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Working Paper
Assessing the Impact of Central Bank Digital Currency on Private Banks
Andolfatto, David (2018-10-05)
I investigate the theoretical impact of central bank digital currency (CBDC) on a monopolistic banking sector. The framework combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of banking. There are two main results. First, the introduction of interest-bearing CBDC increases financial inclusion, diminishing the demand for physical cash. Second, while interest-bearing CBDC reduces monopoly profit, it need not disintermediate banks in any way. CBDC may, in fact, lead to an expansion of bank deposits if CBDC competition compels banks to raise their ...
Working Papers , Paper 2018-026

Working Paper
Bargaining Power and Outside Options in the Interbank Lending Market
Abbassi, Puriya; Bräuning, Falk; Schulze, Niels (2020-06-01)
We study the role of bargaining power and outside options with respect to the pricing of over-the-counter interbank loans using a bilateral Nash bargaining model, and we test the model predictions with detailed transaction-level data from the euro-area interbank market. We find that lender banks with greater bargaining power over their borrowers charge higher interest rates, while the lack of alternative investment opportunities for lenders lowers bilateral interest rates. Moreover, we find that when lenders that are not eligible to earn interest on excess reserves (IOER) lend funds to ...
Working Papers , Paper 20-10

Report
The 2014 survey of consumer payment choice: technical appendix
Foster, Kevin; Angrisani, Marco; Hitczenko, Marcin (2016-07-01)
This document serves as the technical appendix to the 2014 Survey of Consumer Payment Choice administered by the RAND Corporation. The Survey of Consumer Payment Choice (SCPC) is an annual study designed primarily to collect data on attitudes to and use of various payment instruments by consumers over the age of 18 in the United States. The main report, which introduces the survey and discusses the principal economic results, can be found at http://www.bostonfed.org/economic/cprc/SCPC. In this data report, we detail the technical aspects of the survey design, implementation, and analysis.
Research Data Report , Paper 16-4

Working Paper
Institutional quality, the cyclicality of monetary policy and macroeconomic volatility
Duncan, Roberto (2013-12-31)
In contrast to industrialized countries, emerging market economies are characterized by proor acyclical monetary policies and high output volatility. This paper argues that those facts can be related to a long-run feature of the economy - namely, its institutional quality (IQL). The paper presents evidence that supports the link between an index of IQL (law and order, government stability, investment profile, etc.), and (i) the cyclicality of monetary policy, and (ii) the volatilities of output and the nominal interest rate. In a DSGE model, foreign investors that choose a portfolio of direct ...
Globalization Institute Working Papers , Paper 163

Report
Reconciling Bagehot with the Fed's response to September 11
Martin, Antoine (2005-08-01)
The nineteenth-century economist Walter Bagehot maintained that in order to prevent bank panics, a central bank should provide liquidity at a very high rate of interest. However, most of the theoretical literature on liquidity provision suggests that central banks should lend at an interest rate of zero. This latter recommendation is broadly consistent with the Federal Reserve?s behavior in the days following September 11, 2001. This paper shows that Bagehot?s recommendation can be reconciled with the Fed?s policy if one recognizes that Bagehot had in mind a commodity money regime in which ...
Staff Reports , Paper 217

Discussion Paper
How the High Level of Reserves Benefits the Payment System
Bech, Morten L.; McAndrews, James J.; Martin, Antoine (2012-02-27)
Since October 2008, the Federal Reserve has increased the size of its balance sheet by lending to financial intermediaries and purchasing assets on a large scale. While these actions have increased the amount of reserves in the U.S. banking system and therefore raised concerns about excessive bank lending and inflation, we can document an important and overlooked benefit of the high level of reserves: a significantly earlier settlement of payments on Fedwire, the Federal Reserve’s large-value payment system. Quicker settlement on Fedwire improves liquidity throughout the economy, reducing ...
Liberty Street Economics , Paper 20120227

Report
Money in the Production Function
Wessel, Ryan; Prescott, Edward C. (2018-04-10)
Businesses hold large quantities of cash reserves, which have average returns well below their investments in tangible capital. Businesses do this because these monetary assets provide services. One implication is that money services is a factor of production in capital theoretic valuation equilibrium models. Our aggregate production function is consistent with both the classical demand for money function relationship and with extended periods of near zero short-term nominal interest rates. In our model economy, there is a 100 percent reserve requirement on all demand deposits. Demand ...
Staff Report , Paper 562

Journal Article
Evaluating Quantitative Easing: The Importance of Accounting for Forward Guidance
Smith, Andrew Lee; Bundick, Brent (2022-06-30)
During the COVID-19 pandemic crisis, policymakers used large-scale asset purchases (LSAPs) along with forward guidance about the future path of the federal funds rate to help stabilize financial markets. However, policymakers and economists have yet to reach a consensus on the efficacy of LSAPs in providing accommodation and improving macroeconomic outcomes. Because announced changes in LSAPs often coincide with changes in forward guidance, the market responses to these two tools can be difficult to disentangle and each tool’s efficacy challenging to evaluate.Brent Bundick and A. Lee Smith ...
Economic Review , Volume 107 , Issue no.3 , Pages 16

Working Paper
Fiscal Multipliers and Financial Crises
Faria-e-Castro, Miguel (2022-01)
I study the effects of the US fiscal policy response to the Great Recession, accounting both for standard tools and financial sector interventions. A nonlinear model calibrated to the US allows me to study the state-dependent effects of different fiscal policies. I combine the model with data on the fiscal policy response to find that the fall in consumption would have been one-third larger in the absence of that response, for a cumulative loss of 7.18%. Transfers and bank recapitalizations yielded the largest fiscal multipliers through new transmission channels that arise from linkages ...
Working Papers , Paper 2018-023

Working Paper
Average Inflation Targeting and Household Expectations
Coibion, Olivier; Knotek, Edward S.; Gorodnichenko, Yuriy (2020-09-18)
Using a daily survey of U.S. households, we study how the Federal Reserve’s announcement of its new strategy of average inflation targeting affected households’ expectations. Starting with the day of the announcement, there is a very small uptick in the minority of households reporting that they had heard news about monetary policy relative to prior to the announcement, but this effect fades within a few days. Those hearing news about the announcement do not seem to have understood the announcement: they are no more likely to correctly identify the Fed’s new strategy than others, nor ...
Working Papers , Paper 20-26

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