Economics: Research Guide

Corporate bonds are a key source of funding for U.S. non-financial corporations and a key investment security for insurance companies, pension funds, and mutual funds. Distress in the corporate bond market can thus both impair access to credit for corporate borrowers and reduce investment opportunities for key financial sub-sectors. In a February 2021 Liberty Street Economics post, we introduced a unified measure of corporate bond market distress, the Corporate Bond Market Distress Index (CMDI), then followed up in early June 2022 with a look at how corporate bond market functioning evolved over 2022 in the wake of the Russian invasion of Ukraine and the tightening of U.S. monetary policy. T..

This paper provides new evidence on the effect of the 2012 reform on flows from UB to employment. The reform increased the steepness of the time profile of unemployment benefits by raising the initial benefit, lowering its long-term level and increasing the number of steps in-between. The analysis finds no indication that the 2012 reform of the Belgian UB system led to an increase in flows towards employment or inactivity either in the aggregate or when comparing groups of workers whose benefits were affected to different extents. While the results of this paper and recent literature provide little ground in favour of a further accentuation of the steepness of the time profile of UB in Belgi..

The International Monetary Fund (IMF) is increasingly involved in offering policy advice on public pension issues to member countries. Public pension spending is important from both fiscal and welfare perspectives. Pension policy and its reforms can have significant fiscal and distribution implications, can influence labor supply and labor demand decisions, and may impact consumption and savings behavior. This technical note provides guidance on assessing public pension systems’ macrocriticality, i.e., sustainability, adequacy, and efficiency; it also discusses the issues and policy trade-offs to be considered when designing responses aiming to address these dimensions of the pension syste..

The first mission of the Colombia FSAP was conducted virtually during June 1–21, 2021. This technical note focuses on the developments in the crisis management framework for the banking sector. The assessment examines the Colombian financial safety net and crisis management arrangements in light of the international best practices and standards on resolution and deposit insurance standards.

The issue of how best to finance long-term care (LTC) is the subject of recent reforms, forthcoming reforms or continuing debate in various countries and remains as relevant and challenging as ever. LTC services are crucial to the wellbeing of large numbers of older adults who need help with everyday tasks. Demand for LTC for older adults is projected to rise across developed and developing countries as the number of older adults rises. Supply of care services is likely to remain constrained due to shortages of long-term care workforce and financial constraints in many countries, and the financial risks associated with LTC remain. Financing of LTC is a complicated issue which raises consider..

The existing literature provides evidence that public opinion and attitudes often affect public policy. However, little is known on how public policy might affect public attitudes and norms. I present new evidence on this topic by using age-based health insurance policies in the United States as natural experiments. I first exploit the discrete change in insurance coverage rates at age 26 due to the Affordable Care Act's dependent coverage mandate and show that this policy is associated with statistically significant deterioration in attitudes towards the necessity of health insurance among young adults who are affected by this policy the most. Next, I show that gaining health insurance at 6..

Knowing that insurance market might be sensitive to economic evolutions, the aim of this paper is to investigate the effect of few macroeconomic indicators on non-life insurance market in the Baltic States in the period 1993-2020. The results based on panel data models and panel cointegration suggest a low impact of economic growth on non-life insurance market described by direct premium written, insurance density, insurance penetration for non-life segment. Expenditure on tertiary education has a more significant impact on non-life insurance market, while growth in unemployment rates reduces the development of this market. All in all, this study validates the hypothesis that people with hig..

In this paper, we study two optimisation settings for an insurance company, under the constraint that the terminal surplus at a deterministic and finite time $T$ follows a normal distribution with a given mean and a given variance. In both cases, the surplus of the insurance company is assumed to follow a Brownian motion with drift. First, we allow the insurance company to pay dividends and seek to maximise the expected discounted dividend payments or to minimise the ruin probability under the terminal distribution constraint. Here, we find explicit expressions for the optimal strategies in both cases: in discrete and continuous time settings. Second, we let the insurance company buy a reins..

We consider risk sharing in rural China during its rapid economic transformation from the late 1980s through the late 2000s. We document an erosion of consumption insurance against both household-level idiosyncratic and village-level aggregate income shocks, and show that this decline is related to observable economic changes: the shift from agriculture to wage employment, the decline of publicly owned Township-and-Village Enterprises, and increased migrant work. Further evidence suggests that as these changes took place at the village level, higher levels of government failed to offset these effects through the tax-and-transfer system, leaving households more exposed to both idiosyncratic a..

The core of the research is to provide the explicit expression for the expected net present values (NPVs) of the double barrier strategy for regular diffusions. Under the so-called bail-out setting, the value of the expected NPVs of an insurance company varies according to the choice of a pair of policies, which consist of dividend payments paid out and capital injections received. In the case of the double barrier strategy, the closed-form expected NPVs are given via the bivariate $q$-scale function. This is accomplished by making use of a perturbation technique, which could lead to the linear equation system. The expression obtained here shall be conducive to addressing the associated divi..

Using IADI Annual Survey data, we find some evidence that deposit insurers with particularly high deposit inflow during the pandemic tend to see their relative fund size decrease. As this refers to annual data, lags in premium collection are unlikely to explain this in full. At a quarterly level, and using weighted average relative fund sizes, we find that – globally – fund sizes have expanded throughout the pandemic, interrupted by a small decrease during 2021Q1 only. Given the overall growth of deposits during the pandemic, this is noteworthy. Over the 12-month period 2020Q2-2021Q2, we find an accumulated relative fund size increase of 2.6%. Europe and Asia witness high growt..

This paper sheds new light on the mortality effect of delaying retirement by investigating the Spanish 1967 pension reform that exogenously changed the early retirement age depending on the date individuals started contributing to the social security system. Those that contributed before January 1st, 1967, maintained the right to voluntarily retire early at age 60, while individuals who started contributing after could not voluntarily claim pension until age 65. Using the Spanish administrative social security data, we find that the reform delayed labor market exit by around half a year and increased the probability that individuals take up disability pensions, partial pensions, and no pensi..

Recent policies aiming to prolong worklives have increased older males’ labor supply. Yet, little is known about their intergenerational effects. Using unique Dutch administrative data covering three consecutive generations, this paper studies the impact of increased grandfathers’ labor supply following a reform in unemployment insurance for persons aged 57.5+ on grandchildren’s educational performance. We find that increased grandfathers’ labor supply increases grandchildren’s test scores in 6th grade. The effect is driven by substitution of grandparents’ informal care by formal childcare.

In this paper, we present a new family of bivariate mixed exponential regression models for taking into account the positive correlation between the cost of claims from motor third party liability bodily injury and property damage in a versatile manner. Furthermore, we demonstrate how maximum likelihood estimation of the model parameters can be achieved via a novel Expectation-Maximization algorithm. The implementation of two members of this family, namely the bivariate Pareto or, Exponential-Inverse Gamma, and bivariate Exponential-Inverse Gaussian regression models is illustrated by a real data application which involves fitting motor insurance data from a European motor insurance company.

During banking crises, regulators must decide between bailouts or liquidations, neither of which are publicly popular. However, making a comprehensive assessment of regulators requires examining all their decisions against their dual objectives of preserving financial stability and discouraging moral hazard. I develop a Bayesian latent class model to assess regulators on these competing objectives and evaluate banking and savings and loan (S&L) regulators during the 1980s crises. I find that the banking authority (FDIC) conformed to these objectives whereas the S&L regulator (FSLIC), which subsequently became insolvent, deviated from them. Timely interventions based on this evaluation could ..

The Affordable Care Act (ACA) introduced a premium tax credit to help low-income families purchase insurance and an individual mandate penalty to encourage purchasing insurance, but a couple’s total tax credit and mandate penalty may differ depending on whether they are married. We use a sample of married and cohabiting couples in the 2012–2017 American Community Surveys and leverage variation in the marriage subsidy created by the ACA’s premium tax credit, individual mandate, and Medicaid expansion. Using an instrumental variables approach, we estimate a significant though small positive marriage response that is robust to extensive controls and a placebo sample.

The safety nets in high-income countries before 1900 and in low-income countries today were based on savings and aid from extended family, friends, charities, churches, and small amounts from local governments. Mutual societies and eventually insurance companies offered insurance against lost earnings from sickness, injury, death, and old age. Germany led the way in mandating that employers provide benefits. Since 1900 higher income nations have sharply increased public and private social welfare expenditures to well over 20 percent relative to GDP. A large share of this rise has come in increases in aid to the elderly and health care expenses, often in the form of contributory social insura..

In general insurance companies, a correct estimation of liabilities plays a key role due to its impact on management and investing decisions. Since the Financial Crisis of 2007-2008 and the strengthening of regulation, the focus is not only on the total reserve but also on its variability, which is an indicator of the risk assumed by the company. Thus, measures that relate profitability with risk are crucial in order to understand the financial position of insurance firms. Taking advantage of the increasing computational power, this paper introduces a stochastic reserving model whose aim is to improve the performance of the traditional Mack's reserving model by applying an ensemble of Recurr..

Cyber risk is an omnipresent risk in the increasingly digitized world that is known to be difficult to quantify and assess. Despite the fact that cyber risk shows distinct characteristics from conventional risks, most existing models for cyber risk in the insurance literature have been purely based on frequency-severity analysis, which was developed for classical property and casualty risks. In contrast, the cybersecurity engineering literature employs different approaches, under which cyber incidents are viewed as threats or hacker attacks acting on a particular set of vulnerabilities. There appears a gap in cyber risk modeling between engineering and insurance literature. This paper presen..

Balancing caregiving duties and work can be both financially and emotionally burdensome, especially when care is provided to a spouse at home. This paper documents that financial respite for caregivers can influence individuals' early retirement decisions. We examine the effect of a reform extending long-term care (LTC) benefits (in the form of subsidies and supports) in Spain after 2007 on caregiving spouse's early retirement intention. We subsequently examine the effect of austerity spending cuts in 2012 reducing such publicly funded benefits, and we subsequent compare the estimates to the effects of an early retirement reform among private sector workers in 2013. We document evidence of a..

Since the beginning of their history, insurers have been known to use data to classify and price risks. As such, they were confronted early on with the problem of fairness and discrimination associated with data. This issue is becoming increasingly important with access to more granular and behavioural data, and is evolving to reflect current technologies and societal concerns. By looking into earlier debates on discrimination, we show that some algorithmic biases are a renewed version of older ones, while others show a reversal of the previous order. Paradoxically, while the insurance practice has not deeply changed nor are most of these biases new, the machine learning era still deeply sha..

This study examines the determinants of smallholder farmers’ adoption of weather-index crop insurance, which is considered to be a promising means of mitigating the negative welfare impacts of crop loss caused by drought or excess rainfall. The study utilizes household survey data covering 495 smallholder farmers in rural Kenya. It finds that a better understanding of insurance, together with a significant positive effect of years of education, considerably increases insurance uptake. The evidence suggests that it is important to provide educational programs on new financial products when introducing such products to smallholder farmers. However, it also shows the limitations of this study..

We document the effect of unemployment insurance generosity on divorce and fertility using an identification strategy that leverages state-level changes in maximum benefits over time and comparisons across workers who have been laid off and those that have not been laid off. The results indicate that higher maximum benefit levels mitigate the effects of layoffs. In particular, they mitigate increases in divorce associated with men's layoffs; increases in separations associated with women's layoffs; reductions in fertility associated with men's layoffs; and increases in fertility associated with women's layoffs.

Advantageous (or propitious) selection occurs when an increase in the premium of an insurance contract induces high-cost agents to quit, thereby reducing the average cost among remaining buyers. Hemenway (1990) and many subsequent contributions motivate its advent by differences in risk-aversion among agents, implying different prevention efforts. We argue that it may also appear in the absence of moral hazard, when agents only differ in riskiness and not in (risk) preferences. We first show that profit-maximization implies that advantageous selection is more likely when markup rates and the elasticity of insurance demand are high. We then move to standard settings satisfying the single-cros..

Analyses of out-of-pocket healthcare spending often suffer from an inability to distinguish necessary from optional spending in the data without making further assumptions. We propose a two-dimensional rating of the spending categories often available in household budget survey data where we consider the requirement to pay for necessary healthcare as one dimension and the incentive to pay extra for additional services, higher quality options or more convenience as a second dimension to assess the distortionary potential of higher spending for additional healthcare or higher quality options. We use three waves of a large German Household Budget Survey and decompose the Kakwani-index of total ..

Advantageous (or propitious) selection occurs when an increase in the premium of an insurance contract induces high-cost agents to quit, thereby reducing the average cost among remaining buyers. Hemenway (1990) and many subsequent contributions motivate its advent by differences in risk-aversion among agents, implying different prevention efforts. We argue that it may also appear in the absence of moral hazard, when agents only differ in riskiness and not in (risk) preferences. We first show that profit-maximization implies that advantageous selection is more likely when markup rates and the elasticity of insurance demand are high. We then move to standard settings satisfying the single-cros..

This paper is mainly based on case studies collected between March and June 2019 from Resolution Issues for Financial Cooperatives Technical Committee members and non-members. Since then, some respondents may have had changes in their early intervention and resolution framework. Therefore, although some of the examples given in this paper may now no longer apply, they are useful references to how these issues have been approached in the past.

This paper explores how far it is possible to provide a theoretical framework for the Household Costs Indices. Four features are identified which distinguish the index from conventional consumer price indices: i) the index is calculated giving equal weight to each household's expenditure pattern (democratic weights); ii) insurance premia are treated gross rather net of claims; iii) interest payments are included as a cost and iv) goods and services are accounted for when they are paid for rather than when they are consumed. Points i) and ii) are strongly supported. It is suggested that for theoretical coherence iii) needs to be expanded to include interest receipts as well as payments. Point..

We examine the provision of insurance against non-observable liquidity shocks for time-inconsistent agents who can privately store resources. When lack of self-control is strong enough, optimal contracts are similar to individual nancial accounts with remunerated savings and costly borrowing. The corresponding rate of return decreases with savings, which gives a theoretical rationale for pension accounts with decreasing incentive schemes, as implemented in most developed countries. Extending the model to an innite horizon, we show that, in the presence of repeated shocks, optimal contracts lead to impoverishment almost surely. Usury laws, capping interest rates, worsen this tendency to over-..