Risk-based pricing of interest rates in household loan markets

Focusing on observable default risk's role in loan terms and the subsequent consequences for household behavior, this paper shows that lenders increasingly used risk-based pricing of interest rates in consumer loan markets during the mid-1990s. It tests three resulting predictions. First, the premium paid per unit of risk should have increased over this period. Second, debt levels should react accordingly. Third, fewer high-risk households should be denied credit, further contributing to the interest rate spread between the highest- and lowest-risk borrowers. For those obtaining loans, the premium paid per unit of risk did indeed become significantly larger over this time period. For example, given a 0.01 increase in the probability of bankruptcy, the corresponding interest rate increase tripled for first mortgages, doubled for automobile loans and rose nearly six times for second mortgages. Additionally, changes in borrowing levels and debt access reflected these new pricing practices, particularly for secured debt. Borrowing increased most for the low-risk households who saw their relative borrowing costs fall. Furthermore, while credit access increased for very high-risk households, the increases in their risk premiums implied that their borrowing as a whole either rose less or, sometimes, fell.Loans, Personal ; Households - Economic aspects

Monetary policy shocks and long-term interest rates

Exogenous shocks to monetary policy strongly affect short-term interest rates, but have little or no effect on longer-term interest rates.Bonds ; Interest rates ; Monetary policy

Household debt

Debt ; Income

A more equitable distribution of the positive fiscal benefits of immigration

Immigration is good for the US economy and for the fiscal picture at the federal level, but some local areasexperience adverse fiscal impacts when new immigrants arrive. Edelberg and Watson propose a transparentsystem for redistributing resources from the federal government to these localities. Local areas wouldreceive $2,500 annually for each adult immigrant who arrived to the US within the past five years withouta college degree—those more likely to generate negative fiscal flows at the subnational level. The fundswould take the form of unrestricted transfers to local educational agencies through the existing Impact Aidprogram and to Federally Qualified Health Centers. This support would help to offset educational, health,and other costs to local areas associated with immigrant inflows, and more equitably share the overall fiscaland economic benefits of immigration.

Understanding the effects of a shock to government purchases

This paper investigates the consequences of an exogenous increase in U.S. government purchase. We find the in response to such a shock, employment, output, and nonresidential investment rise, while real wages, residential investment and consumption expenditures fall. The paper argues that a simple variant of neoclassical growth model which distinguishes between nonresidential and residential investment is consistent with this evidence.Expenditures, Public