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Economic Research

Liberty Street Economics
The New York Fed DSGE Model Forecast–March 2018
Our bloggers present the latest update to the economic forecasts generated by the Federal Reserve Bank of New York’s Dynamic Stochastic General Equilibrium (DSGE) model. The current GDP growth forecast, at 2.1 percent, is up from the November 2017 projection. Growth is expected to moderate to 1.9 percent in 2019.
Michael Cai, Marco Del Negro, Abhi Gupta, and Pearl Li
Do Low Rates Encourage Yield Seeking by Money Market Funds?
Do low rates on safe assets encourage investors to “reach for yield”—that is, to buy riskier assets in hope of securing higher returns? In a post that previews a forthcoming article in the Journal of Financial Economics, our blogger finds that, after controlling for changes in risk premia, declines in risk-free rates actually reduced money market fund risk taking, leading to a “reach for safety.”
By Gabriele La Spada
Did the Dodd-Frank Act End ‘Too Big to Fail’?
As authorized under the Dodd-Frank Act of 2010, the FDIC developed a “single point of entry” (SPOE) strategy with the goal of ending “too big to fail.” Under SPOE, healthy parent companies bear the losses of their failing subsidiaries. Our bloggers expect this strategy would have made the parents become riskier, relative to their subsidiaries. They find a difference of opinion when examining whether bond raters and investors share their view.
By Gara Afonso, Michael Blank, and João Santos
Options of Last Resort
In the first of two posts, our bloggers describe an additional and rarely discussed liquidity facility introduced by the Federal Reserve during the global financial crisis of 2007-08: the Term Securities Lending Facility Options Program (TOP). The TOP was unique among crisis-period liquidity facilities in its provision of options. A follow-up post will analyze dealer participation in the TOP.
By Erin Denison, Michael Fleming, Warren B. Hrung, and Asani Sarkar
Just Released: Very Favorable Business Climate Indicated in February Business Leaders Survey
The latest Business Leaders Survey from the New York Fed indicates that the services sector in the New York-Northern New Jersey region is continuing to expand at a fairly robust pace. The business climate index reached a record high, and the activity, employment, and capital spending indexes were all fairly steady at high levels.
By Jason Bram and Richard Deitz
Recent Publications
DSGE Forecasts of the Lost Recovery
The authors document the accuracy of the projections of the New York Fed Dynamic Stochastic General Equilibrium (DSGE) model during the recovery from the financial crisis. They find the model's forecasting accuracy to be comparable to that of private forecasters, and notably better for output growth than the median forecasts from the FOMC's Summary of Economic Projections.
By Michael Cai, Marco Del Negro, Marc P. Giannoni, Abhi Gupta, Pearl Li, and Erica Moszkowski, Staff Reports 844, March 2018
What Would You Do with $500? Spending Responses to Gains, Losses, News, and Loans
The authors use survey evidence on reported spending in various scenarios to generate guidance that is useful for testing and refining existing models of consumption. Their survey yielded six broad conclusions—including the finding that spending responses to losses are much larger and more widespread than responses to gains of the same magnitude.
By Andreas Fuster, Greg Kaplan, and Basit Zafar, Staff Reports 843, March 2018
The Side Effects of Safe Asset Creation
Higher government debt satisfies the demand for safe assets, raising the natural rate of interest and restoring full employment. Even if governments can address a shortage of safe assets by increasing debt, however, it remains unclear whether they should do so. The authors present an incomplete markets model to understand the costs and benefits of increasing government debt in a low interest rate environment.
By Sushant Acharya and Keshav Dogra, Staff Reports 842, March 2018
How Do Mortgage Refinances Affect Debt, Default, and Spending? Evidence from HARP
The authors use quasi-random access to the Home Affordable Refinance Program (HARP) to study how refinancing a mortgage affects households' financial decisions and outcomes. They find that refinancing substantially reduced the likelihood of default on mortgages as well as other debts, particularly for borrowers with low credit scores and high credit utilization rates. Refinancing also caused borrowers to expand their use of other forms of debt.
By Joshua Abel and Andreas Fuster, Staff Reports 841, February 2018
A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow
The authors have developed a model that is capable of reproducing the main features of the fed funds market before the financial crisis, when reserves were scarce, and after the crisis, when reserves became abundant. They use this model as a laboratory to quantitatively evaluate the future conditions in the federal funds market in response to changes in the supply of reserves, policy rates, and regulatory requirements.
By Gara Afonso, Roc Armenter, and Benjamin Lester, Staff Reports 840, February 2018
Long-Term Outcomes of FHA First-Time Homebuyers
In this paper, the authors propose metrics for evaluating the degree to which the Federal Housing Authority is attaining its goal of fostering sustainable homeownership for first-time homebuyers. Their work uses the New York Fed Consumer Credit Panel data that permits examining the long-term outcome for households who make the transition from renting to owning using an FHA insured mortgage.
By Donghoon Lee and Joseph Tracy, Staff Reports 839, February 2018
Credit Risk Transfer and De Facto GSE Reform
The authors summarize and evaluate Fannie Mae and Freddie Mac’s credit risk transfer (CRT) programs, which have reduced the exposure of these government-sponsored enterprises and the federal government to mortgage credit risk without disrupting the liquidity or stability of mortgage secondary markets. The CRT programs provide an important building block to help facilitate reform of the U.S. housing finance system.
By David Finkelstein, Andreas Strzodka, and James Vickery, Staff Reports 838, February 2018
Cournot Fire Sales
The standard macro-finance externalities in the literature, such as fire sales, would be partially mitigated if agents internalized the effects of these externalities on prices—agents would hold more liquidity, or borrow less, so that asset prices are supported when bad aggregate shocks occur. The authors investigate whether imperfect competition (Cournot) improves welfare through internalizing the externality and find that this is far from guaranteed.
By Thomas M. Eisenbach and Gregory Phelan, Staff Reports 837, February 2018