply is elastic. Numerical results replicate markdowns of 30-40% and suggest that constrained-efficient wages would be approximately 20% higher. Our framework unifies the analysis of monopsony, sorting and wage posting, and provides a computationally efficient method for evaluating directed search equilibria.

DOI: https://doi.org/10.24149/wp2518

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No. 2517

Relieving Financial Distress Increases Voter Turnout: Evidence from the Mortgage Market

Haoyang Liu, W. Ben McCartney, Rodney Ramcharan, Calvin Zhang and Xiaohan Zhang

Abstract: Borrowers who refinanced mortgages between 2009 and 2012, a period marked by mortgage distress and dislocated housing markets, but also falling interest rates, were more likely to vote in the 2012 general election than similar borrowers who did not refinance. We exploit an eligibility cutoff in the Home Affordable Refinance Program (HARP) to identify a causal relationship. Consistent with the resource model of voting, the effect of refinancing on turnout is strongest among borrowers with lower incomes and larger debt service reductions. Our findings shed new light on an important channel linking economic conditions and political outcomes.

DOI: https://doi.org/10.24149/wp2517

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No. 2516

The Conventional Impulse Response Prior in VAR Models with Sign Restrictions

Atsushi Inoue and Lutz Kilian

Abstract: Some studies have expressed concern that the Gaussian-inverse Wishart-Haar prior typically employed in estimating sign-identified VAR models may be unintentionally informative about the implied prior for the structural impulse responses. We discuss how this prior may be reported and make explicit what impulse response priors a number of recently published studies specified, allowing the readers to decide whether they are comfortable with this prior. We discuss what features to look for in this prior in the absence of specific prior information about the responses, building on the notion of weakly informative priors in Gelman et al. (2013), and in the presence of such information. Our empirical examples illustrate that the Gaussian-inverse Wishart-Haar prior need not be unintentionally informative about the impulse responses. Moreover, even when it is, there are empirically verifiable conditions under which this fact becomes immaterial for the substantive conclusions.

DOI: https://doi.org/10.24149/wp2516

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No. 2515

Asset Manager Commonality and Portfolio Similarity

Ali Ozdagli and Dylan Ryfe

Abstract: Asset managers are increasingly influential in financial markets. We use new regulatory as well as manually collected data on asset managers of life insurers, the largest institutional investors of corporate bonds, and find that insurers with the same asset managers have more similar portfolios and trades. This similarity increases further if the asset manager actively oversees the majority of both insurers’ assets. Moreover, the effect intensifies the longer insurers share the same asset manager. Nevertheless, the effect is primarily driven by purchases rather than sales and the resulting increase in correlation of portfolio returns is relatively small, alleviating associated financial stability concerns.

DOI: https://doi.org/10.24149/wp2515

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No. 2514

Tax Progressivity, Economic Booms and Trickle-Up Economics

Laura E. Jackson, Christopher Otrok, Michael T. Owyang and Nora Traum

Abstract: We propose a method to decompose changes in the tax structure into orthogonal components measuring the level and progressivity of taxes. Similar to tax shocks found in the existing empirical literature, the level shock is contractionary. The tax progressivity shock is expansionary: Increasing tax progressivity raises (lowers) disposable income at the bottom (top) end of the income distribution by shifting the tax burden from the bottom to the top. If agents’ marginal propensity to consume falls with income, the rise in consumption at the bottom more than compensates for the decline in consumption at the top. The resulting increase in output and consumption leads to rising capital gains for those at the high end of the income distribution that more than offsets their losses from higher income taxes. The net result is that an increasing progressivity leads to an increase in income inequality, contrary to what conventional wisdom might suggest. We interpret these results as evidence in favor of trickle up, not trickle down, economics.

DOI: https://doi.org/10.24149/wp2514

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No. 2513

Revisiting the Interest Rate Effects of Federal Debt

Michael D. Plante, Alexander W. Richter and Sarah Zubairy

Abstract: This paper revisits the relationship between federal debt and interest rates. A common approach in the literature is to regress an expected interest rate on a projection of federal debt. We show that issues related to nonstationarity have become more pronounced over the last 20 years, raising significant concern about the reliability of estimates from this model. We argue that estimating the model in first differences rather than in levels addresses these concerns. Our preferred specification indicates that a 1 percentage point increase in the debt-to-GDP ratio raises the 5-year-ahead, 5-year Treasury rate by 3 basis points. About three-quarters of the increase in interest rates is driven by term premium rather than expected short-term real rates.

DOI: https://doi.org/10.24149/wp2513

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No. 2512

Global Macro-Financial Cycles and Spillovers

Jongrim Ha, M. Ayhan Kose, Christopher Otrok and Eswar S. Prasad

Abstract: We develop a new dynamic factor model to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption and investment) and financial variables (equity and house prices and interest rates). The global macro factor plays a major role in explaining G-7 business cycles, but there are also sizeable spillovers from equity and house price shocks onto macroeconomic aggregates, at least over the past two decades, accounting for up to 20 percent of the variation in global business cycle fluctuations. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find weaker evidence of spillovers from macroeconomic cycles to financial variables, perhaps reflecting the predictive power of global financial markets.

DOI: https://doi.org/10.24149/wp2512

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No. 2511

Tempting FAIT: Flexible Average Inflation Targeting and the Post-COVID U.S. Inflation Surge

Roberto Duncan, Enrique Martínez García and Luke Miller

Abstract: In August 2020, the Federal Reserve replaced Flexible Inflation Targeting (FIT) with Flexible Average Inflation Targeting (FAIT), introducing make-up strategies that allow inflation to temporarily exceed the 2% target. Using a synthetic control approach, we estimate that FAIT raised CPI inflation by about 1 percentage point and core CPI inflation by 0.5 percentage points, suggesting a moderate impact net of food and energy and a largely temporary effect. Short- to medium-term inflation expectations increased by approximately 0.8 percentage points, while long-term expectations remained anchored. The effects of FAIT on economic activity were, if anything, minimal. Our results are robust across multiple specifications, including alternative price indices, synthetic control estimators, control groups and adjustments for global supply chain pressures, economic activity, fiscal policy, commodity prices, interest rates and monetary aggregates. The differing macroeconomic outcomes under FAIT versus a counterfactual FIT characterized by moderate inflationary effects, negligible real effects and anchored long-term expectations, are consistent with the hypothesis of a steeper-than-expected post-pandemic Phillips curve in the New Keynesian model.

DOI: https://doi.org/10.24149/wp2511

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No. 2510

Last Resort Insurance: Wildfires and the Regulation of a Crashing Market

Reid Taylor, Madeline Turland and Joakim A. Weill

Abstract: An increasing number of people are denied home insurance coverage in the private market and must instead turn to state-sponsored plans known as “Insurers of Last Resort.” This paper examines how insurers of last resort interact with the private market under increasing disaster risks. We first present a simple model of an adversely selected insurance market, highlighting that the insurer of last resort allows strict price regulation to be compatible with full insurance. We then empirically study the California non-renewal moratoriums, a regulation that forced insurers to supply insurance to current customers following wildfires in 2019 and 2020. Using quasi-random geographic variation in regulatory borders and a difference-in-differences strategy, we find that the moratoriums successfully reduced company-initiated non-renewals and cancellations in the short run. The effects only lasted for one year, with insurers dropping policies as soon as the moratorium lapsed. The moratoriums had no discernible effect on participation in the State’s insurer of last resort.

DOI: https://doi.org/10.24149/wp2510

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No. 2509

The Effects of Competition in the Retail Gasoline Industry

Reid Taylor and Erich Muehlegger

Abstract: We estimate the effect of competition on incumbent firm pricing by using high frequency price data and the precise geographic location for all gas stations in California. Using an event study design, we find that the entry of a new station is associated with a 2.5 cent decrease in prices at incumbent stores, which equates to a 7 percent reduction in estimated retail markups. The effects are immediate, persistent and show no sign of deterrence or limit pricing behavior. In contrast, nearby exit results in precisely estimated null effects on prices with no evidence of predatory pricing in the lead up to the station departure. We show that these results are consistent across all fuel blends, dissipate with distance and are driven by less concentrated markets. Finally, we explore the asymmetric effects, showing that the difference cannot be attributed to difference in branding, proximity to highway or data quality idiosyncrasies, although we find suggestive evidence that exit tends to happen in more competitive markets and amongst less heavily trafficked stations.

DOI: https://doi.org/10.24149/wp2509

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No. 2508

Trade Costs and Inflation Dynamics

Pablo Cuba-Borda, Albert Queralto, Ricardo Reyes-Heroles and Mikaël Scaramucci

Abstract: We explore how shocks to trade costs affect inflation dynamics in the global economy. We exploit bilateral trade flows of final and intermediate goods together with the structure of static trade models that deliver gravity equations to identify exogenous changes in trade costs between countries. We then use a local projections approach to assess the effects of trade cost shocks on consumer price (CPI) inflation. Higher trade costs of final goods lead to large but short-lived increases in inflation, while increases in trade costs of intermediate goods generate small but persistent increases in inflation. We develop a multi-country New Keynesian model featuring trade in final and intermediate goods and show that it can replicate the inflation responses we identify in the data. We estimate the model using historical data and use it to explore the drivers of U.S. inflation in the aftermath of the COVID-19 pandemic. We find that trade costs account for one percentage point of additional inflation in 2022 and the bulk of inflationary pressures in 2023.

DOI: https://doi.org/10.24149/wp2508

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No. 2507

Impulse Response Diagnostics for Priors on Parameters in Structural Vector Autoregressions

Lutz Kilian

Abstract: Structural impulse response functions may be estimated based on priors about the parameters of the structural VAR presentation. Even when such priors appear seemingly reasonable, they may imply an unintentionally informative prior for the structural impulse responses. Rather than pretending that the posterior of the impulse responses does not depend on this prior, the proposal in this paper is to verify that the prior distribution of the vector of impulse responses of interest is not unintentionally informative. Moreover, if the impulse response prior is intentionally informative, this point must be conveyed, so the reader can properly evaluate the reported conclusions. This paper discusses easy-to-use diagnostic tools that help practitioners address these concerns.

DOI: https://doi.org/10.24149/wp2507

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No. 2506

Financial Technology and the 1990s Housing Boom

Stephanie Johnson and Nitzan Tzur-Ilan

Abstract: The 1990s rollout of mortgage automated underwriting systems allowed for complex underwriting rules, cut processing time and raised house prices substantially. We show that locations exposed to initial adopters of Freddie Mac’s Loan Prospector system experienced an early housing boom due to a switch to statistically-informed underwriting rules. Loan Prospector adoption increased lending at high loan-to-income ratios by around 18 percent. Applying our estimated response to lenders who adopted later, we find that the rollout of new lending standards with the GSEs’ systems can explain more than half of U.S. house price growth between 1993 and 2002.

DOI: https://doi.org/10.24149/wp2506

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No. 2505

Climate Risk, Insurance Premiums and the Effects on Mortgage and Credit Outcomes

Shan Ge, Stephanie Johnson and Nitzan Tzur-Ilan

Abstract: As climate change exacerbates natural disasters, homeowners’ insurance premiums are rising dramatically. We examine the impact of premium increases on borrowers’ mortgage and credit outcomes using new data on home insurance policies for 6.7 million borrowers. We find that higher premiums increase the probability of mortgage delinquency, as well as prepayment (driven mainly by relocation). The results hold using a novel instrumental variable. The delinquency effect is greater for borrowers with higher debt-to-income ratios. Both delinquency and prepayment effects are present in both GSE and non-GSE mortgages. We also find that higher premiums significantly raise the probability of credit card delinquency and worsen borrowers’ creditworthiness. Our findings unveil a channel through which climate change can threaten household financial health and potentially impact the stability of the financial system.

DOI: https://doi.org/10.24149/wp2505

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No. 2504

The Impact of Labels on Real Asset Valuations

Yuliya Demyanyk, Luis A. Lopez and Nitzan Tzur-Ilan

Abstract: Expectations and sentiment of economic agents about financial prospects are both the drivers and the leading indicators of economic phenomena. This paper shows that neighborhood labels, frequently used in realtors’ property descriptions, have a causal impact on the demand for housing. Results indicate that appraised values, house prices and rents increased in minority neighborhoods upon removal of neighborhood labels. The underlying mechanism likely works through forming expectations about future growth in housing markets, as documented by the decrease in the rent-to-price ratio and lack of change in the creditworthiness of the neighborhood residents.

DOI: https://doi.org/10.24149/wp2504

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No. 2503

Up in Smoke: The Impact of Wildfire Pollution on Healthcare Municipal Finance

Luis A. Lopez, Dermot Murphy, Nitzan Tzur-Ilan and Sean Wilkoff

Abstract: Wildfire smoke pollution is associated with significantly higher healthcare municipal borrowing costs, amounting to $250 million in realized interest costs for high-smoke counties in 2010–2019, and an estimated $570 million over the following 10 years. These costs are disproportionately higher in high-poverty or high-minority areas where there is more smoke-related uncompensated care. Out-of-state smoke is also associated with higher borrowing costs, suggesting poor wildfire management imposes externalities on nearby states. Our hospital-level analysis shows increases in asthma cases and unprofitable emergency room visits, tighter financial constraints and reduced investment. Migration sorting exacerbates these effects by concentrating vulnerable households in high-smoke counties.

DOI: https://doi.org/10.24149/wp2503

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No. 2502

Air Pollution and Rent Prices: Evidence from Wildfire Smoke Plumes

Luis A. Lopez and Nitzan Tzur-Ilan

Abstract: We leverage quasi-experimental wildfire smoke shocks to analyze the causal effect of air pollution (PM2.5) on rent prices, using satellite-based smoke plumes data and ambient air pollution data. Our results indicate that the rent of homes that are not directly affected by wildfires but exposed to wildfire plumes declines by about -2.4% per one standard deviation increase in PM2.5. The response of home prices is more than threefold highlighting a gap in the tolerance of poor air quality, which we find is driven by age-related differences between tenants and homeowners. We further show evidence that air pollution affects liquidity and search frictions in the rental market.

DOI: https://doi.org/10.24149/wp2502

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No. 2501

Dynamics of Market Power in Monetary Economies

Jyotsana Kala, Lucie Lebeau and Lu Wang

Abstract: We study the dynamic interplay between monetary policy and market power in a decentralized monetary economy. Building on Choi and Rocheteau (2024), our key innovation is to model rent seeking as a process that takes time, allowing market power to evolve gradually. Our model predicts that a gradual reduction in the nominal interest rate causes a simultaneous increase in rent-seeking effort and producers’ market power, consistent with the stylized correlation observed in the U.S. over the last few decades. Producer entry can however reverse this relation in the short run, and neutralize it in the long run. Indeterminacy and hysteresis emerge when consumers benefit from valuable outside options, with short-run monetary policy shocks potentially locking the economy into high- or low-market-power equilibria in the long run.

DOI: https://doi.org/10.24149/wp2501

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