Search Results
Journal Article
The Fed and Its Shadow: A Historical View
Central bank policies have always incorporated both a discretionary or active component and a passive component. Successful central banking has required a coordination of the two components. After a period of apparent dormancy, the passive component of monetary policy has emerged from the shadows and become relevant for Federal Reserve policy today.
Working Paper
How Cyclical Is Bank Capital?
The alleged pro-cyclicality of bank capital (high in good times, low in bad) has received some blame for the recent financial crisis. Others blame the countercyclicality of capital regulations: too low in high times and too high in bad. To address this problem, Basel III has introduced countercyclical capital buffers for large banks. But just how cyclical is bank capital? We look at the question from several vantage points, using both detailed recent data on risk-weighted assets and several sources of annual data going back to 1834. To help understand the historical data, we provide a short ...
Working Paper
How Cyclical Is Bank Capital?
Using annual data since 1834 and quarterly data since 1959, I find a negative correlation between output and current and lagged values of the bank capital ratio, but a positive correlation with leading values, although except for the period since 1996 the numbers are mostly small and usually insignificant. The most significant correlations tend to reflect movements in bank assets, rather than capital itself, and although the pattern of aggregate correlations matches those of large banks, small banks show a different pattern, with strongly pro-cyclical capital ratios (counter-cyclical ...
Working Paper
On the Origins of the Federal Reserve System and Its Structure
The creation of the Federal Reserve System ultimately stemmed from fundamental changes in the banking industry that heightened the risks associated with shifts in the public’s liquidity preferences and that created an atmosphere of distrust between the small, traditional, country banks and the large, transforming, Wall Street banks. The severity of the Panic of 1907 became the proximate factor in the Federal Reserve’s formation. The panic, which the New York Clearing House’s slow, discriminative, and insufficient response characterized, gave credence to concerns of growing financial ...
Working Paper
Stability or upheaval? The currency composition of international reserves in the long run
We analyze how the role of different national currencies as international reserves was affected by the shift from fixed to flexible exchange rates. We extend data on the currency composition of foreign reserves backward and forward to investigate whether there was a shift in the determinants of the currency composition of international reserves around the breakdown of Bretton Woods. We find that inertia and policy-credibility effects in international reserve currency choice have become stronger post-Bretton Woods, while network effects appear to have weakened. We show that negative policy ...
Working Paper
Unprecedented actions: the Federal Reserve’s response to the global financial crisis in historical perspective
Interventions by the Federal Reserve during the financial crisis of 2007-2009 were generally viewed as unprecedented and in violation of the rules---notably Bagehot?s rule---that a central bank should follow to avoid the time-inconsistency problem and moral hazard. Reviewing the evidence for central banks? crisis management in the U.S., the U.K. and France from the late nineteenth century to the end of the twentieth century, we find that there were precedents for all of the unusual actions taken by the Fed. When these were successful interventions, they followed contingent and target rules ...
Working Paper
Historical Patterns of Inequality and Productivity around Financial Crises
To understand the determinants of financial crises, previous research focused on developments closely related to financial markets. In contrast, this paper considers changes originating in the real economy as drivers of financial instability. To this end, I assemble a novel data set of long-run measures of income inequality, productivity, and other macrofinancial indicators for advanced economies. I find that rising top income inequality and low productivity growth are robust predictors of crises, and their slowmoving trend components largely explain these relations. Moreover, recessions that ...
Working Paper
Global Financial Cycles and Risk Premiums
This paper studies the synchronization of financial cycles across 17 advanced economies over the past 150 years. The comovement in credit, house prices, and equity prices has reached historical highs in the past three decades. The sharp increase in the comovement of global equity markets is particularly notable. We demonstrate that fluctuations in risk premiums, and not risk-free rates and dividends, account for a large part of the observed equity price synchronization after 1990. We also show that U.S. monetary policy has come to play an important role as a source of fluctuations in risk ...
Working Paper
Sovereigns versus Banks: Credit, Crises, and Consequences
Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms ...
Working Paper
Betting the House
Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection ...