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Working Paper
Sudden Stops and Optimal Foreign Exchange Intervention
This paper shows how foreign exchange intervention can be used to avoid a sudden stop in capital flows in a small open emerging market economy. The model is based around the concept of an under-borrowing equilibrium defined by Schmitt-Grohe and Uribe (2020). With a low elasticity of substitution between traded and non-traded goods, real exchange rate depreciation may generate a precipitous drop in aggregate demand and a tightening of borrowing constraints, leading to an equilibrium with an inefficiently low level of borrowing. The central bank can preempt this deleveraging cycle through ...
Working Paper
To What Degree and through Which Channel Do Central Banks Other Than the Federal Reserve Cause Spillovers?
Spillovers play a crucial role in driving monetary policy around the world. The literature focuses predominantly on spillovers from the Federal Reserve. Less attention has been paid to spillovers from other central banks. I measure the degree to which 20 central banks cause spillovers. I show that central banks in medium- to high-income countries cause spillovers to medium- to long-term interest rates in similar countries through a bond-pricing channel. These effects are narrower than spillovers from the Federal Reserve, which also affect emerging markets, short-term interest rates, and other ...
Journal Article
The Fed and Its Shadow: A Historical View
Central bank policies have always incorporated both a discretionary or active component and a passive component. Successful central banking has required a coordination of the two components. After a period of apparent dormancy, the passive component of monetary policy has emerged from the shadows and become relevant for Federal Reserve policy today.
Working Paper
The Fed's Discount Window in "Normal" Times
We study new transaction-level data of discount window borrowing in the U.S. between 2010 and 2017, merged with quarterly data on bank financial con- ditions (balance sheet and revenue). The objective is to improve our under- standing of the reasons for why banks use the discount window during periods outside financial crises. We also provide a model of the decision of banks to borrow at the window, which is helpful for interpreting the data. We find that decisions to gain access and to borrow at the discount window are meaning- fully correlated with some relevant banks' characteristics and ...
Working Paper
Managing Stigma during a Financial Crisis
How should regulators design effective emergency lending facilities to mitigate stigma during a financial crisis? I explore this question using data from an unexpected disclosure of partial lists of banks that secretly borrowed from the lender of last resort during the Great Depression. I find evidence of stigma in that depositors withdrew more deposits from banks included on the lists in comparison with banks left off the lists. However, stigma dissipated for banks that were revealed earlier after subsequent banks were revealed. Overall, the results suggest that an emergency lending facility ...
Working Paper
Sudden Stops in Emerging Economies: The Role of World Interest Rates and Foreign Exchange Intervention
Emerging economies are prone to ‘sudden stops’, characterized by a collapse in external borrowing and aggregate demand. Sudden stops may be triggered by a spike in world interest rates, which causes rapid private sector deleveraging. In response to a rise in interest rates, deleveraging is individually rational, but in the aggregate, the effect on the real exchange rate may tighten borrowing constraints so much that it precipitates a large crisis. A central bank can intervene by selling foreign reserves when world interest rates are rising, and prevent excess aggregate deleveraging. But ...
Working Paper
The Neapolitan Banks in the Context of Early Modern Public Banks
I examine the Neapolitan public banks, a group of non-profit institutions that emerged in the late sixteenth century, in the context of the early public banks that existed elsewhere in early modern Europe. In terms of size and stability they compare well with their peers, in spite of a difficult political and economic environment. They were also remarkably financially advanced for their time. Their success is likely due to their ownership structure, governance, and well managed relationship with the monarchical authorities.
Working Paper
Theodore Roosevelt, the Election of 1912, and the Founding of the Federal Reserve
This paper examines how the election of 1912 changed the makeup of Congress and led to the Federal Reserve Act. The decision of Theodore Roosevelt and other Progressives to run as third-party candidates split the Republican Party and enabled Democrats to capture the White House and Congress. We show that the election produced a less polarized Congress and that new members were more likely to support the Act. Absent the Republican split, Republicans would likely have held the White House and Congress, and enactment of legislation to establish a central bank would have been unlikely or ...
Working Paper
Deposit Convexity, Monetary Policy and Financial Stability
In principle, bank deposits can be withdrawn on demand. In practice, depositors tend to maintain stable balances for long periods, allowing banks to fund long-dated assets. Nevertheless, the cost of deposit funding influences banks’ capacity for maturity transformation. Banks and researchers conventionally model the response of deposit interest rates to market interest rates as constant, implying that deposits have nearly constant duration. Contrary to this standard assumption, we show empirically that the “beta” of deposit rates to market rates increases as market rates rise, causing ...
Working Paper
Interventions in Markets with Adverse Selection: Implications for Discount Window Stigma
I study the implications for central bank discount window stigma of the model by Philippon and Skreta (2012). I take an equilibrium perspective for a given discount window program instead of following the program-design approach of the original paper. This allows me to narrow the focus on the model's positive predictions. In the model, firms (banks) need to borrow to finance a productive project. There is limited liability and firms have private information about their ability to repay their debts. This creates an adverse selection problem. The central bank can ameliorate the impact of ...