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Author:Tepper, Alexander 

Discussion Paper
The European Debt Crisis and the Dollar Funding Gap
Against the backdrop of the ongoing debt crisis in Europe, the difficulties faced by European banks in borrowing U.S. dollars have attracted increased attention. The inability to borrow dollars has been partially responsible for European banks? decisions to sell dollar-denominated assets and reduce their lending activity in the United States, to the possible detriment of U.S. companies and global financial markets. In this post, we discuss the genesis of European banks? dollar funding gap problem and the steps taken by central banks to help fill this gap. While we focus on European banks in this post, our discussion applies more generally to global banks that rely on short-term, foreign currency borrowings.
AUTHORS: Miu, Jason; Sarkar, Asani; Tepper, Alexander
DATE: 8/8/2012

Report
Estimating the impacts of U.S. LSAPs on emerging market economies’ local currency bond markets
This paper examines whether large-scale asset purchases (LSAPs) by the Federal Reserve influenced capital flows out of the United States and into emerging market economies (EMEs) and also analyzes the degree of pass-through from long-term U.S. government bond yields to long-term EME bond yields. Using panel data from a broad array of EMEs, our empirical estimates suggest that a 10-basis-point reduction in long-term U.S. Treasury yields results in a 0.4-percentage-point increase in the foreign ownership share of emerging market debt. This, in turn, is estimated to reduce government bond yields in EMEs by approximately 1.7 basis points. Federal Reserve LSAPs, which most previous studies have found reduced ten-year U.S. Treasury yields between 60 and 110 basis points during our sample period, therefore likely contributed to U.S. outflows into EMEs and marginal reductions in longer-term EME government bond yields. These effects are qualitatively similar to conventional U.S. monetary policy easing. To assess the robustness of these estimates, we also employ event study and vector autoregression methodologies, finding broadly similar results using these methods. While these results hold in the aggregate, marginal effects vary notably across emerging market countries.
AUTHORS: Nam, Sunwoo; Tepper, Alexander; Suh, Myeongguk; Moore, Jeffrey
DATE: 2013

Report
A leverage-based measure of financial instability
We employ a model of leverage-induced explosive behavior in financial markets to develop a measure of financial market instability. Specifically, we derive a quantitative condition for how large levered investors can become relative to the whole market before the demand curve for securities suddenly becomes upward-sloping and small price declines cascade as levered investors are forced to liquidate. The size and leverage of all levered investors and the elasticity of demand of unlevered investors define the minimum market size for stability (or MinMaSS), the smallest market size that can support a given group of levered investors. The ratio of actual market size to MinMaSS, termed the instability ratio, can give regulators and policymakers advance warning of financial crises. We apply the instability ratio in an investigation of the 1998 demise of the hedge fund Long-Term Capital Management. We find that a forced liquidation of the fund threatened to destabilize some financial markets, particularly the markets for bank funding and equity volatility.
AUTHORS: Tepper, Alexander; Borowiecki, Karol Jan
DATE: 2014-08-01

Report
Accounting for breakout in Britain: The Industrial Revolution through a Malthusian lens
This paper develops a simple dynamic model to examine the breakout from a Malthusian economy to a modern growth regime. It identifies several factors that determine the fastest rate at which the population can grow without engendering declining living standards; this is termed maximum sustainable population growth. We then apply the framework to Britain and find a dramatic increase in sustainable population growth at the time of the Industrial Revolution, well before the beginning of modern levels of income growth. The main contributions to the British breakout were technological improvements and structural change away from agricultural production, while coal, capital, and trade played a minor role.
AUTHORS: Tepper, Alexander; Borowiecki, Karol Jan
DATE: 2013-09-01

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