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Working Paper
Monetary policy and regional house-price appreciation
Cooper, Daniel H.; Luengo-Prado, Maria Jose; Olivei, Giovanni P. (2016-11-30)
This paper examines the link between monetary policy and house-price appreciation by exploiting the fact that monetary policy is set at the national level, but has different effects on state-level activity in the United States. This differential impact of monetary policy provides an exogenous source of variation that can be used to assess the effect of monetary policy on state-level housing prices. Policy accommodation equivalent to 100 basis points on an equilibrium real federal funds rate basis raises housing prices by about 2.5 percent over the next two years. However, the estimated effect ...
Working Papers , Paper 16-18

Working Paper
Central Bank Credibility During COVID-19: Evidence from Japan
Christensen, Jens H. E.; Spiegel, Mark M. (2021-12-21)
Japanese realized and expected inflation has been below the Bank of Japan’s two percent target for many years. We use the exogenous COVID-19 pandemic shock to examine the efficacy of monetary and fiscal policy responses for elevating inflation expectations from an arbitrage-free term structure model of nominal and real yields. We find that monetary and fiscal policy announcements during this period failed to lift inflation expectations, which instead declined notably and are projected to only slowly revert back to levels far below the announced target. Hence, our results illustrate the ...
Working Paper Series , Paper 2021-24

Working Paper
Credit Risk, Liquidity and Lies
Lewis, Kurt F.; King, Thomas B. (2015-12-18)
We reexamine the relative effects of credit risk and liquidity in the interbank market using bank-level panel data on Libor submissions and CDS spreads. Our model synthesizes previous work by combining the fundamental determinants of interbank spreads with the effects of strategic misreporting by Libor-submitting firms. We find that interbank spreads were very sensitive to credit risk at the peak of the crisis. However, liquidity premia constitute the bulk of those spreads on average, and Federal Reserve interventions coincide with improvements in liquidity at short maturities. Accounting for ...
Finance and Economics Discussion Series , Paper 2015-112

Working Paper
Bond Risk Premiums at the Zero Lower Bound
Andreasen, Martin M.; Joergensen, Kasper; Meldrum, Andrew C. (2019-05-28)
This paper documents a significantly stronger relationship between the slope of the yield curve and future excess bond returns on Treasuries from 2008-2015 than before 2008. This new predictability result is not matched by the standard shadow rate model with Gaussian factor dynamics, but extending the model with regime-switching in the (physical) dynamics of the factors at the lower bound resolves this shortcoming. The model is also consistent with the downwards trend in surveys on short rate expectations at long horizons, but requires a break in the level of its factors to closely fit the ...
Finance and Economics Discussion Series , Paper 2019-040

Report
Managing Monetary Policy Normalization
Benigno, Gianluca; Benigno, Pierpaolo (2022-05-01)
We propose a new framework for monetary policy analysis to study monetary policy normalization when exiting a liquidity trap. The optimal combination of reserves and interest rate policy requires an increase in liquidity (reserves) a few quarters after the policy rate is set at the effective lower bound. Removal of accommodation requires that quantitative tightening starts before the liftoff of the policy rate. Moreover, the withdrawal of liquidity takes place at a very slow pace relative to the normalization of the policy rate.
Staff Reports , Paper 1015

Working Paper
Bubbles and Stagnation
Xavier, Inês (2022-05-31)
This paper studies the consequences of asset bubbles for economies that are vulnerable to persistent stagnation. Stagnation is the result of a shortage of assets that creates an oversupply of savings and puts downward pressure on the level of interest rates. Once the zero lower bound on the nominal interest rate binds, the real rate cannot fully adjust downward, forcing output to fall instead. In such context, bubbles are useful as they expand the supply of assets, absorb excess savings and raise the natural interest rate - the real rate that is compatible with full employment - crowding in ...
Finance and Economics Discussion Series , Paper 2022-033

Report
The Microstructure of China's Government Bond Market
Bai, Jennie; Horan, Casidhe; Fleming, Michael J. (2013-05-01)
Although China now has one of the largest government bond markets in the world, the market has received relatively little attention and analysis. We describe the history and structure of the market and assess its functioning. We find that trading in individual bonds was historically sparse but has increased markedly in recent years. We find also that certain announcements of macroeconomic news, such as China?s producer price index (PPI) and manufacturing purchasing managers? index (PMI), have significant effects on yields, even when such yields are measured at a daily level. Despite the ...
Staff Reports , Paper 622

Working Paper
Not so fast: high-frequency financial data for macroeconomic event studies
Ozdagli, Ali K. (2013-12-01)
Over the last decade, it has become increasingly popular to use event studies with intraday asset pricing data to study the effect of macroeconomic events on the economy. The proponents of this approach argue that asset prices react to macroeconomic events very quickly and that if we know the precise timing of a macroeconomic announcement, a very narrow event window around such an announcement (ranging from 30 minutes to 60 minutes) should be sufficiently long and free from contaminating information that might otherwise cause biased estimates in wider event windows. In contrast, this paper ...
Working Papers , Paper 13-19

Working Paper
Transmission of Quantitative Easing: The Role of Central Bank Reserves
Krogstrup, Signe; Christensen, Jens H. E. (2014-08-06)
In August 2011, the Swiss National Bank engaged in unconventional monetary policy through an unprecedented expansion of bank reserves. As these actions did not involve any outright long-term asset purchases, this unique episode allows for novel insights on the transmission mechanism of central bank balance sheet expansions to interest rates. Analysis of the response of Swiss bond yields to announcements regarding this program suggests that expansion of reserves by itself can lower long-term yields through a portfolio balance effect.
Working Paper Series , Paper 2014-18

Report
What to expect from the lower bound on interest rates: evidence from derivatives prices
Mertens, Thomas M.; Williams, John C. (2018-08-01)
This paper analyzes the effects of the lower bound for interest rates on the distributions of inflation and interest rates. We study a stylized New Keynesian model where the policy instrument is subject to a lower bound to motivate the empirical analysis. Two equilibria emerge: In the “target equilibrium,” policy is unconstrained most or all of the time, whereas in the “liquidity trap equilibrium,” policy is mostly or always constrained. We use options data on future interest rates and inflation to study whether the decrease in the natural real rate of interest leads to forecast ...
Staff Reports , Paper 865

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