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Working Paper
Fiscal Policy during a Pandemic
I study the effects of the 2019-20 coronavirus outbreak in the United States and subsequent fiscal policy response in a nonlinear DSGE model. The pandemic is a shock to the utility of contact-intensive services that propagates to other sectors via general equilibrium, triggering a deep recession. I use a calibrated version of the model to analyze different types of fiscal policies. I find that UI benefits are the most effective tool to stabilize income for borrowers, who are the hardest hit, while savers may favor unconditional transfers. Liquidity assistance programs are effective if the ...
Discussion Paper
A History of SOMA Income
Historically, the Federal Reserve has held mostly interest-bearing securities on the asset side of its balance sheet and, up until 2008, mostly currency on its liability side, on which it pays no interest. Such a balance sheet naturally generates income, which is almost entirely remitted to the U.S. Treasury once operating expenses and statutory dividends on capital are paid and sufficient earnings are retained to equate surplus capital to capital paid in. The financial crisis that began in late 2007 prompted a number of changes to the balance sheet. First, the asset side of the balance sheet ...
Discussion Paper
Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?
The fiscal packages passed in 2020 and 2021 to help the economy cope with the pandemic caused a dramatic increase in federal government borrowing. One might have expected that foreign investors were important buyers of this new debt, but that was not the case. They were instead net sellers of Treasury securities. Still, the amount of money flowing into the United States increased last year, which helped fund the government’s borrowing, if only indirectly. The upturn in inflows, though, was quite modest as a surge in domestic personal saving largely covered the government’s heightened ...
Working Paper
An Empirical Analysis of the Cost of Borrowing
We examine borrowing costs for firms using a security-level database with bank loans and corporate bonds issued by U.S. companies. We find significant within-firm dispersion in borrowing rates, even after controlling for security and firm observable characteristics. Obtaining a bank loan is 132 basis points cheaper than issuing a bond, after accounting for observable factors. Changes in borrowing costs have persistent negative impacts on firm-level outcomes, such as investment and borrowing, and these effects vary across sectors. These findings contribute to our understanding of borrowing ...
Working Paper
Credit and Liquidity Policies during Large Crises
We compare firms’ financials during the Great Financial Crisis (GFC) and COVID-19. While the two crises featured similar increases in credit spreads, debt and liquid assets decreased during the GFC but increased during COVID-19. In the cross-section, leverage was the primary determinant of credit spreads and investment during the GFC, but liquidity was more important during COVID-19. We augment a quantitative model of firm capital structure with a motive to hold liquid assets. The GFC resembled a combination of productivity and financial shocks, while COVID-19 also featured liquidity ...
Discussion Paper
Forecasting Interest Rates over the Long Run
In a previous post, we showed how market rates on U.S. Treasuries violate the expectations hypothesis because of time-varying risk premia. In this post, we provide evidence that term structure models have outperformed direct market-based measures in forecasting interest rates. This suggests that term structure models can play a role in long-run planning for public policy objectives such as assessing the viability of Social Security.
Discussion Paper
Transparency and Sources of Information on the Federal Reserve’s Operations, Income, and Balance Sheet
This week-long series examined the evolution of the Federal Reserve's securities portfolio and its performance over time. While the intent has been to enhance understanding of the Fed's activities, the Federal Reserve has long maintained a commitment to transparency and accountability. The historical information presented in these posts represents the work of New York Fed staff to collect portfolio-related information from annual statements and reports, most of which are public. To enhance public access, the resulting time series we compiled are being provided in downloadable Excel files ...
Working Paper
Modeling to Inform Economy-Wide Pandemic Policy: Bringing Epidemiologists and Economists Together
Facing unprecedented uncertainty and drastic trade-offs between public health and other forms of human well-being, policymakers during the Covid-19 pandemic have sought the guidance of epidemiologists and economists. Unfortunately, while both groups of scientists use many of the same basic mathematical tools, the models they develop to inform policy tend to rely on different sets of assumptions and, thus, often lead to different policy conclusions. This divergence in policy recommendations can lead to uncertainty and confusion, opening the door to disinformation, distrust of institutions, and ...
Working Paper
Inequality, inflation, and central bank independence
What can account for the different contemporaneous inflation experiences of various countries, and of the same country over time? We present an analysis of the determination of inflation from a political economy perspective. We document a positive correlation between income inequality and inflation and then present a theory of the determination of inflation outcomes in democratic societies that illustrates how greater inequality leads to greater inflation, owing to a desire by voters for wealth redistribution. We conclude by showing that democracies with more independent central banks tend to ...
Working Paper
Modeling to Inform Economy-Wide Pandemic Policy: Bringing Epidemiologists and Economists Together
Facing unprecedented uncertainty and drastic trade-offs between public health and other forms of human well-being, policymakers during the Covid-19 pandemic have sought the guidance of epidemiologists and economists. Unfortunately, while both groups of scientists use many of the same basic mathematical tools, the models they develop to inform policy tend to rely on different sets of assumptions and, thus, often lead to different policy conclusions. This divergence in policy recommendations can lead to uncertainty and confusion, opening the door to disinformation, distrust of institutions, and ...