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Economic Research

Liberty Street Economics
Lehman’s Bankruptcy Expenses
The resolution of a complex bankruptcy proceeding can be quite expensive. The direct costs, such as legal fees, reduce a firm’s value below its fundamental level. Bankruptcy also carries indirect costs, such as the loss in value of assets trapped in bankruptcy. In this post, our bloggers provide the first comprehensive estimates of the direct costs of resolving the bankruptcy of Lehman Brothers’ holding company and its affiliates under the U.S. Bankruptcy Code, and of Lehman’s broker-dealer under the Securities Investor Protection Act.
By Erin Denison, Michael Fleming, and Asani Sarkar
Creditor Recovery in Lehman’s Bankruptcy
Expectations of creditor recovery were low when the Lehman Brothers bankruptcy process started. When the firm filed for bankruptcy in September 2008, the average price of Lehman’s senior bonds implied a recovery rate of about 30 percent. A month later the implied recovery rate was 9 percent. Ten years later, our bloggers’ analysis finds that, although their recovery rate improved over time, Lehman’s creditors fared worse than historical norms.
By Erin Denison, Michael Fleming, and Asani Sarkar
How Much Value Was Destroyed by the Lehman Bankruptcy?
Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection on September 15, 2008, initiating one of the largest and most complex bankruptcy proceedings in history. This week, Liberty Street Economics presents a series of posts that provide an assessment of the value lost to Lehman, its creditors, and other stakeholders now that the bankruptcy proceedings are winding down.
By Erin Denison, Michael Fleming, and Asani Sarkar
Highlights from the Fourth Bi-annual Global Research Forum on International Macroeconomics and Finance
Achieving global financial stability has been at the forefront of policy discussions in the decade since the eruption of the global financial crisis. As part of an examination of what has changed since the crisis, our bloggers present highlights from the fourth bi-annual Global Research Forum on International Macroeconomics and Finance, a conference organized by the European Central Bank (ECB), the Federal Reserve Board, and the Federal Reserve Bank of New York and held at the ECB in Frankfurt am Main on November 29-30, 2018.
By Ozge Akinci, Roland Beck, Paola Donati, Linda Goldberg, and Livio Stracca
Coming to Terms with Operational Risk
“Operational risk” often evokes images of catastrophic events like hurricanes and earthquakes. For financial institutions, however, operational risk has a broader scope, encompassing losses related to fraud, rogue trading, and cyberattacks, among other things. Our bloggers examine how operational risk has emerged as a prominent concern over the past two decades and now accounts for more than a quarter of financial institutions’ regulatory capital.
By Gara Afonso, Filippo Curti, and Atanas Mihov
Recent Publications
Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates
In this paper, the authors apply a standard New Keynesian model to analyze the effects of monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will become anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from the authors’ analysis. First, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained. Second, a dynamic strategy such as price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at the target level and potentially further reduce the effects of the lower bound on the economy.
Thomas Mertens and John C. Williams, Staff Report 877, January 2019
Robust Inference in Models Identified via Heteroskedasticity
The author provides a comprehensive framework allowing researchers to conduct inference robust to weak identification in models identified via heteroskedasticity. He describes and models the deficiencies that can lead to such weak identification, and shows that these properties can significantly impact the reliability of standard inference in empirical data. The author also proposes tests to detect weak identification, allowing researchers to determine whether they should consider these concerns.
Daniel Lewis, Staff Report 876, December 2018
The Marginal Propensity to Hire
The rise in unemployment following the financial crisis underscored the importance of links between financial and labor markets. In this paper, the author exploits the idea that, when financial constraints bind, a firm adjusts its employment in response to cash flow shocks, which the author labels the marginal propensity to hire (MPH). Using a novel combination of three large data sets from the United Kingdom, the study shows that for every additional £1 of cash flow, on average 39 pence are spent on employment.
Davide Melcangi, Staff Report 875, December 2018
Special Issue: The Appropriate Role of Government in U.S. Mortgage Markets
The U.S. mortgage finance system was one of the focal points of the 2007-08 financial crisis, yet legislative decisions about the appropriate role of the federal government in the system remain unsettled. This special volume of the Economic Policy Review explores key components of housing finance reform. The eight articles were developed from presentations delivered at “The Workshop on the Appropriate Government Role in U.S. Mortgage Markets,” held at the Federal Reserve Bank of New York in April 2017.
Local Banks, Credit Supply, and House Prices
The author studies the effects of an increase in the supply of local mortgage credit on local house prices and employment by exploiting a natural experiment from Switzerland: Losses in U.S. security holdings triggered a migration of customers from a large, universal bank (UBS) to local mortgage lenders in mid-2008. He shows that house prices in neighborhoods immediately around exogenously shocked local banks grow over 50 percent more than house prices around unaffected banks. There was also an increase in the number of employees at small firms, reliant on real estate collateral, in these neighborhoods.
Kristian Blickle, Staff Report 874, November 2018
The Affordable Care Act and the Market for Higher Education
Obtaining health insurance in America is intimately connected to choosing whether and where to work. But the Affordable Care Act has changed this model and affected people’s incentives for further education. The authors employ a triple-difference strategy comparing counties with different levels of uninsurance pre-ACA, and in states with different Medicaid expansion decisions across time, to investigate changes in enrollment in different types of higher education institutions.
Rajashri Chakrabarti and Maxim Pinkovskiy, Staff Report 873, October 2018
Getting Ahead by Spending More? Local Community Response to State Merit Aid Programs
In more than half of U.S. states, implementation of merit-based aid programs has led to a large reduction in the net tuition expense of in-state college students. Using two different estimation strategies, the authors find that merit aid programs led to a statistically and economically significant increase in state funding for higher education while state funding for kindergarten through twelfth-grade education fell markedly. The authors argue that their findings have important implications because educators and policymakers should be aware of unintended consequences that might undercut the positive benefits of merit aid.
Rajashri Chakrabarti, Nicole Gorton, and Joydeep Roy, Staff Report 872, October 2018