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Economic Research

Liberty Street Economics
Large Bank Cash Balances and Liquidity Regulations
The liquidity needs of the largest U.S. commercial banks play an important role in understanding the banking system’s appetite for actual reserve holdings—bank reserve demand. In this post, the authors discuss the recent evolution of large bank cash balances, the effect of liquidity regulations on these balances, and how banks might react to changes in the supply of reserves.
By Jeffrey Levine and Asani Sarkar
Did the Value of a College Degree Decline during the Great Recession?
The authors have previously explored the impact of choices regarding school and major on employment, earnings, and upward economic mobility. In this post they extend their work with an investigation into whether these labor market effects were preserved across the last business cycle: Did students with certain types of educational attainment weather the recession better?
By Rajashri Chakrabarti, Michelle Jiang, and William Nober
From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market
How do changes in the interest rate that the Federal Reserve pays on reserves affect interest rates in money markets in which the Fed does not participate? And through which channels do changes in the so-called administered rates influence rates in onshore and offshore U.S. dollar money markets? This post offers an interactive map illustrating the web of relationships between the Fed, key market players, and the various instruments in the U.S. dollar funding market.
By Gara Afonso, Fabiola Ravazzolo, and Alessandro Zori
How Large Are Default Spillovers in the U.S. Financial System?
When a financial firm defaults on its counterparties, the counterparties may in turn become unable to pay their own creditors, and so on. This domino effect can quickly propagate through the financial system, creating undesirable spillovers and unnecessary defaults. In this post, the authors use the framework discussed in the first post of this two-part series to answer the question: How vulnerable is the U.S. financial system to default spillovers?
By Fernando Duarte, Collin Jones, and Francisco Ruela
Assessing Contagion Risk in a Financial Network
Since the 2008 financial crisis, there has been an explosion of research trying to understand and quantify the default spillovers that can arise through counterparty risk. This first of two posts delves into the analysis of financial network contagion through this spillover channel. The authors introduce a framework, originally developed by Eisenberg and Noe, that is useful for thinking about default cascades.
By Fernando Duarte, Collin Jones, and Francisco Ruela
Recent Publications
Announcement-Specific Decompositions of Unconventional Monetary Policy Shocks and Their Macroeconomic Effects
The author proposes to identify monetary policy announcement–specific decompositions of asset price changes to identify monetary policy shocks without assuming time-invariance across announcements. To do so, he treats all asset price movements over the course of an announcement day as responses to a series of news shocks. In the period following a monetary policy announcement, these news shocks can be interpreted as monetary policy shocks. The author applies this approach to each scheduled FOMC announcement from 2007-18.
Daniel J. Lewis, Staff Report 891, June 2019
Monetary Policy and Financial Conditions: A Cross-Country Study
The authors provide a novel rationale for the importance of financial conditions in the conduct of monetary policy by showing that financial conditions are highly significant forecasting variables for the conditional distribution of the output gap. They extend recent research to a multi-country setting, focusing on the GDP gap (difference between GDP and its potential), instead of GDP growth. They document that loose financial conditions forecast a high GDP gap and low GDP volatility up to six quarters. This finding is robust across countries, conditioning variables, and time periods.
Tobias Adrian, Fernando Duarte, Federico Grinberg, and Tommaso Mancini-Griffoli, Staff Report 890, June 2019
A Unified Approach to Measuring u*
The authors combine the key features of two popular approaches to estimate the natural rate of unemployment, u*, in the United States in the period from 1960 to 2018. They use both data on labor market flows and a forward-looking Phillips curve that links inflation to current and expected deviations of unemployment from its unobserved natural rate. The authors estimate that the natural rate of unemployment was around 4.0 percent toward the end of 2018 and that the unemployment gap was roughly closed.
Richard K. Crump, Stefano Eusepi, Marc Giannoni, and Ayşegül Şahin, Staff Report 889, May 2019
Demographic Origins of the Startup Deficit
Why has the U.S. startup rate—measured as the ratio of new employers to all employers—been trending down for nearly four decades? The authors point to a slowdown in labor supply growth since the late 1970s, which explains roughly two-thirds of the decline and why incumbent firm survival and average growth over the lifecycle have been little changed. The authors show these results in a standard model of firm dynamics, testing the underlying economic mechanism using shocks to labor supply growth across states.
Fatih Karahan, Benjamin Pugsley, and Ayşegül Şahin, Staff Report 888, May 2019
The Long Road to Recovery: New York Schools in the Aftermath of the Great Recession
This study investigates school finance patterns in New York for the four years following the Great Recession. The authors find that $6 billion in federal stimulus funding initially helped schools offset a loss in state and local support and maintain total funding and expenditure per student in line with pre-recession trends. The stimulus, however, ended in 2011, before the state and local economies fully recovered, forcing school districts to make widespread cuts in expenditures, including for classroom instruction.
Rajashri Chakrabarti and Max Livingston, Economic Policy Review, Forthcoming
Tying Down the Anchor: Monetary Policy Rules and the Lower Bound on Interest Rates
This paper uses a standard New Keynesian model to analyze the effects and implementation of various monetary policy frameworks in the presence of a low natural rate of interest and a lower bound on interest rates.
Thomas M. Mertens and John C. Williams, Staff Report 887, May 2019
Tick Size Change and Market Quality in the U.S. Treasury Market
Tick size, or the minimum price increment, influences trading strategies and market outcomes. The authors study a recent tick size reduction in the U.S. Treasury securities market and identify the effects on the market's liquidity and price efficiency. Among their findings: Based on difference-in-difference regressions, the bid-ask spread narrows significantly, even for large trades, coupled with increased trading activity. Overall, the authors conclude that the tick size reduction improves market quality.
Michael Fleming, Giang Nguyen, and Francisco Ruela, Staff Report 886, April 2019
Money, Credit, Monetary Policy, and the Business Cycle in the Euro Area: What Has Changed since the Crisis?
This article studies the relationship between the business cycle and financial intermediation in the euro area. The authors establish stylized facts and study their stability during the global financial crisis and the European sovereign debt crisis. Long-term interest rates have been exceptionally high, and long-term loans and deposits have been exceptionally low, since the Lehman collapse. However, short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis.
Domenico Giannone, Michele Lenza, and Lucrezia Reichlin, Staff Report 885, April 2019