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Working Paper
The (Unintended?) Consequences of the Largest Liquidity Injection Ever
Crosignani, Matteo; Fonseca, Luis; Faria-e-Castro, Miguel (2017-11-01)
The design of lender-of-last-resort interventions can exacerbate the bank-sovereign nexus. During sovereign crises, central bank provision of long-term liquidity incentivizes banks to purchase high yield eligible collateral securities matching the maturity of the central bank loans. Using unique security level data, we find that the European Central Bank's 3-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds, equivalent to 10.6% of amounts outstanding, and pledge them to obtain central bank liquidity. The steepening of Eurozone ...
Working Papers , Paper 2017-039

Journal Article
The Treasury Securities Market: Overview and Recent Developments
Sack, Brian P.; Dupont, Dominique (1999-12)
The market for U.S. Treasury securities is by many measures the largest, most active debt market in the world, and the securities play a pivotal role in world financial markets. The market has evolved over time in keeping with the changing needs of both the Treasury and investors. After describing the market's structure and examining the factors driving the demand for Treasury securities in some detail, this article discusses recent developments, including the introduction of inflation-indexed securities and a decline in the issuance of Treasury securities.
Federal Reserve Bulletin , Volume 85 , Issue 12 , Pages pp. 785-806

Working Paper
The (Unintended?) Consequences of the Largest Liquidity Injection Ever
Crosignani, Matteo; Fonseca, Luis; Faria-e-Castro, Miguel (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
Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default
D'Erasmo, Pablo; Mendoza, Enrique G. (2016-08-09)
Europe?s debt crisis resembles historical episodes of outright default on domestic public debt about which little research exists. This paper proposes a theory of domestic sovereign default based on distributional incentives affecting the welfare of risk-averse debt and non-debtholders. A utilitarian government cannot sustain debt if default is costless. If default is costly, debt with default risk is sustainable, and debt falls as the concentration of debt ownership rises. A government favoring bondholders can also sustain debt, with debt rising as ownership becomes more concentrated. These ...
Working Papers , Paper 16-23

Working Paper
Doubts about the Model and Optimal Policy
Karantounias, Anastasios G. (2020-07-31)
This paper analyzes optimal policy in setups where both the leader and the follower have doubts about the probability model of uncertainty. I illustrate the methodology in two environments: a) an industry populated with a large firm and many small firms in a competitive fringe, where both types of firms doubt the probability model of demand shocks, and b) a general equilibrium economy, where a policymaker taxes linearly the labor income of a representative household in order to finance an exogenous stream of stochastic spending shocks. The policymaker can distrust the probability model of ...
FRB Atlanta Working Paper , Paper 2020-12

Report
Managing the Maturity Structure of Marketable Treasury Debt: 1953-1983
Garbade, Kenneth D. (2020-07-01)
This paper examines the evolution of the maturity structure of marketable Treasury debt from 1953 to 1983. Average maturity contracted erratically from 1953 to 1960, expanded through mid-1965, contracted again through late 1975, and then expanded into the early 1980s. What accounts for these broad trends? In particular, what were the maturity objectives of Treasury debt managers? Were they able to achieve their objectives? Why or why not?
Staff Reports , Paper 936

Working Paper
Official Debt Restructurings and Development
Diaz-Cassou, Javier; Erce, Aitor; Cheng, Gong (2018-04-20)
Despite the frequency of official debt restructurings, little systematic evidence has been produced on their characteristics and implications. Using a dataset covering more than 400 Paris Club agreements, this paper fills that gap. It provides a comprehensive description of the evolving characteristics of these operations and studies their impact on debtors. The progressive introduction of new terms of treatment gradually turned the Paris Club from an institution primarily concerned with preserving creditors? claims into an instrument to foster development in the world?s poorer nations, among ...
Globalization Institute Working Papers , Paper 339

Journal Article
The effect of “regular and predictable” issuance on Treasury bill financing
Glasserman, Paul; Sirohi, Amit; Zhang, Allen (2017-23-01)
The mission of Treasury debt management is to meet the financing needs of the federal government at the lowest cost over time. To achieve this objective, the U.S. Treasury Department follows a principle of ?regular and predictable? issuance of Treasury securities. But how effective is such an approach in achieving least-cost financing of the government?s debt? This article explores this question by estimating the difference in financing costs between a pure cost-minimization strategy for setting the size of Treasury bill auctions and strategies that focus instead on ?smoothness? ...
Economic Policy Review , Issue 23-1 , Pages 43-56

Working Paper
Fiscal Austerity in Ambiguous Times
Ferrière, Axelle; Karantounias, Anastasios G. (2016-03-01)
This paper analyzes optimal fiscal policy with ambiguity aversion and endogenous government spending. We show that, without ambiguity, optimal surplus-to-output ratios are acyclical and that there is no rationale for either reduction or further accumulation of public debt. In contrast, ambiguity about the cycle can generate optimally policies that resemble "austerity" measures. Optimal policy prescribes higher taxes in adverse times and front-loaded fiscal consolidations that lead to a balanced primary budget in the long-run. This is the case when interest rates are sufficiently responsive ...
FRB Atlanta Working Paper , Paper 2016-6

Working Paper
The Effect of Central Bank Liquidity Injections on Bank Credit Supply
Crosignani, Matteo; Carpinelli, Luisa (2017-03)
We study the effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up. We combine borrower-level data from the Italian credit registry with bank security-level holdings and analyze the transmission of the European Central Bank three-year Long Term Refinancing Operation. Exploiting a regulatory change that expands eligible collateral, we show that banks more affected by the dry-up use this facility to restore their credit supply, while less affected banks use it to increase their holdings of high-yield government bonds. Unable to ...
Finance and Economics Discussion Series , Paper 2017-038

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