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Working Paper
The Transmission of the Financial Crisis in 1907: An Empirical Investigation
Using an extensive high-frequency data set, we investigate the transmission of financial crisis specifically focusing on the Panic of 1907, the final severe panic of the National Banking Era (1863-1913). We trace the transmission of the crisis from New York City trust companies to the New York City national banks through direct and indirect interconnections. Trust companies held cash balances at national banks, and these balances were liquidated as trust companies suffered depositor runs. Secondly, trust companies and national banks were notable creditors to the New York Stock Exchange; when ...
Working Paper
Asset Prices and Credit with Diagnostic Expectations
Using long-run cross-country panel data, we document that (i) contemporaneous credit growth strongly predicts contemporaneous equity returns with positive sign, and (ii) lagged credit growth strongly predicts contemporaneous equity returns with negative sign. This correlation reversal is robust to added controls for contemporaneous and lagged consumption growth and these credit factors have greater explanatory power than the consumption factors. We find that a general equilibrium model with financial frictions and rational expectations fails to match the empirically estimated sign on ...
Discussion Paper
What’s News?
Economic news moves markets. Most analyses find that economic news is incorporated quickly (within minutes) into asset prices, with some measurable persistence of these effects, and with some spillovers across national borders. Some types of announcements—for example, U.S. nonfarm payrolls announcements—generate much larger asset price responses than others. Generally, news that is more timely, is more precise (being subject to smaller revisions on average), and contains more information (being better able to better forecast GDP growth, inflation, or central bank policy decisions) has a ...
Report
Financial Stability Considerations for Monetary Policy: Empirical Evidence and Challenges
This paper reviews literature on the empirical relationship between vulnerabilities in the financial system and the macroeconomy, and how monetary policy affects that connection. Financial vulnerabilities build up over time, with both risk appetite and risk taking rising during economic expansions. To some extent, financial crises are predictable and have severe real economic consequences when they occur. Empirically it is difficult to link monetary policy to financial vulnerabilities, in part because financial cycles have long durations, making it difficult to separate effects of changes in ...
Working Paper
Monetary policy through production networks: evidence from the stock market
Monetary policy shocks have a large impact on stock prices during narrow time windows centered around press releases by the FOMC. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct effect and a network effect. We attribute 50 to 85 percent of the overall impact to network effects. The decomposition is a robust feature of the data, and we confirm large network effects in realized cash-flow fundamentals. A simple model with intermediate inputs allows a structural interpretation of our empirical strategy. Our findings indicate that production ...
Report
Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy
We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns of fifty-four sectors in twenty-six countries. We first present a conceptual framework based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We then use the SAR model to decompose the overall impact of U.S. monetary policy on stock returns into a direct and a network effect. We find that up to 80 percent of the total impact of U.S. monetary policy shocks on average ...
Working Paper
Wealth Inequality and Return Heterogeneity During the COVID-19 Pandemic
Wealth inequality in the U.S., measured by the top 1% wealth share, experienced dramatic changes in the first year of the COVID-19 pandemic. Economic theory suggests that the key to understanding wealth inequality is heterogeneity in the return to net worth across households. To understand the dynamics of wealth inequality during the COVID-19 pandemic, we develop a novel methodology that allows us to estimate the returns to net worth for different groups of households at relatively high frequency. We show that portfolio heterogeneity and asset price movements are the main determinants of ...
Report
Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms
This paper reviews the theoretical literature at the intersection of macroeconomics and finance to draw lessons on the connection between vulnerabilities in the financial system and the macroeconomy, and on how monetary policy affects that connection. This literature finds that financial vulnerabilities are inherent to financial systems and tend to be procyclical. Moreover, financial vulnerabilities amplify the effects of adverse shocks to the economy, so that even a small shock to fundamentals or a small revision of beliefs can create a self-reinforcing feedback loop that impairs credit ...
Working Paper
The economic effects of a potential armed conflict over Taiwan
This article examines the likely economic effects of a Chinese invasion or blockade of Taiwan for the U.S. and the world by considering historical precedents. Such a conflict would likely produce a flight-to-safety in the asset market, huge disruptions in international trade, banking problems, and would greatly exacerbate existing fiscal pressures. The authorities of the People’s Republic of China would probably try to sell U.S. and other western securities prior to a conflict to avoid sanctions on those assets. Such sales would be temporarily disruptive but would likely have only marginal ...
Working Paper
The economic effects of a potential armed conflict over Taiwan
This article examines the likely economic effects of a Chinese invasion or blockade of Taiwan for the U.S. and the world by considering historical precedents. Such a conflict would likely produce a flight-to-safety in the asset market, huge disruptions in international trade, and banking problems, and it would greatly exacerbate existing fiscal pressures. The authorities of the People’s Republic of China would probably try to sell U.S. and other western securities prior to a conflict to avoid sanctions on those assets. Such sales would be temporarily disruptive but would likely have only ...