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Report
Federal Reserve Participation in Public Treasury Offerings
Garbade, Kenneth D. (2019-12-01)
This paper describes the evolution of Federal Reserve participation in public Treasury offerings. It covers the pre-1935 period, when the Fed participated on an equal footing with other investors in exchange offerings priced by Treasury officials, to its present-day practice of reinvesting the proceeds of maturing securities with “add-ons” priced in public auctions in which the Fed does not participate. The paper describes how the Federal Reserve System adapted its operating procedures to comply with the 1935 limitations on its Treasury purchases, how it modified its operating procedures ...
Staff Reports , Paper 906

Report
Managing the Treasury Yield Curve in the 1940s
Garbade, Kenneth D. (2020-02-01)
This paper examines the efforts of the Federal Open Market Committee (FOMC) to first control, and later decontrol, the level and shape of the Treasury yield curve in the 1940s. The paper begins with a brief review of monetary policy in 1938 and a description of the period between September 1939 and December 1941, when the idea of maintaining a fixed yield curve first appeared. It then discusses the financing of U.S. participation in World War II and the experience with maintaining a fixed curve. The paper concludes with a discussion of how the FOMC regained control of monetary policy in the ...
Staff Reports , Paper 913

Working Paper
The Stock of External Sovereign Debt: Can We Take the Data at ‘Face Value’?
Dias, Daniel A.; Richmond, Christine; Wright, Mark L. J. (2014-05-09)
The stock of sovereign debt is typically measured at face value. Defined as the undiscounted sum of future principal repayments, face values are misleading when debts are issued with different contractual forms or maturities. In this paper, we construct alternative measures of the stock of external sovereign debt for 100 developing countries from 1979 through 2006 that correct for differences in contractual form and maturity. We show that our alternative measures: (1) paint a very different quantitative, and in some cases also qualitative, picture of the stock of developing country external ...
Working Paper Series , Paper WP-2014-5

Working Paper
Is Inflation Default? The Role of Information in Debt Crises
Galli, Carlo; Bassetto, Marco (2017-03-17)
We consider a two-period Bayesian trading game where in each period informed agents decide whether to buy an asset ("government debt") after observing an idiosyncratic signal about the prospects of default. While second-period buyers only need to forecast default, first-period buyers pass the asset to the new agents in the secondary market, and thus need to form beliefs about the price that will prevail at that stage. We provide conditions such that coarser information in the hands of second-period agents makes the price of debt more resilient to bad shocks not only in the last period, ...
Working Paper Series , Paper WP-2017-6

Working Paper
Domestic Debt and Sovereign Defaults
Mallucci, Enrico (2015-12-18)
This paper examines how domestic holdings of government debt affect sovereign default risk and government debt management. I develop a dynamic stochastic general equilibrium model with both external and domestic debt that endogenously generates output contraction upon default. Domestic holdings of government debt weaken investors' balance sheets and induce a contraction of credit and output upon default. I calibrate the model to the Argentinean economy and show that the model reproduces key empirical moments. Introducing domestic debt also yields relevant normative implications. While ...
International Finance Discussion Papers , Paper 1153

Working Paper
The Anatomy of Financial Vulnerabilities and Crises
Lee, Seung Jung; Posenau, Kelly E.; Stebunovs, Viktors (2017-02)
We extend the framework used in Aikman, Kiley, Lee, Palumbo, and Warusawitharana (2015) that maps vulnerabilities in the U.S. financial system to a broader set of advanced and emerging economies. Our extension tracks a broader set of vulnerabilities and, therefore, captures signs of different types of crises. The typical anatomy of the evolution of vulnerabilities before and after a financial crisis is as follows. Pressures in asset valuations materialize, and a build-up of imbalances in the external, financial, and nonfinancial sectors follows. A financial crisis is typically followed by a ...
International Finance Discussion Papers , Paper 1191

Working Paper
Selective Sovereign Defaults
Mallucci, Enrico; Erce, Aitor (2018-11)
Governments issue debt both domestically and abroad. This heterogeneity introduces the possibility for governments to operate selective defaults that discriminate across investors. Using a novel dataset on the legal jurisdiction of sovereign defaults that distinguishes between defaults under domestic law and default under foreign law, we show that selectiveness is the norm and that imports, credit, and output dynamics are different around different types of default. Domestic defaults are associated with contractions of credit and are more likely in countries with smaller credit markets. In ...
International Finance Discussion Papers , Paper 1239

Working Paper
Avoiding Sovereign Default Contagion: A Normative Analysis
De Ferra, Sergio; Mallucci, Enrico (2020-02-27)
Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country sovereign-default model that we calibrate to the euro-area periphery. First, we look at cross-country bailouts. We find that whenever agents anticipate their existence, bailouts induce moral hazard an reduce welfare. Second, we look at the borrowing choices of a global central borrower. We find that it borrows less than individual governments and, as such, defaults become less frequent and welfare increases. Finally, we show that central borrower's policies can be ...
International Finance Discussion Papers , Paper 1275

Working Paper
The (Unintended?) Consequences of the Largest Liquidity Injection Ever
Fonseca, Luis; Faria-e-Castro, Miguel; Crosignani, Matteo (2017-01)
We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank?s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance ...
Finance and Economics Discussion Series , Paper 2017-011

Working Paper
Treasury Safety, Liquidity, and Money Premium Dynamics: Evidence from Recent Debt Limit Impasses
Cashin, David B.; Ferris, Erin E. Syron; Klee, Elizabeth C. (2020-01-31)
Treasury securities normally possess unparalleled safety and liquidity and, consequently, carry a money premium. We use recent debt limit impasses, which temporarily increased the riskiness of Treasuries, to investigate the relationship between the money premium, safety, and liquidity. Our results shed light on Treasury market dynamics specifically, and debt more generally. We first establish that a decline in the perceived safety of Treasuries erodes the money premium at all times. Meanwhile, changes in liquidity only affected the money premium during the impasses. Next, we show that ...
Finance and Economics Discussion Series , Paper 2020-008

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