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Economic Research

How the Fed Adjusts the Fed Funds Rate within Its Target Range
The Federal Open Market Committee maintained its target range for the fed funds rate at 0 to 25 basis points at its June 2021 meeting, while two of the Federal Reserve’s administered rates—interest on reserve balances and the overnight reverse repo facility offering rate—each were increased by 5 basis points. What do these two simultaneous decisions mean? In this post, the authors look at “technical adjustments”—a tool the Fed can deploy to keep the FOMC’s policy rate well within the target range and support smooth market functioning.
By Gara Afonso, Lorie Logan, Antoine Martin, William Riordan, and Patricia Zobel
How the Fed's Overnight Reverse Repo Facility Works
Daily take-up at the overnight reverse repo facility increased from less than one billion dollars in early March 2021 to well over a trillion dollars five months later. In this second post of the series, the authors take a closer look at this important tool in the Federal Reserve’s monetary policy implementation framework and discuss the factors behind the recent increase in volume.
By Gara Afonso, Lorie Logan, Antoine Martin, William Riordan, and Patricia Zobel
How the Federal Reserve's Monetary Policy Implementation Framework Has Evolved
The Federal Reserve’s monetary policy implementation framework has changed markedly in the last two decades. Prior to the global financial crisis, the Fed used a system of scarce reserves and fine-tuned the supply of reserves to maintain rate control. However, since then, the Fed has operated in a floor system, in which the Fed’s administered rates influence the federal funds rate. In this first post of a series, the authors discuss the salient features of the implementation framework.
By Gara Afonso, Lorie Logan, Antoine Martin, William Riordan, and Patricia Zobel
The Effect of Monetary and Fiscal Policy on Inequality
How does accounting for households’ heterogeneity—and in particular inequality in income and wealth—change our approach to macroeconomics? What are the effects of monetary and fiscal policy on inequality, and what did we learn in this regard from the COVID-19 pandemic? These are some of the questions debated at a recent symposium on “Heterogeneity in Macroeconomics: Implications for Policy” organized by the new Applied Macroeconomics and Econometrics Center (AMEC) of the New York Fed.
By Marco Del Negro, Keshav Dogra, and Laura Pilossoph
When Will U.S. Exports Take Off?
Although U.S. imports have rebounded, U.S. exports remain far below their pre-pandemic level. This asymmetry in part reflects that U.S. imports are driven by goods trade, while exports rely more heavily on services trade—a key component of which is foreign travel to the United States. But U.S. exports may be at a turning point given the reopening of U.S. borders to all vaccinated travelers on November 8. The authors analyze the trajectory of U.S. services and how the lifting of the travel ban might contribute to the rebound of U.S. services exports.
By Ruth Cesar Heymann and Julian di Giovanni
The Effects of Leverage on Investments in Maintenance: Evidence from Apartments
A significant fraction of American households rent rather than own their homes. Although owners of multifamily real estate assets invest substantially in maintaining their buildings, tenants frequently complain of poor housing quality. The author studies the sensitivity of investment in apartment building maintenance to building debt levels. He uses a novel data set combining housing code violations from forty-five U.S. cities with apartment financing information to show that highly leveraged buildings tend to be less well maintained.
Lee Seltzer, Staff Report 1000, December 2021
Superstar Returns
The authors study long-term returns on residential real estate in twenty-seven “superstar” cities in fifteen countries over 150 years. They find that total returns in superstar cities are close to 100 basis points lower per year than in the rest of the country. House prices tend to grow faster in the superstars, but rent returns are substantially greater outside the big agglomerations, resulting in higher long-run total returns. They expect that the detailed data put together for this paper will enable future researchers to analyze and understand risk and return patterns in housing markets in greater detail.
Francisco Amaral, Martin Dohmen, Sebastian Kohl, and Moritz Schularick, Staff Report 999, December 2021
The Federal Reserve’s Market Functioning Purchases
In March 2020, the COVID-19 pandemic triggered massive customer selling of U.S. Treasury securities and agency mortgage-backed securities (MBS). Such selling overwhelmed the capacity of dealers to intermediate trades, contributing to a marked deterioration of market functioning. The Federal Reserve promptly took numerous steps, including the initiation of market functioning purchases of Treasuries and agency MBS. Market liquidity improved steadily after mid-March, suggesting that the Fed’s efforts were effective, and the security purchases were scaled back accordingly.
Michael Fleming, Haoyang Liu, Rich Podjasek, and Jake Schurmeier, Staff Report 998, December 2021
The Fed's International Dollar Liquidity Facilities: New Evidence on Effects
In March 2020, the Federal Reserve eased the terms on its standing swap lines in collaboration with other central banks, reactivated temporary swap agreements, and introduced the new Foreign and International Monetary Authorities (FIMA) Repo Facility. The authors provide new evidence on how the central bank swap lines and FIMA Repo Facility can reduce strains in global dollar funding markets and U.S. Treasury markets during extreme stress events.
Linda Goldberg and Fabiola Ravazzolo, Staff Report 997, December 2021
Repo over the Financial Crisis
The 2007-09 financial crisis highlighted important vulnerabilities of the U.S. repo market and several studies have shed some light on these events. The authors use new data to provide a comprehensive view of repo activity during the 2007-09 financial crisis for the first time. Consistent with previous studies, they find that the decline in overall repo activity is very large and it is much greater in the bilateral segment of the market than in the tri-party segment. Surprisingly, they also find that a large share of the decline in activity is driven by repos backed by Treasury securities.
Adam Copeland and Antoine Martin, Staff Report 996, December 2021
Subsidizing Startups under Imperfect Information
Startups are a crucial driver of aggregate job creation and productivity growth; consequently, many countries devise policies to promote their formation and success. The authors document a novel information channel that alters the effects of policies targeted at startups. They study the early stages of firm creation under imperfect information and show that information frictions alter the effects of lump-sum transfers to startups: the total employment gain is amplified and labor misallocation goes up.
Davide Melcangi and Javier Turen, Staff Report 995, December 2021
Signaling with Private Monitoring
The authors study dynamic signaling when the informed party does not observe the signals generated by their actions. Linear-quadratic-Gaussian models are a workhorse class in many areas within economics due to their clean insights. Although their advantages are well known in static settings, it is far less obvious what to expect from them in dynamic settings involving rich information structures that allow for learning, signaling, and strategic behavior. From this perspective, the authors have uncovered a complex, yet still tractable, class of games through which they can analyze a whole new set of questions related to strategic information transmission through actions.
Gonzalo Cisternas and Aaron Kolb, Staff Report 994, December 2021
Financial Transaction Taxes and the Informational Efficiency of Financial Markets: A Structural Estimation
The authors develop a new methodology to estimate the impact of a financial transaction tax (FTT) on financial market outcomes. In their sequential trading model, both noise traders and informed traders are price-elastic. The authors estimate the model through maximum likelihood for a sample of sixty New York Stock Exchange stocks in 2017. They find that an FTT increases the proportion of informed trading and improves information aggregation, but lowers trading volume and welfare.
Marco Cipriani, Antonio Guarino, and Andreas Uthemann, Staff Report 993, November 2021
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