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Working Paper
Money and velocity during financial crises: from the Great Depression to the Great Recession
This study models the velocity (V2) of broad money (M2) since 1929, covering swings in money [liquidity] demand from changes in uncertainty and risk premia spanning the two major financial crises of the last century: the Great Depression and Great Recession. V2 is notably affected by risk premia, financial innovation, and major banking regulations. Findings suggest that M2 provides guidance during crises and their unwinding, and that the Fed faces the challenge of not only preventing excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia ...
Working Paper
Stablecoins: Growth Potential and Impact on Banking
Stablecoins have experienced tremendous growth in the past year, serving as a possible breakthrough innovation in the future of payments. In this paper, we discuss the current use cases and growth opportunities of stablecoins, and we analyze the potential for stablecoins to broadly impact the banking system. The impact of stablecoin adoption on traditional banking and credit provision can vary depending on the sources of inflow and the composition of stablecoin reserves. Among the various scenarios, a two-tiered banking system can both support stablecoin issuance and maintain traditional ...
Discussion Paper
A Principle for Forward-Looking Monitoring of Financial Intermediation: Follow the Banks!
In the previous posts in this series on the evolution of banks and financial intermediaries, my colleagues and I considered the extent to which banks still play a central role in financial intermediation, given the rise of the shadow banking system. There’s no arguing that financial intermediation has grown in complexity. And there’s also little doubt that the balance sheet of banks is not as representative of financial intermediation activity, and the associated risks, as it once was. Yet as we’ve argued, regulated bank entities have remained very much involved in virtually every ...
Working Paper
FinTech and Financial Innovation : Drivers and Depth
This paper answers two questions that help those analyzing FinTech understand its origins, growth, and potential to affect financial stability. First, it answers the question of why "FinTech" is happening right now. Many of the technologies that support FinTech innovations are not new, but financial institutions and entrepreneurs are only now applying them to financial products and services. Analysis of the supply and demand factors that drive "traditional" financial innovation reveals a confluence of factors driving a large quantity of innovation. Second, this paper answers the question ...
Working Paper
Financial Innovations and Issuer Sophistication in Municipal Securities Markets
When local governments default or file for bankruptcy, it is often because public officials misunderstood the risks associated with innovative financial products. If unsophisticated municipal bond issuers were to widely adopt a high risk financial product, this could harm taxpayers and investors, as well as destabilize the financial system. This analysis uses municipal bond issuers? total debt outstanding as a proxy for their sophistication and investigates the relationship between sophistication and adoption of financial innovations. Using comprehensive data on securities issued between 1992 ...
Discussion Paper
Partnerships between Community Development Financial Institutions and Workforce Development Organizations
Inability to secure capital to improve worker skills or expand training programs can prevent growth in a local economy. This paper presents the role CDFIs can play to fill a need for financing in the workforce development sector. While the transactions presented in this paper are unique, they highlight the importance of partnerships between the two industries. Shared missions and an overlapping client base between CDFIs and workforce development practitioners creates a natural pairing for collaboration. In addition, CDFIs are uniquely able to serve as test beds for innovation because of their ...
Working Paper
A Field Guide to Monetary Policy Implementation Issues in a New World with CBDC, Stablecoin, and Narrow Banks
This paper develops an analytical framework aimed at shedding light on the implications of the evolution of financial market structure for monetary policy implementation and transmission. The basic model builds on that developed in Chen et. al. (2014) which, in turn, draws inspiration from the pioneering work of Tobin (1969) and Gurley and Shaw (1960). The paper focuses, in particular, on the implications of introducing new types of fixed-rate financial assets in the financial system including retail and wholesale central bank digital currency (CBDC), stablecoins issued by narrow nonbanks, ...
Report
Capital Management and Wealth Inequality
Wealthier individuals have stronger incentives to seek higher returns. We investigate theoretically the effect this has on long-run wealth inequality. Incorporating capital management into a standard Ramsey-Cass-Koopmans model generates substantial long-run inequality: the majority of the population works and holds no capital, while a small minority holds a large amount of capital and manages it full-time. Counterintuitively, financial innovations or policies that reduce return differentials increase long-run wealth inequality. Egalitarian steady states may exist, but are inefficient and ...
Working Paper
Partial Homeownership: A Quantitative Analysis
Partial Ownership (PO), which allows households to buy a fraction of a home and rent the remainder, is increasing in many countries with housing affordability challenges. We incorporate an existing for-profit PO contract into a life-cycle model to quantify its impact on homeownership, households’ welfare, and its implications for financial stability. We have the following results: 1) PO increases homeownership rates. 2) Willingness to pay increases with housing unaffordability and is highest among low-income and renting households. 3) PO increases aggregate debt as renters become partial ...
Discussion Paper
Is There a Future for Credit Default Swap Futures?
Last year, IntercontinentalExchange (ICE) launched a credit default swap index futures contract. In the first two weeks there were spurts of interest in it, but soon it became evident that the new product was unable to generate sufficient demand. Given their short life span in the credit default swaps (CDS) market, the question becomes why were these futures contracts launched in the first place? And, assuming that they were created in response to a real need of market participants, will we see a revival of swap futures in the future?