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Economic Research

Liberty Street Economics
The New York Fed DSGE Model Forecast–July 2018
Our bloggers present the latest update to the economic forecasts generated by the Federal Reserve Bank of New York Dynamic Stochastic General Equilibrium (DSGE) model. The current fourth-quarter GDP growth forecast of 2.3 percent is slightly higher than where it stood this past March. Growth is expected to moderate to 1.8 percent in 2019.
By Sushant Acharya, Michael Cai, Marco Del Negro, Abhi Gupta, and Pearl Li
U.S. Virgin Islands’ Economy Hit Hard by Irma and Maria
The damage that Hurricanes Irma and Maria caused on the U.S. Virgin Islands was comparable to that suffered by Puerto Rico, yet the islands of St. Thomas, St. Croix, and St. John have received far less attention. Our bloggers examine roughly six months of economic data to better ascertain the extent of the U.S. Virgin Islands’ disruption and subsequent recovery from the hurricanes.
By Jason Bram and Lauren Thomas
Why New York City Subway Delays Don’t Affect All Riders Equally
The New York City subway system is plagued by delays and frequently fails to deliver riders to their destinations on time. Although these delays are a headache for anyone who depends on the subway, they do not affect all riders in the same way. Our bloggers explain why subway delays disproportionately affect low-income New Yorkers.
By Nicole Gorton and Maxim Pinkovskiy
How is Technology Changing the Mortgage Market?
The adoption of new technologies is transforming the mortgage industry.  Our bloggers review their findings from a recent staff report that suggests technology is reducing frictions in mortgage lending, such as reducing the time it takes to originate a mortgage and increasing the elasticity of mortgage supply. These benefits do not seem to come at the cost of less careful screening of borrowers.
By Andreas Fuster, Matthew Plosser, and James Vickery
At the New York Fed: Conference on the Effects of Post-Crisis Banking Reforms
On Friday, June 22, the New York Fed will host a conference featuring staff research regarding the efficacy of the wave of regulatory reforms enacted following the financial crisis and ensuing recession. Have the banking reforms achieved their intended goals and have there possibly been unintended consequences?
By Richard Crump and João Santos
Recent Publications
Uncertain Booms and Fragility
The author develops a model that provides a framework that weaves together the run-up, trigger, and outbreak of a financial crisis. In equilibrium, two distinct economic states arise endogenously: normal times—periods of modest investment—and booms—periods of expansionary investment. During a boom, the subsequent arrival of negative information about an intermediary asset results in large downward shifts in investors’ confidence about the underlying quality of long-term assets. A crisis of confidence ensues. Investors collectively force costly early liquidation of the intermediated assets and move capital to safe assets, in a flight-to-quality episode.
By Michael Junho Lee, Staff Report 861, July 2018
The Pre-Crisis Monetary Policy Implementation Framework
The authors describe the Federal Reserve’s operating framework for monetary policy prior to the expansion of the Fed’s balance sheet during the financial crisis. This pre-crisis framework was effective at meeting monetary policy objectives but receives mixed reviews in terms of unimpaired financial market functioning, efficiency, and transparency. It has been abandoned in favor of a framework that enables the Federal Reserve Bank of New York’s Open Market Trading Desk(the “Desk”) to continue to carry out FOMC objectives regardless of the amount of reserves in the banking system. The Desk has successfully controlled the policy rate using this new framework, suggesting that effective monetary control may be achieved through different frameworks.
By Alexander Kroeger, John McGowan, and Asani Sarkar, Economic Policy Review, Forthcoming
Tracking and Stress-Testing U.S. Household Leverage
The authors analyze household leverage—the ratio of housing debt to housing values—over time and across states and regions, using a unique new data set. They find that leverage was low before 2006, rose rapidly through 2012, and then—as home prices recovered—fell back toward pre-crisis lows by early 2017. Their stress tests to project the likely consequences of declining home prices of different severities reveal that, while the riskiness of the household sector has declined significantly since 2012, when home prices were at their low, the sector remains vulnerable to very severe declines in house prices.
By Andreas Fuster, Benedict Guttman-Kenney, and Andrew Haughwout, Economic Policy Review, Forthcoming
Replacement Hiring and the Productivity-Wage Gap
Real compensation per hour has failed to keep up with labor productivity since the 1980s. At the same time, an upward trend in the fraction of total hires that are replacement hires—hires in excess of net employment change—has emerged. The authors analyze how increased replacement hiring can contribute to the productivity-wage gap.
By Sushant Acharya and Shu Lin Wee, Staff Report 860, June 2018
Resolving “Too Big to Fail”
Following the 2008 financial crisis, the Dodd-Frank Act mandated that each large and complex financial institution file a “living will” that details how it could unwind positions when distressed, without significant systemic impact. Using a synthetic control research design, the authors find that living-will regulation increases a bank’s annual cost of capital by 22 basis points, or 10 percent of total funding costs. The authors interpret their findings as a reduction in “too big to fail” subsidies.
By Nicola Cetorelli and James Traina, Staff Reports 859, June 2018
Bank-Intermediated Arbitrage
In the aftermath of the financial crisis, a number of asset markets have experienced large, persistent deviations from the law of one price—that the same exposure to the same source of risk should be priced the same no matter how that exposure is achieved. The authors argue that these deviations persist because of limits-to-arbitrage engendered by post-crisis regulatory and market structure changes that have increased the cost of participation in spread-narrowing trades for regulated institutions.
By Nina Boyarchenko, Thomas M. Eisenbach, Pooja Gupta, Or Shachar, and Peter Van Tassel, Staff Reports 858, June 2018
Does CFPB Oversight Crimp Credit?
The authors study the effects of regulatory oversight by the Consumer Financial Protection Bureau (CFPB) on credit supply as well as bank risk taking, growth, and operating costs. They find little evidence that CFPB oversight significantly reduces the overall volume of mortgage lending. However, their analysis does yield some evidence of changes in the composition of lending—CFPB-supervised banks originated fewer loans to risky borrowers, offset by an increase in “jumbo" mortgages. The authors find no clear evidence that CFPB oversight induced lower asset growth or higher expenses.
By Andreas Fuster, Matthew Plosser, and James Vickery, Staff Reports 857, June 2018