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Working Paper
Bubbly Recessions
Hanson, Andrew; Phan, Toan; Biswas, Siddhartha (2018-02-22)
We develop a tractable rational bubbles model with financial frictions, downward nominal wage rigidity, and the zero lower bound. The interaction of financial frictions and nominal rigidities leads to a "bubbly pecuniary externality," where competitive speculation in risky bubbly assets can result in excessive investment booms that precede inefficient busts. The collapse of a large bubble can push the economy into a "secular stagnation" equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent and inefficient recession. We evaluate a ...
Working Paper , Paper 18-5

Working Paper
The Collateral Premium and Levered Safe-Asset Production
Ross, Chase P. (2022-07-12)
Banks are vital suppliers of money-like safe assets, which they produce by issuing short-term liabilities and pledging collateral. But their ability to create safe assets varies over time as leverage constraints fluctuate. I present a model to describe private safe-asset production when intermediaries face leverage constraints. I measure bank leverage constraints using bank-intermediated basis trades. The collateral premium â€” a strategy long Treasuries used more often as repo collateral and short Treasuries used less often â€” has a positive expected return of 22 basis points per ...
Finance and Economics Discussion Series , Paper 2022-046

Working Paper
The Dynamics of Large Inflation Surges
Blanco, Andres; Ottonello, Pablo; Ranošová, Tereza (2024-09-23)
We empirically characterize episodes of large inflation surges that have been observed worldwide in the last three decades. We document four facts. (1) Inflation surges tend to be persistent, with the duration of disinflation exceeding that of the initial inflation increase. (2) Surges are initially unexpected but followed by a gradual catch-up of average short-term expectations with realized inflation. (3) Long-term inflation expectations tend to exhibit increases that persist throughout disinflation. (4) Policy responses are characterized by hikes in nominal interest rates but no tightening ...
FRB Atlanta Working Paper , Paper 2024-9

Working Paper
Self-confirming Price Dispersion in Monetary Economies
Rabinovich, Stanislav; Baughman, Garth (2018-07-10)
In a monetary economy, we show that price dispersion arises as an equilibrium outcome without the need for costly simultaneous search or any heterogeneity in preferences, production costs, or search technologies. A distribution of money holdings among buyers makes sellers indifferent across a set of posted prices, leading to a non-degenerate price distribution. This price distribution, in turn, makes buyers indifferent across a range of money balances, rationalizing the non-degenerate distribution of money holdings. We completely characterize the distribution of posted prices and money ...
Finance and Economics Discussion Series , Paper 2018-046

Working Paper
The Effect of the China Connect
Rogers, John H.; Ma, Chang; Zhou, Sili (2019-12-30)
We document the effect on Chinese firms of the Shanghai (Shenzhen)-Hong Kong Stock Connect. The Connect was an important capital account liberalization introduced in the mid-2010s. It created a channel for cross-border equity investments into a selected set of Chinese stocks while China's overall capital controls policy remained in place. Using a difference-in-difference approach, and with careful attention to sample selection issues, we find that mainland Chinese firm-level investment is negatively affected by contractionary U.S. monetary policy shocks and that firms in the Connect are more ...
Finance and Economics Discussion Series , Paper 2019-087

Journal Article
Revamping the Kansas City Financial Stress Index Using the Treasury Repo Rate
Cook, Thomas R.; Doh, Taeyoung (2018-10-24)
The Kansas City Financial Stress Index (KCFSI) uses the London Interbank Offered Rate (LIBOR) to measure money market borrowing conditions. But regulatory changes in the United Kingdom will eliminate LIBOR by 2021. We construct a revised financial stress index with a variable that measures the cost of borrowing collateralized by Treasury securities (the Treasury repo rate) instead of LIBOR. {{p}} This revised measure of the KCFSI is highly correlated with the current KCFSI, suggesting the Treasury repo rate can replace LIBOR.
Macro Bulletin , Issue October 24, 2018 , Pages 1-2

Working Paper
The Macroeconomic Implications of CBDC: A Review of the Literature
Infante, Sebastian; Kim, Kyungmin; Orlik, Anna; Silva, André F.; Tetlow, Robert J. (2022-11-17)
This paper provides an overview of the literature examining how the introduction of a CBDC would affect the banking sector, financial stability, and the implementation and transmission of monetary policy in a developed economy such as the United States. A CBDC has the potential to improve welfare by reducing financial frictions in deposit markets, by boosting financial inclusion, and by improving the transmission of monetary policy. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential ...
Finance and Economics Discussion Series , Paper 2022-076

Working Paper
Global Stablecoins: Monetary Policy Implementation Considerations from the U.S. Perspective
Lowe, David; Malloy, Matthew (2021-03-22)
This note explores the potential effects of the widespread adoption of a global stablecoin (GSC) on key aggregate financial sector balance sheets in the United States. To do this, we map out cash flows of GSC transactions among financial sector entities using a stylized set of 't-accounts'. By analyzing these individual transactions, we infer aggregate and compositional effects on U.S. commercial banking sector and Federal Reserve balance sheets. Through this lens, we also consider how these balance sheet changes could affect monetary policy implementation, the demand for central bank ...
Finance and Economics Discussion Series , Paper 2021-020

Working Paper
On the Stability of Money Demand
Nicolini, Juan Pablo; Lucas, Robert E. (2015-02-02)
We show that regulatory changes that occurred in the banking sector in the early eighties, which considerably weakened Regulation Q, can explain the apparent instability of money demand during the same period. We evaluate the effects of the regulatory changes using a model that goes beyond aggregates as M1 and treats currency and different deposit types as alternative means of payments. We use the model to construct a new monetary aggregate that performs remarkably well for the entire period 1915-2012.
Working Papers , Paper 718

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