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Working Paper
How to Starve the Beast: Fiscal Policy Rules
Martin, Fernando M. (2023-08-08)
Countries have widely imposed fiscal rules designed to constrain government spending and ensure fiscal responsibility. This paper studies the effectiveness and welfare implications of expenditure, revenue, budget balance and debt rules when governments are discretionary and prone to overspending. The optimal prescription is either an expenditure ceiling or a combination of revenue and primary deficit ceilings. Most of the benefits can still be reaped with constraints looser than optimal or escape clauses during adverse times. When imposed on their own, revenue ceilings are only mildly ...
Working Papers , Paper 2019-026

Working Paper
Monetary Policy in a Model of Growth
Queraltó, Albert (2022-04-01)
Empirical evidence suggests that recessions have long-run effects on the economy's productive capacity. Recent literature embeds endogenous growth mechanisms within business cycle models to account for these "scarring" effects. The optimal conduct of monetary policy in these settings, however, remains largely unexplored. This paper augments the standard sticky-price New Keynesian (NK) to allow for endogenous dynamics in aggregate productivity. The model has a representation similar to the two-equation NK model, with an additional condition linking productivity growth to current and expected ...
International Finance Discussion Papers , Paper 1340

Discussion Paper
What Is Corporate Bond Market Distress?
Boyarchenko, Nina; Crump, Richard K.; Kovner, Anna; Shachar, Or (2022-06-29)
Corporate bonds are a key source of funding for U.S. non-financial corporations and a key investment security for insurance companies, pension funds, and mutual funds. Distress in the corporate bond market can thus both impair access to credit for corporate borrowers and reduce investment opportunities for key financial sub-sectors. In a February 2021 Liberty Street Economics post, we introduced a unified measure of corporate bond market distress, the Corporate Bond Market Distress Index (CMDI), then followed up in early June 2022 with a look at how corporate bond market functioning evolved ...
Liberty Street Economics , Paper 20220629

Working Paper
The Federal Reserve’s Evolving Monetary Policy Implementation Framework: 1914-1923
Chabot, Benjamin (2017-01-18)
The Federal Reserve has relied upon a number of different monetary policy implementation frameworks throughout its history. This paper describes the original implementation framework that evolved between 1914 and 1923 in response to new policy objectives and changing market conditions.
Working Paper Series , Paper WP-2017-1

Working Paper
A Tale of Two Bailouts: Effects of TARP and PPP on Subprime Consumer Debt
Berger, Allen N.; Roman, Raluca; Epouhe, Onesime (2021-09-23)
High levels of subprime consumer debt can create social problems. We test the effects of the Troubled Asset Relief Program (TARP) and Paycheck Protection Program (PPP) bailouts during the Global Financial Crisis and COVID-19 crisis, respectively, on this debt. We use over 11 million credit bureau observations of individual consumer debt combined with banking, bailout, and local market data. We find that subprime consumers with more TARP institutions in their markets had significantly increased debt burdens following these bailouts. In contrast, PPP bailouts were associated with reduced ...
Working Papers , Paper 21-32

Working Paper
The boy who cried bubble: public warnings against riding bubbles
Asako, Yasushi; Ueda, Kozo (2014-01-16)
Attempts by governments to stop bubbles by issuing warnings seem unsuccessful. This paper examines the effects of public warnings using a simple model of riding bubbles. We show that public warnings against a bubble can stop it if investors believe that a warning is issued in a definite range of periods commencing around the starting period of the bubble. If a warning involves the possibility of being issued too early, regardless of the starting period of the bubble, it cannot stop the bubble immediately. Bubble duration can be shortened by a premature public warning, but lengthened if it is ...
Globalization Institute Working Papers , Paper 167

Working Paper
Is There a Stable Relationship between Unemployment and Future Inflation? Evidence from U.S. Cities
Fitzgerald, Terry J.; Nicolini, Juan Pablo (2014-05-30)
This paper makes two straightforward points that we argue are central to understanding the literature and debate surrounding the stability of the Phillips curve. First, the endogeneity of monetary policy implies that aggregate data are largely uninformative as to the existence of a stable relationship between unemployment and future inflation. Second, if the NAIRU model is assumed to be true, regional data can be used to identify the structural relationship between unemployment and future inflation. We find that a 1 percentage point increase in the unemployment rate is associated with a ...
Working Papers , Paper 713

Report
COVID Response: The Primary Dealer Credit Facility
McLaughlin, Susan; Martin, Antoine (2021-09-01)
The Federal Reserve established a new Primary Dealer Credit Facility (PDCF) in March 2020, to allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households, in the face of deteriorating conditions in the market for triparty repo financing due to the coronavirus pandemic. A similar facility had been established in March 2008 to help restore the orderly functioning of the market, following the near-bankruptcy of Bear Stearns, and to prevent the spillover of distress to other financial firms. This paper provides an overview of ...
Staff Reports , Paper 981

Working Paper
International financial integration, crises, and monetary policy: evidence from the euro area interbank crises
Peydro, Jose Luis; Fecht, Falko; Bräuning, Falk; Abbassi, Puriya (2017-07-01)
We analyze how financial crises affect international financial integration, exploiting euro area proprietary interbank data, crisis and monetary policy shocks, and variation in loan terms to the same borrower on the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of crossborder liquidity, with stronger volume effects than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home ? but this is independent of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman ...
Working Papers , Paper 17-6

Working Paper
Ties That Bind: Estimating the Natural Rate of Interest for Small Open Economies
Zhang, Ren; Wynne, Mark A.; Martinez-Garcia, Enrique; Grossman, Valerie (2021-03-05)
This paper estimates the natural rate of interest for six small open economies (Australia, Canada, South Korea, Sweden, Switzerland and the U.K.) with a structural New Keynesian model using Bayesian techniques. Our empirical analysis establishes the following four main findings: First, we show that the open economy framework provides a better fit of the data than its closed economy counterpart for the six countries we investigate. Second, we also show that, in all six countries, a Taylor (1993)-type monetary policy rule that tracks the Wicksellian short-term natural rate fits the data better ...
Globalization Institute Working Papers , Paper 359

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