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Economic Research

On the Distributional Effects of Inflation and Inflation Stabilization
The authors discuss the distributional effects of inflation and inflation stabilization through the lens of a Heterogeneous Agent New Keynesian (HANK) model. They find that while inflation hurts everyone, it hurts the poor in particular. When the source of inflation is a supply shock, fighting inflation aggressively hurts the poor even more; however, the opposite is true for demand shocks.
By Marco Del Negro, Keshav Dogra, Pranay Gundam, Donggyu Lee, and Brian Pacula
Racial and Ethnic Inequalities in Household Wealth Persist
The authors continue documenting the evolution of wealth inequality and equitable growth gaps between Black, Hispanic, and white households for a variety of assets and liabilities —in this case from the first quarter of 2019 to the fourth quarter of 2023 for a pandemic-era picture. They find that real wealth grew, and that the pace of growth for Black, Hispanic, and white households was very similar across this timeframe—yet gaps across groups persist.
By Rajashri Chakrabarti, Natalia Emanuel, and Ben Lahey
Deciphering the Disinflation Process
U.S. inflation surged in the early post-COVID period, driven by economic shocks such as supply chain disruptions and labor supply constraints. Following its peak at 6.6 percent in September 2022, core consumer price index (CPI) inflation has come down rapidly over the last two years, falling to 3.6 percent recently. The authors argue that the same forces that drove the nonlinear rise in inflation in 2021 have worked in reverse since late 2022, accelerating the disinflationary process.
By Sebastian Heise and Ayşegül Şahin
The Growing Risk of Spillovers and Spillbacks in the Bank-NBFI Nexus
Banks support the growth of nonbank financial institutions (NBFIs) through funding and liquidity insurance. The transformation from banks to a bank-NBFI nexus may result in overall growth in markets and wider access to financial services, but the system may be disproportionately exposed to financial and economic instability when aggregate tail risk materializes. The authors consider the systemic implications of the observed build-up of bank-NBFI connections associated with the growth of NBFIs.
By Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman
Banks and Nonbanks Are Not Separate, but Interwoven
Building on previous evidence of the dependence of nonbank financial institutions (NBFIs) on banks for funding, the authors explain that the observed growth of NBFIs reflects banks optimally changing their business models in response to factors such as regulation, rather than banks stepping away from lending and risky activities, and then being substituted by NBFIs. The enduring bank-NBFI connection is best understood as an ever-evolving transformation of bank risks that are now being repackaged between banks and NBFIs.
By Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman
Decorative image: View of high rise glass building and dark steel in London
Nonbanks Are Growing but Their Growth Is Heavily Supported by Banks
Traditional approaches to financial sector regulation view banks and nonbank financial institutions (NBFIs) as substitutes, one inside and the other outside the perimeter of prudential regulation, with the growth of one implying the shrinking of the other. However, the authors argue that banks and NBFIs are better described as intimately interconnected, with NBFIs being especially dependent on banks both for term loans and lines of credit.
By Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman
Quantitative Easing and Inequality
The author studies how quantitative easing (QE) affects household welfare across the wealth distribution. He builds a Heterogeneous Agent New Keynesian (HANK) model with household portfolio choice, wage and price rigidities, endogenous unemployment, frictional financial intermediation, an effective lower bound (ELB) on the policy rate, forward guidance, and QE. The author finds that the QE program unambiguously benefited all households by stimulating economic activity; however, it had non-linear distributional effects.
Donggyu Lee, Staff Report 1108, July 2024
Insurance, Weather, and Financial Stability
Global warming will affect risks of bank lending and potentially the stability of the banking sector. The authors introduce a model to study the interaction between insurance and banking, building on the Federal Crop Insurance Act of 1980 -- banks increased lending to the agricultural sector in counties with higher insurance coverage after 1980. They discuss the implications of their results in light of potential changes to insurance availability as a consequence of global warming.
Charles M. Kahn, Ahyan Panjwani, and João A. C. Santos, Staff Report 1107, May 2024
The Financial Consequences of Undiagnosed Memory Disorders
For households with older adults, financial decisions—and the importance of cognitive function to those decisions—are particularly consequential. However, older households are also the most vulnerable to memory disorders such as Alzheimer’s disease. The authors examine the effect of undiagnosed memory disorders on credit outcomes using nationally representative credit reporting data merged with Medicare data. They find that the harmful financial effects of undiagnosed memory disorders exacerbate the financial pressures that these households already face.
Carole Roan Gresenz, Jean M. Mitchell, Belicia Rodriguez, R. Scott Turner, and Wilbert van der Klaauw, Staff Report 1106, May 2024
Wage Insurance for Displaced Workers
The authors study the effects of an innovative policy known as wage insurance, which temporarily subsidizes the earnings of displaced workers whose new job pays less than their old one. They find that wage insurance eligibility increases short-run employment probabilities and leads to higher long-run cumulative earnings. The program's effectiveness primarily results from shorter non-employment spells, which enables workers to avoid the negative consequences of duration-dependent wage offers.
Benjamin Hyman, Brian Kovak, and Adam Leive, Staff Report 1105, May 2024
Tracing Bank Runs in Real Time
Economists still have a limited understanding of how bank runs unfold. The authors offer novel insights on modern bank runs using confidential data on wholesale and retail payments from the bank runs of March 2023. Their findings suggest that these runs were driven by large depositors, rather than many small depositors, and that the banks that survived a run did so by borrowing new funds and then raising deposit rates—not by selling liquid securities.
Marco Cipriani, Thomas M. Eisenbach, and Anna Kovner, Staff Report 1104, May 2024
Can Discount Window Stigma Be Cured? An Experimental Investigation
The Federal Reserve has been operating as a lender of last resort through its “Discount Window” (DW) for more than a century. Because it aims to address liquidity problems before they have systemic consequences, the DW is the Fed’s first line of defense against financial crises. However, the DW has been plagued by stigma, based on concerns that it could be interpreted as a sign of financial weakness. The authors study how such stigma can be cured.
Olivier Armantier and Charles Holt, Staff Report 1103, May 2024
Information and Market Power in DeFi Intermediation
The decentralized nature of blockchain markets has given rise to a complex and highly heterogeneous market structure. The authors introduce the Decentralized Finance (DeFi) intermediation chain and provide theoretical and empirical evidence that private information is the key determinant of intermediation rents. They propose a repeated bargaining model that predicts that the block builder’s share of the surplus is proportional to the value of their private information.
Pablo Azar, Adrian Casillas, and Maryam Farboodi, Staff Report 1102, May 2024
Do Mortgage Lenders Respond to Flood Risk?
Using property-level mortgage data, property-level risk data, and country-wide FEMA flood maps, the authors identify the effects of flood risk on mortgage lending. Focusing on properties that face flood risk but are not in a FEMA flood zone, they find that lenders are less willing to originate mortgages and charge higher rates for lower LTV loans for properties that face “un-mapped” flood risk. Their results suggest that lenders are aware of flood risk outside FEMA’s identified flood zones.
Kristian S. Blickle, Evan Perry, and João A. C. Santos, Staff Report 1101, May 2024
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