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Working Paper
Financial Frictions, Financial Shocks, and Aggregate Volatility
Fuentes-Albero, Cristina (2014-10)
I revisit the Great Inflation and the Great Moderation. I document an immoderation in corporate balance sheet variables so that the Great Moderation is best described as a period of divergent patterns in volatilities for real, nominal and financial variables. A model with time-varying financial frictions and financial shocks allowing for structural breaks in the size of shocks and the institutional framework is estimated. The paper shows that (i) while the Great Inflation was driven by bad luck, the Great Moderation is mostly due to better institutions; (ii) the slowdown in credit spreads is ...
Finance and Economics Discussion Series , Paper 2014-084

Working Paper
Asset Prices and Credit with Diagnostic Expectations
Cloyne, James; Jordà, Òscar; Singh, Sanjay R.; Taylor, Alan M. (2025-08-22)
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 ...
Working Paper Series , Paper 2025-15

Discussion Paper
Is Bitcoin Really Frictionless?
Sarkar, Asani; Kroeger, Alexander (2016-03-23)
Bitcoin is the most popular virtual currency yet developed. Proponents assert that bitcoin can remove frictions involved in payment and settlement systems by eliminating the need for the financial intermediaries that exist in traditional currencies. In this blog post, we show that while bitcoin transfers themselves are relatively frictionless for the user, there are significant frictions when bitcoins trade in exchange markets resulting in meaningful and persistent price differences across bitcoin exchanges. These exchange-related frictions reduce the incentive of market participants to use ...
Liberty Street Economics , Paper 20160323

Discussion Paper
A Bird's Eye View of the FRBNY DSGE Model
Sbordone, Argia M.; De Paoli, Bianca; Tambalotti, Andrea (2014-09-23)
Dynamic stochastic general equilibrium (DSGE) models provide a stylized representation of reality. As such, they do not attempt to model all the myriad relationships that characterize economies, focusing instead on the key interactions among critical economic actors. In this post, we discuss which of these interactions are captured by the FRBNY model and describe how we quantify them using macroeconomic data. For more curious readers, this New York Fed working paper provides much greater detail on these and other aspects of the model.
Liberty Street Economics , Paper 20140923

Report
Buy Big or Buy Small? Procurement Policies, Firms' Financing, and the Macroeconomy
di Giovanni, Julian; Pijoan-Mas, Josep; García-Santana, Manuel; Jeenas, Priit; Moral-Benito, Enrique (2022-02-01)
This paper examines the macroeconomic effects of public procurement. We exploit novel data to show that procurement eases firms’ borrowing constraints and has persistent effects on firm growth. Using a macroeconomic model with heterogeneous firms, asset- and earnings-based borrowing frictions, and government purchasing, we simulate revenue-neutral reforms that increase the share of small firms in procurement. We find that, despite helping financially constrained firms grow, these policies lead to non-trivial unintended negative effects. On net, the policies lead to a modest decline in GDP. ...
Staff Reports , Paper 1006

Working Paper
Optimal Asset Market Operations
Chiang, Yu-Ting; Żoch, Piotr (2026-09-16)
We provide a unifying theory of how governments should trade assets in response to economic disturbances. Across a broad class of models with financial frictions, the first-order Ramsey plan is characterized by a target relationship among asset returns. The relationship is determined by empirically measurable asset demand and supply elasticities and can be implemented without having to identify the underlying frictions or disturbances. Due to financial frictions, optimal policy may preserve or widen spreads between returns to steer intermediation; absent this concern, the target stabilizes ...
Working Papers , Paper 2025-014

Report
The marginal propensity to hire
Melcangi, Davide (2018-12-01)
When financial constraints bind, firms adjust employment in response to cash flow shocks. A 2010 revaluation of business rates, a United Kingdom tax levied on business-occupied properties, implied that similar firms, occupying similar properties in narrow geographical locations, experienced different tax changes. I find that, on average, for every £1 of additional cash flow triggered by the tax change, 39 pence were spent on employment, with small and leveraged firms responding the most. A general equilibrium model with firm heterogeneity and financial frictions rationalizes these findings, ...
Staff Reports , Paper 875

Working Paper
Bank Financing of Global Supply Chains
Alfaro, Laura; Presbitero, Andrea F.; Minoiu, Camelia; Brussevich, Mariya (2025-05-19)
Finding new international suppliers is costly, so most importers source inputs from a single country. We examine the role of banks in mitigating trade search costs during the 2018–19 US-China trade tensions. We match data on shipments to US ports with the US credit register to analyze trade and bank credit relationships at the bank-firm level. We show that importers of tariff-hit products from China were more likely to exit relationships with Chinese suppliers and find new suppliers in other Asian countries. To finance their geographic diversification, tariff-hit firms increased credit ...
FRB Atlanta Working Paper , Paper 2025-4

Working Paper
Asset Bubbles and Global Imbalances
Ikeda, Daisuke; Phan, Toan (2018-03-23)
We analyze the relationships between bubbles, capital flows, and economic activities in a rational bubble model with two large open economies. We establish a reinforcing relationship between global imbalances and bubbles. Capital flows from South to North facilitate the emergence and the size of bubbles in the North. Bubbles in the North in turn facilitate South-to-North capital flows. The model can simultaneously explain several stylized features of recent bubble episodes.
Working Paper , Paper 18-7

Working Paper
Financial Frictions, Financial Shocks, and Aggregate Volatility
Fuentes-Albero, Cristina (2018-08-07)
The Great Moderation in the U.S. economy was accompanied by a widespread increase in the volatility of financial variables. We explore the sources of the divergent patterns in volatilities by estimating a model with time-varying financial rigidities subject to structural breaks in the size of the exogenous processes and two institutional characteristics: the coefficients in the monetary policy rule and the severity of the financial rigidity at the steady state. To do so, we generalize the estimation methodology developed by Curdia and Finocchiaro (2013). Institutional changes are key in ...
Finance and Economics Discussion Series , Paper 2018-054

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