Search Results
Working Paper
A Price-Differentiation Model of the Interbank Market and Its Application to a Financial Crisis
Rate curves for overnight loans between bank pairs, as functions of loan values, can be used to infer valuation of reserves by banks. The inferred valuation can be used to interpret shifts in rate curves between bank pairs, for example, in response to a financial crisis. This paper proposes a model of lending by a small bank to a large monopolistic bank to generate a tractable rate curve. An explicit calibration procedure for model parameters is developed and applied to a dataset from Mexico around the 2008 financial crisis. During the crisis, relatively small banks were lending to large ...
Working Paper
Demand for U.S Banknotes at Home and Abroad: A Post-Covid Update
In principle, physical currency should be disappearing: payments are increasingly electronic, with new technologies emerging rapidly, and governments increasingly restrict large-denomination notes as a way to reduce crime and tax evasion. Nonetheless, demand for U.S. banknotes continues to grow, and consistently increases at times of crisis both within and outside the United States because dollar banknotes remain a desirable store of value and medium of exchange when local currency or bank deposits are inferior. Most recently, the COVID crisis resulted in historic increases in currency ...
Journal Article
Central Bank Lending in a Liquidity Crisis
Solvent banks may appear insolvent in the midst of a liquidity crisis, due to the plunge of their assets? value below their normal value. The responsibility of the central bank is to provide liquidity to the banks that would be solvent under normal economic conditions, at lending terms consistent with normal market conditions.
Discussion Paper
Federal Reserve Liquidity Facilities Gross $22 Billion for U.S. Taxpayers
During the 2007-09 crisis, the Federal Reserve took many measures to mitigate disruptions in financial markets, including the introduction or expansion of liquidity facilities. Many studies have found that the Fed’s lending via the facilities helped stabilize financial markets. In addition, because the Fed’s loans were well collateralized and generally priced at a premium to the cost of funds, they had another, less widely noted benefit: they made money for U.S. taxpayers. In this post, I bring information together from various sources and time periods to show that the facilities ...
Discussion Paper
Did the Fed’s Term Auction Facility Work?
The Federal Reserve introduced the Term Auction Facility (TAF) in December 2007 to provide term loans to banks during the recent financial crisis. In this post, we report on the effectiveness of the TAF during the early stages of the crisis. We find that the TAF was associated with a decrease in the “liquidity premium,” one component of a bank’s borrowing cost. In other words, the TAF worked as intended.
Working Paper
The Rise in Home Currency Issuance
Using a large sample of private international bond issues, we document a substantial decline in the share of international bonds denominated in major reserve currencies over the last two decades, and an increase in bonds denominated in issuers? home currencies. These secular trends appear to have accelerated notably after the global financial crisis. Observed increases in home currency foreign bond issuance was larger in countries with stable inflation and lower government debt, and in emerging markets that adopted explicit inflation targeting policies. We then present a model that ...
Working Paper
Crises in the Housing Market: Causes, Consequences, and Policy Lessons
The global financial crisis of the past decade has shaken the research and policy worlds out of their belief that housing markets are mostly benign and immaterial for understanding economic cycles. Instead, a growing consensus recognizes the central role that housing plays in shaping economic activity, particularly during large boom and bust episodes. This article discusses the latest research regarding the causes, consequences, and policy implications of housing crises with a broad focus that includes empirical and structural analysis, insights from the 2000's experience in the United ...
Discussion Paper
Dealer Participation in the TSLF Options Program
Our previous post described the workings of the Term Securities Lending Facility Options Program (TOP), which offered dealers options for obtaining short-term loans over month- and quarter-end dates during the global financial crisis of 2007-08. In this follow-up post, we examine dealer participation in the TOP, including the extent to which dealers bid for options, at what fees, and whether they exercised their options. We also provide evidence on how uncertainty in dealers’ funding positions was related to the demand for the liquidity options.