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Economic Research

Financial Stability and Interest Rates
In a recent research paper, the authors argued that interest rates have very different consequences for current versus future financial stability. In the short run, lower real rates mean higher asset prices and hence higher net worth for financial institutions. In the long run, lower real rates lead intermediaries to shift their portfolios toward risky assets, making them more vulnerable over time. In this post, the authors use a model to highlight the challenging trade-offs faced by policymakers in setting interest rates.
By Ozge Akinci, Gianluca Benigno, Marco Del Negro, Ethan Nourbash, and Albert Queralto
Financial Vulnerability and Macroeconomic Fragility
What is the effect of a hike in interest rates on the economy? Building on recent research, the authors argue that the answer depends on how vulnerable the financial system is. They measure financial vulnerability using a novel concept—the financial stability interest rate r** (or “r-double-star”)—and show that, empirically, the economy is more sensitive to shocks when the gap between r** and current real rates is small or negative.
By Ozge Akinci, Gianluca Benigno, Marco Del Negro, Ethan Nourbash, and Albert Queralto
Banks’ Balance-Sheet Costs and ON RRP Investment
Daily investment at the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility increased from a few billion dollars in March 2021 to more than $2.3 trillion in June 2022 and has stayed above $2 trillion since then. This post, which is based on a recent staff report, discusses two channels—a deposit channel and a wholesale short-term debt channel—through which banks’ balance-sheet costs have increased investment by money market mutual funds in the ON RRP facility.
By Gara Afonso, Marco Cipriani, Catherine Huang, and Gabriele La Spada
Look Out for Outlook-at-Risk
Timely characterization of risks to the economic outlook plays an important role in economic policy and private sector decisions. The concept of “Outlook-at-Risk”—the downside risk to real activity and two-sided risks to inflation—which the authors first introduced in February, provides a timely, quantitative approach to measuring risks to the future evolution of the economy. This post uses data to investigate how such risks have evolved over the current and previous five monetary policy tightening cycles, and launches Outlook-at-Risk as a data product that will be updated monthly.
By Nina Boyarchenko, Richard Crump, Leonardo Elias, and Ignacio Lopez Gaffney
The Great Pandemic Mortgage Refinance Boom
Mortgages balances grew by only $121 billion in the first quarter of 2023, with the increase tempered by a sharp reduction in purchase and refinance mortgage originations—a clear end to a boom that began with the COVID pandemic. The boom in purchase originations was driven by many factors—low mortgage rates, strong household balance sheets, and an increased demand for housing. This post explores the refi boom of 2020-21—who refinanced, who took out cash, and how much potential consumption support these transactions provided.
By Andrew Haughwout, Donghoon Lee, Daniel Mangrum, Joelle Scally, and Wilbert van der Klaauw
First-Time Buyers Did Not Drive Strong House Price Appreciation in 2021
In May 2022, the chief economist for Freddie Mac had argued that a surge in first-time home buyers had been an important driver of the 2021 housing market. However, using data from the New York Fed Consumer Credit Panel, the authors find that the share of home purchases by first-time buyers actually fell in 2021, suggesting that other factors were important to the rapid increase in house prices in 2021.
By Donghoon Lee and Joseph S. Tracy
Working Remotely? Selection, Treatment, and the Market for Remote Work
The authors ask how remote work affects productivity and how productive are workers who choose remote jobs? They estimate both effects on the call-center workers of a U.S. Fortune 500 firm that hired both remote and on-site workers prior to COVID-19 and went entirely remote during the pandemic. Their findings suggest several reasons why the mass experiment with remote work during COVID-19 will permanently affect the market provision of remote work.
Natalia Emanuel and Emma Harrington, Staff Report 1061, May 2023
Applications or Approvals: What Drives Racial Disparities in the Paycheck Protection Program?
The $800 billion Paycheck Protection Program (PPP), authorized by Congress in March 2020, was created to provide financial support to small businesses during the COVID-19 pandemic. This paper uses the 2020 Small Business Credit Survey, which includes detailed information on PPP loan applications and approvals, along with information on owner race, gender, and Hispanic origin, to identify the sources of racial disparities in the take-up of PPP loans and to study the effects of racial bias on both loan applications and approvals.
Sergey Chernenko, Nathan Kaplan, Asani Sarkar, and David Scharfstein, Staff Report 1060, May 2023
Climate Stress Testing
The authors examine the potential for stress testing to assess and manage climate-related risks to financial stability. They discuss various challenges with the existing approaches and highlight areas with a particular need for future academic research. They also compare and contrast existing stress testing methods with alternative market-based stress tests. Although they acknowledge that many parts of the financial system, such as insurance companies, are potentially exposed to climate risks, their analysis focuses on the assessment of climate risks to the banking sector.
By Viral V Acharya, Richard Berner, Robert Engle, Hyeyoon Jung, Johannes Stroebel, Xuran Zeng, and Yihao Zhao, STAFF REPORT 1059, APRIL 2023
U.S. Banks’ Exposures to Climate Transition Risks
Growing evidence of climate change has heightened the interest in understanding the potential impact it may have on the financial system. However, researchers have focused on the impact of the physical risks associated with climate change, paying less attention to the potential implications of transition risks. This paper investigates banks’ exposures to alternative policies and scenarios that aim at promoting the transition to a low-carbon economy. It also examines how these exposures vary over time and across banks.
Hyeyoon Jung, João A. C. Santos, and Lee Seltzer, Staff Report 1058, April 2023
Non-Bank Financial Institutions and Banks’ Fire-Sale Vulnerabilities
Non-Bank Financial Institutions (NBFIs) have grown increasingly more interconnected, and so have their linkages with banking institutions. The authors evaluate the fire-sale implications from shocks to banks and twelve separate NBFI segments (multiple types of insurance companies, open-end funds, hedge funds, pension funds, securities brokers-dealers, and finance companies).
Nicola Cetorelli, Mattia Landoni, and Lina Lu, Staff Report 1057, March 2023
Workers’ Perceptions of Earnings Growth and Employment Risk
The authors analyze workers’ beliefs on several important sources of uncertainty about their own labor market outcomes: on-the-job earnings growth and risk of layoff and quitting. They examine how they differ across workers and types of jobs, how they evolve over the working life and business cycles, and how they covary with consumers’ expectations about the economy. They also study the perceived persistence of earnings shocks. To do so, they use a decade worth of monthly data from the New York Fed’s Survey of Consumer Expectations.
Gizem Koşar and Wilbert van der Klaauw, Staff Report 1056, February 2023
Noncognitive Skills at the Time of COVID-19: An Experiment with Professional Traders and Students
Noncognitive skills play a crucial role for economic and social outcomes. They are predictive of educational achievement, job-searching effort, the likelihood of finding a job, job performance, wage levels, and long-term health. Noncognitive skills are typically treated as stable characteristics that do not vary with life events or the business cycle. In this paper, the authors elicit and analyze noncognitive skills for a sample of professional traders and portfolio managers. They also use a sample of undergraduate students to gauge whether noncognitive skills of different segments of the population reacted differently to the pandemic events.
Marco Angrisani, Marco Cipriani, Antonio Guarino, Ryan Kendall, and Julen Ortiz de Zarate Pina, Staff Report 1055, February 2023
Market-Function Asset Purchases
The authors explore the design of market-function purchase programs, including their communication, triggers, operational protocols, exit, and wind-down strategies. They also discuss whether fiscal buybacks might be a useful alternative or complement to central bank market-function purchase programs, and how these buybacks could be funded. Fiscal buybacks to support market functionality can be aligned with the fiscal authority’s goal of minimizing the government’s interest expense and can reduce a central bank’s challenges when asset purchases are not naturally congruent with monetary policy.
Darrell Duffie and Frank Keane, Staff Report 1054, February 2023
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