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Working Paper
Liquidity Premiums on Government Debt and the Fiscal Theory of the Price Level
Berentsen, Aleksander; Waller, Christopher J. (2017-03-29)
We construct a dynamic general equilibrium model where agents use nominal government bonds as collateral in secured lending arrangements. If the collateral constraint binds, agents price in a liquidity premium on bonds that lowers the real rate on bonds. In equilibrium, the price level is determined according to the fiscal theory of the price level. However, the market value of government debt exceeds its fundamental value. We then examine the dynamic properties of the model and show that the market value of the government debt can fluctuate even though there are no changes to current or ...
Working Papers , Paper 2017-8

Working Paper
Fedwire Funds Service: Payments, Balances, and Available Liquidity
Badev, Anton; Clark, Lauren; Ebanks, Daniel; Marquardt, Jeffrey C.; Mills, David C. (2021-11-05)
We analyze the universe of payments settled through the Fedwire Funds Service--the primary U.S. real-time gross settlement service operated by the Federal Reserve--for the period January 2004 to December 2020. We report on trends in payments volume, payments value, balances, and overdrafts, in addition to documenting changes in the behavior of financial institutions transacting via the Fedwire Funds Service.
Finance and Economics Discussion Series , Paper 2021-070

Working Paper
Funding Liquidity Risk and the Cross-section of MBS Returns
Kitsul, Yuriy; Ochoa, Marcelo (2016-06-07)
This paper shows that funding liquidity risk is priced in the cross-section of excess returns on agency mortgage-backed securities (MBS). We derive a measure of funding liquidity risk from dollar-roll implied financing rates (IFRs), which reflect security-level costs of financing positions in the MBS market. We show that factors representing higher net MBS supply are generally associated with higher IFRs, or higher funding costs. In addition, we find that exposure to systematic funding liquidity shocks embedded in the IFRs is compensated in the cross-section of expected excess returns| agency ...
Finance and Economics Discussion Series , Paper 2016-052

Working Paper
Bank Complexity, Governance, and Risk
Goldberg, Linda S.; Correa, Ricardo (2020-07-02)
Bank holding companies (BHCs) can be complex organizations, conducting multiple lines of business through many distinct legal entities and across a range of geographies. While such complexity raises the the costs of bank resolution when organizations fail, the effect of complexity on BHCs' broader risk profiles is less well understood. Business, organizational, and geographic complexity can engender explicit trade-offs between the agency problems that increase risk and the diversification, liquidity management, and synergy improvements that reduce risk. The outcomes of such trade-offs may ...
International Finance Discussion Papers , Paper 1287

Working Paper
Credit and Liquidity Policies during Large Crises
Ebsim, Mahdi; Kozlowski, Julian; Faria-e-Castro, Miguel (2022-01-24)
We compare firms’ financials during the Great Financial Crisis (GFC) and COVID-19. While the two crises featured similar increases in credit spreads, debt and liquid assets decreased during the GFC, but increased during COVID-19. In the cross section, leverage was the main determinant of credit spreads and investment during the GFC, but liquidity was more important during COVID-19. We augment a quantitative model of firm capital structure with a motive to hold liquid assets. The GFC resembled a combination of productivity and financial shocks, while COVID-19 also featured liquidity shocks. ...
Working Papers , Paper 2020-035

Working Paper
Treasury Safety, Liquidity, and Money Premium Dynamics: Evidence from Recent Debt Limit Impasses
Klee, Elizabeth C.; Ferris, Erin E. Syron; Cashin, David B. (2020-01-31)
Treasury securities normally possess unparalleled safety and liquidity and, consequently, carry a money premium. We use recent debt limit impasses, which temporarily increased the riskiness of Treasuries, to investigate the relationship between the money premium, safety, and liquidity. Our results shed light on Treasury market dynamics specifically, and debt more generally. We first establish that a decline in the perceived safety of Treasuries erodes the money premium at all times. Meanwhile, changes in liquidity only affected the money premium during the impasses. Next, we show that ...
Finance and Economics Discussion Series , Paper 2020-008

Working Paper
Liquidity Traps and Monetary Policy: Managing a Credit Crunch
Buera, Francisco J.; Nicolini, Juan Pablo (2014-05-14)
We study a model with heterogeneous producers that face collateral and cash in advance constraints. These two frictions give rise to a non-trivial financial market in a monetary economy. A tightening of the collateral constraint results in a credit-crunch generated recession. The model can suitable be used to study the effects on the main macroeconomic variables - and on welfare of each individual - of alternative monetary - and fiscal - policies following the credit crunch. The model reproduces several features of the recent financial crisis, like the persistent negative real interest rates, ...
Working Paper Series , Paper WP-2014-14

Working Paper
The Fed's Discount Window in "Normal" Times
Ennis, Huberto M.; Klee, Elizabeth C. (2024-12-20)
We study transaction-level data of bank borrowings at the Federal Reserve’s discount window from 2010 to 2019. We merge these data with quarterly information on bank balance sheets and income statements. To aid in the interpretation of our empirical analysis, we also develop a detailed model of the decision of banks to borrow from various sources, including the discount window. The objective is to contribute to a better understanding of the reasons why banks use the discount window during “normal” times—periods of relative calm in financial markets. Consistent with our model, we find ...
Finance and Economics Discussion Series , Paper 2021-016r1

Working Paper
Dealers' Insurance, Market Structure, And Liquidity
Carapella, Francesca; Monnet, Cyril (2017-12-15)
We develop a parsimonious model to study the equilibrium structure of financial markets and its efficiency properties. We find that regulations aimed at improving market outcomes can cause inefficiencies. The welfare benefit of such regulation stems from endogenously improving market access for some participants, thus boosting competition and lowering prices to the ultimate consumers. Higher competition, however, erodes profits from market activities. This has two effects: it disproportionately hurts more efficient market participants, who earn larger profits, and it reduces the incentives of ...
Finance and Economics Discussion Series , Paper 2017-119

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