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Discussion Paper
Stressed Outflows and the Supply of Central Bank Reserves
Bush, Ryan; Martin, Antoine; Zobel, Patricia; Weed, Phillip; Kirk, Adam (2019-02-20)
Since the financial crisis, banking regulators around the world have been intensely aware of liquidity risk and, in part as a response, have introduced the Basel III liquidity regulation. Today, the world's largest banks hold substantial liquidity buffers comprising both securities and central bank reserves, to satisfy internal liquidity stress tests and minimum quantitative regulatory requirements. The appropriate level of liquidity buffers depends on the likely outflows in a market stress situation. In this post, we use public data to provide a rough estimate of stressed outflows that the ...
Liberty Street Economics , Paper 20190220

Report
The sensitivity of housing demand to financing conditions: evidence from a survey
Fuster, Andreas; Zafar, Basit (2014-11-01)
The sensitivity of housing demand to mortgage rates and available leverage is key to understanding the effect of monetary and macroprudential policies on the housing market. However, since there is generally no exogenous variation in these variables that is independent of confounding factors (such as economic conditions or household characteristics), it is difficult to cleanly estimate these sensitivities empirically. We circumvent these issues by designing a strategic survey in which respondents are asked for their willingness to pay (WTP) for a home comparable to their current one, under ...
Staff Reports , Paper 702

Report
DSGE forecasts of the lost recovery
Cai, Michael; Del Negro, Marco; Giannoni, Marc; Gupta, Abhi; Li, Pearl; Moszkowski, Erica (2018-03-01)
The years following the Great Recession were challenging for forecasters. Unlike other deep downturns, this recession was not followed by a swift recovery, but generated a sizable and persistent output gap that was not accompanied by deflation as a traditional Phillips curve relationship would have predicted. Moreover, the zero lower bound and unconventional monetary policy generated an unprecedented policy environment. We document the real real-time forecasting performance of the New York Fed dynamic stochastic general equilibrium (DSGE) model during this period and explain the results using ...
Staff Reports , Paper 844

Report
The over-the-counter theory of the fed funds market: a primer
Afonso, Gara M.; Lagos, Ricardo (2014-12-01)
We present a dynamic over-the-counter model of the fed funds market, and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the Discount Window lending rate, and the interest rate on bank reserves.
Staff Reports , Paper 660

Report
A Dynamic Theory of Collateral Quality and Long-Term Interventions
Lee, Michael Junho; Neuhann, Daniel (2019-08-07)
We study a dynamic model of collateralized lending under adverse selection in which the quality of collateral assets is endogenously determined by hidden effort. Complementarities in incentives lead to non-ergodic dynamics: Asset quality and output grow when asset quality is high, but stagnate or deteriorate otherwise. Inefficiencies remain, even in the most efficient competitive equilibrium?investment and output are vulnerable to spells of lending market illiquidity, and these spells may persist because of suboptimal effort. Nevertheless, benevolent regulators without commitment can destroy ...
Staff Reports , Paper 894

Report
Financial stability policies for shadow banking
Adrian, Tobias (2014-02-01)
This paper explores financial stability policies for the shadow banking system. I tie policy options to economic mechanisms for shadow banking that have been documented in the literature. I then illustrate the role of shadow bank policies using three examples: agency mortgage real estate investment trusts, leveraged lending, and captive reinsurance affiliates. For each example, the economic mechanisms are explained, the potential risks emanating from the activities are described, and policy options to mitigate such risks are listed. The overarching theme of the analysis is that any policy ...
Staff Reports , Paper 664

Report
Repo runs: evidence from the tri-party repo market
Copeland, Adam; Martin, Antoine; Walker, Michael (2011)
The repo market has been viewed as a potential source of financial instability since the 2007-09 financial crisis, owing in part to findings that margins increased sharply in a segment of this market. This paper provides evidence suggesting that no system-wide run on repo occurred. Using confidential data on tri-party repo, a major segment of this market, we show that the level of margins and the amount of funding were surprisingly stable for most borrowers during the crisis. However, we also document a sharp decline in the tri-party repo funding of Lehman in September 2008.
Staff Reports , Paper 506

Report
A model of the federal funds market: yesterday, today, and tomorrow
Afonso, Gara M.; Lester, Benjamin; Armenter, Roc (2018-02-01)
The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before ...
Staff Reports , Paper 840

Report
Dynamic effects of credit shocks in a data-rich environment
Boivin, Jean; Giannoni, Marc; Stevanovic, Dalibor (2013)
We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. An identified credit shock resulting in an unanticipated increase in credit spreads causes a large and persistent downturn in indicators of real economic activity, labor market conditions, expectations of future economic conditions, a gradual decline in aggregate price indices, and a decrease in short- and longer-term riskless interest rates. Our identification procedure, which imposes restrictions on the response of a small number of economic ...
Staff Reports , Paper 615

Report
The term structure of expectations and bond yields
Crump, Richard K.; Eusepi, Stefano; Moench, Emanuel (2016-05-01)
Bond yields can be decomposed into expected short rates and term premiums. We directly measure the former using all available U.S. professional forecasts and obtain the latter as the difference between bond yields and survey-based expected short rates. While the behavior of nominal and real short rate expectations is consistent with standard macroeconomic theory, term premiums account for the bulk of the cross-sectional and time series variation in yields. They also largely explain the yield curve's reaction to a host of structural economic shocks. This dramatic failure of the expectations ...
Staff Reports , Paper 775

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