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Jel Classification:G00 

Working Paper
A Macroprudential Theory of Foreign Reserve Accumulation

This paper proposes a theory of foreign reserves as macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to over-borrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and can quantitatively account for the ...
Working Papers , Paper 761

Working Paper
The Financial (In)Stability Real Interest Rate, R**

We introduce the concept of financial stability real interest rate using a macroeconomic banking model with an occasionally binding financing constraint as in Gertler and Kiyotaki (2010). The financial stability interest rate, r**, is the threshold interest rate that triggers the constraint being binding. Increasing imbalances in the financial sector measured by an increase in leverage are accompanied by a lower threshold that could trigger financial instability events. We also construct a theoretical implied financial condition index and show how it is related to the gap between the natural ...
International Finance Discussion Papers , Paper 1308

Report
Merger options and risk arbitrage

Option prices embed predictive content for the outcomes of pending mergers and acquisitions. This is particularly important in merger arbitrage, where deal failure is a key risk. In this paper, I propose a dynamic asset pricing model that exploits the joint information in target stock and option prices to forecast deal outcomes. By analyzing how deal announcements affect the level and higher moments of target stock prices, the model yields better forecasts than existing methods. In addition, the model accurately predicts that merger arbitrage exhibits low volatility and a large Sharpe ratio ...
Staff Reports , Paper 761

Report
Competition, reach for yield, and money market funds

Do asset managers reach for yield because of competitive pressures in a low-rate environment? I propose a tournament model of money market funds (MMFs) to study this issue. When funds care about relative performance, an increase in the risk premium leads funds with lower default costs to increase risk-taking, while funds with higher default costs decrease risk-taking. Without changes in the premium, lower risk-free rates reduce the risk-taking of all funds. I show that these predictions are consistent with MMF risk-taking during the 2002-08 period and that rank-based performance is indeed a ...
Staff Reports , Paper 753

Working Paper
Interest Rates or Haircuts? Prices Versus Quantities in the Market for Collateralized Risky Loans

Markets for risky loans clear on two dimensions - an interest rate (or equivalently a spread above the riskless rate) and a specification of the amount of collateral per dollar of lending. The latter is summarized by the margin or "haircut" associated with the loan. Some key models of endogenous collateral constraints imply that the primary equilibrating force will be in the form of haircuts rather than movements in interest rate spreads. Indeed, an important benchmark model, derived in a two-state world, implies that haircuts will adjust to render all lending riskless, and that a loss of ...
Working Paper Series , Paper WP-2016-19

Journal Article
Financial literacy: an overview of practice, research, and policy

Attention to financial literacy has grown in recent years, in large part because technological, market, and legislative changes have resulted in a more complex financial services industry that requires consumers to be more actively involved in managing their finances. Consumer and community interest groups, banking companies, government agencies, and policymakers, among others, have become concerned that many consumers lack a working knowledge of financial concepts and the tools they need to make decisions most advantageous to their economic well-being. As a result, considerable resources ...
Federal Reserve Bulletin , Volume 88 , Issue Nov , Pages 445-457

Report
Intermediary leverage cycles and financial stability

We present a theory of financial intermediary leverage cycles within a dynamic model of the macroeconomy. Intermediaries face risk-based funding constraints that give rise to procyclical leverage and a procyclical share of intermediated credit. The pricing of risk varies as a function of intermediary leverage, and asset return exposures to intermediary leverage shocks earn a positive risk premium. Relative to an economy with constant leverage, financial intermediaries generate higher consumption growth and lower consumption volatility in normal times, at the cost of endogenous systemic ...
Staff Reports , Paper 567

Journal Article
Do \\"Too-Big-to-Fail\\" banks take on more risk?

The notion that some banks are ?too big to fail? builds on the premise that governments will offer support to avoid the adverse consequences of disorderly bank failures. However, this promise of support comes at a cost: Large, complex, or interconnected banks might take on more risk if they expect future rescues. This article studies the effect of potential government support on banks? appetite for risk. Using balance-sheet data for 224 banks in forty-five countries starting in March 2007, the authors find higher levels of impaired loans after an increase in government support. To measure ...
Economic Policy Review , Issue Dec , Pages 41-58

Working Paper
Private Equity and Debt Contract Enforcement: Evidence from Covenant Violations

We document the importance of a financial sponsor when a borrower violates a covenant, providing creditors the opportunity to enforce debt contracts. We identify private-equity (PE) sponsored borrowers in the Shared National Credit Program (SNC) data and find PE-sponsored borrowers violate covenants more often than comparable non-PE borrowers. Yet, compared to non-PE, PE-backed borrowers experience smaller reductions in credit commitment upon violation, suggesting lenders are lenient with PE sponsors. Moreover, this leniency is stronger among financially healthier lenders. We show that our ...
Finance and Economics Discussion Series , Paper 2023-018

Working Paper
Employment Effects of Unconventional Monetary Policy : Evidence from QE

This paper investigates the effect of the Federal Reserve's unconventional monetary policy on employment via a bank lending channel. We find that banks with higher mortgage-backed securities holdings issued relatively more loans after the first and third rounds of quantitative easing (QE1 and QE3). While additional volume is concentrated in refinanced mortgages after QE1, increases are driven by newly originated home purchase mortgages and additional commercial and industrial lending after QE3. Using spatial variation, we show that regions with a high share of affected banks experienced ...
Finance and Economics Discussion Series , Paper 2018-071

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