St. Louis Fed's Review: The Evolution of the Subprime Mortgage Market; On the Size and Growth of Government; Are the Causes of Bank Distress Changing? Can Researchers Keep Up?; Replicability, Real-Time Data, and the Science of Economic Research; The Fed's Monetary Policy Rule


ST. LOUIS — The January/February issue of Review, the Federal Reserve Bank of St. Louis' journal of economic and business issues, features the following articles. The publication is also available on the St. Louis Fed's web site:

  • "The Evolution of the Subprime Mortgage Market." Subprime lending has introduced a substantial amount of "risk-based" pricing into the mortgage market by creating numerous prices and product choices, most of which are largely determined by a borrower's credit history and down payment requirements. Economists Souphala Chomsisengphet and Anthony Pennington-Cross examine the history of subprime lending and how it has evolved over time. They find that much of the growth of subprime lending, at least in the securitized part of the market, has come in the least-risky segment. In addition, lenders have imposed prepayment penalties to extend the duration of the loans and required larger down payments to lower their credit-risk exposure from high-risk loans.
  • "On the Size and Growth of Government." The size of the U.S. federal government, as well as state and local governments, increased dramatically during the 20th century. Economists Thomas A. Garrett and Russell M. Rhine describe the two theories about this growth: citizen-over-state and state-over-citizen. The former suggests that citizens demand government programs, and the government simply responds to meet those demands. The theory of state-over-citizen suggests that the size of government is independent from citizens' demands, and government grows because of inherent inefficiencies in public sector activities and incentives facing government bureaucrats. Garrett and Rhine conclude that portions of each theory can probably explain government size and growth, but the challenge remains to develop a single, unifying theory.
  • "Are the Causes of Bank Distress Changing? Can Researchers Keep Up?" Since 1990, the banking sector has experienced enormous legislative, technological and financial changes, yet research into the causes of bank distress has lagged. One consequence of this is that traditional supervisory surveillance models may not capture important risks inherent in the current banking environment. Economists Thomas B. King, Daniel A. Nuxoll and Timothy J. Yeager review the history of these models. They provide empirical evidence that the characteristics of failing banks have changed in the past 10 years and argue that the time is right for new research that employs new empirical techniques. King, Nuxoll and Yeager offer several examples of a new generation of "early-warning" models that are not yet widely known among academic banking economists.
  • "Replicability, Real-Time Data, and the Science of Economic Research: FRED®, ALFRED® and VDC." Economist Richard G. Anderson explores the linkages between to recent themes in economic research: "real-time" data and replication. These two themes share many of the same ideas, namely that scientific research itself has a time dimension. Both real-time and replication studies require specialized datasets, and the article discusses two ongoing St. Louis Fed projects—FRASER® and ALFRED—that will make large amounts of such historical data available on the Internet. The article also compares and contrasts these projects with Harvard University's Virtual Data Center (VDC) project.
  • "The Fed's Monetary Policy Rule." This is a reprint of a speech by William Poole, the president of the Federal Reserve Bank of St. Louis, which he delivered at the Cato Institute in Washington, D.C., on Oct. 14, 2005.

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