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Working Paper
Forecasts of inflation and interest rates in no-arbitrage affine models
Wei, Bin; Gospodinov, Nikolay (2016-02-01)
In this paper, we examine the forecasting ability of an affine term structure framework that jointly models the markets for Treasuries, inflation-protected securities, inflation derivatives, and oil future prices based on no-arbitrage restrictions across these markets. On the methodological side, we propose a novel way of incorporating information from these markets into an affine model. On the empirical side, two main findings emerge from our analysis. First, incorporating information from inflation options can often produce more accurate inflation forecasts than those based on the Survey of ...
FRB Atlanta Working Paper , Paper 2016-3

Working Paper
Assessing bankruptcy reform in a model with temptation and equilibrium default
Nakajima, Makoto (2015-03-09)
A life-cycle model with equilibrium default in which consumers with and without temptation coexist is constructed to evaluate the 2005 bankruptcy law reform and other counterfactual reforms. The calibrated model indicates that the 2005 bankruptcy reform achieves its goal of reducing the number of bankruptcy filings, as seen in the data, but at the cost of loss in social welfare. The creditor-friendly reform provides borrowers with a stronger commitment to repay and thus yields lower default premia and better consumption smoothing. However, those who borrow and default due to temptation or ...
Working Papers , Paper 15-12

Working Paper
Heterogeneous bank lending responses to monetary policy: new evidence from a real-time identification
Bowdler, Christopher; Bluedorn, John C.; Koch, Christoffer (2014-03-01)
We present new evidence on how heterogeneity in banks interacts with monetary policy changes to impact bank lending, at both the bank and U.S. state levels. Using an exogenous policy measure identified from narratives on FOMC intentions and real-time economic forecasts, we find much stronger dynamic effects and greater heterogeneity in U.S. bank lending responses than that found in previous research based on realized federal funds rate changes. Our findings suggest that studies using realized monetary policy changes confound monetary policy?s effects with those of changes in expected ...
Working Papers , Paper 1404

Working Paper
A Macroeconomic Model with Financial Panics
Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea (2017-12-15)
This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
International Finance Discussion Papers , Paper 1219

Report
Financial Crises and Lending of Last Resort in Open Economies
Lorenzoni, Guido; Bocola, Luigi (2017-10-24)
We study financial panics in a small open economy with floating exchange rates. In our model, bank runs trigger a decline in domestic wealth and a currency depreciation. Runs are more likely when banks have dollar debt. Dollar debt emerges endogenously in response to the precautionary motive of domestic savers: dollar savings provide insurance against crises; so when crises are possible it becomes relatively more expensive for banks to borrow in local currency, which gives them an incentive to issue dollar debt. This feedback between aggregate risk and savers? behavior can generate multiple ...
Staff Report , Paper 557

Working Paper
Ambiguity in Securitization Markets
Anderson, Alyssa G. (2015-05-13)
During the financial crisis of 2008, origination and trading in asset-backed securities markets dropped dramatically. I present a model with ambiguity averse investors to explain how such a market freeze could occur and to investigate how ambiguity affects origination and securitization decisions. The model captures many features of the crisis, including market freezes and fire sales, as well as the timing and duration of the freeze. The presence of ambiguity also reduces real economic activity. Lastly, I consider the differing implications of ambiguity and risk, as well as the role of ...
Finance and Economics Discussion Series , Paper 2015-33

Working Paper
Sticky Leverage: Comment
Ajello, Andrea; Pérez-Orive, Ander; Szőke, Bálint (2023-07-26)
We revisit the role of long-term nominal corporate debt for the transmission of inflation shocks in the general equilibrium model of Gomes, Jermann, and Schmid (2016, henceforth GJS). We show that inaccuracies in the model solution and calibration strategy lead GJS to a model equilibrium in which nominal long-term debt is systematically mispriced. As a result, the quantitative importance of corporate leverage in the transmission of inflation shocks to real activity in their framework is 6 times larger than what arises under the rational expectations equilibrium.
Finance and Economics Discussion Series , Paper 2023-051

Working Paper
The Reversal Interest Rate
Brunnermeier, Markus K.; Abadi, Joseph; Koby, Yann (2022-09-01)
The reversal interest rate is the rate at which accommodative monetary policy reverses andbecomes contractionary for lending. We theoretically demonstrate its existence in a macroeconomic model featuring imperfectly competitive banks that face financial frictions. When interest rates are cut too low, further monetary stimulus cuts into banks’ profit margins, depressing their net worth and curtailing their credit supply. Similarly, when interest rates are low for too long, the persistent drag on bank profitability eventually outweighs banks’ initial capital gains, also stifling credit ...
Working Papers , Paper 22-28

Working Paper
Stock Market Cross-Sectional Skewness and Business Cycle Fluctuations
Ferreira, Thiago Revil T. (2018-03-06)
Using U.S. data from 1926 to 2015, I show that financial skewness?a measure comparing cross-sectional upside and downside risks of the distribution of stock market returns of financial firms?is a powerful predictor of business cycle fluctuations. I then show that shocks to financial skewness are important drivers of business cycles, identifying these shocks using both vector autoregressions and a dynamic stochastic general equilibrium model. Financial skewness appears to reflect the exposure of financial firms to the economic performance of their borrowers.
International Finance Discussion Papers , Paper 1223

Working Paper
The Rising Cost of Climate Change: Evidence from the Bond Market
Rudebusch, Glenn D.; Bauer, Michael D. (2020-07-07)
The level of the social discount rate (SDR) is a crucial factor for evaluating the costs ofclimate change. We demonstrate that the equilibrium or steady-state real interest rate isthe fundamental anchor for market-based SDRs. Much recent research has pointed to adecrease in the equilibrium real interest rate since the 1990s. Using new estimates of thisdecline, we document a pronounced downward shift in the entire term structure of SDRsin recent decades. This lower new normal for interest rates and SDRs has substantiallyboosted the estimated economic loss from climate change and the social ...
Working Paper Series , Paper 2020-25

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