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Economic Research

The Evolving Market for U.S. Sovereign Credit Risk
The authors argue that aggregate measures of activity in U.S. sovereign credit default swaps (CDS) mask a decrease in risk-forming transactions after 2014—quoted CDS spreads in this market are based on few, if any, market transactions and thus may be a misleading indicator of the market’s default risk expectations.
By Nina Boyarchenko and Or Shachar
Banking System Vulnerability: Update
The authors provide an update of four analytical measures that aim to capture different aspects of banking system vulnerability. Since last year, vulnerabilities as indicated by these measures have increased moderately, continuing the slow but steady upward trend that started around 2016. Despite the recent increase, the overall level of vulnerabilities according to this analysis remains subdued and is still significantly smaller than before the financial crisis.
By Kristian Blickle, Fernando Duarte, Thomas Eisenbach, and Anna Kovner
How Does Tick Size Affect Treasury Market Quality?
The authors review their recently updated research studying how a 2018 change in the minimum price increment, or tick size, for the two-year U.S. Treasury note affected market quality. They find that the change led to improvements in market liquidity, price efficiency, and price discovery relative to the futures market.
By Michael Fleming, Giang Nguyen, and Francisco Ruela
The New York Fed DSGE Model Forecast—December 2019
This post presents the latest quarterly update to the economic forecasts generated by the New York Fed’s dynamic stochastic general equilibrium (DSGE) model. The current 2019 Q4/Q4 GDP growth forecast stands at 2.0 percent, down from 2.4 percent in September.
By William Chen, Marco Del Negro, Ethan Matlin, Reca Sarfati, and Andrea Tambalotti
Selection in Banking
What type of bank chooses to become a conglomerate organization? In this post, the authors document that from 1986 to 2018 such institutions had, on average, a higher return on equity in the three years prior to their decision to expand, as well as a lower level of risk overall. However, this superior pre-expansion performance diminishes over the time period analyzed, and all but disappears by the end of the 1990s.
By Nicola Cetorelli and Douglas Leonard
Medicare and the Geography of Financial Health
Why does consumer financial strain vary so much across the United States? Using data from the New York Fed Consumer Credit Panel, the authors examine the role health insurance plays in shaping geographic differences in financial health. In particular, they estimate the effect of universal health insurance at age 65—when most Americans become eligible for Medicare.
Paul Goldsmith-Pinkham, Maxim Pinkovskiy, and Jacob Wallace, Staff Report 911, January 2020
Monetary Policy Implementation with an Ample Supply of Reserves
The level of reserve supply—scarce, super abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime for monetary policy. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. The authors discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007-09 financial crisis.
Gara Afonso, Kyungmin Kim, Antoine Martin, Ed Nosal, Simon Potter, and Sam Schulhofer-Wohl, Staff Report 910, January 2020
Cyber Risk and the U.S. Financial System: A Pre-Mortem Analysis
The authors model how a cyberattack may be amplified through the U.S. financial system, focusing on the wholesale payments network. They estimate that the impairment of any of the five most active U.S. banks has the potential to result in significant spillovers to other banks. The impact varies and can be larger on particular days and in geographies with concentrated banking markets.
Thomas M. Eisenbach, Anna Kovner, and Michael Junho Lee, Staff Report 909, January 2020
How Did the Fed Funds Market Change When Excess Reserves Were Abundant?
The authors describe the functioning of the federal funds market during the recent period of abundant excess reserves that started in 2010 and ended in early 2018. In particular, they show that the very large increase in excess reserves in the period following the 2007-08 financial crisis changed both the types of participants that were active in the fed funds market and their motivations for participating. They also observe that day-to-day volatility in the effective federal funds rate decreased significantly in this period.
John P. McGowan and Ed Nosal, Economic Policy Review, Forthcoming
Anatomy of Lifetime Earnings Inequality: Heterogeneity in Job Ladder Risk vs. Human Capital
The authors study the determinants of lifetime earnings (LE) inequality in the United States, for which differences in lifetime earnings growth are key. Using detailed administrative data from Social Security Administration records, they show that earnings growth is surprisingly similar for the bottom two-thirds of the LE distribution when workers stay with the same employer. Differences arise when workers change employers, with earnings growth rising with LE.
Fatih Karahan, Serdar Ozkan, and Jae Song, Staff Report 908, December 2019
Information Management in Times of Crisis
Following a national bank holiday in 1933, New York state bank regulators suspended the publication of balance sheets of state-charter banks for two years, whereas the national-charter bank regulator did not. The authors find that the more opaque state-charter banks experienced significantly less deposit outflows than national-charter banks. However, the behavior of bank deposits across both types of banks converged in 1934 after the introduction of federal deposit insurance.
Haelim Anderson and Adam Copeland, Staff Report 907, December 2019
Federal Reserve Participation in Public Treasury Offerings
The author describes the evolution of the Federal Reserve System’s participation in public Treasury offerings from the period before 1935 to the present day. The discussion includes how the System adapted its operating procedures to comply with a 1935 limitation imposed by the Banking Act of 1935, how it modified its operating procedures from time to time in response to changes in Treasury funding techniques, and how the System and the Treasury worked together to improve both Treasury debt management and System reinvestment operations.
Kenneth Garbade, Staff Report 906, December 2019
Individual and Market-Level Effects of UI Policies: Evidence from Missouri
Extending unemployment insurance (UI) benefits is one of the most commonly used macroeconomic stabilization tools in the United States. The authors develop a method to jointly measure the response of worker search effort (individual effect) and vacancy creation (market-level effect) to changes in the duration of UI benefits. To implement this approach, they exploit an unexpected cut in UI durations in Missouri and provide quasi-experimental evidence on the effect of UI on the labor market.
Fatih Karahan, Kurt Mitman, and Brendan Moore, Staff Report 905, December 2019