Search Results
Working Paper
Financial Stress and Equilibrium Dynamics in Money Markets
Interest rate spreads are widely-used indicators of funding pressures and market functioning in money markets. Using weekly data from 2002 to 2015, we analyze money market dynamics in a long-run equilibrium framework where commonly-monitored spreads serve as error correction terms. We find strong evidence for nonlinearities with respect to levels of the spreads. We provide point and interval estimates for spread thresholds that quantify funding pressure points from a long-run perspective. Our results indicate significant asymmetry in the adjustment toward long-run equilibrium. We show that ...
Working Paper
Government debt and macroeconomic activity: a predictive analysis for advanced economies
This paper explores the empirical relationship between government debt and future macroeconomic activity using data on twenty advanced economies throughout the post-war era. We use robust inference techniques to deal with the bias arising from the persistent nature of debt to GDP ratio as an endogenous predictor of GDP growth. Our results show that statistical significance of the coefficient on the debt ratio in predictive regressions changes considerably with the use of robust inference techniques. For countries with relatively low average debt ratios we find a negative threshold effect as ...
Working Paper
Non-linearity in the Inflation-Growth Relationship in Developing Economies: Evidence from a Semiparametric Panel Model
Using data on developing economies, we estimate a flexible semiparametric panel data model that incorporates potentially nonlinear effects of inflation on economic growth. We find that inflation is associated with significantly lower growth only after it reaches about 12 percent, which is notably lower than the comparable estimate obtained from a threshold model. Our results also suggest that models with restrictive functional form assumptions tend to underestimate marginal effects of inflation on economic growth. We also document significant variation in the effect of inflation on growth ...
Working Paper
What does financial volatility tell us about macroeconomic fluctuations?
This paper provides an extensive analysis of the predictive ability of financial volatility measures for economic activity. We construct monthly measures of aggregated and industry-level stock volatility, and bond market volatility from daily returns. We model log financial volatility as composed of a long-run component that is common across all series, and a short-run component. If volatility has components, volatility proxies are characterized by large measurement error, which veils analysis of their fundamental information and relationship with the economy. We find that there are ...
Working Paper
What does financial volatility tell us about macroeconomic fluctuations?
This paper provides an extensive analysis of the predictive ability of financial volatility measures for economic activity. We construct monthly measures of stock and bond market volatility from daily returns and model volatility as composed of a long-run component that is common across all series, and a set of idiosyncratic short-run components. Based on powerful in-sample predictive ability tests, we find that the stock volatility measures and the common factor significantly improve short-term forecasts of conventional financial indicators. A real-time out of sample assessment yields a ...
Working Paper
Effects of Changing Monetary and Regulatory Policy on Overnight Money Markets
Money markets have been operating under a new monetary policy implementation framework since the Federal Reserve started paying interest on bank reserves in late 2008. The regulatory environment has also evolved substantially over this period. We develop and test hypotheses regarding the effects of changes in the monetary and regulatory policy on dynamics of key overnight funding markets. We find that the federal funds rate continued to provide an anchor, albeit weaker, for unsecured funding rates amid substantial decline in activity and changing composition of trades, while its transmission ...
Discussion Paper
Government Bonds' Safe-Haven Property and Inflationary Pressures
Earlier this year, escalation of the conflict in the Middle East resulted in sharp declines in major stock indexes as energy prices rose and the global economic outlook deteriorated, but prices of long-term government bonds in major advanced economies also declined (Figure 1). This prompted some commentators to question the premise that government bonds in these major advanced economies will rally in times of increased risk aversion and serve as a safe haven for investors (see for example, Kim, 2026).
Discussion Paper
Dynamics of Overnight Money Markets: What Has Changed at the Zero Lower Bound?
In this note we provide a comparative analysis of overnight money market dynamics before the crisis and after the target federal funds rate (FFR) has been lowered to the zero lower bound (ZLB).
Discussion Paper
The Impact of COVID-19 on Emerging Market Economies' Financial Conditions
The emerging market economies (EMEs) – and the lower-income developing economies to an even greater extent – generally are extremely vulnerable to the COVID-19 pandemic. Many EMEs have weak public health systems, poor and financially vulnerable populations, inadequate social safety nets, limited monetary and especially fiscal policy space, and high exposure to global trade and commodity prices.
Discussion Paper
Are Rising U.S. Interest Rates Destabilizing for Emerging Market Economies?
Rising U.S. interest rates are often thought to be bad news for emerging market economies (EMEs) as they increase debt burdens, trigger capital outflows, and generally cause a tightening of financial conditions that can lead to financial crises. Indeed, as shown in Figure 1 below, the rise in the federal funds rate (the black line) during the Volcker disinflation of the early 1980s was associated with a sharp rise in the incidence of financial crises in EMEs (the green bars).