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Working Paper
Incorporating Diagnostic Expectations into the New Keynesian Framework
L’Huillier, Jean-Paul; Singh, Sanjay R.; Yoo, Donghoon (2023-03-01)
Diagnostic expectations constitute a realistic behavioral model of inference. This paper shows that this approach to expectation formation can be productively integrated into the New Keynesian framework. Diagnostic expectations generate endogenous extrapolation in general equilibrium. We show that diagnostic expectations generate extra amplification in the presence of nominal frictions; a fall in aggregate supply generates a Keynesian recession; fiscal policy is more effective at stimulating the economy. We perform Bayesian estimation of a rich medium-scale model that incorporates consensus ...
Working Paper Series , Paper 2023-19

Working Paper
Capital Controls and the Global Financial Cycle
Matschke, Johannes; Lovchikova, Marina (2021-09-08)
Capital flows into emerging markets are volatile and associated with risks. A common prescription is to impose counter-cyclical capital controls that tighten during economic booms to mitigate future sudden-stop dynamics, but it has been challenging to document such patterns in the data. Instead, we show that emerging markets tighten their capital controls in response to volatility in international financial markets and elevated risk aversion. We develop a model in which this behavior arises from a desire to manipulate the risk premium. When investors are more risk-averse or markets are ...
Research Working Paper , Paper RWP 21-08

Working Paper
Reasons Behind Words: OPEC Narratives and the Oil Market
Brunetti, Celso; Joëts, Marc; Mignon, Valérie (2024-02-02)
We analyze the content of the Organization of the Petroleum Exporting Countries (OPEC) communications and whether it provides information to the crude oil market. To this end, we derive an empirical strategy which allows us to measure OPEC's public signal and test whether market participants find it credible. Using Structural Topic Models, we analyze OPEC narratives and identify several topics related to fundamental factors, such as demand, supply, and speculative activity in the crude oil market. Importantly, we find that OPEC communication reduces oil price volatility and prompts market ...
Finance and Economics Discussion Series , Paper 2024-003

Report
Dealer Capacity and U.S. Treasury Market Functionality
Fleming, Michael J.; Keane, Frank M.; Duffie, Darrell; Van Tassel, Peter; Nelson, Claire; Shachar, Or (2023-08-01)
We show a significant loss in U.S. Treasury market functionality when intensive use of dealer balance sheets is needed to intermediate bond markets, as in March 2020. Although yield volatility explains most of the variation in Treasury market liquidity over time, when dealer balance sheet utilization reaches sufficiently high levels, liquidity is much worse than predicted by yield volatility alone. This is consistent with the existence of occasionally binding constraints on the intermediation capacity of bond markets.
Staff Reports , Paper 1070

Working Paper
Mind Your Language: Market Responses to Central Bank Speeches
Ahrens, Maximilian; Erdemlioglu, Deniz; McMahon, Michael; Neely, Christopher J.; Yang, Xiye (2024-02-21)
Researchers have carefully studied post-meeting central bank communication and have found that it often moves markets, but they have paid less attention to the more frequent central bankers’ speeches. We create a novel dataset of US Federal Reserve speeches and develop supervised multimodal natural language processing methods to identify how monetary policy news affect financial volatility and tail risk through implied changes in forecasts of GDP, inflation, and unemployment. We find that news in central bankers’ speeches can help explain volatility and tail risk in both equity and bond ...
Working Papers , Paper 2023-013

Discussion Paper
How Has Treasury Market Liquidity Evolved in 2023?
Fleming, Michael J. (2023-10-17)
In a 2022 post, we showed how liquidity conditions in the U.S. Treasury securities market had worsened as supply disruptions, high inflation, and geopolitical conflict increased uncertainty about the expected path of interest rates. In this post, we revisit some commonly used metrics to assess how market liquidity has evolved since. We find that liquidity worsened abruptly In March 2023 after the failures of Silicon Valley Bank and Signature Bank, but then quickly improved to levels close to those of the preceding year. As in 2022, liquidity in 2023 continues to closely track the level that ...
Liberty Street Economics , Paper 20231017

Working Paper
An Empirical Analysis of Futures Margin Changes: Determinants and Policy Implications
Abruzzo, Nicole; Park, Yang-Ho (2014-09-02)
Margin regulation raises two policy concerns. First, an alignment of margins to volatility can amplify procyclicality, leading to a build-up of excess leverage in good times and a forced deleverage in bad times. Second, competition among central counterparties (CCPs) can result in lower margin levels in order to attract more trading volume, which is referred to as a "race to the bottom." Motivated by these issues, we empirically analyze the determinants of margin changes by using a data set of various futures margins from Chicago Mercantile Exchange (CME) Group. We first find that CME Group ...
Finance and Economics Discussion Series , Paper 2014-86

Working Paper
Top Income Concentration and Volatility
Thompson, Jeffrey P.; Bricker, Jesse; Parisi, Michael (2018-02-05)
Measures of income concentration?such as the share of income received by the highest income families?may be biased by pro-cyclical volatility in annual income. Permanent income, though, can smooth away such volatility and sort families by their usual economic resources. Here, we demonstrate this bias using rolling 3-year panels of IRS tax records from 1997 to 2013 as a proxy for permanent income. For example, one measure of 2012 income concentration?the share of income received by the top 0.1 percent?falls from 11.3 percent to 8.9 percent when families are organized by permanent income ...
Finance and Economics Discussion Series , Paper 2018-010

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